Financial Times by Ben McLannahan (May 2, 2016)
Online lending group SoFi is offering institutional investors slices of its equity in exchange for commitments to buy loans, as it tries to lock down secure sources of funds.
The new equity round, which could come close to the $1bn SoFi raised in the biggest ever fintech fundraising last year, should give the fast-growing student-loans specialist more firepower to expand into mortgages, personal loans and wealth management products.
But unlike the group’s last round in September, which was populated by venture firms such as SoftBank, SoFi is now targeting insurers, pension funds and sovereign wealth funds in Europe and Asia, trying to tie them in to deeper, more strategic partners
According to Mike Cagney, co-founder and chief executive, the advent of negative interest rates in Japan, in particular, has sparked interest in the high-yielding assets that SoFi is generating at the rate of about $1bn a month.“We’re hoping for meaningful, predictable, take-down of loans through a couple of large partners, while also raising some more equity capital,” he said.The San Francisco-based group is the biggest and most aggressive of the non-bank financial technology companies that have sprung up in the wake of the crisis, competing with the big brick-and-mortar banks on marketing, underwriting and other areas where traditional lenders have struggled to keep up. Last year, SoFi funded more than $5bn of loans — quadruple its total for 2014.But like many of the other 400 or so platforms across the US, SoFi is now running up against
funding troubles. Online lenders lack the deposits needed to fund loans like a traditional bank, relying instead on institutions, hedge funds or individuals, to buy them. But wobbles in credit markets since the turn of the year have underlined the
urgency of securing multiple sources of steady funds — even if it means giving up a share of profits.“What we have to do is to find alternatives to deposits,” said Mr Cagney, adding that he hoped to close the new equity round by late summer. “It is difficult to be originating $1bn-plus a month if you don’t know where those loans go.” Mr Cagney said the fundraising is likely to place a higher valuation on the group than the last one, which was estimated to value SoFi at about $4bn. Such fundraisings — known as “up-rounds” — are becoming less common in fintech, as institutions become choosier about which platforms to back.“
Because of the nature of the funding that is coming through, inherently it will add a lot of value,” he said. “If it’s not an up-round, we wouldn’t do it.”
More combinations like SoFi’s could follow, said analysts, especially for companies such as Avant and OnDeck, which hold loans on their own balance sheets before trying to find them a home with banks and hedge funds.“
Platforms that have secure sources of funding in place will slingshot past their rivals during the next downturn,” said Ram Ahluwalia, chief executive of PeerIQ, a data and analytics firm. “The name of the game is who can find lowest-cost resilient capital.”
[Original article available here.]
