Eight-year old peer-to-peer lending platform Funding Circle have officially confirmed an IPO that is expected to value to company at £2 billion. Its current valuation, of more than a $1 billion, based on the company’s most recent private funding round a year ago, rubberstamped the fintech’s ‘unicorn’ status. However, the IPO, which hopes to raise around £300 million, would more than double that. The IPO will involve the listing of new shares rather than see current investors, which include some of the biggest names in technology-focused venture capital, divest their holdings.
Despite Funding Circle still being a loss-making enterprise, the IPO would see Samir Desai, the company’s 35-year old co-founder and chief executive, achieve a paper value of around £125 million for his remaining 7.7% share in the business. However, his own shareholding will be surpassed by the 10% stake that Danish billionaire businessman Anders Holch Povlsen has agreed to buy in a private placement of the new shares created for the IPO.
The peer-to-peer lending sector sprang up in the wake of the international financial crisis ten years ago. One of the results of the tremors that ripped through the banking system and financial markets was a tightening of lending criteria, with SMEs among the most affected. Peer-to-peer lending, which charges slightly higher interest rates than those offered by traditional lenders, sprang up to fill the market need and Funding Circle has been one of the most successful examples of the new fintech sector.
The system has proven popular with those investing online as an alternative to cash savings that have offered rock bottom interest rates over the past several years. Despite peer-to-peer loans coming with default risk, the percentage of borrowers who do not repay their borrowings in full or on time has proven to be surprisingly low. Investors are also encouraged to spread their capital over a number of loans to reduce the risk if any one borrower defaults.
A new ISA format, the Alternative Finance ISA, was even recently launched. It means those investing online through peer-to-peer lending platforms can benefit from the same tax breaks as if investing in stocks and shares or cash ISAs. However, the consumer finance watchdog and regulator, the FCA, recently warned it was considering restricting the advertisement of peer-to-peer lending as an investment for retail investors. It is concerned some are over-exposed to an investment vehicle that has yet to go through a ‘full economic cycle’. It fears current returns and low default rates may mask what will be a high risk investment during times of an economic slowdown or recession.
Nonetheless, peer-to-peer lending platforms like Funding Circle have so far been doing well and offer a strong alternative to more traditional investment vehicles as well as a means for those investing online to diversify. As with any investment, those investing online should spread their risk across a portfolio of peer-to-peer loans and also not put all their eggs in the P2P lending basket but consider it as a compliment to a wider portfolio.