LendingClub (NYSE:LC) could be begging for an activist investor. The company has seen its shares cut down by 60% in 2016, and now down 80% since its Dec. 2014 IPO. All this because of some falsified documents, which ultimately revealed some corporate governance weaknesses.
The big issue is that LC sold some loans to investors, and the documents on those loans weren't 100% accurate. In particular, LC founder and then CEO, Renaud Laplanche, also owned a stake in a fund that LC invested in, of which, wasn't disclosed. However, the founder and CEO has already stepped down given the issues.
Do we already have an activist?
Renaud Laplanche, the French entrepreneur, could be the activist LC was looking for? Now, what we could see is a founder turned activist. This is something that's not uncommon, where we've seen this to some degree with Lululemon (NASDAQ:LULU) and Chip Wilson. Basically, a founder gets ousted, but loves the business and knows the potential, thus they work to take the company private.
Laplanche been talking with banks and private equity players to see about raising some money to take the company private. With the company trading at a $1.8 billion market cap, it's still a decent size deal. However, it does have about a third of its market cap covered by net cash.
Then there's the pseudo activist, the Chinese private equity firm Shanda Media, which has taken a 15% take in LC over the past few months. Shanda has been looking for growth opportunities in the U.S. Certainly, P2P lending is still a growth investment - especially if we're on the cusp of another recession. What's interesting is that Shanda was a buyer of LC before the allegations were revealed.
But even after the news, they took advantage of the cratering stock price to buy more. Would they team up to buy all of LC? That doesn't really fit their modus operandi, but I think they'd certainly support a buyout. Shanda has filed as an activist, although it's generally known as a passive holder. However, they have said they plan on having a continued dialogue with the company.
Is LC the next Ocwen (OCN)?
Let's face it, there's still a lot of hate for the big banks. Conventional lending remains broken and there's still plenty of room for disruption in lending. The P2P (peer to peer) economy was born from the last finanical recession. By all accounts, we could be headed for another recession soon, which could be just what LC needs.
But the NYDFS (New York Dept. of Financial Services) is on the prowl. These guys have it out for the lending industry, having put the hurt on Ocwen. They're now looking to probe the LC's lending practices. They have a subpoena from the Department of Justice.
LC has a leadership position, being the largest P2P lender. They have an installed base and name recognition. It's a little different than the OCN case, but that's the big worry - a regulatory crackdown that fundamentally hurts the LC business model. So, the question remains, is it the next Ocwen? Or is this a generational buying opportunity? The business model is solid and there's long-term viability. LC does some $8 billion a year in loans, while the entire consumer lending market is said to be worth $3.5 trillion. LC remains a threat to conventional lenders, with JPMorgan's (NYSE:JPM) Jamie Dimon noting that Silicon Valley is coming for conventional lenders.
Are things really all that bad
LC has been knocked down to reality, now trading at 1.6x book value, which is more in line with conventional credit servicers. The market has forget about the growth potential at LC overnight. But in truth, LC is cheap compared to top non-conventional lenders Discover Financial (NYSE:DFS) and Capital One (NYSE:COF), which both trade north of 1.7x sales. LC is at 1.6x. Book value wise, Discover trades at 2.2x.
The other beauty is that costs remain low thanks to no branches, low bank regulations and automation - all of which help keep rates lower for borrowers. It's a win-win where investors can get 8% returns - above comparable debt instruments - and borrowers pay 12% or so for a loan to consolidate credit card debt that they're paying nearly 20% on.
As with anything, it takes time to re-build trust. Investors paused making loans on the LC platform, but assuming the fallout is contained, investors should quickly come back around. LC brought on Pat Dunne from Blackrock as its Chief Capital Officer. He's handing the investor group, which handles partnerships.
How I think of LC
LC is the Uber of loans, seamlessly matching lenders with borrowers. Yet, it trades like a old world bank stock with no growth. The business is pretty streamlined, where LC has computerized the analysis of risks and rates. LC has already solved the chicken and the egg problem with any marketplace. Creating a platform for buyers and sellers that has enough value to keep both parties coming back.
The next level for LC is breaking beyond credit card consolidation into medical and small business lending. They don't have to deal with loan brokers - which is something OnDeck (NYSE:ONDK) utilizes - and can lead to force and irresponsible lending. I like LC as a put against the market. If the economy starts to show, there should be a return to the P2P lending industry and LC. Trading at 1.6x book value it's cheaper than the majority of the modern credit lenders and servicers.
Disclosure: I am/we are long LC.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.