LendingClub finally got the vote of confidence it sorely needed.
For all the speculation that a bank or a peer in the brave new world of online lending who would swoop in and buy the beaten-down company whole, so far the biggest bet has come from someone who made his fortune in a different corner of the Internet: video games.
A tangle of four companies affiliated with Shanda Group of Singapore, run by video-game entrepreneur Tianqiao Chen, disclosed that they hold 29 million shares of LendingClub and 15.7 million options, as Bloomberg's Hugh Son and Noah Buhayer reported. That would give Chen's companies a stake of almost 12 percent if the options are exercised, which would make Shanda the largest shareholder in LendingClub.
That stake, coupled with the news that another online lender, SoFi, received an Aaa rating from Moody's for a security offering backed by student debt, was enough to rescue LendingClub's shares from the dungeon, at least temporarily. The shares surged as much as 15 percent on Monday after bouncing around their all-time low of $3.44 last week. But to maintain that momentum, Shanda should express its confidence by investing in LendingClub's loans as well.
Chen started the firm first known as Shanda Interactive in 1999 with $60,000, helped by investments from friends and family, according to the company's website. The company focused on creating free online games that could earn revenue from in-game purchases, then transformed into an investment holding company that had 140 technology, media and telecommunications companies under its management at its peak. Among other things, Shanda's ambitions included bringing an online version of Dungeons & Dragons to China.
In April, Shanda bought all of Trian Fund Management's almost 10 percent stake in Legg Mason after those shares experienced a brutal slide that had erased more than half their value at one point:
Just last week, Shanda received U.S. antitrust approval that allows the firm to add to its 2 percent stake in Sotheby's, the auction house whose shares have also been battered:
Viewed collectively, Shanda's recent headline-making investments appear to be sort of risky and bold bottom-fishing. Chen seems to be in the mood to take positions in severely beaten down stocks on a hunch that the companies can be turned around.
His takeover of Trian's stake in Legg Mason came after Nelson Peltz's firm abandoned the position following a six-year push to lift the share price, which worked for a time -- the stock reached a record in February 2015 but is down about 45 percent since then. While Legg Mason's revenue dropped almost 6 percent in 2015 and it's hard to find people who are bullish on active fund management, Shanda heralded the investment by saying the asset-management business is “entering a new phase of growth opportunities.” His interest in Sotheby's comes in a year when analysts forecast the auction house's sales will drop 17 percent and operating income will decline 28 percent.
This type of bottom-fishing, of course, can reap tremendous rewards, though it comes with tremendous risks.
The investment in LendingClub may be the riskiest of all because investor confidence has been so decimated this month by the ouster of Chairman and CEO Renaud Laplanche, the disclosure of faulty internal controls and a Justice Department investigation. Confidence among shareholders is only one piece of the puzzle; LendingClub also has to rebuild confidence among investors who fund the loans it originates because many of them have grown reluctant to keep purchasing the debt amid all the negative news. Without a growing pool of loan investors, LendingClub will have a hard time increasing loan originations.
Last week LendingClub made it clear it that it was leaving all options on the table:
We are actively exploring ways to restore investor confidence in our platform and obtain additional investment capital for the platform loans. These efforts may take a number of different structures and terms, including equity or debt transactions, alternative fee arrangements or other inducements including equity.
It makes one wonder whether investors are looking beyond Shanda's equity investment and speculating that the Singapore fund will follow up by investing in LendingClub's loans as well. Shanda's statement on Monday may have only fueled that speculation: "We look forward to supporting LendingClub’s efforts to strengthen its competitive advantages and continue leading the development of the industry.”
To show other potential investors how committed it really is, Shanda would be wise to put some money where the business is.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
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