Funding Circle, the peer-to-peer lender that became the first of the new breed of fintech lender to go public in the UK through an IPO in September 2018, finally offered investors some positive news as it announced an upgrade on its annual forward guidance. The announcement made today, that that loans under management rose by 31% to £3.7 billion in the third quarter of this year compared to the same period last year, has seen the Funding Circle share price leap by almost 17% into the afternoon session.
That’s a welcome turnaround after 13 months that saw the company’s share price fall over 78% from its opening post-IPO level of £4.40 to a low of £0.94 early this month. The wider P2P lending industry has had a troubled recent history with two smaller companies going under, seeing thousands of retail investors lose millions. That has led to calls for the FCA to crack down on a sector that was until recently a darling of the fintech scene and even saw the UK government create a specialised ISA for P2P investments to be held in – the Innovative Finance ISA.
Funding Circle’s business model is, as an alternative to traditional bank lending which has tightened up since the financial crisis, to extend loans to SMEs via an online platform. Funding Circle assesses the borrower’s credit risk, assigning an interest rate that corresponds to that, and matches the loan with private and institutional investors who usually spread the risk between themselves. That is all done via a digital platform. To date the fintech has acted as the intermediary for loans worth over £8 billion, to around 77,000 companies. The number of private retail investors that have invested in P2P loans through the Funding Circle platform numbers around 80,000. Around £1.8 billion of new loans have been processed so far this year, up 9% on last year.
Funding Circle investors can expect to realise average returns of between 5% and 7% this year after bad debts and fees. Investors are advised to spread their investments over multiple loans to offset the risk of one particular borrower defaulting – much as a bank or any other lending institution does. Last year average returns were between 4.2% and 5.2%.
The company’s co-founder and CEO Samir Desai commented:
“In what remains an uncertain economic environment we continue to manage the business prudently, which we are confident is the right course of action for the long-term growth and development of our business.”
Last month Funding Circle’s fall in market capitalisation saw it drop out of the FTSE 250 and some of its retail investors have criticised the illiquidity of its secondary market, which allows investors to sell their loans. The company has reportedly instigated an internal review into ways to reverse the lengthening periods of time needed for investors to dispose of loans through the secondary market, though being able to do so is not guaranteed by the company.
The FCA last month announced it is reviewing the P2P lending market with a view to taking a stricter approach to it, particularly around how transparently companies in the sector communicate to retail investors the level of risk they are taking on.