Growth Investing | Funding Circle - Growth At A Price

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26th Sep '18 by SundayTrader

6 comments 1776 reads

Don't know if anyone else has been mulling the Funding Circle prospectus. The key figure is an EV of 13x current year revenue, and another 300 million of cash to fund more IT and marketing.

As a business, I rate Funding Circle the pick of the bunch of the peer to peer lending businesses in this country. But a market cap of around 1.5 billion just feels too rich to me. Anyone else have any thoughts?

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SundayTrader

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6 comments

Howard Marx

26th Sep '18

Funding Circle is seeking to raise £300m (net of £17m expenses) - part of the funds are to used in marketing the brand to raise it's profile. It's history is one of consistent losses:

Funding Circle’s IPO follows sales of shares in similar companies on US stock exchanges, which have left initial investors out of pocket. Lending Club, a US peer to peer lender, debuted in New York in 2014. Its market capitalisation shot up to $8.5bn on the first day the shares were traded. Today the market capitalisation sits at $1.6bn.

https://www.stockopedia.com/sh...

I don't think this type of business model would generate much interest in the Dragons Den - where are the entry barriers?

timarr

26th Sep '18

I don't think this type of business model would generate much interest in the Dragons Den - where are the entry barriers?

Regulation. The FCA is proposing making it much harder to let retail investors lend through this type of platform. That's how Funding Circle got started, although now most of its funds come through institutional investors. So lookalikes would have to find a different route to market.

timarr

JohnEustace

26th Sep '18

Both this and the Aston Martin IPO look like to me as if they are trying to launch while they can before the good times end. I see them as indicative of the late stages of the bull market and the valuations they are seeking as decidedly optimistic.
They could both be shorting opportunities when they release their first results post flotation, but I'll be staying away until then.

SundayTrader

26th Sep '18

I think there is a fair amount of moat. There are quite a few P2P outfits out there, but I don't know any that looks serious competition in Funding Circle's chosen niche. As with any online business, the trick is getting sufficient scale fast enough to get well clear of the possible competitors. On current and projected growth rates, FC are well placed to be doing that. I just have a fundamental discomfort about a valuation that requires a 30% plus growth rate in the loan book to justify it. Maybe I am too squeamish - this is not a bank and it is not the shareholders who suffer if , or rather when, too many loans turn sour.

Dragon

26th Sep '18

Sorry had to give a thumbs down to this as we are now talking about a loans company that does business loans without security. This was my first P2P experience back in 2012 and I lent to businesses and lent on property. I stopped lending on businesses later on and just lent on the property loans because so many of the businesses loans were going into default some two months into the loan.

There are P2P companies that only do loans with security and I don't mean a personal guarantee which isn't worth the paper it's written on. I just don't see how you justify saying this is the pick of the bunch. Yes you can make money on the interest but try getting the capital back when a company defaults. Diversification is an absolute necessity with this type of P2P lending.

It's perhaps not the worst but from an IPO buying point of view it's expensive. You are looking at a Price to Sales ratio of between 11 and 18 for a company that doesn't make a profit. I think you could buy this cheaper after the IPO.

Michael Ridyard

27th Sep '18

I also will not be investing in this IPO based on my previous experience investing with Funding Circle. I felt there was not enough due diligence in assessing the financial health of some of the companies on its books. One of my loans went bust after 3 months from the loan date, I was not impressed. However they mitigate some risk by only investing up to 1% in any one company. My current Peer to Peer leading punt is with P2P which is trading significantly below its NAV and currently paying 6.1% yield on share price.

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Funding Circle - Growth at a Price

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SundayTrader

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