Peer-to-peer lending platforms seeking acquisition may have to adapt to performance-based valuations, an increased focus on technology and a new cadre of institutional investors, as M&A trends evolve in the post Covid world.
According to Frank Wessely, managing director at business advisory firm Quantuma, P2P lending platforms still represent a great opportunity for investment, but he points out that potential acquirers may be more interested in assets such as credit-checking technology or its online lending capabilities rather than the historical value of a loanbook.
"There are clearly institutions that want to invest in technology and improve their distribution channels,' says Wessely. "P2P lending platforms represent an off-piste area where these investors could diversify their income streams.
"Technology or what I call the 'lending engine' would be of great interest,' he adds. "Clearly some platforms have had success in terms of scaling up the effectiveness of their technology and digital competences. And it gives acquirers the opportunity to modernise their own distribution capabilities and minimise distribution costs.' Quantuma has had plenty of experience with M&A activity in the financial services world - most recently, when the company was itself acquired in a £26.95m deal with the Aim-listed K3 Capital Group. The newly-merged company now boasts an extended corporate finance team with many decades of experience.
Wessely says that he expects to see a "big uptick" in the volume levels of M&A work that Quantuma does alongside K3. This is particularly timely given a clutch of high-profile acquisitions in the alternative finance community.
In July, Lending Works sold 100 per cent of its equity to Intriva Capital - a fund manager which focuses on special situations and distressed investment strategies across Western Europe. Then just a few weeks later, 'big three' P2P lending platform RateSetter was acquired by Metro Bank in a deal worth up to £12m over three years.
Like many industry stakeholders, Wessely was surprised at the relatively low value attached to the RateSetter deal.
"Obviously, the details of the transaction are confidential, but given that valuations were £200m historically, and the initial payment is just one per cent
of that, it is an incredibly large reduction,' he says. "And the vast bulk of it is performance based, not based on the immediate quality of the loanbook.
"I think that reflects the likelihood that any P2P deals that might happen in the foreseeable future will not be at high values. If you look at the levels of profitability on platforms, there are very few that have been attracting levels of profitability.'
Values can also vary depending on the position of platform itself, he adds. A distressed or disorderly sale will attract a lower price, and the acquirer could opt to cherry-pick certain items from the loanbook, rather than buying out the entire platform.
But as for a wave of consolidation across the P2P sector - Wessely doesn't think it's likely. "We can help to source potential suitors for a platform sale,' says Wessely. "Or for those who are interested in acquiring, we have many years' experience in sourcing strategic acquisitions for investors.
"But I don't expect there to be a sudden flurry of consolidation or M&A activity. "Clearly, if there's a need on the side of the platforms for a deal to be done then it's likely to happen quite quickly. But if not, we may see some private equity firms or other institutions enter the market.'