Company Name

LBO & private equity - CASE 4Bing liFrancesco lupisGeorgios moros

1Investing in Lending Club: a Top-Down ApproachFoundation Capital Venture capitalfirm located inSilicon Valley, founded in 1995, with more than $2 billion AUM10.3% ownership in Lending Club, the leading Peer-to-Peer lending platform

April 17th 2013: Lending Club investment opportunityIncrease Foundations stake by purchasing preferred shares of an existing investor

Could Lending Clubs growth continue and justify the $1.55bn valuation?Yes, it is an attractive investment opportunity and we will increase the ownership

Top-down analysis: US consumer credit market, marketplace lending market & P2P, Lending Club

AgendaCredit market analysisUnsecured consumer credit marketSME credit market

The Opportunity of the Online Lending Market

The P2P online lending market

Lending Club Analysis

Key risks

Our decision

What happened next3Credit Market AnalysisUnsecured Consumer Credit MarketMarket trend1.4% quarterly growth rateMarket behavioral analysisHouseholds get default are typically in poor financial shape 40% householders carrying credit debt to the following month61% loans on LC were used to pay out the Credit card and refinancing

Market participantsBanks and Credit UnionOnline Lending platform (Small but grow very fast)

Sources: federal reserve Economic Research & Data and Lending Club, Prosper Data.http://www.federalreserve.gov/releases/g19/current/#fn8b

Small Business Market Size & Growth2012: $ 240BExpected at a 8.5% growth rate 2015(e): $ 280B

Market participantsBanks/ Financial companiesOnline lending platform (Main competitors)OnDeck - Online Balance Sheet Biz2Credit - Marketplaces

Small Business Lending Market Analysis:Small Business lending often with high riskSBO financing highly rely on bank loans (85%)

Sources: https://www.sba.gov/sites/default/files/2013-Small-Business-Lending-Study.pdfhttp://www.cnet.com/news/with-rising-revenues-lending-club-ceo-plans-expansion-q-a/Small Business Lending Market

US Consumer Credit: a huge addressable market

After 3 years20122015eThe Opportunity of the Online Lending Market

Since the financial crisis small business lending has declined in absolute terms..and in relative terms as a portion of total loansOnline SME Lending: an OpportunitySource: Mills, Karen and McCarthy, Brayden, The State of Small Business Lending (July 22, 2014), HBSBecause banks are using capital to recapitalise themselves and are not interested in competing for SME credit.

Online SME Lending: an OpportunitySource: Mills, Karen and McCarthy, Brayden, The State of Small Business Lending (July 22, 2014), HBSbut also because SMEs loans are among the riskiest since SMEshard hit by the recession and report weak salesweakened by less valuable real estate collateral hit by the financial crisisOnline SME Lending: an Opportunity

Source: Mills, Karen and McCarthy, Brayden, The State of Small Business Lending (July 22, 2014), HBS

Marketplace lending is the solution

Flexibility to lend to SMEs

Have better credit-scoring systems thanks to BIG DATA and COMPLEX ALGORITHMS

SMEs want small loans that online lenders can cater

51% of readily targetable SME loansOnline SME Lending: an OpportunitySource: Mills, Karen and McCarthy, Brayden, The State of Small Business Lending (July 22, 2014), HBS

And SMEs seem to feel confident with online loan option!Online SME Lending: an OpportunitySource: Mills, Karen and McCarthy, Brayden, The State of Small Business Lending (July 22, 2014), HBSBut, there is no free lunch

The loans are riskier

Even though risk is passed on to investorsthe lack of possibility to secure loans might scare away some investorsThe P2P online lending marketAlternative Lending MarketALTERNATIVE LENDING MARKETOnline Balance SheetMarketplacesP2P PlatformsModelLoans to dateUse own balance sheet to issue loans using new credit-scoring algorithms

