Funding Circle rebounds from IPO slump with higher loan returns

Funding Circle rebounds from IPO slump with higher loan returns

Peer-to-peer lender Funding Circle reported strong loan growth and improved average loan returns in its first trading update as a listed company, helping its shares recover most of the losses suffered since its initial public offering last month.

The lender, which matches investors with small business borrowers, raised £300m in one of the highest-profile London flotations of the year, but its stock shed a quarter of its value in the following days. Investors raised concerns about Funding Circle’s lack of profits and high valuation compared with listed peers in the US.

In a trading update on Friday, however, chief executive Samir Desai said the company had enjoyed a “strong” third quarter and was on track to meet its growth targets.

Shares in Funding Circle were up 2.4 per cent in early afternoon trading at 420p, having earlier come within touching distance of its 440p IPO price.

Total loans under management rose 61 per cent in the 12 months to September 30, to £2.8bn. New loan originations in the third quarter increased 45 per cent year on year excluding property loans, which the company stopped providing last year.

Projected returns on new loans increased in every country Funding Circle is active in, while bad loan forecasts declined in its two largest markets — the UK and US.

Despite the positive reception, however, some observers remained sceptical. John Cronin, analyst at Goodbody, said: “While Funding Circle is clearly in a high-growth phase, the company has yet to deliver net profit and it is difficult to see the stock get back to the 440p IPO level without evidence of profitability build.”

The company has already attracted the interest of short sellers, with about 3.6 per cent of its free float currently on loan to investors betting against the stock, above the FTSE 250 average, according to Markit data.

Funding Circle was the first British peer-to-peer lender to IPO, with the flotation seen as a major milestone for the sector. Such online platforms have grown rapidly since the financial crisis, providing about 15 per cent of all SME loans in the UK in 2016.

However, regulators are increasingly looking to crack down on certain practices in the sector, fearing that unsophisticated investors are encouraged to take on too much risk. The FCA is currently consulting on new rules that would limit access to retail investors, while the European Commission is in the process of introducing new EU-wide regulation.

Funding Circle has reduced its reliance on retail investors as it has grown, instead taking funds from institutional investors such as asset managers.

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