Tuesday 2 July 2019 4:16 pm

Funding Circle share crash 'brutally punishes' IPO investors

Analysts have accused Funding Circle of failing to deliver on the promises of its IPO after the lender’s shares crashed today following a revenue warning.

Small business lending platform Funding Circle’s shares slumped today after it halved its revenue growth projection to 20 per cent following poor demand for its loans. 

Read more: Funding Circle halves revenue growth target amid market uncertainties

“The uncertain economic environment has reduced demand from small businesses and led us to proactively tighten lending criteria. As a result, revenue growth will be impacted,” said Samir Desai, Funding Circle’s founder and chief executive.

The peer-to-peer lender’s shares dropped sharply in response to the news, and had fallen 29 per cent by mid-afternoon to 119p, down from 163p at yesterday’s close. 

Funding Circle has struggled to meet the ambitious growth targets set out in its IPO last year, when shares launched at £4.40. It reported an operating loss of £51.6m last year, up 40 per cent on the year before.

IPO investors ‘brutally punished’

Helal Miah, an investment research analyst at The Share Centre, says today’s share price plunge is “brutally punishing” for investors who took part in the IPO, which saw shares launch at 440p.

He adds that Funding Circle’s move to tighten lending standards are necessary to ward off “an unsustainable rise in bad debts”. 

An increasing number of the lender’s loans are funded through other institutions, and Miah suggests that this is a “more sustainable direction for the business in the longer term”. However, he warns: “Short term headwinds remain due to requirement of huge capital investments in technology.”

“The business is unprofitable and it looks like being so for a little while longer,” he adds. “Funding Circle remains a share for the brave Investor and one we prefer to avoid.”

Funding Circle still ‘a one-trick pony’

Chris Beauchamp, IG’s chief market analyst, says Funding Circle’s IPO was meant to mark the coming of age of the peer-to-peer lending sector, Beauchamp says, but these hopes were dashed by “a slowing economy and a need to be discerning with its loans”.

He adds that while the company’s decision to focus on its core market is sensible, “it will mean that the firm remains a one-trick pony, with investors unable to benefit from overseas expansion.”

Lender fails to live up to great expectations

Funding Circle had been pitched as a fast-growth business at its IPO, says Russ Mould, investment director at AJ Bell, but the reality has been “far less attractive”.

“One of the worst crimes a company can commit is failing to deliver on promises set out at its IPO” because of the consequent loss of credibility, he says. 

Mould cautions that it may take Funding Circle some time to regain this. “Going too fast presents significant execution risks and scope for major disappointments. Funding Circle should have learned its lesson by now, given how it hasn’t been awash with good news since being a listed company.”