Applauding an online lending model that challenges banks, investors rushed to buy LendingClub Corp. shares in the biggest initial public offering by a California company this year.
Lending Club, which uses the Internet to match borrowers with investors eager to lend them money, saw its stock rise 56.2% on Thursday after it had raised $870 million in the IPO.
The closing price of $23.43 a share valued the San Francisco company at $8.5 billion and made the personal holdings of its founder and chief executive, Renaud Laplanche, worth more than $350 million. The IPO consisted of about 16% of total shares outstanding.
In preparing for the offering, Laplanche described the moment in 2006 when he decided to create an Internet company to connect consumers seeking loans directly with investors eager to make them.
"I opened a credit card statement charging me a 16.99% interest rate, and a savings account statement from the same bank where I was earning a 0.48% interest rate on my deposits," Laplanche said in materials provided to potential shareholders of Lending Club.
The chasm between what he paid the bank and what it paid him "made me wonder whether the existing banking system was indeed the most efficient mechanism to allocate capital," he wrote.
Wall Street embraced Laplanche's online challenge to banks by snapping up shares priced at $15, up from an initial target of $10 to $12 a share.
From the opening trade Thursday on the
Under the IPO's restrictions, Laplanche must wait six months to sell shares, as will other insiders, including corporate directors John J. Mack, the former chairman of Morgan Stanley, and former U.S. Treasury Secretary Lawrence Summers.
The IPO was the biggest for a California company, dwarfing the $427 million raised in June by GoPro Inc. of San Mateo, maker of strap-on cameras worn by outdoor sports enthusiasts.
Lending Club is the leader among so-called peer-to-peer lenders, which describe themselves as efficiency-driven technology companies, not banks. They don't have any branches to maintain, and, they said, they have streamlined underwriting, processing and bill collecting operations.
The risks are familiar to financial firms: uncertainties of what would happen when interest rates rise, potential liquidity crunches if funding sources dry up, increased competition from other innovative firms or the banks themselves, and the prospect of tighter regulations and lawsuits should borrowers and investors complain of problems.
But in the midst of the successful first day of trading, Laplanche seemed confident, saying the company was now positioned to grow exponentially and serve a wider range of customers over the next 10 years.
"We think we have an opportunity to transform the entire banking system," he said, "making it more transparent, more cost-efficient, more consumer-friendly."
The peer-to-peer companies aren't in the business of making and keeping loans. Instead they serve as matchmakers on conduits, funneling money from investors to consumers and small businesses whose alternatives are higher-interest credit cards.
The companies make money from fees charged to arrange the transactions and to collect payments on the loans.
Lending Club's core business is unsecured loans of up to $35,000 to consumers with Fair Isaac Corp. credit scores of at least 660, the conventional cutoff point for prime-quality loans.
Depending on the FICO scores, overall debt loads and other factors, borrowers are assigned risk ratings and charged interest rates of 6% to 25%, depending on the degree of risk, and payable in installments over three years or five years.
Business has been booming. Loans arranged by Lending Club totaled $718 million in 2012, $2.1 billion last year and $3 billion for the first nine months of this year. The company's revenue for the first nine months was $144 million, up from $98 million for last year. It reported its first annual profit last year, $7.3 million.
Notable competitors include Prosper Marketplace Inc., which like Lending Club is focused on consumers, and OnDeck Capital Inc., which lends to small businesses and hopes to raise more than $200 million in its own IPO next week.
OnDeck analyzes the credit risk of mom-and-pop businesses using a variety of data sources not incorporated in FICO scores. The New York company, which bundles its loans into securities for sale to investors, was founded by entrepreneur Mitch Jacobs, who retains a large stake in the company after stepping out of management and moving to Southern California.
"It sounds retro to say the Internet has arrived," Jacobs said. "But financial services are really the last massive market that is technology-based but remains rooted in systems from the 1980s and 1990s, before the Internet disrupted everything."
Lending Club's original funding sources, who dominated the picture until three years ago, were individuals seeking to lend as little as $25 and expecting returns in the 5% to 9% range, depending on the risk scores of the borrowers.
Funding now comes from a far wider variety of sources, including banks that want safe investments yielding 3% to 4% and aggressive investment firms willing to shoulder extra risk in return for rates of 10% or 12%, said Scott Sanborn, Lending Club's chief operating officer.