California’s top 2014 IPO: online finance disruptor Lending Club
The online lending challenge to banks exploded on Thursday with the stock market debut of Lending Club Corp., a San Francisco company that harnesses the Internet to help investors provide personal loans to consumers.
Lending Club raised $870 million in an initial public offering late Wednesday, after increasing its pre-trading share price from an initial target of $10-$12 a share to $15.
It opened trading at about $25 Thursday on the New York Stock Exchange, then fell back to $23 by midday, a price that would value the company at well over $8 billion. The founder and chairman, 43-year-old Renaud LaPlanche, owned shares worth more than $330 million.
It was the biggest IPO of a California company this year, dwarfing the $427 million raised in June by wearable camera specialist GoPro Inc. of San Mateo.
Investors include John J. Mack, former chairman of Wall Street giant Morgan Stanley, and economist Lawrence Summers, the former U.S. Treasury secretary. Both are directors of Lending Club.
Lending Club is the leader among so-called peer-to-peer lenders, which provide financing to consumers and small businesses unable to get bank loans or only on less favorable terms that the online lenders can provide.
Founded in 2008, Lending Club made its initial splash by enabling small investors to examine loan prospects online and provide money to fund them. Competitors include Prosper Marketplace Inc., also based in San Francisco.
The nonbank companies funnel money from the investor side to borrowers; revenue comes from charging fees to arrange the deals and to serve as bill collectors for the loans.
These days the funders at Lending Club are more likely to be hedge funds and other large financial institutions than individual investors, because of the huge growth in the number of loans that the company arranges.
Indeed, among the many risks the company disclosed as it prepared to issue stock was the fact that so much of its funding now comes from only a few big sources. If just one of those withdrew it could potentially disrupt operations, Lending Club said.
Loans arranged by the company totaled $718 million in 2012, $2.1 billion in 2013, and $3 billion for the first nine months of this year. Lending Club’s revenue for those nine months was $144 million, up from $98 million for all of 2013.
The company began making some small-business loans this year. But its core business is unsecured loans to consumers with Fair Isaac Corp., or FICO, credit scores of at least 660, the conventional cutoff point for prime-quality loans.
Depending on their FICO scores, overall debt loads and other factors, the borrowers are charged interest rates ranging from 6% to 25%, payable in installments over three years or five years.
They often use the loans to refinance debts run up on bank credit cards at higher interest rates, the company said in the prospectus describing the stock offering.
Most borrowers have excellent credit scores well into the 700s, according to Peter Renton, who blogs about peer-to-peer lending and was on the NYSE trading floor Thursday with Lending Club executives.
Renton said he has collected annual returns in the 8% to 11% range by funding borrowers on Lending Club and other peer-to-peer services.
Other lenders in the online marketplace have focused on loans to small-business owners, who rarely can get bank loans of less than $100,000 unless they put their homes or other personal assets on the hook to secure the debt.
New York small-business lender OnDeck Capital Inc., for instance, analyzes the credit risk of mom-and-pop businesses using data sources not incorporated in FICO. It is scheduled to go public next week, with plans to raise more than $200 million.
OnDeck, which raises money by selling securities backed by its loans, was founded by entrepreneur Mitch Jacobs, who retains a large stake in the company after surrendering management of it 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.”
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