In December 2014, the leading peer to peer lending company, Lending Club (LC), started trading on the New York Stock Exchange (NYSE) after a widely inclusive and smoothly executed initial public offering (IPO). Early equity investors and peer lenders who were able to participate profited handsomely.
As a Lending Club loan investor (read this Lending Club review to learn more about investing on the platform. since May of 2013, I was invited to partake in the IPO and bought 250 shares at the offering price of $15. When the stock finished the day at $23.43, IPO investors made a 56% return on their investment in one day. Instead of handing all of the IPO shares to institutions and their wealthiest clients, Lending Club used this once in a lifetime opportunity to thank their loan investors, the very people who make the business model possible.
I am extremely grateful to Lending Club for giving me the opportunity to invest in the company at the IPO price. It was an honor to be a part of this historic event. THANK YOU LENDING CLUB!
IPO Review Background
A Lending Club IPO was widely expected to occur in early 2014. Back in July, I wrote a blog post entitled Eyes on the Upcoming Lending Club IPO. Prior to that post, I had read everything I could find about the likelihood of an IPO. In that article, I referenced some previously written articles with interviews and clips from company representatives that spoke of allowing access to the IPO for smaller investors who fund loans on their platform.
On August 27th, the company filed for an IPO and published this blog post to let the world know about it. While not a lot of detail was disclosed, they announced that Morgan Stanley and Goldman Sachs would jointly lead the managing and underwriting processes. With former Morgan Stanley CEO John Mack on the Board of Directors, it came as no surprise that Morgan Stanley would be in charge.
In the July post, based on limited information, I laid out what I thought to be a logical partnership between Lending Club and Loyal3 for the administration of the IPO so that regular investors could participate. To prepare for the scenario, I participated in the Dave & Busters (PLAY) IPO on Loyal3 to learn the process, hoping to get a leg up on others that want to invest. That opportunity was very helpful in understanding the IPO process.
Signing Up With Fidelity
While I and others speculated about a Loyal3 partnership, that was not the case. On November 17th, Lending Club announced it chose Fidelity to administer a Directed Share Program (DSP), and the offering would not be available to the public as a whole, only to Lending Club loan investors of record before September 30th. Around the same time, there was some talk of a full buyout in lieu of an IPO, with Goldman Sachs advising on selling the company. That never materialized.
Since I already had two retirement accounts with Fidelity, I was happy with the choice. In hindsight, a deal with Loyal3 did not make sense because it is a small newcomer to the brokerage space. This being one of the largest IPOs of the year, it was an opportunity for a larger brokerage, like a Fidelity, to gain a significant number of customers. Fidelity required IPO investors to open a new account, potentially adding tens of thousands of new brokerage customers. This side benefit of brand new fee-paying customers gave them a vast cost advantage over a smaller no-fee brokerage. Plus, Fidelity’s reputation and history of execution were strong. Given the size and complexity of this offering, it was a safer route to go with Fidelity.
About a week later, I received a few emails from both Lending Club and Fidelity, indicating that certain steps would need to be followed for those interested in the IPO. I meticulously completed each of the necessary steps to remain eligible, including opening a new account. However, Fidelity made it clear that taking these steps did not guarantee an allotment of shares. During the process, I learned a few more things, particularly from a tweet that Fidelity sent me after I announced that I opened an account.
What stuck out to me the most was the When Can I Sell My Shares section. You could sell your shares at any time. However, Fidelity frowns upon flippers who sell shares immediately after the IPO and penalize the investor by not allowing them to participate in future IPOs for a designated period of time (180-365 days). That seemed a little harsh. My initial strategy, if the IPO went well, was going to be to sell some shares if the price appreciated quickly. I did not expect to be investing in any more IPOs at Fidelity anytime soon, so wasn’t too worried about being locked out.
However, as the process continued, I decided I was not going to sell any shares after the IPO. Why? Lending Club is a company and platform that I firmly believe in. The business model is massively disruptive to a huge market, the personal and small business credit markets. I was potentially getting in on the ground floor of what could someday be a high-flying $100+ billion company. Maybe, just maybe, it was the next Facebook, or Google or something bigger. Here I was possibly getting in at about a $6 billion dollar valuation. Maybe this was my opportunity to buy a stock that will someday reach incredible heights. Probably not, but what if? So I decided I’m not going to sell anytime soon. 5-10-20 years from now, we’ll see.
