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Alternative Lending Market: A Valuation Perspective

The year 2014 witnessed two significant initial public offerings in the technology-enabled alternative lending, or FinTech, space. Investor demand was strong resulting in the two FinTech IPOs becoming the second and sixth largest in 2014. These IPOs were, of course, that of Lending Club and OnDeck Capital. While both are very different companies – Lending Club is a Peer to Peer Lender, OnDeck Capital is an online lending company, which uses their own balance sheet to fund loans – analyzing the valuation of both firms with such innovative business models has created a very wide confidence interval across analyst expectations.

Given the uncertainty of industry players, analysts seek to assign value on a relative basis by establishing a peer group. However, because these companies are innovative, there naturally does not exist a well-established set of comparable companies for benchmarking. To achieve a high valuation, technology-enabled lenders will seek to be viewed as technology companies, rather than finance companies. This is because high-growth technology companies are often valued on revenue multiples and are trading at enterprise values of ~7-8x current annual sales. In contrast, traditional banks are generally valued by the market as a multiple of book value, with current price/book multiples of ~1.2.

But which valuation is most appropriate for a technology-enabled lender? We see merit to both sides. Our paper titled Alternative lending Market: A Valuation Perspective explores the various business models of technology-enabled lenders, how they compare/contrast with those of technology companies and traditional financial institutions, and what this means for their valuation. Download the full version of this cutting-edge white paper to get insights on the exciting, emerging market of technology-enabled lending.

Category: Credit