FINANCE: P2P Fire Grows With Lufax Mega-Funding
Bottom line: P2P lenders like Lufax and Jimu Box have become the latest hot ticket for Chinese Internet investors, and one or more could make an IPO later this year to seize on the positive sentiment.
I remember a time not long ago when China tech deals worth just $10-$20 million were considered big and worthy of news, as such sums looked big when the sector was just starting to develop. Nowadays the threshold has risen sharply as both domestic and international investors flood into the space. That’s definitely the case with the latest mega-deal, which has seen peer-to-peer (P2P) lending platform operator Lufax raise a cool $485 million in new funding round, a record for the fast-emerging space.
Lufax’s new mega-funding comes just a week after Jimu Box, another high flyer in the space, was reportedly on the cusp of raising $400 million in a similar exercise. (previous post) This sudden rush of funds into P2P lending looks similar to something we saw earlier this year, when investors collectively pumped $1.5 billion into 2 major funding deals for group buying sites Meituan and Dianping. The biggest of the recent mega-funding deals for China tech firms actually came late last year, when smartphone sensation Xiaomi raised more than $1 billion.
According to the latest reports, investors in Lufax’s latest funding round include both Chinese and international companies. (English article; Chinese article) The actual funding closed in March, and backers included BlackPine Private Equity Partners, CDH Investments and the private equity arm of China International Capital Corp (CICC). The bulk of the funding came from BlackPine, which was founded 5 years ago and is focused on Asia-based investments.
Lufax’s earlier investors include financial services giant Ping An, which became a minority stakeholder after this latest funding round that reportedly values the company at nearly $10 billion. That number seems quite large for a firm that was founded just 3 years ago, but also reflects the big growth potential of P2P lending. That business model sees companies like Lufax act as middle men, operating online platforms that bring together borrowers and lenders to make relatively small loans.
In Lufax’s case, the company has arranged more than 200,000 loans totaling $2.5 billion since its founding, averaging about $12,500 per loan. Lufax makes its money by collecting fees from borrowers, typically about 4 percent of the loan size. China is in desperate need of this kind of funding for small and medium-sized businesses, which have been largely neglected by traditional banks that typically lend to big state-run enterprises.
These P2P companies differ a bit from the group buying companies like Meituan and Dianping in several key ways. Most importantly, the P2P lending group targets mostly businesses and wealthy individuals who want to put their money to work, and thus has less difficulty finding paying customers. By comparison, the group buying sites operate in the difficult consumer space where users are much more reluctant to spend money.
The result is that Lufax, Jimu Box and other P2P lenders can quickly become profitable, unlike more consumer-focused Internet companies that often take years to reach that milestone. While the P2P sites can quickly become profitable, their big downside is the huge risk involved since these companies deal with relatively large sums of money and unsophisticated investors, making them easy targets for fraud. That means they may often perform well in their first few years, but could implode later when fraudsters continually find new ways to abuse the system.
For that reason, we might see some of these P2P sites move quickly to make IPOs, as they want to sell their fast-growth and big profit story to investors before the inevitable problems start to hit. Accordingly, I wouldn’t be surprised to see Lufax, Jimu Box or perhaps another major P2P high-flyer attempt to make an offering by the end of this year, potentially fetching a valuation of $10 billion or more if the current level of investor excitement remains.
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