Main players

$1.5bn 4Q2013 est.N/A$4.7bn 4Q2013 est.Connect borrowers with a range of traditional and alternative lendersConnect borrowers with capital by offering investors an investment platformSource: Mills, Karen and McCarthy, Brayden, The State of Small Business Lending (July 22, 2014), HBS

P2P Lending Market: 5 ForcesLenders bargaining power MODERATESmall lenders cant negotiate returnsLarge investors may have some power to negotiate returns

Borrowers bargaining power - LOWBorrowers dont have any power to negotiate interest rates

Threat of substitutes - HIGHLenders: other asset classes to invest inBorrowers: other financial institutions to demand credit fromCompetitive rivalry within an industry - HIGHLow product differentiation among competitorsSimilar sized players triggers fierce price competitionThreat of entrants HIGHAn easy to duplicate website on the internetMore effective algorithms may easily attract financeLenders trust is however necessary

Despite an attractive opportunity to fill a gap in the market by exploiting SMEs diminishing access to credit and Banks falling customer loyaltythe P2P Lending market is very competitive and ensuring that growth is at least aligned with markets growth may be a challengeP2P Lending Market: SWOT AnalysisLower operating costs than banksMore accurate credit scoringSticky growth engine: borrowers and lenders locked-in for loan periodAvailability of a 5+ years track record for lenders/investorsStrengthsLenders suffer from information asymmetryOnly unsecured loans originatedUnavailability of bank deposits excludes passive saversOnly lending to private individualsIlliquid secondary notes market

WeaknessesBanks consumer loyalty droppingBanks reluctance to lendLarge addressable market: lending to SMEsAttracting professional asset managersLoan co-branding: offering low-rates loans through institutional lendersAcquisition by banksOpportunitiesUncertain regulatory landscape: too much or too little regulation is harmfulUnfavorable tax treatment vs other asset classesP2P lending is banned in 7 states in USCompetition: banks, direct banks, other alternative lendersThreatsSWOTAnalysisP2P lending market offers investors an attractive investment opportunity with Regulatory Challenges of P2P Lending Reclassifying P2P lending platforms as lenders from loan marketersWill subject players to heavy regulation and loss of flexibility

An American jurisdiction can always opt out the interest rate exportation regime (under Section 525 of DIDA)Then the interest rate of FDIC-insured institutions will be subject to a cap

Of the 44 jurisdictions that approved P2P lending, only seven states have no interest rate limitations on consumer loans

If a P2P lender is required to register as broker-dealer, operating costs would significantly increase and/or operations could be impaired

Investors can invest and lend capital in P2P platforms only in 26 states*See appendix for complete regulatory analysis & sourcesLending Club Analysis

Image from Lending Club websiteOur goal is to transform the banking industry to make it more cost efficient, transparent and consumer friendlyGeneral Corporate Overview Lending Club 2013 10-KLeadershipFounder & CEO Renaud Laplanche Proven entrepreneurial record (Founder & CEO of Triple Hop Technologies 1999-2005, acquired by Oracle)ManagementAccomplished executives with >20 years experienceHeaded diverse functions at corporate giants (JP Morgan Chase, Visa Inc etc)Honoured by prestigious industry awardsBoDHighly acclaimed members (ex John Mack, Lawrence Summers)Strong exposure in financial services and technology21Business Model in a SnapshotAs a P2P lending platform, LC brings together good-quality borrowers and lenders without the involvement of traditional retail banking

Product offeringPersonal loans (Notes)Small Business loansPrivate Placement in Investment Funds through LC Advisors LLCSMAs to accredited investors

22Value PropositionTo borrowers:By leveraging technology to acquire, facilitate and service Loans Lending Club is able to Realize cost savingsPass the savings to borrowersTo investors:Lending Clubs customizable investment options and lower cost structureOffer attractive risk-adjusted returns that are not correlated with traditional asset classes23Customer Satisfaction & Loyalty

What is NPS?

