LendingClub IPO to benefit Silicon Valley Banking Style

BrokerDealer.com blog post courtesy of extract from cnbc.com and Ari Levy 





Alibaba has dominated the IPO headlines since the Chinese e-commerce and digital marketplace behemoth filed for a U.S. initial public offering in May. But it’s the coming share sale of another online marketplace that likely has greater relevance to Americans.

LendingClub, the largest U.S. provider of peer-to-peer loans announced plans Wednesday to raise $500 million in an IPO. Located in San Francisco, clear across the country from the nation’s money hub of Wall Street, Lending Club has gained popularity by focusing on a piece of the financial universe that the banking industry has long neglected: consumer loans.

Families wanting to remodel their homes, take overseas vacations or relocate have been forced to rack up credit card debt at high interest rates, because banks stopped putting forth the resources into underwriting those relatively low dollar loans.

LendingClub and smaller rival Prosper Marketplace invite borrowers looking for loans of up to to $35,000, with more than three-quarters of customers using the funds to consolidate existing debt. For LendingClub’s lowest-risk borrowers, rates on three-year loans start at below 7 percent.

As of the end of June, LendingClub had issued more than $5 billion in loans since its launch in 2007, including over $1 billion just in the latest quarter. If the stock market behaves, LendingClub plans to go public before the Thanksgiving holiday in late November, said a person close to the company. Morgan Stanley and Goldman Sachs are leading the offering.

Here’s what makes it a marketplace. Rather than acting like a bank, which makes money on fees to consumers as well as the spread between its borrowing costs and interest rates charged to customers, LendingClublets outside investors—retail and institutional—buy loans from its website.

After a prospective borrower applies for a loan, LendingClub uses software and lots of data to underwrite the customer and determine if the loan can be issued. If the application makes it through the screening, it’s made available for the investing public.

A retail investor can open an account with a few hundred or few thousand dollars and build a portfolio of diversified loans by putting as little as $25 into each. When a loan gets fully funded, it gets issued to the borrower and LendingClub gets paid an origination fee. LendingClub’s net revenue more than doubled in the second quarter to $48.2 million, though operating expenses surged, leaving the company with a $9.2 million net loss.