Lending Club weighs in on Funding Circle’s float

Lending Club’s communications lead Anuj Nayar describes his company as ‘supremely undervalued’, as Funding Circle’s shares slide.

Funding Circle’s landmark float is done. Its shares are now trading on the main market of the London Stock Exchange.

The stock closed at 364p yesterday, down almost 20 per cent. This was the result of trading during the period between its float last Friday and the stock’s official market debut yesterday.

Having first narrowed its share price to 440-460p per share, Funding Circle ultimately raised £300m at a valuation of around £1.5bn, approximately 15 times its 2017 revenues of £95m.

Those revenues are expected to grow significantly over the next few years as originations increase, but its valuation-to-revenue multiple will nevertheless remain high by traditional measures, should its current valuation hold.

On the road to its IPO, Funding Circle was repeatedly compared to two publicly-listed US-based online lenders, Lending Club and OnDeck. The former lends primarily to American consumers, the latter to small businesses in the US, Canada and Australia.

Neither has had an especially easy ride as a publicly traded company. The two lenders listed in late 2014 at roughly $25 a share. Today, Lending Club sits at a little under $4 a share, with OnDeck at around $7.50 after recovering from a low-point of under $4 last year.

It’s too early to tell how Funding Circle will fare, but an article in The Times portrayed the early signs as worrying for the UK's prized fintech sector.

Lending Club currently boasts a market cap of $1.65bn (at the time of writing). In 2017, the platform raked in revenues of approximately $575m. This year it expects to see around $700m in revenue – and it holds around $700m in cash.

In an interview, Lending Club’s communications lead Anuj Nayar pointed to what he sees as an ‘incredible difference’ in the way that Funding Circle and Lending Club are currently valued.

The two firms are not directly comparable. The assets they originate are different and are funded by a different mix of investors. They operate in different parts of the world. They are subject to very different regulatory regimes. The list goes on. But fundamentally they are both marketplace lenders, which is why comparisons have been drawn.

Nayar described Lending Club ‘supremely undervalued’. That may be, but it should be noted that when the company first came to market it was valued at $5.4bn at a revenue multiple of 30 times, according to an article by LendAcademy. Nayar said that when Lending Club floated it was primarily seen as a tech stock, but added: “Now, we’re in a different place.”

The erosion of Lending Club’s value can be partly attributed to governance errors that led to founder and former CEO Renaud Laplanche’s dismissal in 2016 – although a significant amount of value had already been wiped away by that point.

Now, Nayar characterises Lending Club as a business focused on execution and responsible growth. He spoke of working with regulators ‘to ensure they know how to manage businesses that are testing new ground to provide new services to consumers or small businesses’, citing a bill on transparency in small business lending that’s just been signed into law in California. Lending Club has been an active supporter of the bill and calls it the most important new financial regulation to be passed in the US since Dodd-Frank (you can read more on it here).

Nayar also emphasised the importance of scale. Lending Club, he said, is now the number one provider of unsecured personal loans in the US, with 40,000 people visiting the platform in search of a loan every day. The firm – which sources most of its lending capital from over a hundred institutional investors – facilitates around $1bn in loans a month. Funding Circle lent a little over £1bn across the UK, US, Germany and the Netherlands in the first six months of 2018, according to its Registration Document.

Lending Club sees scale as a ‘virtuous cycle’. Years of data on consumer borrowers are continuously fed into the firm’s credit models, while most of its institutional partners have their own credit departments, splicing extra layers of assessment into the system.

“Because of the scale we can run tests very, very quickly,” said Nayar. If he has a point, it’s that Lending Club is clearly bigger than Funding Circle, that being bigger entails certain advantages, and that Lending Club is thus undervalued by comparison.  

“Currently, our scale is significantly broader. Our addressable market is focused on the US. We obviously have a different core audience segment…” he said. “But under all those metrics, a revenue multiple of one is low.”

Nayar reaches that revenue multiple by subtracting Lending Club’s ‘cash equivalencies’ (approximately $700m) from its market cap of £1.65bn and comparing its expected 2018 revenues to what remains. Since the interview, Lending Club’s market cap has risen a little, but the revenue multiple remains around 1.4 times.

Interestingly, Lending Club doesn’t underestimate the extent to which the nascent fintech market is interconnected globally. Nayar said that every movement in the space has ‘residual effects for the whole industry’. It would seem then that the company will be keeping a sharp eye on how Funding Circle handles life as a public company – as indeed will most of the UK's fintech sector.

Nayar described marketplace lending as a darling in the mid-2010s. Now that people ‘get it’, he sees investor focus switching to execution. This is especially important for newly-listed companies.

“It’s all about laying out what you’re going to be able to achieve in the future, quarter by quarter, and then executing against it,” he said.