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Lending Club IPO Should Be a Hot Financial Deal

The company is the largest player in the peer-to-peer banking space.


Investors are about to get access to one of the most disruptive forces in the financial sector.

Lending ClubLending Club, the nation’s largest peer-to-peer lender, has filed for an IPO that is likely to gin up a lot of interest, and in turn should spark offerings from other players in the space, such as OnDeck Capital and Kabbage.

Lending Club founder Renaud Laplanche got the idea for the company after looking through his mail. He saw a credit card offer for a 17% interest rate (and one would assume hefty fees). And he also saw the crummy return he got on the other side of the lending deal — his bank savings account, which earned a measly 0.5%.

His thought: Why not leverage the Internet to get better deals?

So in 2007, Laplanche launched the Lending Club, an online marketplace for borrowers and lenders. For example, a borrower would request a loan — say, to pay for an elective surgery or to fund a small business — on the site. These are small loans, with terms of three or five years, and Lending Club requires a minimum FICO score of 660.

Once a loan request is posted on the site, a lender can then bid on it, which helps to provide a more reasonable interest rate. Still, lenders aren’t complaining — they can rack up attractive returns, as seen by the site’s average of about 14%.

Since inception, Lending Club has processed more than $5 billion in loans, including more than $1 billion in the second quarter of 2014.

Lending Club gets its pound of flesh via charging fees for its service, and the business is lucrative — for the first six months of 2014, revenues soared by 134% year-over-year to $86.9 million. True, the company suffered a loss of $16.5 million, but that’s in part because of aggressive marketing spending.

Besides, the company has had little trouble attracting outside capital. Investors include top players such as Google (GOOG), Kleiner Perkins Caufield & Byers, T. Rowe Price (TROW), BlackRock (BLK), Sands Capital and Wellington Management.

While the Lending Club doesn’t take any credit risk — it’s the lender that takes this on — the company uses sophisticated analytics to score each loan. Which sounds great, but should the scoring system prove flawed, default rates will increase, killing interest in funding loans through the site.

Moreover, rising interest rates could be problematic, too, as lenders might prefer safer Treasury bonds or corporate debt. So far, Lending Club has benefited from a historically low-interest-rate environment.

Such factors should be outweighed by Lending Club’s quality business plan — the real immediate concern is hype. Specifically, expect hot demand when the IPO comes out in November and a quick spike in prices. Most retail investors won’t be able to get in before the Lending Club IPO, so the best bet is to wait for prices to subside after the offering, then buy in once Lending Club starts trading on its own merits again.

Terms for the Lending Club IPO have not been set yet, but the deal should be sizable. During a funding round earlier in the year, the company fetched a valuation of $4 billion.

Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO StrategiesAll About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media,

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