Who will win big in the Funding Circle IPO?

By Ryan Weeks on 3rd September 2018

P2P/Marketplace Lending

Index Ventures owns around 20 per cent of the peer-to-peer lender.

Who will win big in the Funding Circle IPO?

Leading peer-to-peer lender Funding Circle today confirmed its plan to stage a landmark IPO on the London Stock Exchange.

The firm hopes to raise £300m at a valuation of £1.65bn, and already has a backstop order for up to 10 per cent of its issued shares from Heartland A/S, the private holding company of Danish billionaire Anders Holch Povlsen.

Funding Circle’s Registration Document, published this afternoon, is full of hitherto unseen information about the company and its investors. Analysts will doubtless pore over the 183-page pack over the next week, but here are AltFi's key takeaways.

Winning big

Index Ventures is Funding Circle’s single biggest backer with around 20 per cent of the company's shares on a fully diluted basis. Behind Index, Accel and Union Square Ventures own 9.1 per cent and 7.3 per cent of the company respectively.

Co-founder and CEO Samir Desai owns 7.7 per cent of the company. A simple calculation, based on the price that anchor investor Heartland has agreed to pay, suggests that Desai’s stake is worth about £127.5m.

Desai’s co-founders James Meekings and Andrew Mullinger own 4.7 and 4.2 per cent of the firm respectively. Meekings is the company's UK managing director. Mullinger ran the platform's risk department until stepping back in 2016. 

DST Global and Stone Ridge Trust V also appear on Funding Circle's significant shareholders list.

We do not know how much these shareholders will offload – or be able to offload – through the flotation. Still, the founders and early stage investors in particular stand to make significant amounts of money.

Lender composition

In its Registration Document, Funding Circle divides its investors base into four distinct groups: institutional investors, retail investors, listed credit funds or investment trusts, and supranational and public bodies.

In 2013, during the firm’s infancy, 86 per cent of the money it lent to businesses came from individual investors, with 14 per cent coming from public bodies.

Today, just 31 per cent of Funding Circle loans are funded by retail cash, compared to 51 per cent by institutions, 13 per cent by the Funding Circle SME Income Fund (an investment trust), and 5 per cent by supranational and public bodies.

So granular a breakdown of the platform’s investor base has not been available until now.

International expansion

The company has provided key metrics on the performance of its loanbook across the four markets in which it operates – the UK, US, Germany and the Netherlands.

Its projected annualised investor returns for loans originated in 2017, across all four markets, range between 4.6 and 7.6 per cent, with returns a little higher in the US and Netherlands. Those higher returns are driven by commensurately higher risk. Projected bad debt rates for loans originated in the same period are 4.1-6.1 per cent in the US and 2.3-4.2 per cent in the Netherlands. This compares to projected bad debt rates of 2.4-3.3 per cent in the UK and 1.9-3.9 per cent in Germany.

It is well known that Funding Circle experienced – or perhaps inherited – growing pains in continental Europe, after expanding to Germany, the Netherlands and Spain through the acquisition of Zencap in 2015. The company restructured its European operations in early 2017, when it also stopped lending in Spain.

However, Funding Circle now sees more opportunity in both mainland Europe and the US than in the UK, where it has historically facilitated most of its lending.

The company has calculated total addressable originations for the US of $125bn. Some way behind, Germany and the Netherlands are sized up at €55bn and €10bn respectively – versus addressable originations of £35bn in the UK.

The firm does not seem to be done expanding internationally. In its Registration Document, it says: “The strategy of Funding Circle is to continue expanding geographically in a disciplined and phased manner, either through acquisitions or organically.” Furthermore, the business is continuing its push for consistent cloud-based hosting across all geographies, which it says will provide an ‘infrastructure blueprint for future geographic expansion’.

Losses mounting

Funding Circle is seeing substantial growth in both revenues and losses.

In the year ended 31 December 2017, the firm posted revenues of £94.5 million, compared to £50.9 million in the previous year. In its 2016 full year results, published September last year, the company narrowed its losses to £35.7m, down from £36.9m in the in the previous year. 

More recently, in the first six months of 2018, the company posted £63.0m in revenues, up from £40.9m in the first half of 2017. But losses have also increased, from £19.2m in the first half of 2017 to £27.0m this year.

Significant investment in brand is at least partially to blame for the losses. Funding Circle launched a major marketing push under the banner ‘Made To Do More’ this time last year. The campaign included a number of prime-time television adverts, the latest of which aired last weekend. 

In the medium term, Funding Circle is targeting 40 per cent revenue growth, with a longer-term target of adjusted EBITDA margins of 35 per cent of more.

Key selling point?

Time and again in its Registration Document, Funding Circle stresses the benefits of its high rates of repeat business.

In the UK, for instance, it says that while a growing percentage of its loan funding comes from existing investors (85 per cent in 2017 and H1 2018, up from 68 per cent in 2015), many borrowers also maintain an ongoing balance of financing through the platform.

Both are cited as key factors in what Funding Circle sees as improving unit economics and expanded margins. Analysts will likely pay special attention to these metrics over the coming weeks.

 

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