by Jay Antenen, and Eleanor Duncan
Prosper Marketplace is involved in a lengthy arbitration with Colchis Capital Management, one of its original institutional debt investors, according to a source and a person familiar with the matter.
Prosper and the San Francisco-based credit hedge fund have been in arbitration for over a year, the sources said. The arbitration involves an agreement Colchis struck with Prosper in early 2013 to buy loans originated on its platform, said the first source.
The Colchis arbitration is not impacting the San Francisco-based marketplace lender’s efforts to finalize a new USD 5bn financing agreement with a consortium of investors, the source said, adding that those talks remain on track.
The arbitration is separate from the consortium agreement and the investor group is aware of the arbitration, the source said. It is possible Colchis may be taking issue with the consortium, though it is also possible that the hedge fund could get involved in the investor group and that the terms of that agreement could change, said the source.
A source briefed on the matter said that Colchis’s existing agreement with Prosper has become a contentious issue in the talks for the new agreement.
Fortress Investment Group, Jefferies and other investors have been in talks with Prosper for months about a deal to purchase billions in loans, as reported (see article, 13 July). The deal is intended to provide Prosper with a steady supply of funding to meet consumer loan demand at a time when institutional investors have become more selective in response to controversies in the marketplace lending sector.
Prosper is expected to give the new investors sizable equity warrants in exchange for agreeing to purchase loans, as reported. The company may then go on to raise new equity capital.
Despite market expectations that a deal would be announced this summer, Prosper has not yet publicly confirmed an agreement with the consortium. The tough terms of the potential agreement are the latest sign that marketplace lenders have become dependent on debt providers, who are subsequently able to extract favorable terms.
Prosper turned to Colchis when it needed to lock in loan funding in January 2013. That month Prosper hired a new CEO, Stephan Vermut, and took an equity investment from Sequoia Capital.
Under that deal, Colchis gained the right to see Prosper’s origination pipeline and bid for loans at no disadvantage to other investors on the platform, the source and first person said. It is unclear if the new loan buying agreement threatens Colchis’s arrangement.
Colchis enjoyed an early mover advantage when it reached agreement with Prosper and its competitor Lending Club, said Jeff Nauta, a principal at Henrickson Nauta Wealth Advisors, who has invested client funds with Colchis.
The hedge fund gained access to loan data on the Prosper platform at a time when marketplace lenders tended to restrict investors’ access to information, Nauta said.
Since then, Prosper and Lending Club have become much more open about sharing data and the market has become more efficient, reducing the advantage early funds enjoyed in picking loans, Nauta said.
Lending Club spent around two years renegotiating its agreement with Colchis, the source briefed said. The fund remains a Lending Club debt investor and it is unclear how the terms of the deal changed.
Colchis, founded in 2005, has USD 1bn in assets under management and is known in the industry as a tough negotiator.
The firm formed a dedicated Prosper investment vehicle in 2011, according to SEC filings. It later consolidated its investments under a single fund and primarily lends on Prosper, Lending Club and Marlette Funding.
Representatives for Colchis, Prosper, Lending Club and Jefferies declined to comment. A Fortress representative did return a request for comment.