Cracking the Non-Prime Nut – A Closer Look at PAIF

The US investment vehicle Princeton Alternative Funding (PAF) has adopted a unique approach to navigating the non-prime consumer lending space.

Princeton’s “Alternative Income Fund” arrived on the scene rather quietly at the beginning of the year, and staged a “soft launch” in March. It’s not a lending platform in the mould of a Lending Club or an Avant, but neither is it a P2PGI/Victory Park Capital-like fund. In truth, Princeton sits somewhere in between the two.

Princeton Alternative Income Fund (PAIF) provides credit lines to a select crop of sub-prime loan originators. The money behind these lines of credit, it recently transpired, comes from Ranger Capital Group’s Direct Lending Fund – which raised £135m in May via an IPO on the London Stock Exchange. PAIF Co-Founder Bert Szostak indicated that Ranger is supplying his company with somewhere in the region of $5m to $7m a month, for the time being.

Princeton uses those funds to establish credit facilities with a batch of carefully curated, top-performing short-term consumer lenders – drawn from a pool of roughly 4,000 prospective partners.

But how does the selection process work?

As part of its soft launch, Princeton announced the advent of an exclusive partnership with the MicroBilt Corporation – which is often described as the world’s “leading alternative credit bureau”. The vast majority of the borrowers that Princeton’s consumer lending partners cater to fall beyond the coverage of traditional Credit Reference Agencies (CRAs). But where their remit ends, MicroBilt’s begins.

MircroBilt affords Princeton access to proprietary scorecards which utilise non-traditional data for over 100 million customers. This resource allows Princeton to make informed credit decisions (i.e. determine the suitability of a line of credit candidate) in under 3 seconds.

Said Szostak of the partnership:

"With more than 3 times the alternative market data than the Big Three consumer credit bureaus combined, MicroBilt brings robust analytics to our underwriting process. From inception we can monitor the borrower (consumer), the business that made the loan, the vertical it resides in and a host of other metrics."

The sheer size of the business opportunity is itself alluring. The subprime sector in the US is currently populated by some 110 million people. One third of US consumers carry a sub 670 FICO score, cutting them off from the assistance of most traditional lenders. But by the collective estimation of PAIF, MicroBilt, and indeed the sub-prime lending companies themselves, many of these people are in fact credit-worthy. Harnessing a broader and deeper range of data is the key to identifying such individuals.

But even with the exclusive services of MicroBilt on side, steering through the choppy seas of non-prime consumer finance will not be an easy ride. Princeton points to diversification as a key risk mitigator. The investment vehicle owns loan portfolios that span the US in terms of borrower location, covering various different verticals and industries.

In terms of what Princeton will look to return to Ranger, the bottom line number is a projected yield of 13%-15%, net of fees. There’s a 2% management fee, and a 20% performance fee – which is subtracted from the gross return following the subtraction of all other fees and of “Drag” (which is money lost through incomplete deployment). Institutional investors must supply a minimum of $1m to access PAIF. Others are likely to join Ranger in channeling capital into Princeton in the not too distant future.

To round out the PAIF picture, we put a few questions to Mr. Szostak…

Can you provide more detail about the types of consumer lenders that you’re providing credit lines to? What’s the typical model?

“Our lenders provide short term loans at the point of sale or online for products and services such as: furniture, tire centers & care repairs, appliances, consumer electronics, musical instruments, medical bills and more.”

Why are institutional investors going to want to invest via PAIF, rather than going direct through a P2P platform, or through one of the established funds?

“Aside from the geographical and vertical diversification our portfolio offers, we believe MicroBilt analytics used in tandem with elite non-prime lenders significantly reduces risk for those looking to allocate capital to this part of the spectrum.”