Lending Club Corp. aims to extend its assault on traditional, old-school banking with an initial public offering (IPO) of stock Thursday on the New York Stock Exchange. The San Francisco company, which runs a peer-to-peer marketplace connecting borrowers and investors, seeks to raise as much as $929 million, which would make it 2014’s largest U.S. technology IPO.
Company executives say they intend to transform banking into a more transparent and efficient industry by making credit more affordable and eliminating the middle man, that is, traditional banks.
The recent rise of peer-to-peer lending has its roots in the financial crisis of the late 2000s that led to the Great Recession and substantially increased all types of private transactions, including peer-to-peer lending.
The firm, founded by CEO Renaud Laplanche in 2007, is the largest of its kind and has facilitated over $5 billion in loans in the last seven years, including more than $1 billion in the second quarter of 2014. Company directors include Larry Summers, former U.S. Treasury Secretary, and John Mack, former Morgan Stanley CEO.
“The changes in the banking system in 2008 are directly responsible for the rise of peer-to-peer lending because there’s plenty of demand there, and just like private mortgages have increased substantially, when you take away a product that was by and large available, you’ve easily created a substantial vacuum,” said William Jordan of William Jordan Investments, an Orange County, California, wealth-advisory firm. And those peer-to-peer lending companies have stepped into that vacuum.
On Monday, Lending Club updated its filings with the Securities and Exchange Commission, increasing the IPO price range to $12 to $14 per share from $10 to $12. The company is offering 50 million shares of its common stock and the selling stockholders are offering 7.7 million shares of common stock. It will list on the New York Stock Exchange, trading under the ticker symbol “LC.”
How peer-to-peer lending works
Peer-to peer lending allows individuals lend and borrow money directly from one other. The company connects people who need a loan with others who are interested in lending — and getting a small return on their investments. These investors use Lending Club to earn returns from an asset class that has historically been closed to individual investors and only available on a limited basis to institutional investors.
"It's a nice opportunity for people to borrow money potentially at interest rates that are lower than what they might have to pay for a credit card or personal loan,” said Jordan. “Individuals have investments that they can put money into and try to get a higher rate of return."
The advantage for credit-challenged borrowers is that peer-to-peer loans offer access to financing and bypass the banking industry while individual lenders generate more returns in the form of interest.
Of course, peer-to-peer lending does come with risks.
"The game works beautifully as long as the economy is expanding," said Dick Bove, equity research analyst with Rafferty Capital Markets. "Ultimately we've seen companies try to do this in 1980s and 1990s, but when the economy falls into recession these people are paying above average rates for money and are unable to repay their loans.”
Lending Club operates solely online with no branch infrastructure. The company charges a fee for the loan but does not lend its own money. So, in financial parlance, it is serving as an agent, not a principal. By creating a platform where investors can make loans directly to prime consumers, Lending Club eliminates the intermediary banks.
Consumers and small business owners borrow through Lending Club to lower the cost of their credit as opposed to traditional bank lending. Transaction fees were $133.8 million and $55.2 million for the nine months ended Sept. 30, 2014 and 2013, respectively, an increase of 142 percent.
"While currently focused on originating just prime-based installment loans, we see no reason this company’s platform cannot reach out to all aspects of the U.S. consumer and small business loan market, to markets outside this current geography, and to both prime and not-prime borrowers," Sterne Agee, an independent wealth management firm, said in a pre-IPO report.
Sterne Agee anticipates shares of Lending Club are likely to be valued between $13 and $17 per share, above the company's publicly projected IPO price range.The firm expects Lending Club will be able to generate in excess of $1 billion in revenue by 2017 and have an estimated cash-based earnings per share of 15 cents for 2015.