In my recent research note on marketplace lending, I made the case that much of the current trouble experienced by Lending Club, OnDeck Capital, and others is due to the overly optimistic initial valuations of those companies by investors.
In a recent TechCrunch article, an executive at a venture capital firm made the exact same argument:
“As we at Bessemer Venture Partners have evaluated these businesses as potential venture investments over the past several years, we struggled across a few key fronts when trying to justify the lofty valuations of these tech-enabled, non-bank lenders.”
“This group of alternative lending startups has seen phenomenal growth and has leveraged software and better data to disrupt large markets. But at the same time, these new originators shouldn’t continue to be valued off of the same metrics and lofty valuation multiples as SaaS businesses or online marketplaces. Instead, these new lenders are more appropriately evaluated within the context of the financial services companies they are trying to displace.”
“Alternative lenders have primarily been either fee-based market makers selling loans to investors or have been leveraging their balance sheets and earning interest income and securitization revenue, much like established specialty finance companies and banks. Simply put, these are not software businesses. Historically, banks have been valued on a price/book basis (typically ranging from ~1-2x P/B) with P/E as an additional guide for public equity investors. As alternative lenders have emerged, many venture investors focused on unit economics, but banks have long been valued on their book equity for a reason.”
The author also argues that many of the core innovations developed by alternative lenders still have tremendous value (and disruptive potential). This is another point on which I strenously agree.
“We remain excited about the transformation of the lending landscape. While we’re currently experiencing some soberness after years of froth in the space, this current negative sentiment may now lead to overly depressed valuations and overlooked opportunities. We are confident that many great companies will be built as entrepreneurs bring more software, data-driven underwriting practices and innovative origination models to improve the market for borrowers and enhance capital market efficiency in the years ahead”
Overview by Alex Johnson, Director, Credit Advisory Service at Mercator Advisory Group
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