Brian Weinstein is Managing Partner at Blue Elephant Capital Management. Previously, Brian was a portfolio manager at BlackRock, overseeing $300 billion in assets across short duration, financial institutions and multi-sector fixed income portfolio.
Blue Elephant is at the forefront of the newly evolving structural opportunities made possible by the intersection of technology and finance. The asset manager is among the first to offer investors institutional quality access to the yields of the developing platform lending market. Brian joined Tradestreaming to talk about the firm’s investment strategy and where he’s looking to uncover reasonable yields on a risk-return basis.
What is Blue Elephant? Are you looking at a global investment universe?
Blue Elephant Capital was founded by 3 former Wall Street professionals – 2 from traditional banks and 1 from the asset management industry. Together, we watched the banks get heavily regulated at the same time that the Fed dropped interest rates to zero, inflating asset values globally. We left out respective jobs with the idea that there were going to be many opportunities that emerged in this type of environment.
The first place caught our attention was the “peer-to-peer” or “marketplace” lending industry, where the technology is changing the way borrowers and lenders interact. We’ve started a fund that invests directly in loans originated by these non-bank lenders. With our capital markets background, we are able to focus in on where the best risk adjusted returns will be based on our economic outlook.
Currently, we are investing in prime US secured and unsecured consumer debt, secured US small business debt, and New Zealand unsecured consumer debt. We continue to look at opportunities globally.
You have a traditional portfolio mgmt background. what propelled you to address such a young space in platform lending?
My traditional portfolio management background taught me some very important things which lead me toward this young industry. The most important is that a good investor needs a long-term thesis that serves as the basis for investing. In today’s world, that has become exceedingly difficult. Too many investors are focused on short term performance, despite the fact that yields are at all-time lows.
To me, marketplace lending represents an investment opportunity where I can put my long-term thesis to work, while getting compensated for the risks we are taking. Marketplace lending represents one of the many ways that capital markets are going to change as the large banks become less dominant – so being on the forefront of the change and using my skill set to capitalize on the changing environment makes a lot of sense.
What’s your interest in boat finance? What’s the investment case and what does the field look like?
Boat finance was one of those opportunities that took a long time to come together. Our first investment was on the unsecured US consumer side. We think that investment makes sense given the large quantity of data that the underwriting is based on. From there, the industry has really started to evolve into much riskier markets: namely, subprime consumer and unsecured small business lending.
Quoted yields in these markets are higher than in the prime markets, but the underwriting is based on a small data set and we think it is a terrible time in the business cycle to go down in quality. More likely than not, these subprime markets will end up with lower returns than the prime markets after default.
This left us looking for a secured debt market. The only problem is that most of the good ones are well covered by traditional capital markets – mortgages, autos, and equipment lending are good examples. The used boat market ended up being a great opportunity for us because it is truly underserved by the broad markets. The collateral has a title, is insured, is already depreciated and can be repossessed, so it has real value to the loan holder. It is a nice complement to our unsecured portfolio.
What’s the most underhyped investment opportunity in online finance now? what’s overhyped?
There is so much hype surrounding the space that it is hard to find anything underhyped exactly. I think the prime unsecured paper that we like makes a lot of sense. It doesn’t look as “sexy” as some of the lower quality lending, but I think it is easier to understand the borrower and how they will behave.
The overhyped part at this stage is the lower-quality lender, whether that is subprime consumer or unsecured small business lending. The hype comes from the higher coupon that these lenders offer to investors. If you stop and loss-adjust the yields for what happens during a downturn, you’ll quickly realize why banks have not traditionally made these loans.
What can go wrong with these types of investments? What can go right?
Lending is not a risk free business. A turn in the business cycle will impact the sector negatively. As interest rates rise or the credit markets weaken, there will be other asset classes competing for the same capital which will slow down the growth in the industry. Regulation is coming as are legal challenges to the structure of some of these lenders. These risks are part of the reason why returns are higher in this space than many others, so at least investors are being compensated for taking those risks.
What can go right is that the industry matures, adopts best practices and demonstrates that the models can survive the inevitable bumps in the road that are coming. Blue Elephant’s team brings decades of institutional experience to the space – we are qualified to serve as guides, making sure investors stay on the correct path.
What’s next for you and Blue Elephant?
We will continue to look for opportunities in the global marketplace lending space as well as other areas where banks are pulling back. Remember, bank disintermediation is the real theme here, not purely fintech – there will be plenty of opportunities in direct lending space. We are ready to expand our purview when it makes sense.
In December, we will launch our second fund, which is a unlevered version of our current offering, targeted towards 401k/IRA and offshore investors.