Investors should not limit their stock choices to companies listed on the local sharemarket. There are a number of industries that are not well represented on the Australian Securities Exchange and investors who want to gain exposure to some growth sectors need to consider investing in offshore markets.
A good example is peer-to-peer lending, which has developed rapidly in recent years. One of the biggest P2P (or marketplace) lenders is Lending Club, which is headquartered in San Francisco, California, and listed on the New York Stock Exchange.
Lending Club gives consumers and businesses an alternative way to get a loan. The online platform connects borrowers and investors directly and removes the middleman, reducing much of the transaction cost in the process.
The company offers various types of loan products, including unsecured personal and small business, super prime consumer (offering low rates to borrowers with high credit scores), unsecured education and patient finance loans. It has recently introduced an auto loan refinancing product.
On the other side of the loan transaction, the company gives investors an opportunity to invest in a range of loans with different terms, credit characteristics and rates of return.
The company has funded more than US$24 billion of loans since it was launched in 2006.
For investors looking at the Lending Club stock, there are a few key investment points to consider. The cornerstones of the business are high revenue growth and enhanced operating efficiency compared with banks and other traditional lenders.
The company generated operating revenue in excess of US$129 million in the December quarter last year – an increase of 15 per cent over the previous quarter.
Total standard loans offered increased by 6.5 per cent quarter-on-quarter in the December quarter last year. This improvement shows a clear momentum, as the company continues to bring back institutional investors to the mix.
It has significantly improved its funding mix over last two quarters. Banks contributed around 31 per cent of total funds raised by the company, exceeding its targeted mix. Key partners returned and there were a number of new banking partners.
Lending Club is a technology-driven company and has an asset-light business model. It outsources the bulk of its non-core activities, such as loan origination and verification, to its issuing bank partners.
As the company matures and stabilises its delinquency rates it will attract more institutional investors to support large loan purchases.
Investors need to be aware of the key risks. They include:
- Liquidity: Higher-than-expected credit losses could negatively impact investor confidence, leading to withdrawal of funds from the platform, which would significantly reduce earnings.
- Regulatory: A rise in the number of regulations increases operating expenditure or restrains the company from operating in certain states. Moreover, material changes to business practices could negatively impact the company’s results.
- Rising interest rates: The rise in interest rates could impact demand from borrowers.
- Recent developments such as fake loans have dented investor confidence in the platform. However, the management is executing on its strategies to restore investor confidence.