As one of the UK’s largest peer-to-peer lending companies, Funding Circle (FCH) aims to fix what it sees as a “broken system” that separates businesses from growth capital and investors from decent returns. Unfortunately, the group’s own short market history has so far defied the former observation, and confirmed the latter.
The group's shares fell to a new low of 112p on the day, after it used a first-half trading update to halve its full-year revenue growth forecast to 20 per cent. The business is now worth less than a third than it was at its initial public offering last October, when it managed to secure £300m in investor capital.
The reduction in the top-line forecast is a new source of pain for backers who have so far swallowed a woeful market debut on hopes that massive loan growth will accelerate the journey to cash generation. The group blamed an “increasing uncertain economic outlook” for a fall in loan demand, and acknowledged it had tightened lending criteria to higher risk businesses. The latter move has been designed to protect net returns for investors on its platform, but casts further doubt on the business plan pitched to shareholders less than a year ago.
At the end of June, loans under management stood at £3.54bn, up 37 per cent in a year but just 4.8 per cent higher since March and well short of broker Numis’ mid-year estimate of £3.8bn. First-half loan originations also grew 14 per cent, but declined 15 per cent quarter-on-quarter. Though no guidance was provided on the year-end loan book, the reduction in forecast revenues mean second half top-line growth should slim to 12 per cent, year on year.
That can only add to the pressure on cash, even if projected defaults and platform investor returns are both moving in the right direction. At a group level, the adjusted loss margin before interest, tax, depreciation and amortisation is expected to come in at around 25 per cent for the first six months of the year, although Funding Circle expects the full-year adjusted loss margin to improve to less than 20 per cent.
What this means for Funding Circle’s closed-end private debt funds is unclear. So far this year, two Finnish insurers, a Swedish financial group and the European Investment Bank have collectively pumped €190m (£170m) into various direct lending mandates in continental Europe. Funding Circle is also hoping to attract up to £200m towards its UK direct lending fund “over the next few years”, and last week received a £30m commitment from the Merseyside Pension Fund. The fund, which is being marketed to institutional investors, will target an annualised net return of 5.5 to 6.5 per cent over eight years.
