LendingClub’s Latest Setback: Investment Fund First Ever Negative Return

Every baseball fan knows a June swoon when they see one – a team that otherwise seems to be staffed by professional baseball players suddenly turns into a little league team that managed to sneak into the big leagues. They can’t hit, they can’t field and they don’t win.  What separates a team in a swoon from terrible a baseball team (that also can’t hit, field or win) is July – if the teams suddenly remembers the goal of the game is to score runs and prevent the other team from doing so, it’s a June Swoon.  If not – bad team.

And as it turns out, June Swoons can hit things that aren’t baseball teams – just ask the team at LendingClub.

In summer where the firm needed no more bad news, more ill tidings have come to call. A fund managed by LendingClub Corp. will likely report its first-ever negative month, according to investor documents reviewed by The Wall Street Journal.

The fund – LendingClub’s Broad Based Consumer Credit (Q) Fund – is responsible for investing the company’s online consumer loans. This is its first negative month after 63 consecutive months of positive performance.  It is the largest in-house portfolio run by its parent firm – and has generally been a steady performer, with a return in the .5 percent range per month.  But that rate of return has been under pressure in recent months, as defaults have climbed and LendingClub has taken steps to control that. In March the fund returns were .05 percent, following a smaller than average gain in December of .13 percent.  The fund – as of the 17th of June – had received  $442 million in redemption requests. That accounts for 58 percent of their total assets.”

LendingClub has placed restrictions on investor withdrawals and may consider a wind down of the fund.

LendingClub CEO Scott Sanborn wrote in the letter to investors Tuesday that the June returns have been weighed down by a series of increases on borrower interest rates designed to entice new investments. Those rates will yield better returns for investors in the longer term – but for now under accounting rules LC Advisors must mark down the value of existing loans the fund holds that carry lower coupons.

“It is important to remember that these markdowns are not reflective of the expected cash flow performance of underlying loans held by the Fund,” Mr. Sanborn wrote.

But LendingClub is still recovering its reputation from the rather spectacular exit of its CEO Renaud Laplanche in May in the wake of an internal investigation.  Among reveals – it turned out that LC Advisors were valuing their loan packages making use of some “non-traditional accounting” for determining the value of the loans in its portfolio as well as their monthly returns.

LendingClub – to rectify those issues –  is making some structural changes to LC Advisors’ operations, including appointing a governing board that replaces the old investment policy committee.

The three members of the new governing board are Sid Jajodia, LendingClub’s chief investment officer; Rick Arney, a former executive at BlackRock Inc.; and Robert Hartheimer, the managing member of regulatory consulting firm Hartheimer LLC, according to the Tuesday letter.

LendingClub will work with Duff & Phelps Corp. to work on the portfolio, according to a person familiar with the matter.

“The issue this revolves around is confidence in LendingClub and that’s what we need to rebuild,” he said. “The asset itself is continuing to perform and it’s my belief we can rebuild that confidence over time.”