Skype: Signal2forex / Whatsapp: +79065178835

No products in the cart.

The story of small business lender Funding Circle’s IPO in October was in some ways a surprise – and in other ways entirely predictable.

When the IPO was launched at the beginning of September there was feverish speculation that the firm, which chalked up revenue of £63 million in the first half of this year but has yet to make a profit, could be valued at more than £1.65 billion. This was the upper valuation limit set by Heartland, the private holding company of Danish billionaire Anders Holch Povlsen, which had pledged to buy 10% of the deal.

The ink was hardly dry on a strategic partnership that the lender had signed with Alcentra, under which the BNY Mellon-owned specialist loan manager will buy $1 billion loans from Funding Circle’s US business over the next three years.

Revenue for the full year 2017 was £95 million, so the first half 2018 numbers looked encouraging. The firm has now lent £5 billion globally since it launched in 2010 and is a high-profile poster child for alternative lending in the UK. Established with VC backing from Index Ventures and Union Square Ventures, backers now also include Accel Partners, Baillie Gifford, BlackRock, DST Global, Ribbit Capital, Sands Capital and Temasek.

A central challenge to any marketplace lender is to avoid referencing Lending Club, which IPO-ed in New York in 2014 through Goldman Sachs and Morgan Stanley, as a valid comparable. The loss-making US firm raised almost $900 million and enjoyed a 56% share price bump on the first day of trading to give it a valuation of $8.5 billion. By December last year, however, following a compliance scandal and poor loan performance, the shares were 80% down on their IPO price.

Funding Circle differentiates itself from other peer-to-peer lenders by only lending to small businesses, not consumers. However, so does US lender On Deck, which also IPO-ed in 2014 at $20 a share. On Deck was trading at $6.97 on October 5. Funding Circle has failed to buck this trend, and on the same day, three days after unconditional trading in its stock began, the new shares were down 23% on the IPO price. Global coordinators on the deal, Bank of America Merrill Lynch, Goldman Sachs and Morgan Stanley, had to compress the original price range from 420p-530p to 440p-460p and eventually price at the bottom end of this.

For traders: test results of our odin forex robot free download or use our best Portfolio of forex robots for automated trading.


There are certainly technical reasons for the share performance: a highly aggressive 17 times trailing revenue multiple, very concentrated allocation over and above Povlsen’s stake, short selling and a limited audience for an untested business model. But the share slump is also a sobering wake-up call for the level of concern there is, or should be, over non-investment grade credit.

Funding Circle’s business model involves lending to small businesses. The technology may be new but that’s one of the oldest and most straightforward business models in finance – you lend and the borrower either pays you back or they don’t. The USP of alternative lenders such as Funding Circle is that their automated risk management produces better lending decisions. But this has never been tested in a downturn.

The company projected an annualized return of around 7% for its UK business in 2012 but as rates rise and late-cycle behaviour becomes more widespread in the private debt markets, this will be hard to achieve. Indeed, the annualized projected return today has fallen to between 6% and 7% for a balanced lending option and between 5% and 5.55% for a conservative lending option.

The firm’s projected bad debt rate in the UK is between 2% and 4%, up from just over 1% in 2012, while the default rate for loans 18 months after origination has climbed from 2.8% in 2012 to 3.5% in 2017.

This isn’t bad, but things are moving in the wrong direction. Funding Circle stress tested its existing book to the PRA’s stress scenario in 2016, which resulted in a fall in net yield from 7.2% to 5.7%. When the stress tests were run in 2017 they showed the projected annual return fall from 6.7% to 5% for investors in the entire loan portfolio, and from 6.8% to 4.4% for investors in loans made in the first six months of 2017.

Alarm bells

By definition, alternative lenders are often lending to corporates that more traditional lenders ­– the banks – will not accept. Indeed, many such firms have done good business from client referral agreements with the banks themselves. However, it is late in the cycle and alarm bells have been ringing loud and clear in sub-investment grade debt for some time even though many lenders don’t seem to be listening.

The elephant in the room for any UK-based lender – and borrower – is Brexit. Alternative asset manager ICG recently identified growing margin pressures for Europe’s private mid-market companies but described the UK as a regional laggard in ebitda growth terms as Brexit uncertainty continues to weigh on domestically oriented businesses.

All of this will certainly have weighed on the minds of potential investors in Funding Circle’s IPO, coming as it did less than six months before the UK is due to leave the EU.

The initial valuation of the company at £1.8 billion at the top of the range was extraordinarily bullish given the sector backdrop. In 2016 Adair Turner, chairman of the Institute for New Economic Thinking, famously observed that: “The losses which emerge from peer-to-peer lending over the next five years will make the worst bankers look like absolute lending geniuses.” Although he later backtracked from these comments somewhat, firms such as Funding Circle face an uphill battle in convincing the market that they can perform well and turn a profit as their borrowers enter an uncertain future and the end of easy money.

NOTE: if you have a basic job and just want to increase your income without special risks, you do not have time to search for strategies and study all the tools of the trade, you do not have the extra funds for testing and errors, tired of taking risks and incurring losses – trade with the help of our best forex robots developed by our professionals.

We offer you forex robot free download based on stop and reverse system for testing results in Metatrader.

Share this product!

Do you want to start trade profitably?
Earn 50-300% monthly!