Seller Beware! Overpricing P2P Assets Can Backfire


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We could have told you so. In fact, one of us did: the mingling of alternative finance with the mainstream is to be welcomed - but only providing the financials are right.

The highest-profile example of such dangers is surely the flotation of Lending Club on the New York Stock Exchange in December 2014. Lending Club was a trailblazer for the US version of our own peer-to-peer (P2P) business lending market. The fundamental business model is attractive; it is the bringing of individuals seeking good returns on capital together with small business seeking funds for growth.

But what's a P2P business worth?

The trite answer is what people will pay for it. Some might argue – and our communications director did at the time – that when Lending Club was floated, it was hampered by an overly aggressive asking price. Subsequent problems, eg difficulties with the loan book, may have been compounded by the pressure management must have been under to meet ambitious growth projections (necessary to justify the asking price of the stock).

Here's the latest report on Lending Club, from our friends at AltFI.

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"The past six months have been a troubled period for the US giant of marketplace lending, but analyst upgrades could suggest the worst may be behind the platform with an expectation that its Q3 earnings have recovered from a blip in the preceding quarter.

"Lending Club has had a perilous 2016 with investors losing confidence suddenly in May due to allegations of impropriety in the underwriting of loans being prepared for sale to an institutional investor. The immediate result of the news was the resignation of its co-founder and chief executive officer at the time Renaud Laplanche and subsequently a major shakeup of its senior executive team in the following months as well as a plunge in its share price.

"As a direct consequence, Lending Club suffered its biggest quarterly loss in the second quarter of 2016 prompting its chief financial officer Carrie Dolan to step down. The firm reported a loss of $81.4m, or 21 cents per share, for the second quarter of 2016 compared to a loss of $4.1m, or 1 cent per share, compared to the same period in 2015. In this period Lending Club saw its origination volumes decline by nearly 30 per cent compared to Q1 of 2016 although it was still marginally better than the second quarter of 2015.

"The stock price of Lending Club saw a bounce at the close of yesterday's trading, however, of more than 5 per cent after analysts upgraded their expectations for its Q3 earnings."

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To put this in perspective: The stock price of Lending Club is around $15 at the time of writing. The strike price of the IPO was $15 in December 2014. The stock closed at just under $25 at the end of the first session – valuing the business at around $8 billion. Anyone investing at $25 would have lost roughly 80 per cent of their money.

Here's an excerpt of what our communications director wrote in CityA.M. at the time of the IPO: "[The] aggressive pricing of Lending Club is just that – aggressive. The bankers behind Lending Club's IPO have played the media like a knackered trout. They were going to price this asset at nearer $4 billion than $5 billion – still a huge price. But now the financial rabbit has been pulled out of the hat, and here's Lending Club – fluffy, cute, and possibly just a bit too expensive for its own good."

See the argument in full here.

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Money&Co. is not quoted – ie, we are privately owned, and part of the alternative-finance sector. Learn more about how to lend directly to carefully vetted SME borrowers by visiting our Lend page here.



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Disclaimer: Money&Co.™ is the trading name of Denmark Square Limited, Company Number 08561817, registered in England & Wales, authorised and regulated by the Financial Conduct Authority (FCA). The company is identified on the Financial Services Register under Reference Number 727325. The registered office is 58 Glentham Road, Barnes, London, SW13 9JJ where the register of Directors may be inspected. Denmark Square Limited (ISA manager reference number Z1932) manages the Money&Co. Innovative Finance ISA.