LendingClub’s IPO Looms Large Over Alternative-Lending Market

By Leslie Picker

It’s not often one company can have as much impact on an entire industry as LendingClub Corp. will next month.
LendingClub, which runs an online platform that links up borrowers with investors who want to fund them, may kick off its initial public offering as soon as next week by setting a price range for the sale, people familiar with the matter said.
With no other alternative lender already trading, the IPO could set a benchmark for more than 50 companies -- from Prosper Marketplace Inc. to On Deck Capital Inc. (ONDK) -- currently deciding whether to stick to venture funding, go public, or sell themselves. It’s a small industry so far, having issued $2.4 billion in loans in the U.S., just 0.02 percent of consumer debt outstanding, according to Fitch Ratings Ltd.
“LendingClub’s IPO is a bellwether of the
sector’s growing importance,” said Sam Hodges, the co-founder of Funding Circle, an online lender for small businesses. “We anticipate seeing other major financings, strategic partnerships -- likely including with some major banks -- and M&A across the sector over the coming year.”
There’s plenty of room for error, and a lot at stake. If LendingClub overreaches and the IPO fares poorly, the market for other transactions in the industry could falter. If it fares well, though, it could unleash a wave of deals to follow. In a funding round this year, LendingClub was valued at more than double where Facebook Inc. trades based on price to last year’s sales.

Alternative Pioneer

The San Francisco-based company was a pioneer in the peer-to-peer lending world. Its primary products are unsecured three-and five-year consumer loans for up to $35,000. Potential borrowers come to the company’s site, fill out some basic information and say why they want the money. If approved, LendingClub assigns them an interest rate, and investors then choose which borrowers they want to fund.
Typically companies looking for a public listing base their valuation on multiples fetched by already-public peers. With LendingClub there aren’t any, so setting a price will require some creativity.
Instead of comparing LendingClub to banks or credit card companies, its advisers are looking at high-growth Internet companies and marketplaces, the people familiar with the matter said, asking not to be identified discussing private details of the IPO process.

High Growth

Without any direct comparisons, investors could look at LinkedIn Corp., Facebook and Twitter Inc. to compare multiples with LendingClub, according to Praveen Menon, an analyst at Bloomberg Intelligence.
“The bankers are going to try and push LendingClub to compare themselves to the companies that make it look more attractive,” said Aswath Damodaran, who teaches corporate finance and valuation at New York University’s Stern School of Business. “You as an investor have to guess who they remain comparable to at the end of the game.”
LendingClub declined to comment on its valuation. Morgan Stanley and Goldman Sachs Group Inc., who are managing the company’s IPO, also declined to comment.
In the private market, LendingClub’s valuation is already at a premium to many Internet companies on a price-to-sales basis -- partly because sales are growing so quickly, with revenue almost tripling in 2013. The company was valued at almost $3.8 billion in April in a $65 million funding round. That market capitalization implies a price of 39 times last year’s sales -- higher than all 15 of the publicly traded companies that LendingClub used to determine employee compensation.
Facebook, Twitter and LinkedIn, the three companies named by Menon, fetch about 17, 18 and 16 times last year’s sales, respectively.

Not A Bank

Not all of the startups in this industry employ the same model. LendingClub earns money by taking a small fee every time it helps originate a loan. It also earns revenue from servicing. Others, such as On Deck, fund new loans with debt facilities as well as securitizing loans or selling loans that it already has extended.
For those, companies including more traditional lenders could serve as one reference point for investors. Still, they’re not exactly the same: On Deck uses software to make relatively small loans to businesses that are viewed as too risky to get attention from traditional lenders.

On Deck

On Deck, which disclosed its IPO prospectus last month, has also reached out to potential buyers -- including traditional lenders, said people with knowledge of the matter. The company has decided it can fetch a better valuation by going public, those people said.
A representative for On Deck declined to comment.
CAN Capital Inc., another online small-business lender, has been interviewing banks for an IPO, people familiar with the situation said last week. Prosper, a peer-to-peer competitor to LendingClub that struggled to stay in business amid investor lawsuits and regulatory burdens, was valued at $650 million in a May financing round, people familiar with the matter said at the time.
“A successful IPO could act as a catalyst and benchmark to other P2P institutions to pursue IPOs,” Fitch analysts Brendan Sheehy and Nathan Flanders wrote in a report in August ahead of LendingClub’s prospectus filing. “Publicly traded shares could also serve as a currency for acquisitions for industry consolidation.”