Twice in December the New York Stock Exchange’s famous pillars donned the colours of alternative lenders on the day their shares began trading publicly.
First came Lending Club’s red banner, then OnDeck’s blue and turquoise, for initial public offerings worth $1 billion and $230 million respectively.
The closely watched deals marked a coming of age of sorts for fintech firms, many of which are still in the earliest phases of life. They also raised the question of what lies ahead for fintech exits in 2015.
While some venture capitalists and fintech firm founders see a small, but swelling pipeline of firms ripe for public exits, others say fintech has a long way to go before it truly comes of age.
Matt Harris, managing director at Bain Capital Ventures in New York, said: “I think we’re going to see – pending market availability – a lot more IPOs relative to private exits in 2015 when looked at against the historic average.”
Within alternative lending specifically, Harris said the normal ratio of private exits to IPOs was about nine to one. But now, he said: “I think in this category it will be way closer to 50:50. There’s a pipeline that’s small, but super-fast growing.”
Social Finance or SoFi, which refinances student debt, is expected to file for an IPO this year and P2P lending platform Prosper is another closely watched candidate for a float in the coming years, venture capitalists say.
John Locke, a partner at Accel Partners in Silicon Valley, which has invested in small business funding firm CAN Capital, said: “2015 is going to be a big coming-out year for fintech.”
In addition to IPOs, Locke expects to see more M&A from classic financial services firms seeking to acquire the next generation of technology.
Venture capitalists describe a spectrum of fintech firms ready for some form of exit, with payments and alternative lenders looking more developed but wealth management and investment platforms and insurance fintech firms less so.
Harris said: “Payments are in the seventh inning, lending is in the fourth and capital markets and investments are earlier still.”
Venture capital investments in fintech firms reached a new high of $5.3 billion in 328 deals globally last year, according to Dow Jones VentureSource, more than twice the level in 2013.
But fintech is still just a fraction of overall venture capital investment.
Data provider CB Insights, which tracks US-based venture capital rounds, estimates that investments across all sectors reached $47.3 billion in 3,617 deals during 2014, the highest level since 2001. The firm does not break out fintech investments separately. There were 101 venture capital-backed IPOs, up for the third consecutive year, according to CB Insights.
Greg Brogger, founder of online trading site SharesPost, which allows investors to sell stakes in private companies, said: “A lot of successful exits in the last quarter of the year paved the way for a certain amount of enthusiasm going into this year. There seems to be support for those in the public market.” He added, however, that many companies still preferred to stay private, mature further, stabilise earnings and avoid market shocks that could disrupt their valuations.
The increased investment and visibility of fintech firms as they go public has raised the question of how the market and investors think about the companies.
Accel’s Locke said: “Lending Club in many ways is a bellwether for a number of other fintech companies thinking about the public market. Lending Club is being seen as a tech multiple, not a lending multiple or speciality finance multiple and rightly so.”
Lending Club’s stock was down about 20% from its first day of trading as of Friday morning while OnDeck’s share price was down about 40% from its first day as a public company. Personal finance platform Yodlee, which went public in a $75 million float in October, was trading more than 30% below its opening price.
Not all analysts have been bullish on the prospects for publicly traded P2P businesses. Sterne Agee analyst Henry Coffee wrote in a note about OnDeck this month: “In some ways, the rapidly growing marketplace lending and P2P business reminds us of the US prepaid card business five years ago.” He was referring to two companies that saw growth slow after regulatory scrutiny ramped up.
Amber Dolman, a partner in law firm Goodwin Procter’s financial institutions group, said: “You’ve got all the same pressures of a technology company – high, high growth but not necessarily a proven history of profitability. But when you start dealing with fintech you get the regulatory overlay.”
Scott Raney, a partner at Redpoint Ventures, said advisory was another area that held promise but where there were still questions. Companies such as Acorns, which helps save small amounts of money, and personal finance firm Personal Capital, are examples of firms on the rise in this sector.
Raney said: “They’re scaling [assets under management], they’ve had some very successful financings and are on nice trajectories, but there are still some questions left unanswered. Their models are based on AUM and they need a lot of accounts. How do you scale the acquisition of and managing those accounts?”
Public vs private
Looking at the roster of advisers on the three fintech IPOs in the third quarter, traditional investment banks, including Morgan Stanley, Goldman Sachs, Credit Suisse, Citi, and Bank of America Merrill Lynch are among the bookrunners.
But several fintech specialists say the decision to pursue a private versus public exit is largely driven by venture capital firms.
Dolman at Goodwin Procter said: “Before they listen to bankers, they’re listening to their investors and boards. The biases of a strategic investor on the board or private equity or venture capital fund is really going to guide the process as to whether or not the company is focused on an IPO or merger.”
Ex-bankers including former Citi banker Hans Morris, former Citi chief Vikram Pandit and former Morgan Stanley chief executive John Mack are among the advisers that are increasingly active in advising on investment in the sector and investing in fintech firms.
Stephane Dubois, chief executive of financial data firm Xignite, said fintech as a whole still had growing up to do before the market saw a spate of public exits.
He said: “I’m not anticipating a lot of IPOs in fintech in 2015. For a lot of the start-ups we heard about in 2014, it’s too early on.”
Source: Financial News