David Stevenson decodes the London listings of TruFin and Augmentum, each of which hold a stake in P2P lender Zopa.
For ages we’ve waited for an encounter between fintech and the world of public stock market investors. The first encounter was focused on investment trusts looking to build a robust income stream – as a result a number of funds raised a few billion pounds, most of which has promptly declined in value as investors started to fret about risk and inadequate dividend payouts. The real fun though will start when the platforms themselves start to list on the market. My money had initially been on LendInvest going first, possibly followed by Zopa and Assetz in quick succession but it now looks like we’ll see Funding Circle hit the green button – with what I assume will be a fairly meaty valuation courtesy of its top tier banks running the book.
Luckily though when FC does list we won’t be completely starved of information about how to value alternative finance platforms. Over the last week or so we’ve seen not one but two fintech focused venture capital style listed funds list on the London market: Augmentum Fintech raised £94m while TruFin hit the market with a £70m valuation. Both of these funds have their own unique characteristics although perhaps the most interesting information from the listings is what they reveal about the likely worth of the alternative finance space in the UK.
TruFin feels more like an accelerator for an interrelated bunch of businesses that are being carefully nurtured by hedge fund Arrowgrass. Outfits such as DFC (in supply chain finance and involving ex GE principals), Oxygen (public sector funding) and Satago feel like a mesh of businesses that are linked by their Arrowgrass patronage (and financing) – and a common requirement to find innovative solutions for various funding gaps.
The fund’s 15 per cent stake in Zopa, by contrast, seems a little more tangential though it’s also the single most valuable asset in the fund. By contrast the Augmentum fund feels much more like a pure fintech venture capital fund with very diverse businesses included in the portfolio. In sum then, one can imagine the TruFin businesses slowly crystallising into one financial services group (think Tungsten mark 2) whilst Augmentum will probably be viewed as a rival to the existing roster of Venture capital trusts and university spin out funds.
Whether both or either fund thrives is a wide-open question – all I’d say is that the market is currently in a harsh and unforgiving mood and doesn’t like private equity and VC spin offs which then singularly fail to deliver on their potential (or produce the appropriate profits). Investors will watch the valuations of the underlying businesses like a hawk and if there’s even so much as a hint of under-performance, expect the shares to trade at a discount. By contrast if these funds start to emulate the hugely successful university spin out VC funds, we could see them trade at a chunky premium.
In sum, then, everything really depends on the health of those existing portfolio businesses. And on this front we can at least begin to get a handle on expected valuations. Let’s start with TruFin. I’ll ignore their majority owned businesses (DFC, Oxygen and Satago) for now and focus on the 15 per cent stake in P2P giant Zopa. TruFin puts a £33.9m valuation on its stake in the P2P lender which implies a valuation of around £225m for the business.
"... a banking licence will not only allow Zopa to expand its product range, but also significantly enhance profitability. For instance, the Directors believe that, in 2017, if Zopa had:
taken all of the loans outstanding on its platform onto its balance sheet (the average loan portfolio in 2017 being £1.1 billion);
funded these loans through deposits (at a market rate of 2%) and equity; and
achieved its current annualised projected return of c.4.5%, Zopa would have generated approximately £25 million of additional net revenue."
If the TruFin directors are right, simply becoming a bank could nearly double Zopa’s revenues and vastly increase margins – if that is the case one wonders why every P2P platform isn’t racing to become a bank?
We also discover that TruFin:
“...expects Zopa to raise equity within the next twelve months of the publication of this document and the Directors’ current intention is for the Company to invest an additional £15 million in Zopa, subject to reaching acceptable terms on the investment, the size of the equity raise and a satisfactory valuation being achieved for Zopa. The Directors believe that the [Zopa] fundraising is likely to be carried out at a higher valuation than the valuation implied by the current carrying value of £33.9 million.”
My rough and ready measure is that VCs such as TruFin would be expecting to report a big gain on their booked investments, which I think implies that they’d want an uplift of at least 50 per cent in value terms for their investments – which implies that Zopa could be looking to list with a market cap of around £350m.
Over at Augmentum, Zopa is also the key asset in the portfolio. This fund’s 7.4 per cent holding in Zopa is valued at £18.5m. Curiously this rather implies that the P2P lender (soon to be bank) is valued at a slightly higher price of £250m – which also implies that my 50 per cent valuation uplift would put the IPO closer to £400m.
The RIT Capital Partners backed Augmentum also helpfully includes a longer list of key fintech assets including the following:
Seedrs which by my calculations is valued at £47.5m. On one level this strikes me as quite a high valuation especially when compared to the much longer established businesses in the Augmentum portfolio (see below). Then again, Seedrs does have a strong position in the crowdfunding market and its rival Crowdcube raised £6.69m on a £65m pre money valuation (£71m post valuation), so maybe this number isn’t that toppy.
Online stockbroker Interactive Investor which is valued at £126m. This seems a little low given the fact that iii is already an established business which is producing strong cashflows and has a strong market brand position.
Gold website Bullionvault is valued £78m. As with Interactive Investor, this seems a fairly conservative estimate for a long-established business.
Last but by no means least portfolio analysis business SRL Global which is valued at £15m.
Crucially for all you budding Fintech venture capitalists out there, Augmentum publishes a useful table (on page 49) outlining its likely target businesses for the investment pipeline – a useful shopping list of businesses it would like to buy into in the future. Pipeline candidates include a pensions business in the UK, a global remittances specialist, a firm focused on personal financial data analysis, another on SME lending and finally insurance analytics.