The hot IPO of Lending Club has elevated the focus on the emerging market of non-bank alternative lending. Following the tremendous success of the Lending Club IPO, another of the US companies this hot market, OnDeck Capital (NYSE:ONDK), is set to make its initial public offering this week. OnDeck provides an online platform for small-business lending.
OnDeck plans to raise $170 million by offering 10 million shares at 16 to 18. It will list on the NYSE under the ticker ONDK, looking to price late Tuesday and start trading Wednesday. Its investors include Google (NASDAQ:GOOGL) and SAP (NYSE:SAP).
It is a common mistake by US media and investors that Lending Club (NYSE:LC) and OnDeck are the first two IPOs in the fast-growing field of alternative lending via online platforms. The European leader in the field of P2P lending is a company called TrustBuddy, which is listed in Sweden. Other companies in this market include Prosper Marketplace, Funding Circle, CAN Capital, Merchant Cash and Capital, and Kabbage.
Lending Club raised $865.5 million in its IPO, pricing 57.7 million shares at 15. The stock rose 56% to 23.43 on its first day of trading on Thursday. The stock closed Monday at 24.97.
“It’s a hot market and there’s no question Lending Club made it a lot hotter,” said Peter Renton, a blogger and founder of the website Lend Academy, which focuses on alternative lending. “Lending is going through a massive transition.”
These companies are filling a void partly created by the 2007-08 financial crisis, providing consumers and small-business owners with more options to get loans. Since the financial crisis, banks have avoided relatively small loans for consumers and businesses. Lending Club and Prosper Marketplace specialize in consumer loans. Funding Circle and OnDeck focus on business loans. Lending Club recently branched out into business lending as well. TrustBuddy is offering short- and long-term consumer loans, as well as business lending.
“There has been a huge decline in banks lending to small business,” said Brendan Ross, founder and president of Direct Lending Investments, a private investment firm focused on small-business loans. “The alternative lending space is extremely hot and a threat to banks, which have been slow to react.”
Companies in this market have various business models. TrustBuddy, Lending Club and Prosper connect borrowers with lenders, a process known as peer-to-peer lending, through their online platforms. They make money on loan origination fees and don’t carry the debt.
OnDeck is different. Through its online platform, OnDeck lends money from its own pool of capital accessed through a variety of sources, such as credit facilities provided by banks and institutional sources like Deutsche Bank (NYSE:DB) and Goldman Sachs (NYSE:GS). OnDeck, in its IPO prospectus, says it is “fundamentally changing how small businesses are evaluated and opening the door to millions of healthy small businesses that have historically been unable to access the credit they need to grow.” It provides loans of $5,000 to $250,000, with maturities of three to 24 months.
“We believe that the application of our technology to credit assessment can stimulate additional demand for our products and expand the total addressable market for small-business credit,” OnDeck says in its prospectus. When a small-business owner applies for a loan, OnDeck uses its proprietary technology to analyze thousands of data points from disparate sources to determine the creditworthiness of the business. This includes activity shown on bank statements, government filings, and tax and census data, among other sources.
OnDeck says it has originated more than $1.7 billion in loans since its first loan in 2007. It has originated about 48,000 total loans since inception to more than 25,000 business owners, many of whom are repeat customers. In September 2013, OnDeck expanded its product offerings by launching a line of credit option in the range of $10,000 to $20,000. OnDeck earns interest on the balance outstanding and charges a monthly fee. In October 2013, it began generating revenue by selling some term loans to third-party institutional investors through a service called OnDeck Marketplace.
OnDeck reported net revenue of $107.6 million for the nine months ended Sept. 30, up 156% from the year-earlier period. It reported a net loss of $14.4 million, less than a loss of $18.7 million for the first nine months of 2013. About 93% of the company’s revenue this year through September came from interest payments on loans. The average size of a term loan was $44,602 and the average size of a line of credit extended to our customers was $15,944. For the third quarter, OnDeck reported gross revenue of $43.5 million, up 144%, and net income of $354,000, swinging from a loss of $5 million in Q3 2013.
It will be interesting to see whether OnDeck will receive a similarly warm welcome by the stock market as Lending Club did. Swedish TrustBuddy has yet to see its share price react to the significantly higher valuation of its US peers, so investors with an international investment strategy might be able to strike a real bargain here.