I submitted this article to seekingalpha.com
Summary: Lending club has had consistent growth in number of loans issued since 2009, and holds a competitive advantage over traditional lending institutions. While I don't generally recommend Initial Public Offerings, this company doesn't seem to be going public because they need money.
Background: What do Borders and Blockbuster have in common? They are both information based businesses that have been largely displaced by the internet. Looking back at the story of the US economy during the turn of the century I think we'll agree the dominant trend will be the internet disrupting large, information based products like these.
As Lending Club CEO states: "There have been many examples of this happening before, whether it was when Borders could not react fast enough to Amazon or when Blockbuster could not react fast enough to Netflix and eventually went bankrupt. There have also been many attempts at companies trying to survive by spinning out low-cost operations... Despite their best efforts they keep the same culture."
Renaud Leplanche 1
The financial industry could very well be the next one up for a ride. Every interaction of the financial industry is currently being re-evaluated from transactions with Paypal, to fundraising using Kickstarter public funding with Neighborly and even currency itself using Bit-coin. While I'm not totally convinced that all these "innovations" will turn out to be real improvements, one in particular has caught my attention. Partly because Lending Club is going public, I've been thinking about Peer to Peer Lending. Peer to Peer Lending first emerged in the UK with Zopa followed by companies like Funding Circle and Assetz Capital.2 The essence of these peer to peer lending is that the companies are not issuing the loans but simply use the internet to facilitate loans being made from one person to their peer.
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| Peer to Peer Lending https://www.prosper.com/welcome/how_it_works.aspx |
Peer to peer lending is the natural development of applying the internet to finance. This is the emergence of an entire industry not limited to one or two companies. Along with peer to peer lending, micro-finance organizations for charity like Zidisha have popped up using the internet to give individuals access to funding otherwise un-available in developing world. Out of this developing field two major players in the U.S. that have shown staying power are Prosper and Lending Club. In 2008 during the financial crisis, the SEC required these companies to register their loans as traded securities, and offer re-sale on a secondary market which ended up suspending new loans from being issued and forced Zopa out of the US market.2 After adjusting to the new regulations, both companies were able to resume issuing loans near the end of the financial crisis of 2008-2009 with Lending Club taking the lead as the largest, best run Peer to Peer Lender in the US. Lending Club had originally been formed by Renaud Laplanche in 2007 partly "after he became irked by the massive disparity between the 18% interest rate on his credit card bill, and the 1% savings rate at his bank."Laplanche collaborated with Oracle co-worker Soulaiman Htite in 2006 and initially tried to issue loans through Facebook but later realized they would have to build their own platform. Video summary: http://youtu.be/GWsVTu1rgUo
Potential- Since then Lending Club has continued to facilitate more loans, gain financial strength as well as recruit prominent financial industry leaders to their team. John Mack former CEO of Morgan Stanley and Lawrence Summers former chief economist at the World Bank, Simon Williams former Citigroup head of Global Consumer Risk are the more notable recruits.4
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| https://www.lendingclub.com/info/statistics.action |
Probably the strongest indicator of their success though, is the continued increase in number of loans facilitated which more than doubled from $600 million in 2013 to $2 billion in 2014. In addition to this consistent upward trend as LePlanche states: "I feel that our competitive advantage compared to traditional banks is really long lasting because, again, it is grounded in technology and cost, not something they can react to. The amount of debt that American families are carrying is really huge, so the opportunity to make an impact and help people is really tremendous."1
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| 2013 SEC Report http://tinyurl.com/n93dj9u p.58 |
Risks- while Lending Club has enormous promise and is growing at an surprisingly consistent pace, it should still be remembered that this is a high risk start-up that has only 1 year of actual functioning with positive income. This is an industry that 10 years ago wasn't even an idea and it has never paid a dividend and is untried in its long term performance. With revenue of about $100 million and net income for the first time becoming positive around $7 million in 2013 this company has a long way to go before living up to the $1.55 billion dollar valuation heaped on it via the loans from $125 million investment by Google, $15 million from Kleiner Perkins and others. 7 For the long term investor it will likely take years and overcoming some large setbacks for Lending Club make money for its investors. It is by no means a sure bet during the bull market in an economy artificially propped up by a federal stimulus.
Along with its profitability, Initial Public Offerings in general are not a great way to find value, as Warren Buffet has stated in different ways on multiple occasions: "It's almost a mathematical impossibility to imagine that, out of the thousands of things for sale on a given day, the most attractively priced is the one being sold by a knowledgeable seller (company insiders) to a less-knowledgeable buyer (investors)."8 His own history speaks even louder as he grew his wealth without ever having to purchase an IPO. Or as Seth Klarman explains: "Gone are the days when a new issue was a collaborative effort in which a business that was long on prospects but short on capital could meet investors with capital in hand but few good outlets. Today the IPO is where hopes and dreams are capitalized at high multiples." 9 Or as Ben Graham, quips IPO really stands for Insiders Play Only, so for the true value investor IPO's are out of the question.
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| http://www.lendingmemo.com/lending-club-for-investors/ |
Recap: Because Lending Club is run using the internet to its advantage, I believe it will continue to take market share away from banks, credit card companies and other traditional lenders by offering better rates to individual borrowers and lenders. Although Lending Club is a company organized around the internet and has a culture that will give them a competitive advantage, it is still an untried business model in an emerging industry. My personal interest in this company is not purely about making more money so much as participating in the greater cause of reducing people's personal debt and losing less money in unnecessary administrative and bureaucratic costs that have built up in older financial systems. I have used Lending Club's service as an investor for about 6 months and I think it holds the potential for a genuine improvement because it should enable people to more quickly reduce personal debt and get above a 1% return on their savings.
Disclosure: I am an investor in loans using the Lending Club website. I will most likely invest a small amount of money in the IPO depending on the price.
1. http://www.lendingmemo.com/lending-club-renaud-laplanche-interview/
2. http://www.bizjournals.com/sanfrancisco/stories/2008/10/13/daily55.html
http://en.wikipedia.org/wiki/Peer-to-peer_lending.
3. http://www.forbes.com/sites/parmyolson/2013/05/02/google-buys-stake-in-lending-club-valuing-peer-to-peer-lender-at-1-6-billion/
4. https://www.lendingclub.com/public/board-of-directors.action
7. http://www.forbes.com/sites/parmyolson/2013/05/02/google-buys-stake-in-lending-club-valuing-peer-to-peer-lender-at-1-6-billion/
8 Margin of Safety Risk Averse Value Investing Strategies for the Thoughtful Investor Seth Klarman
9 http://www.cbsnews.com/news/buffett-ipos-are-almost-always-bad-investments/
"Neither do men put new wine into old bottles: else the bottles break, and the wine runneth out, and the bottles perish: but they put new wine into new bottles, and both are preserved." Mathew 9:17
