So far not many have stepped into the gap, but one firm that has is Prodigy, an innovative peer-to-peer lending firm set up by three Insead alumni in 2006. The idea is that students ask for money and investors, who are former Insead alumni, buy a bond that is linked to a particular cohort. The scheme started at the founders’ alma mater and so far 500 students of 80 nationalities have borrowed an average of €35,000, with 50 investors so far stumping up cash. (A minimum investment of €50,000 has kept the numbers down, a deliberate plan, say the founders, to keep things simple.)
What might have seemed in its early days like a quirky idea is starting to look like a very interesting one indeed. Prodigy has just announced that it has extended the scheme to London Business School, Vlerick in Belgium, and Skolkovo School of Management in Moscow, and says that it will be announcing a number of other deals in the near future.
So far a total of €15m has been lent, which will increase to €20m by the end of the year. The investment is an unusually good one. As Prodigy’s chief executive Cameron Stevens says: “You are investing in a pool of students and so that means multiple industries and countries, there is a lot of diversity built in”. Returns are good – EURIBOR or LIBOR plus 4 per cent depending on your currency, and since 2007 there have been no defaults. The bond has outperformed the FTSE (not hard, it’s true) but also AAA and BBB bonds. Crucially, central to the idea is the community – you are investing in your peers, or near-peers, and the details of your repayments are visible on a website, so everybody can see if you miss a payment. “There is a large social pressure to repay the loan,” says Stevens.
In keeping with this community aspect, between 80 and 90 per cent of investors so far have been Insead alumni, although there has been interest from institutional investors with an educational slant, says Stevens. From January, they will be looking for a broader range of investors.
Peer-to-peer lending, broadly on the Prodigy model, has enjoyed something of a boom during the downturn, with firms like Zopa doing well. Some critics think that once the banks start lending again peer-to-peer will vanish. However, there are good reasons to think that peer-to-peer has a better chance of survival in the MBA market. The story of banks pulling their MBA lending looks like a long-term one, says Stevens.
BANKING ON MBAS
That might seem odd, given the sure-fire bet that MBAs arguably represent, but MBAs apparently don’t fit the templates that banks understand. They are international workers and tend to zip all over the world, so they don’t always stick about to invest their money or take out mortgages; they are a diverse lot who take effort to understand. Even worse, it’s hard to evaluate what sort of risk they are; banks tend to look backwards at how much you have earned in the past, and the whole point of an MBA is that it boosts your earnings in the future. The MBA market is made for specialist lenders and the ties that bind MBAs are strong; MBAs are big on alumni networks and the pressures not to default are undoubtedly strong.
With over a billion euros of loans made every year to MBAs, this is a big and attractive market for those willing to step into the gap. So is Prodigy worried that competitors will piggy-back on its success? Not quite yet, it seems. Devising a legal model that allows it to enforce the loans in lots of jurisdictions is not easy, and setting up repayment channels in dozens of countries is challenging, says Stevens. The firm has also devised a complex scorecard that predicts students’ future earnings – essential for evaluating the risk of your investment, but complicated to do.
Equally important has been creating a scalable model. Prodigy’s aim is to be lending €120m a year for top-class schools, and then expand into business or science-focused masters programmes. And then? As anybody who has been following the revolution in UK university funding will know, there is definite scope for innovation in that market. So are there plans to expand into undergraduate funding? Maybe, as a “long-term proposition”, says Stevens. One day, perhaps, all student loans will look like this.