During this whole process, the website to be for new information was Lend Academy. Peter Renton thoroughly spelled out what potential investors needed to know, and additional chatter was going on in the forums. The Directed Share Program forum was particularly lively. Click here to check that out. Many people were chiming in with their experiences talking to Fidelity as we all tried to piece together how this thing would progress.
December 2nd was a busy day for the Lending Club IPO preparation and the Directed Share Program at Fidelity. That day, Lending Club filed an updated S1-Registration with the SEC and began its roadshow. Peter over at Lend Academy broke this down in terms of what it means to potential investors. Check out that article here. Here’s a direct link to the prospectus.
That day I also received an email from Fidelity laying out more key steps to be able to participate. At the end of the email, I was pointed to the Directed Share Program website where I logged in with my retirement Fidelity credentials.
The steps were clear and easy to complete. It also stated that pricing was expected to be set on December 10th. Based on what I learned investing in IPOs at Loyal3, the day after the pricing is when the IPO takes place, Thursday, December 11th.
Also of note in the registration was the indication of interest, meaning the number of shares you were requesting. The range given was between 25 and a maximum potential allotment of 350, in increments of 25. The initial price range was set at $10-12 dollars per share. This number, of course, was subject to change based on demand. I requested the full 350.
A few days before the IPO, the price range was increased to $12-$14. This was no surprise as demand for buying shares in the company seemed to remain strong among loan investors. On Wednesday night, the final pricing was set at $15.
That night I confirmed my share interest of 350 with Fidelity. They said the allocation amount for investors would be set at 9am. Investors waited anxiously.
Big Red Day
The next day, Lending Club executives, employees, and associates flooded the NYSE with red jackets, assuring it was indeed the big day, and no large buyer would be swooping in to buy the company out. A huge red banner was attached to the outside of the NYSE with digital photographs of everyday people who were photographed on site. I was tuned into CNBC on my iPhone, watching all of this unfold… shareless.
9am came and went, and no information was provided to potential investors about allocations. I and some others on Twitter were quite nervous that we might get left out. Finally, around 10am, I logged into my Fidelity account to find 250 shares! I was giddy with excitement. Upon sharing the news on Twitter, this seemed to be the standard allocation for most eligible participants who requested the full allotment. When the stock opened later in the 10am hour, the first tick was $24.75.
A few of us on Twitter also celebrated, as our $3750 investment turned into $6187 in less than an hour. It was thrilling. The fact that Lending Club management went through the hassle and likely extra expense to make this happen for us small investors was a testament to the company, thanking those that helped to get them there.
Morgan Stanley and Goldman Sachs did an excellent job of pricing this IPO at a level that created excitement and demand, raised money for the client, and rewarded investors. Fidelity in its role was nearly flawless. Emails were prompt, instructions were clear and concise, and there appeared to be few hitches aside from the one hour delay in allocation news. The Lend Academy forum participants shared conversations they had with the company, and their customer services reps came across as friendly, professional and forthcoming. The IPO and the delicate Directed Share Program was executed very well from the investor standpoint, so credit must be given to the companies involved.
I told my wife that this opportunity was a rare market advantage for us. To be part of a limited group of people able to invest in a stock when many others would be left out, does not happen every day. That is why I went all in on my request. Yesterday, the stock closed at $27.90, an increase of 86% since the IPO price, and momentum is in the company’s favor. Sure, valuation may get out of hand, but I’m not going to sell because of it.
The market opportunity is very large, and my cost basis already has a lot of padding to it. Maybe it will be THE big company of the new few decades. It’s too early to tell, but the potential is certainly there. I don’t want to be that guy 20 years from now looking back saying, I got into that stock at the IPO… but sold, only to watch it become a Peter Lynchian mega multi-bagger. I’m holding on.
What about you? Did you get in on this historic event? Are you selling, holding or buying more?
Disclosure: The author is long LC stock.