The Lending Club IPO and Beyond: Equities.com Interview with Lend Academy's Peter Renton

Peter Renton |

p2p lending, peer-to-peer lending, lend academy, peter renton, crowdfunding, IPOs, new IPOs, lending club ipoPeer-to-peer (p2p) lending appears poised to take a big step into the public eye when Lending Club, one of the premier p2p sites, makes its IPO next May. With plans to raise $500 million based on a $4 billion valuation, the San Francisco-based company is making a pretty clear statement that p2p lending is here to stay.

Peter Renton, founder of Lend Academy and co-founder of the LendIt Conference, is one of the country’s foremost experts on the p2p space. He talked with equities.com about what the IPO means for the industry and what investors should possible expect from this stock.

EQ: Lending Club has officially filed to go public. What do you think that this means for the P2P industry? Is it a real game changer or is it not that big of a deal?

Peter Renton: I think it's a real game changer for p2p lending.

Firstly, you've really got an industry that is still just getting on its feet. It's not part of the conversation when you go to an investment advisor. Even when people are talking about alternative investments, it's still often not part of the conversation. So what this does is put peer-to-peer lending on the map.

For example the day Lending Club filed for their IPO there were more articles written about peer to peer lending, about Lending Club, than any other day ever. There was so much coverage that it raises the awareness of the whole industry. I think the really big story here is that this isn’t a fledgling new-fangled investment. It’s becoming part of the mainstream now. This is the piece that begins that process.

EQ: Do you have any opinions on the valuation? Early speculation has the IPO at $500 million for a valuation of $4 billion.

Peter Renton: If you're trying to look at the fundamentals of the business and come up with a reasonable valuation, it defies logic. Like with anything, valuation is simply a factor of demand and supply. If there’s enough people who really want to buy the stock of this company then the valuation can be justified with any metrics.

I mean you look at some of the recent IPOs where companies were losing money, there’s certainly precedence for heavy valuations. I feel like at this stage, Lending Club is going to be around for a very long time. That is where the valuation is coming from. The valuation is based on the fact that Lending Club is going to be a very large company one day. That is certainly the vision of their CEO [Renaud Laplanche]. He sees this as the financial services company of the 21st century on par with Citibank (C) , with Chase (JPM) , with Bank of America (BAC) , with those kinds of financial institutions.

If you look at it from that perspective, taking the long view then, the valuation is certainly justified. But whether it's justified in the short term? Time will tell. If enough investors will buy the stock, then they'll say the valuation is justified.

EQ: It does raise an interesting question. Any time you have a unique company like this going public for the first time you get into the question of how exactly is a stock like this supposed to trade? In the early going, what do you think people should be looking at when you're looking at a P2P stock? There’s just the one now, but, as the segment expands, what elements do you think will matter?

Peter Renton: I think the most important element right now is their loan volume. Lending Club did just over a $1 billion in the second quarter. It is starting to do significant volume, but they need to be able to keep generating that growth as time goes on.

The other metric, obviously, is the cost of that volume. That’s something that people are going to be keeping a close eye on long term. That cost cannot go up with the percentage of revenues. You’ve got to be able to justify the fact that there's economies of scale for getting larger and your cost structure is going down. With Lending Club they made a profit in 2013 and the first six months of this they didn’t. They made losses. They did have a $140 million acquisition that certainly would have cost quite a bit of money. There’s obviously costs involved in preparing to do an IPO. That’s something I think people need to keep an eye on.

Obviously if Lending Club thought the loss (in the first six months of 2014) was a really big deal, they wouldn’t have filed to go public. They’re clearly feel like there is enough demand regardless of this loss but I think to justify any kind of valuation like this you look at the revenue they're making off the originations, and what is the cost to get that revenue. Those are the two key metrics.

EQ: This also raises an interesting question. Better investment in the long run: P2P loans or P2P lending stocks?

Peter Renton: I don’t know if I can make a prediction there. I can say this, though, I think the peer-to-peer loans themselves have proven to be a very consistent performers over several years. I’ve now been an investor for over five years and I’ve received very consistent returns.

There are few, if any comps, for Lending Club’s stock. OnDeck Capital is not true peer to peer, but they do have a loan marketplace as part of their offerings, and OnDeck Capital is also filing to go public right now, so there will two in the space. But if you're talking about Lending Club, one individual stock as a good investment over the long haul, I’m not prepared to say it's going to be better than their loans.

But certainly, the potential upside is a lot higher with their stock than their loans because if they do end up executing on their plan and becoming the Chase or Citi or tomorrow then their stock right now is going to look pretty cheap even with the $5 billion to $6 billion valuation.

EQ: What do you think the current environment of interest rate concerns means to the P2P lending industry? Obviously, a lot of fixed income is not doing particularly well right now because there's that looming interest rate hike somewhere on the horizon. Do you think it's had a particular effect on the P2P industry?

Peter Renton: We've been in this same kind of low environment for many years now that has driven the investor side. There’s no question that this is a big part of the growth story. If you could get 5% to 6% with treasuries, the market might be different. There probably would be less demand, particularly at the lower risk loans that are paying less interest.

This industry has grown up in an environment that has had extraordinarily low yields for investors. The investor story has been very easy to tell, particularly now that the platform has a reasonably long track record of solids investor returns. What no one knows for certain is what will happen when interest rates go back to, say, more normal level even 3% or 4% with treasuries. We haven’t really had that.

I think peer to peer lending is always going to be have investor demand because there's always going to be a premium placed on these loans over the prime rate. If it’s at 8% then the corresponding interest rates for borrower's will go up and therefore corresponding returns to investors will go up.

I’m very bullish on the space. I see this as being a success in any interest rate environment. In this current interest rate environment it's incredibly easy to justify, but I think we'll have a solid industry no matter what.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

Companies

Symbol Name Price Change % Volume
C Citigroup Inc. 60.15 1.09 1.85 32,535,971
JPM JP Morgan Chase 85.12 1.05 1.25 20,844,853
BAC Bank of America Corporation 22.95 0.38 1.68 182,693,888

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