The rise of the UK fintech scene has seen it become one of the rare breed of technology sectors where we are genuinely competing head-to-head with the big hitters from Silicon Valley. We now have a slew of recent fintech ‘unicorns’ – the term applied to start-ups that hit a $1 billion (£777 million) valuation including TransferWise and Revolut as well as digital banking start-up Monzo and alternative lender Acorn OakNorth.
Many IPOs skip a retail investor offering, considering administering the smaller investments of numerous private individuals investing online through stockbroking platforms not worth the effort if there is enough interest from institutional investors contributing millions each. However, with Funding Circle’s business model based on retail investors, it should perhaps come as no surprise to learn that the 80,000 already investing online through the platform will be offered the opportunity to buy into the IPO. The bad news is that the minimum shares allocation has been set at £1000 so smaller investors on the platform that often only have a few hundred pounds available at a time will be locked out.
Funding Circle, the peer-to-peer lending platform founded in 2010 by a trio of Oxford Graduates, will be join that exclusive group next month when it completes an IPO that values the company at £1.5 billion and aims to raise £300 million. The platform facilitates retail investors lending their money to SMEs against an interest rate that beats that offered by savings accounts and can diversify the portfolio of those investing online. Investors are advised to split any investment across a portfolio of loans to reduce risk my lessening the impact of any one borrower defaulting.
So far over the company’s several year history, default and late payment rates by borrowers have been low and average portfolio returns, minus fees and defaults, around 6%. However, some critics point out that the peer-to-peer lending model has yet to pass through a full economic cycle that includes a recession or other form of shock to the financial system. Banks also don’t often get into trouble with non-performing loans when everything is rosy with the economic backdrop.
The model initially picked up the slack from banks in the wake of the ‘credit crunch’ a decade ago, when SMEs struggled to access traditional bank-issued finance due to the introduction of much tighter lending criteria. Now Funding Circle and other online platforms also often compete directly with traditional lenders.
The funds raised through the IPO have been earmarked for Funding Circle’s international expansion and stepping up its marketing drive in existing markets. Post-IPO around 25% of the company’s stock is expected to be publically traded. 10% of the company will also be sold to Anders Povlsen, Denmark’s richest man, in a private placement, on the condition the company’s IPO valuation does not exceed £1.65 billion. Povlsen has an eye for an online business model as the largest shareholder in digital-only fashion retailer Asos.