Morning all,
Quick question for anyone with experience in fintech or early-stage FIG company valuations.
What are the relevant multiples and what are the numerical values of relevant multiples for a 'startup' lender? A multiple on forecast gross interest income? A multiples on estimated loan book value?
I'm doing some reading online, but haven't found anything particular helpful.
Thanks,
For lenders, (SoFi, Prosper, Upstart, etc) a common multiple used is monthly originations. I valued an early stage marketplace lender and that's the multiple we focused on. The problem with the originations multiple is that it accounts for all origs, not only quality ones, and you can imagine the problem with this.
I presume a multiple of originated loans by value? Thanks for the input regardless.
It's extremely tricky and it will depend on what the company's business model is. Are they lending from their own balance sheet or are they comparable to a P2P lender, e.g. Lending Club? Corporate or retail clients? Long-term lending, credit cards or payday loans? Etc. If it's a bank-like business model, you can forget any topline-based multiples, they're virtually meaningless due to the way the business makes money. You'll have to take an earnings-based approach, e.g. RoE/ P/(T)BV regression analysis, comparing your target to listed peers. For an intrinsic value of the company, you can refer to a DDM. Unless it's an actual lender in the sense of a bank, revenue or EBITDA (depending on maturity of the company) are legitimate. Careful with 'operative' valuations such as loan originations, as the post above says, not all loans are equal. Similarly, the size of the loan book won't tell you much about the value of the company.
Thanks for the response, Escobar. It's beginning to look like a combination of P/BV guided by 'operative' valuations may be the way to go.
This market is particularly interesting since it’s a hybrid of several industries. Firstly, the assumption is that you’re talking about “FinTech” in the sense of Alternative lenders, and not SaaS based companies. Quick comparables would be I.O.U Financial, OnDeck, LendingClub Etc…
FinTech Companies will resemble FIG industries as they’re BalanceSheet driven. Which means that it’s not revenue that drives growth, it’s their balance sheet (AR) to be exact. There are a few arguments for why certain multiples can or cannot be used, some are agreed on and some are personal preference.
Revenue – Can be used, though “excess spread” (interest income - cost of capital = Net interest income) is a more accurate multiple. (Revenue-cost of revenue) Net revenue Multiple.
EBITDA – No…..
DDM – You thought it was a joke in school, though THIS IS FIG. what do shareholders get? There is no FCF… any profits get re-invested to originate new loans and so you may pull a dividend at best (though doubtful) it’s also impossible to know the growth rate (though you can build a 2 or 3 step DDM model.
Price/Book – Pretty standard. The book value of equity tends to be small as these firms are often highly leveraged and so if you can get a good comp set it’s not the worst option and often used.
Finally… Book run-off. think of it like salvage value. Basically, if I bought up the portfolio and ran it off until it no longer existed without funding new loans.. what would it be worth? Collect interest and principal, pay back debt, keep cash, wind down G&A until you close up shop… discount to today and what’s that worth? A similar approach is securitization if say OnDeck bought your portfolio, how much would you get from it (value like a bond).
Good point also about originations, though be careful with this since it’s often wrongly represented for investors. Originations should be the new FUNDED amount. Though often time, if someone renews a loan, say $100K goes down to $50K, and then next year they bring that loan back to $100K, the lender will count this as $100K origination when in reality it should have been $50K.
If anyone has questions.. I'll try my best to answer.
Thanks for taking the time to write such a detailed response, tiptop. As I mentioned above, we're going to go with a blend of P/BV and operative/KPI-based metrics.
How do you value a Fintech company? Are there any specialized technicals for Fintech banking? (Originally Posted: 10/16/2017)
Hey guys,
I've got an interview with FT Partners coming up, and though I don't anticipate the first round being overly technical, I'd like to get a glimpse on Fintech valuation / finance particularly. Is there any emphasis on certain valuation methods or multiples?
Appreciate it.
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