Should you participate in the Funding Circle IPO?

Funding Circle has become a real success story for British Fintech and it plays an important role in our economy – helping businesses to grow and create jobs.” That’s according to chancellor of the exchequer Philip Hammond.

Founded in 2010, Funding Circle is a peer-to-peer lending platform that allows investors to lend money directly to small- and medium-sized businesses. The first company to offer peer-to-peer lending for business funding here in the UK, it’s grown dramatically in recent years (lending over £5bn to businesses with over 80,000 peer-to-peer investors), and is now looking to IPO.

So what are the details and should you participate?

Funding Circle IPO details

You can apply for Funding Circle shares through ‘intermediaries’ such as Hargreaves Lansdown, AJ Bell Youinvest, and Barclays Smart Investor. If you want to participate in the IPO, you’ll have to act quickly. The ‘intermediaries offer’, which provides retail investors with the opportunity to participate in the IPO and become a shareholder in the fintech company, closes tomorrow. The minimum investment is £1,000.

Should you invest in Funding Circle?

Let me begin by saying I’m a huge fan of Funding Circle. I actually started using the peer-to-peer lending platform around five years ago in order to generate higher returns on my cash savings. Lending my money to small businesses around the UK, I’ve been able to generate returns of around 5-6% per year, which is a much higher return than the returns offered on UK savings accounts. The platform is extremely easy to use and you can withdraw your capital at any time. Overall, I rate Funding Circle’s product very highly.

But is that enough to make Funding Circle a good investment? Looking at the details, I’m not so sure, to be honest.

High valuation

One thing that concerns me about the Funding Circle IPO is that the valuation looks quite high.

The group is planning to offer shares at between 440p and 460p, which would give the company a market valuation of a whopping £1.5bn.

When you consider that Funding Circle isn’t yet profitable (last year made a loss of £35m), that valuation certainly adds risk to the investment case.

On the positive side, the group is generating revenue and is growing quickly. Last year, revenue surged from £50.9m to £94.5m and in the first half of 2018, revenue increased 62%. Yet if we assume revenue grows at 60% this year to approximately £151m, the £1.5bn valuation places the stock on a forward-looking price-to-sales ratio of just under 10, which looks lofty. In comparison, US peer-to-peer lending rivals OnDeck Capital and LendingClub trade on forward-looking price-to-sales ratios of 1.5 and 2.25, respectively.

Share price performance

It’s also worth noting the performance of these US peer-to-peer lending companies since their stock market listings. As my colleague Rupert Hargreaves points out, since their 2014 IPOs, OnDeck has fallen around 60%, and LendingClub has declined by around 75%. Both have struggled to find growth.

As such, I’m not convinced Funding Circle is a great investment right now. There’s just a little too much risk for my liking. I’ll be sitting on the sidelines for this IPO and watching to see how things pan out.

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Edward Sheldon owns no share mention. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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