Matt O’Malley is the co-founder, President and Chief Operating Officer at Looking Glass Investment (LGI), a private investment firm focused on marketplace lending as an alternative to traditional–and often volatile–equity markets.
We reached out to learn more about LGI and Matt’s experience investing with Prosper. Here’s what he had to say:
I first became acquainted with marketplace lending in 2006 upon discovering Prosper. We initially thought it was an interesting concept – and also a new investment opportunity, but there weren’t many details available. We tracked the industry for a couple of years, building financial models to better understand what returns would look like. We made our first investment in August 2008.
What specifically did you like about the investment opportunity?
We became increasingly focused on marketplace lending during the recession that followed the 2008 financial crisis. Marketplace lending presented a fascinating investment opportunity: attractive returns together with low correlation to the equity market— especially appealing given what was happening in the economy. Our approach was “slow and steady wins the race” versus high volatility and potentially high return. We also recognized marketplace lending as an opportunity, through Prosper, to invest in the American people, believing their spirit and resilience would transcend the tough economy.
How have you seen the industry evolve since you discovered marketplace lending?
In one word: maturity. Congressional hearings, reports from legitimate government and regulatory sources such as the Cleveland Federal Reserve, the Treasury, and the G.A.O. all point to an industry maturing in the proper way. By and large they have been reporting tremendous success. I think the industry should be commended for being transparent, for always opening the door and inviting the regulators to ask the tough questions.
Moreover, when Stephan Vermut, Aaron Vermut and Ron Suber came to Prosper with the support of Sequoia Capital, their contribution of intellectual capital was nothing less than transformational. They brought a new vision, and a new rigor, to an industry which was ready for their talent.
What’s next? How do you see the industry evolving over the next few years?
Even more rigor and transparency is needed as the industry matures. I recently wrote an essay for the institutional capital publication FINalternatives and for Bankless Times in which I quoted former Supreme Court Justice Louis Brandeis’ comment that sunlight is the best disinfectant. We believe increased scrutiny is inevitable, including for platforms and investors such as ourselves. We see this process as the natural and beneficial evolution of an industry that meets a genuine need in society and whose benefits will increase as it grows.
Tell us a bit about LGI. What is it specifically about marketplace lending that resonates with your investors?
We started the business in 2011 and have continued to build from there. From an investment standpoint, what resonates most with our investors is the potential for low correlation and attractive income. Some investors allocate alternative dollars; others allocate from the fixed-income portion of their portfolios. In either case, investors recognize the marketplace lending asset class as an appealing diversifier in a broader portfolio.
How do you evaluate the Notes you invest in?
Our mission is to lend, on behalf of our investors, to borrowers who have the lowest probability of default. We consider ourselves a research firm above all else, and our commitment to the research has not wavered since inception.
Our view is that over time research will win the day. Earlier this year, we opened what we believe is the first marketplace lending research office in Brunswick, Maine. The office is led by Dr. Nathan Tefft, a tenured professor of economics at Bates College and the LGI Chief Economist. In partnership with Bates College and their Purposeful Work program, our research assistants support Nate in the research office to continuously improve our ability to identify the best borrowers.
This independent research model is unique to Looking Glass Investments and is in our view absolutely critical for long-term success.
This Q&A has been edited for the purpose of this blog post.
Prosper owns a marketplace lending platform through which retail and institutional investors may invest in personal consumer loans. More information about Prosper and the borrower payment dependent notes (“Notes”) offered by Prosper to retail investors is available at www.prosper.com/prospectus.
Prosper has no role in Mr. O’Malley’s investment decisions and is not responsible for and does not approve, endorse, review, recommend or guarantee the statements made by Mr. O’Malley herein.