Funding Circle Picks Goldman Sachs, Morgan Stanley for IPOBy
U.K. online lender’s share sale may spur IPOs from rivals
Bank of America and Morgan Stanley also working on share sale
Funding Circle Ltd., the biggest online loan provider in Britain, named Bank of America Merrill Lynch, Goldman Sachs Group Inc., Morgan Stanley and Numis Corp. Plc to help manage its initial public offering, according to a person familiar with the deal, in a milestone for U.K. fintech.
The offering in London, planned for the second or third quarter, will probably value the eight-year-old company at between 1.5 billion pounds ($2.1 billion) and 2 billion pounds, according to the person, who asked not to be identified as the information is private. That would make it the biggest IPO by a British financial-technology startup.
Funding Circle has arranged more than 4 billion pounds in loans for small and medium-sized companies in the U.K., the U.S., Germany and the Netherlands. Index Ventures, Union Square Ventures and Accel Partners, all early backers of Funding Circle, are poised to be big winners in the share sale.
More IPOs are likely to follow in London, which has become the hub for Europe’s fintech sector. Often founded by former bankers who left mainstream lenders in the wake of the financial crisis, several London startups have found a niche in challenging the legacy banks by using the internet to make loans faster and cheaper to obtain.
“This listing is a catalyst for the industry to be taken more seriously,” said Christian Faes, the co-founder and chief executive officer of LendInvest Ltd., a London-based startup that loaned more 500 million pounds to property developers in 2017. “Businesses like ours aspire to be publicly listed, and I think this does pave the way for other offerings.”
Representatives for Goldman Sachs, Bank of America Merrill Lynch and Numis declined to comment on Sunday. Morgan Stanley didn’t return a call seeking comment.
Founded by three friends from Oxford University in a London pub in 2009, Funding Circle doesn’t use its own balance sheet to make loans. Instead, it scores the credit of small companies eager to borrow capital, and then matches them with investors on its website. More than 34,000 British companies have tapped Funding Circle for loans, which they receive in days instead of the weeks or months it typically takes with conventional lenders.
Funding Circle says its investors have pocketed an average annual net return of 6.4 percent since the company’s inception in 2010. The company said its U.K. business generated positive cash flow in 2017, but has yet to disclose any details about its earnings for the unit or the whole group.
Funding Circle has avoided the pitfalls suffered by U.S. firms offering a similar lending concept. In 2016, LendingClub Corp. was engulfed in scandal when it emerged that executives tampered with loan documents and its top executive failed to disclose loans the company had made to him. The firm’s stock is down 74 percent since its IPO in December 2014. On Deck Capital Inc., an online lender based in New York, has also skidded 74 percent since its listing the same month.
Unlike the U.S. industry -- which grew rapidly with Wall Street capital and little regulation -- U.K. players such as Funding Circle benefited by asking the Financial Conduct Authority to regulate them, said Rupert Taylor, founder and CEO of AltFi Data, a London firm that collects lending information. Funding Circle and its rivals also agreed to publicly disclose and standardize their lending performance data.
“That’s the only way to deliver genuine accountability,” Taylor said.
Headwinds that potential share buyers will want to consider include high consumer debt levels that have drawn attention from authorities, as well as potential competition from Goldman Sachs Group Inc.: that firm plans to bring its own online lending operation, called Marcus, to the U.K. in the near future, though it will focus on consumers rather than small businesses. And then there’s Brexit, which is only a year away.
Funding Circle, which is one of four companies Bloomberg News is following through the Brexit process, has felt little impact from Britain’s pending separation from the European Union so far. Its loan volume in the U.K. has soared 130 percent since Britons voted to leave the bloc in June 2016.
Still bullish on London’s vibrant startup scene, venture capitalists plowed more than $358 million into U.K. fintech firms in the third quarter of 2017, more than triple the inflow in the same period in 2016, according to the latest data from CB Insights, a New York research company.
Funding Circle co-founders Samir Desai, James Meekings and Andrew Mullinger are poised to be worth millions after the offering. “Some people may still want to sit with a branch manager, but this is a game-changing way for businesses to borrow,” Desai, Funding Circle’s co-founder and CEO, told Bloomberg News in 2014. The company declined to make its executives available for this article.
Former bankers involved with Funding Circle include board members Bob Steel, CEO of Perella Weinberg Partners and the former vice chairman of Goldman Sachs, and Eric Daniels, the onetime head of Lloyds Banking Group Plc. Jerome Le Luel, the former risk analytics chief at Barclays Plc, is Funding Circle’s chief risk officer.
Policymakers have also embraced Funding Circle as bank lending to small business remained lackluster after the credit crunch. The European Investment Bank, an arm of the EU, placed 100 million pounds on Funding Circle’s platform in 2016, as did the U.K. government’s British Business Bank.