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Third Point: ‘Upstart (UPST) Exemplifies Our Approach to Lifecycle Investing’

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Jose Karlo Mari Tottoc
·5 min read
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Third Point LLC, an investment management firm, published its fourth-quarter 2020 Investor Letter – a copy of which can be downloaded here. A net return of 16.1% was recorded by the fund for the Q4 of 2020, outperforming all its S&P 500, MSCI WORLD, and CS HF Event-Driven benchmark that delivered a 12.1%, 14.1% and 10.4% return respectively. You can view the fund’s top 5 holdings to have a peek at their top bets for 2021.

Third Point, in their Q4 2020 Investor Letter, said that Upstart Holdings, Inc. (NASDAQ: UPST) exemplifies Third Point’s approach to lifecycle investing. Upstart Holdings, Inc. is a consumer lending company that currently has a $5.5 billion market cap. For the past month, UPST delivered a 14.33% return and settled at $77.01 per share at the closing of February 22nd.

Here is what Third Point has to say about Upstart Holdings, Inc. in their Q4 2020 investor letter:

"During the Fourth Quarter, the Upstart IPO transaction was priced by Goldman Sachs at $20 per share and raised about $180 million for the company. Since the IPO, the stock has traded to $80, with a market cap of over $5.8 billion. We initially invested in the Series C round in 2015 at a pre-money valuation of $145 million and added to our investment on the IPO with the purchase of an additional 1.2 million shares, bringing our total ownership to approximately 13.4 million shares, or roughly an 18% stake.

Founded by Google technologists, Upstart launched in 2012 and originated its first personal loan in 2014. Upstart leverages artificial intelligence operating on non-traditional underwriting variables to more accurately price risk for unsecured consumer loans and, more recently, for auto loans. Through September 2020, 70% of loans through Upstart were automated and approved instantly without human involvement. In the same period, fraud loss was negligible. Compared to traditional bank underwriting models, Upstart’s AI platform has yielded a 75% reduction in loss rates. Upstart’s ongoing model improvements deepen its competitive moat and continually strengthen its business case. This is reflected in increased credit rate requests and increased loan conversion leading to ~87% CAGR in the total number of loans transacted.

Upstart’s model benefits from flywheel dynamics that should drive compounding growth through a cycle of continuous model feedback and improvement. As the platform grows, more data points (payments, defaults, etc.) are fed into the model, thus improving its accuracy and supporting additional share gain. An understanding of the opportunities presented by AI and machine learning has been an important theme we have expressed in numerous investments at the firm.

Upstart’s core focus is unsecured personal loans, a market that totaled $118 billion in originations between April 2019 and March 2020. This market is rapidly growing by every measure, including new loans, number of unique borrowers, and total debt outstanding. There is a significant opportunity to expand Upstart’s footprint within its core consumer lending market, as well as new markets such as auto, a market worth $625 billion in originations. In September 2020, the first auto loan was processed on the Upstart platform. Beyond personal and auto, the same AI engine could also be used for mortgage and credit card originations. Upstart is also working to deliver a competitive digital lending platform to small banks, which brings with it an expanded customer base (the typical age of an Upstart borrower is 28 years old, which is a valuable demographic), lower loss rates, and new product offerings.

Upstart exemplifies Third Point’s approach to lifecycle investing. Following a lead from our Structured Credit group, which had looked at funding Upstart’s loan pools, we led Upstart’s Series C in June of 2015 and Rob Schwartz joined their Board. Third Point delivered value on capital markets strategy, staffing, and organizational development, and eventually became a loan buyer on the platform. As Upstart grew, we maintained our ownership through further investments and placed a 10% order of the IPO in December 2020."

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UPST delivered an impressive 88.98% return YTD. Our calculations show that Upstart Holdings, Inc. (NASDAQ: UPST) does not belong in our list of the 30 most popular stocks among hedge funds.

The top 10 stocks among hedge funds returned 216% since the end of 2014 and outperformed the S&P 500 Index ETFs by more than 121 percentage points. We know it sounds unbelievable. You have been dismissing our articles about top hedge fund stocks mostly because you were fed biased information by other media outlets about hedge funds’ poor performance. You could have doubled the size of your nest egg by investing in the top hedge fund stocks instead of dumb S&P 500 ETFs. Here you can watch our video about the top 5 hedge fund stocks right now. All of these stocks had positive returns in 2020.

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, Federal Reserve has been creating trillions of dollars electronically to keep the interest rates near zero. We believe this will lead to inflation and boost real estate prices. So, we recommended this real estate stock to our monthly premium newsletter subscribers. We go through lists like the 15 best innovative stocks to buy to pick the next Tesla that will deliver a 10x return. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. You can subscribe to our free daily newsletter on our website:

Disclosure: None. This article is originally published at Insider Monkey.