Who can sell what when Funding Circle starts trading?

Co-founder and CEO Samir Desai’s stake in the company could be worth as much as £127.5m.

UK peer-to-peer lending firm Funding Circle will go public in early October. Substantial fortunes stand to be made by members of the firm’s senior management team, as well as by its investors.

Additionally, every single one of the firm’s 1,000-plus permanent employees owns equity in the company.

What exactly should we expect when the firm goes public?

When Funding Circle published its Registration Document last week, we learnt that Index Ventures is its single biggest backer, holding around 20 per cent of the company’s shares on a fully diluted basis. After Index, venture investors Accel and Union Square Ventures own 9.1 and 7.3 per cent respectively.

Samir Desai (pictured), co-founder and CEO of the company, owns 7.7 per cent of the shares. If the firm is valued at £1.65bn – a price that backstop investor Heartland A/S has already agreed to pay – a simple calculation suggests Desai’s stake will be worth £127.5m. His co-founders, James Meekings and Andrew Mullinger, own 4.7 and 4.2 per cent respectively.

Of course, neither the investors nor senior management will be free simply to sell shares at will. A lock-in period applies to the firm’s major shareholders, meaning they won’t be able to participate in trading in the immediate aftermath of the listing.

This is how it works.

Senior management and members of the board (including major investors) – in other words, shareholders who own more than 0.25 per cent of the company – will be offered the chance to sell either nothing or 25 per cent of their shares as part of the offer.

To be clear, the money raised from whatever these shareholders choose to sell is separate to the c. £300m in new, primary market money that Funding Circle aims to raise through the issuance of new shares – shares that bookrunners Goldman Sachs, Merrill Lynch, Morgan Stanley and Numis will be busily hawking over the next few weeks.

The proceeds of shareholder sales will be treated as secondary fundraising, but will still count towards the 25 per cent ‘free float’ marker which Funding Circle must meet. Companies must make at least 25 per cent of their issued share capital available for investment (the "free float") to stage a flotation on the premium segment of the London Stock Exchange.

Imagine Funding Circle ends up with a valuation of £1.5bn. In that scenario, raising £300m would give it a post-money valuation of £1.8bn. 25 per cent of £1.8bn is £450m, meaning another £150m in shares would have to be sold. It’s this £150m that would be raised through the sale of shares by significant existing shareholders.

Beyond participating in the initial offering, however, the firm’s leadership team and board members (which includes most of its investors) will be locked-in for a period of 365 days, meaning they won’t be able to sell any more shares until that period of time has elapsed. Certain large investors which do not have a representative on the board will be locked in for just 180 days after the listing.  

The thousand or so employees who own shares in the company will not be able to participate in the IPO itself, but they will be free to trade shares from the moment the company is listed in October. Should they choose to cash in their stake in the company, they’ll be free to do so from the moment its shares are admitted to the London Stock Exchange.

Whether they choose to hang on to their shares is another matter. Some might be hoping for an Adyen-like situation. The Dutch payments company saw its share price effectively double in the days following its IPO earlier this year, and the stock continues to perform well.

Then again, all that Adyen and Funding Circle share is the broadly-applicable ‘fintech’ tag. Far closer comparisons to the peer-to-peer lending business exist in the form of Lending Club and OnDeck – two US online lenders which went public in late 2014. Both firms are down significantly from their listing prices of around $25 a share. Lending Club today sits at $3.60 a share, with OnDeck at just over $8, after recovering from a low-point last year of under $4.

It should be said, however, that neither Lending Club nor OnDeck work as direct comparisons for Funding Circle. The types of loans originated by the three firms are different, their investor mixes are different, their geographical focus is different, UK regulation is different, and so on. Perhaps more importantly, Funding Circle has not been hit by the kind of controversy that its US counterparts experienced in 2016 (the year Lending Club founder Renaud Laplanche resigned as CEO of the company) – widely considered a down-year for the US online lending industry. 

Funding Circle’s shareholders won’t be alone in keeping a close eye on the first days and weeks of trading in the company's shares. Multiple sources within the fintech industry have said they’ll be watching the IPO with keen interest.

Other UK-based fintech lenders such as Zopa and LendInvest have been linked with public offerings at various times over the past few years. A successful float for Funding Circle could tee up a string of similar listings in UK fintech. Contrastingly, if the share price struggles, we could see fintech lenders stick to private funding for the foreseeable future.