Lending Club vs. Industry

Source: LC Transforming the Banking System, Bain & Company: 2012 NPS SurveyGrowth record

Lending Club boasts robust growth Average 28.49% QoQ

Source: LC website, 10-K & 10-Q (2009-2013)25P2P Model Feedback LoopSource: Credit Suisse US Equity Research,

Revenue Generation Lending Club derives ca 90% of Total Revenue from Origination fees Paid upfront by borrowers (1.11% - 5% of Loan Principal)Depend on Loan $ size ($1,000 $35,000)Over the period 2009 2013 Q1Average loan origination rose 58.45% to $15,541.49 Average origination fee rose to 4.40%Non-interest Revenue rose from ~ $1.4M to $98M

Rising Loan VolumeOrigination, Servicing & Management feeRevenueSource: LC website and 10-K reports (2013, 2012)27Cost controlling P2P marketplace lending is inherently cost-effective and driven by operating leverageAbsence of physical network (Branches cost 30-35% of Banks OpEx)Automated origination processMinimal compliance & collection overhead, no FDIC-fees

Source: Foundation Capital: How Marketplace Lending Will Remake Banking as we Know it, McKinseyFinancialsEvolution of CF measures (in $000s)Source: LC Annual & Quarterly Statements29Valuation

Comparables (Value in $000s)19 April 20131yr Forward PSFacebook8.195Zillow9.212LinkedIn7.412ServiceNow8.650Workday14.920Splunk11.710Group average10.02Implied Value$1,309,240.87Valuation range$1.310Bn $1.5BnLending Club Data2012 S% (QoQ)30.00%2013 Q1Sales$16,251.00Next 4Qs E(Sales)$130,708.42Source: LC Reports, Ycharts.com*Range Based on sensitivity analysis involving 1yr-Forward PS from 10 to 12 & E(QoQ) growth between 30% and 32%Comparables: Online marketplaces connecting supply with demandMultiple: Tied to growth

Key RisksInability to assess risk of loans of new segments (SME) Deterioration of the return on marketing expenditure as borrowers base expandsDisruption of technological infrastructureHacking attacks & IT securityRegulation

Our DecisionWhat happened nextFoundation Capital increases ownership to 11.5% on 1st May 2013Foundation Capital purchased 164,319 Series A and 2,067,598 Series B Convertible Preferred SharesRound F raised $90M on April 2014 valuation $3.5BnLending Club went public on 11th December 2014Offer price: $15.00Closing price: $23.43Equity raised: $870M (58M Shares)IPO Valuation at close: $8.9Bn

Thank you for your attention!AppendixSensitivity analysisAppendixRegulatory threats & sourcesRegulatory threats for Lending ClubLitigation that has the potential to recharacterize a loan marketer (like Lending Club) as the lender for the purposes of state consumer protection law restrictions. Assertion that payday loan marketers use out-of-state lenders in order to evade the consumer protection laws imposed by states where they do business (LC 2013 10-K page 45)

FDIC-insured institutions (like WebBank) are allowed to export the interest rate permitted under the laws of the state where the bank is located, unless the state has opted out of the exportation regime So if a state opts out of the exportation regime under Section 525 of DIDA, then the amount of fees/interest charged is limited (2013 10-K pages 9 & 45)

Of the 44 states whose residents may obtain loans, only seven states (Arizona, Nevada, New Hampshire, New Mexico, South Carolina, South Dakota and Utah) have no interest rate limitations on consumer loans while all other jurisdictions have a max rate less than the current max rate offered by WebBank through LC platform. So, if a borrower were to successfully bring a claim against LC for a state usury law violation, LC may be subject to fines and penalties and adversely affect return on underlying Notes and Certificates (2013 10-K page 45)

If LC was required to register as broker-dealer, LC costs would significantly increase or operations could be impaired (2013 10-K page 46)

As internet commerce develops, federal and state governments may draft new legislation to regulate internet commerce, which may impact LC business (2013 10-K page 45)BibliographySensitivity analysis