Peer-to-Peer Lender Prosper Eyes Investors Seeking Yield

As many investors hunt for yield and banks remain hesitant to lend at pre-crisis levels, peer-to-peer lender Prosper is hoping to fill that gap—with a key investor betting big on Prosper's strategy.

The peer-to-peer company has generated $95 million in funding, with the most recent round in January coming from Sequoia Capital, about $20 million.

Sequoia partner Pat Grady, who sits on Prosper's board, said there's big growth potential for the space during the next few years. "There is plenty of room in the space for additional competitors and it has the head room to become a big business," Grady said.

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How Prosper Works

Prosper works to connect borrowers and lenders online. Borrowers post a loan listing with the amount they require on the website. Potential investors then review the listings and can select those that meet their criteria. Borrowers must then make fixed monthly payments, which are paid to lenders' accounts on the site. In this way, Prosper differs from traditional banks, since it does not use its own capital to make loans.

According to Prosper, investors using its service have average returns of 10 percent over three years. Investments like these are far less volatile than equities, and with the pay schedule similar to bonds.

"We are providing both sides of the market, both the borrower and the lender, with a unique proposition," said Stephan Vermut, chief executive of Prosper.

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Will Prosper Challenge the Traditional Bank Model?

But other market watchers say when it comes to peer-to-per lending: proceed with caution.

"Peer-to-peer lenders run into same risk of credit cycles as the banks," said Gerard Cassidy, bank analyst at RBC Capital Markets. "It's not always a guarantee that they can provide a 10 percent return for investors. There's a lot of risk involved."

But Prosper sees growth potential and the company's biggest challenge is attracting more lenders, particularly large institutional investors.

CEO Vermut also said Prosper is focused on developing the business as a private entity. "An IPO is an exit strategy and I am focused on an entrance strategy. We have an obligation to see to it that the world is aware peer-to-peer lending is maturing," Vermut said.

"We've got to the point now where it's not a concept, it's not a startup, it's a legitimate business," Vermut said.