What Lending Club’s float means for peer-to-peer lending

The biggest peer-to-peer platform has delivered stellar returns, says David C Stevenson. But big players are not the only profit-spinners out there.

The biggest peer-to-peer lending platform has delivered stellar returns but big players are not the only profit-spinners out there.

Alternative finance's biggest platform, US firm Lending Club, has hit the American stockmarket. And what a debut! The San Francisco-based peer-to-peer (P2P) lending platform is currently valued at just under $9bn.

The shares trade at around $25, well above the listing price of $15. In total, the consumer lender has raised a $750m war chest that will come in very handy as it looks to buy into new markets, both at home and internationally.

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These are remarkable numbers, especially when you consider that it is now in effect valued as the 14th-biggest bank in the US although, of course, it isn't a bank. But even more extraordinary are the returns made by early investors in the business.

Lending Club has been through many funding rounds since its inception in 2006, with one of the more recent fund-raising rounds (2013) involving Google taking a $125m stake in the business.

However, the "A round" investors back in 2007 have almost certainly made a return of 5,500% on their initial investment, when Lending Club was valued at $15m. The "B round" investors made an even more staggering 8,097% return, while the "C round" investors had to make do with a 3,726% return.

Venture capitalists who put money in Lending Club such as Canaan and Foundation Capital will be very happy.

Equally impressive are the hard numbers produced by this alternative finance business. To date, Lending Club has lent out $6bn, largely to US consumers looking to refinance things like credit cards, at interest rates that vary around the 12% to 14% mark. Some $1.1bn of that funding has come in the last quarter alone.

Revenues for the firm have been on a sharp upwards track in 2012 it pulled in $33m, then $98m in 2013. In the first nine months of 2014 revenues have totalled $143m, although the business actually made a loss of $23m.

Of course, these are still fairly small numbers compared to that market valuation. Lending Club is being valued like a super-fast-growth tech business. I'm not sure I'd want to pay that kind of multiple. Not because I don't think the opportunity is huge (it is) it's just that I think there are better value, non-US based businesses listed in Europe which offer alternative ways into the sector. These can be bought for a fraction of the Lending Club asking price.

In the past, I've mentioned both TrustBuddy (Sweden: TBDY) and London-listed GLI Finance (LSE: GLIF), where the fundamental multiples are many times lower than Lending Club's. But to be fair, the US business is the biggest and best in a sector that is growing fast, so I'd also warn that anyone looking to short the shares might be in for a bumpy ride in the short term.

Just like e-commerce giant Alibaba, there are many investors who think its shares are overvalued, but the market doesn't always listen to the cynics. Alibaba's shares have surprised on the upside since its initial public offering (IPO) and, I suspect, Lending Club will do the same.

Get ready for mergers and buy outs

According to AltFi Data, Zopa the current UK market leader in terms of total transactions to date and the original P2P pioneer has lent out £693m, or just under $1.1bn.

If we were to use a very simplistic reckoner (based on Lending Club's IPO and a multiple of 1.5 times total transactions to date), that would make the British firm worth $1.6bn. That may be too big a price ticket for Lending Club, which is why it might instead take a closer look at RateSetter (Zopa's rival in consumer loans) and Funding Circle (market leader in loans to small-to-medium enterprises).

Total transactions to date are £428m for RateSetter and £461m for Funding Circle, suggesting a possible deal size of about $1bn. That looks more manageable, although I'd also wager Funding Circle is the most likely platform to list in 2015.

Sadly, this will have no impact on the ordinary lenders who put money to work on these UK platforms their investment is in loans that yield income, not in the equity of the business. The idea of making thousands of percentages via lending is, of course, preposterous, but many would like to see a yield in the higher single digits, or even in the double digits per annum.

One constant gripe for many private investors is that once they put money to work on P2P platforms, the income returns aren't always as high as they might have at first expected although all the platforms are careful to spell out likely returns after defaults.

I think it's fair to say that with the big three you'll have your work cut out getting a net return of much above the 8% to 10% range without taking some big risks (by lending to businesses through Funding Circle, for instance).

Better returns from smaller lenders

But there is an even more adventurous option out there for the more internationally minded among you lending money out via platforms based outside the UK but in Europe.

In this respect two platforms stand out, Bondora (otherwise known by its Estonian name isePankur) and Swedish-based TrustBuddy. Both lend to consumers (short-term loans in the case of TrustBuddy) and both allow investors from the UK to access their platform in a fairly straightforward manner.

Net returns on both platforms vary but TrustBuddy data suggests that in the period since 2011 net returns have varied between 11% and 18.8%, while the annualised net return from the Bondora platform has been running at 20% a year.

These returns are much better than the middling single digits on offer from the big UK platforms and, of course, there is an obvious reason for this. These European platforms are smaller than their UK peers, with a much smaller volume of loans.

Risks may also be higher (although not necessarily so) from a business model that involves lending in a number of different European markets including, in TrustBuddy's case, making what are in effect payday loans.

Regulations and consumer attitudes towards debt vary enormously from country to country, so this option is only for the more adventurous among you. UK investors can read more on the websites of Bondora and TrustBuddy.

You can read more about alternative finance at my site, www.altfi.com.

David C. Stevenson

David Stevenson has been writing the Financial Times Adventurous Investor column for nearly 15 years and is also a regular columnist for Citywire. He writes his own widely read Adventurous Investor SubStack newsletter at davidstevenson.substack.com

David has also had a successful career as a media entrepreneur setting up the big European fintech news and event outfit www.altfi.com as well as www.etfstream.com in the asset management space. 

Before that, he was a founding partner in the Rocket Science Group, a successful corporate comms business. 

David has also written a number of books on investing, funds, ETFs, and stock picking and is currently a non-executive director on a number of stockmarket-listed funds including Gresham House Energy Storage and the Aurora Investment Trust. 

In what remains of his spare time he is a presiding justice on the Southampton magistrates bench.