NSR offers both a private fund for accredited investors and managed accounts for non-accredited investors. Retail investors, and the financial advisors who serve them, are a key market for NSR.

“We work almost entirely with financial advisors, and our core audience is independent advisors,” says Bo Brustkern, CEO and co-founder at NSR. He adds the company is working with various industry players to integrate its offering on major portfolio reporting platforms used by RIAs.

NSR’s P2P Fund has a $250,000 investment minimum and invests in small-business and consumer loans on the platforms of Lending Club, Prosper, Funding Circle and Upstart. The fund’s target annual return is 10%, and it charges a fee of 1.5%.

NSR’s managed accounts have a $10,000 minimum, invest in consumer loans made on the Lending Club and Prosper platforms, and come in three flavors—conservative, balanced and assertive—based on the credit quality of the underlying loans. The targeted returns range from to 5% to 9%, and the fees range from 0.45% to 0.90%, depending on the aggressiveness of the funds.

Investors in the P2P lending space need to understand the credit quality of the underlying loans and the liquidity of their investment. With NSR’s managed accounts, for example, Brustkern says the default rate typically is 1% in the conservative account and close to 5% for the assertive account. The loans are three to five years in length, and they’re fractionalized, which means investors can invest with as little as $25 per loan.

“It’s easy to create a diversified portfolio with a small amount of invested money,” he says, noting that the underlying securities are illiquid and should be considered illiquid on the managed accounts side.

Filling A Void
Online P2P lending is growing because bank lending to individuals is shrinking. And that’s because tighter regulations on capital requirements and various other activities wrought by the Dodd-Frank Act in the U.S. and international Basel III standards have caused banks to leave or minimize certain businesses. And in order to maintain profits, they’re less inclined to service individual loans.

P2P borrowers typically are creditworthy folks who can’t get loans in a very tight credit environment. As described in a Goldman Sachs report, the combination of big data analytics and new distribution channels has enabled online P2P players to fill the gap in the lending system by catering to individuals.

According to Brustkern, P2P lending started in 2005 with a U.K. company called Zopa. That was followed in the U.S. with the launch of Prosper and Lending Club. “The volumes really started increasing in 2011 because it took time for Prosper and Lending Club to build large enough portfolios where institutions could start to trust their underwriting, processes and returns,” he says.

In the case of Lending Club, for example, a person can invest in notes that represent small fractions of loans for as little as $25, which means a $2,500 overall investment can be diversified over 100 notes. Investors can either choose their own investments or use the company’s automated investing tool that matches orders with investor-supplied criteria.

Lending Club offers both consumer and small-business loans, with the majority being the former. As mentioned earlier, all of its loans are unsecured. As borrowers pay back their loans, investors get a monthly income stream. Lending Club charges 1% to process the payments borrowers make on their loans. An example on the company’s website says an investor with a loan portfolio paying an average of 13% should expect a net return of 8% after factoring in a default rate of 4% and the aforementioned 1% fee.