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Lending Club Makes Their First Acquisition: It’s a Traditional Lender

by Peter Renton on April 17, 2014

Lending Club's first company acquisition is Springstone Financial

First, let me say this is not an April Fools joke. This announcement from Lending Club today is very big news and it is real. Lending Club has just closed on their first acquisition and it is not an online lender – they are buying a traditional lender called Springstone Financial for $140 million in a cash and stock deal.

Springstone Financial, not to be confused with Springleaf Financial, is a consumer lender based in Massachusetts, just outside of Boston. They have two divisions: a patient financing business that provides loans for people seeking elective medical and dental procedures as well as a tuition financing business for K-12 private school education.

Lending Club Raises a New $65 Million Round at a $3.76 Billion Valuation

Despite all their recent success Lending Club does not have $140 million in cash sitting on their balance sheet so they needed to raise more capital to finance this transaction.

Part of this financing was a $65 million equity capital raise from T. Rowe Price Associates, Inc., Wellington Management Company, LLP, BlackRock and Sands Capital. While Lending Club did not share their valuation for this raise it is not difficult to work out from their 8-K filing. Lending Club is now valued at nearly $3.8 billion (up from $2.3 billion just last November).

This $65 million equity round only got Lending Club part of the way there. They also took on $50 million in debt financing and the remainder of the deal ($25 million) was paid for in Lending Club stock. Which basically means no cash whatsoever came off Lending Club’s balance sheet to finance this deal.

Who is Springstone Financial?

I had never heard of Springstone Financial before learning about this news. Doing a little online research reveals some interesting information that speaks to some obvious synergies between them and Lending Club.

On their patient financing website they offer two kinds of plans. Short-term plans are interest free if the debt is fully paid off in 6, 12, 18 or 24 months. In these situations no doubt Springstone is being compensated by the medical practice for issuing these loans. In their extended plans interest rates are 3.99% to 17.99% in terms ranging from two years to seven years. The minimum loan size is $499 and maximum is $40,000. The five niches they work within are dental, fertility, orthodontics, hair restoration and weight loss surgery.

On their private school tuition financing site the terms are very similar. The interest rates are from 3.99% to 17.99% with a duration from two years to seven years. The maximum loan size is also $40,000 and tuition funding is available at over 12,000 accredited private schools. All loans are unsecured.

Why Springstone Financial?

I managed to chat briefly with Renaud Laplanche, CEO of Lending Club, about this groundbreaking new deal and this is what he had to say:

“This is the first time in history that a peer to peer lending firm is acquiring a traditional finance business. Peer to peer finance is beginning to emerge as the dominant model. This deal will also mark the beginning of peer to peer loans becoming available outside of the Internet.”

Laplanche also liked the credit profile of the borrowers at Springstone. Their 150,000 borrowers have an average FICO score of 735 – these are prime and super-prime borrowers.  Their average interest rate is 10.5% with an annual loss rate around 2% the rough equivalent of a B grade Lending Club borrower but with an A grade loss rate.

Of course, this will be a huge shot in the arm for Lending Club’s already rapid growth.

“This deal immediately adds a lot of origination for Lending Club,” said Laplanche. “It also opens the door to us for other types of financing. Springstone has a large network of 14,000 dental practices and provides an entry for us into point-of-sale financing.”

Springstone adds two completely new lines of business for Lending Club, there will be very little overlap with Lending Club’s existing business. That is clearly one of the major benefits of this acquisition.

Also shared in the 8-K are some of the financials from Springstone. They have been in business around seven years but they are already highly profitable. Last year they issued $340 million in new loans, which resulted in gross revenue of $17.3 million and a net profit of $8.6 million. That is one nicely profitable business.

More Opportunities Coming Soon for Investors

Today, banks finance the loans issued by Springstone. Laplanche sees an obvious opportunity to expand and diversify their funding sources here. Eventually, these loans will be made available to both large and small Lending Club investors. Although this integration will take some time, the intention is to put these loans on the Lending Club platform within 12 months.

My Take on This News

When I heard yesterday there was some big news coming from Lending Club today I immediately assumed it would be IPO related. So, I was certainly surprised to hear it was an acquisition. And even more surprised to hear it was an acquisition outside of the online lending space. I had always assumed Lending Club would grow by acquiring other online platforms. But Laplanche is thinking outside the box here.

Lending Club doesn’t want to be known as just a peer to peer lender or even an online lender for that matter. Laplanche has said several times that his team is building a leading financial services company for the 21st century. This means offering a complete suite of lending products to their customers. This first acquisition is a movement along that path.

What Lending Club has demonstrated time and again in the many years I have been following them is an ability to execute in a disciplined and consistent manner. They don’t make any changes without careful deliberation. This history of disciplined execution will serve them very well in this new chapter.

Acquisitions can be challenging, there is no question about that. And Laplanche is going to have to deal with blending two different work cultures on opposite sides of the country. But as an industry leader, this is likely going to be the first of many acquisitions Lending Club will do in the coming years.

While it is difficult to give my full stamp of approval on an acquisition of a company I had never heard of until just now, as an investor I am happy that there will be new opportunities to put my money to work. And based on the track record of Springstone this looks like a relatively low risk bet. I will be fascinated to see how this plays out in the coming months and years.

Here are links to the official press release and Form 8-K.

{ 14 comments… read them below or add one }

Simon Cunningham April 17, 2014 at 8:49 am

Really interesting news. And what an incredible valuation. Peter, do you think Lending Club will continue to raise additional rounds of funding in the coming years, even though they exist today as a profitable company?

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Peter Renton April 17, 2014 at 9:26 am

When they go public, presumably later this year, this will provide them with a large amount of capital, possibly as much as $1 billion which should be all they will need for the foreseeable future.

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Sean Murray April 17, 2014 at 9:15 am

$3.76 billion! That’s incredible. I wonder how much they will raise in their IPO.

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Peter Renton April 17, 2014 at 9:28 am

Yes. That is a huge amount. When the Google deal was done 11 months ago their valuation was $1.55 billion. So Google have already more then doubled their money on paper at least.

As for the IPO I am guessing they will raise less than $1 billion by floating a small percentage of their shares.

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Don Davis April 17, 2014 at 9:47 am

Great article, Peter. There is no surprise here. It’s been anticipated that Lending Club would IPO with a $4Bil+ valuation this year, and this is a natural step for them in that direction.

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Peter Renton April 17, 2014 at 10:36 am

Thanks Don. If they don’t IPO for six months or more then the valuation is going to well over $5 billion I would expect.

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Adam Limbach April 17, 2014 at 10:20 am

So at $3.76B LC is currently valued at 38.4x revenue, and in 2013 generated $7.3M in profits for a P/E of 515x. They buy this company at 8.1x revenue and 16x earnings. No wonder they raised all the dough externally.

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Peter Renton April 17, 2014 at 10:37 am

Thanks for doing the math and sharing here. It looks like a pretty good deal when viewed from that perspective.

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Jason April 17, 2014 at 12:47 pm

The demand for Lending Club shares is really incredible. The $3.7b valuation speaks volumes about the high regard for Lending Club within the greater context of online marketplaces and financial services firms. The valuation continues to track pretty close to 1x its total originations. The valuation is a signal of strength. These investors must take the long view on LC’s strategic position, its disruptive nature, and the huge market segment to justify such nose bleed multiples. I have a feeling that P2P is one of those investment sub-segments that is going to be very highly valued by investors and will defy logic for a long time.

This deal is especially impressive given the backdrop in tech stock corrections since the beginning of March: FB -17%, NFLX -27%, YELP -33%, TWTR -39%.

Check out this article by the WSJ: Drop in Tech Stocks Hits Startup Funding http://online.wsj.com/news/article_email/SB10001424052702304626304579505911294879066-lMyQjAxMTA0MDEwNjExNDYyWj

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Charlie April 17, 2014 at 7:20 pm

Should I liquidate my LC notes to buy lending club IPO stocks through my brokerage account?
:)

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NealS April 24, 2014 at 9:54 am

How about taking an LC loan to finance your IPO shares?

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Anil @ PeerCube April 18, 2014 at 10:48 am

This acquisition of a borrower channel shows the main hurdle in future growth for Lending Club – getting more borrowers.

The interesting aspect of LC financing was the debt financing and how LC chose to ignore their own platform and opted for traditional debt financing. Raising the debt from their own platform could have made the headline. It would also have shown the LC really being debt market disruptor rather than the positioning being just a marketing ploy.

I didn’t believe the big news will be Lending Club filing S-1 for IPO as it will force them to go in Quiet period and the CEO was already scheduled for keynote at LendIt.

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Peter Renton April 19, 2014 at 10:17 pm

Hi Anil,

Logistically, it would have been very challenging for LC to put the $50 million up for financing by its members. Given that the average loan size is around $15,000 to put a loan out there for $50 million would have required a mindset change for investors, not to mention some changes to their policies and IT infrastructure. I don’t blame them for not going this route.

Also, Renaud Laplanche was going to be the opening keynote at LendIt regardless of whether Lending Club was in a quiet period or not.

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Charlie April 21, 2014 at 6:59 pm

It would have been cool.

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