Online small business lender Prospa has launched an initial public offering, with an offer of 40.3 million shares at $3.64 a share.
If it reaches its $146.5 million target, it will commit around $60 million as capital backing for its loans, $40 million for investment in the business and the balance will allow existing shareholders to realise part of their investment.
With the proceeds of the IPO, the company would have a total of 130.5 million shares on issue and a market capitalisation of $576.3 million. The offer closes on June 4 and the company expects to start trading on the Australian Stock Exchange on June 12.
Prospa was founded in 2012 and claims to be Australia’s number one online small business lender.
It has originated $500 million of loans and dealt with 12,000 unique customers since it started. The current loan book is worth $200 million. Loans originations grew at a compound annual growth rate of 127 per cent between 2015 and 2017.
The company is forecasting that loan originations will grow by 34 per cent this calendar year.
Prospa provides loans of between $5000 and $250,000. It has only one product, which is an amortising term loan, with no requirement for security on loans up to $100,000 (although a personal guarantee is required for all loans). Terms are between three months and two years.
The average loan size if $26,400 and the average term 11.9 months. An average size loan provides a “net contribution” of $3100.
The earnings model includes loan impairment charge of 4.5 per cent of the loan principal at origination, based on the company’s “historical cumulative static loss rate experience on fully seasoned cohorts.”
The board has set a target loss range between 4 per cent and 6 per cent. The loss rate has been as high as 5.8 per cent, during the December half 2014. The arrears rate (90 days past due) ranges between 6 per cent and 8 per cent.
The company believes it has a niche in the market because small business is under-served by banks. It says its competitive advantage is its speed, with decisions and funding often by the next business day.
Its “proprietary credit decision engine” assesses “hundreds of data points from customers’ financial information, government data and credit bureau data, and overlays management requirements such as credit quality.”
The company claims to have compiled a large store of small business data, against which its algorithms drive improved credit decisions.
It also claims to have strong customer feedback and a 69 per cent repeat business rate (although this is for eligible customers only).
The founders and joint chief executives of the company are Greg Moshal and Beau Bertoli.
“Our business model is focused on small businesses, many of which are able to service a loan but do not have the requisite documentation or security to access bank loans.
Borrowers are fairly evenly split between the building industry (21 per cent), hospitality (20 per cent), professional services (17 per cent) and retail (16 per cent).
The company has four sources of funds: a $195 million “warehouse facility” (revolving credit line) supported by “institutional investors and senior funders”; an asset-backed securities issuance program (it has completed one ABS issue worth $79 million); corporate debt and cash. At April 13 the company had $70 million available in undrawn warehouse capacity.
Most of the company’s loan sales are via intermediaries, such as loan brokers and accountants. This channel includes AFG, Yellow Brick Road and Finsure, and accounts for 65 per cent of distribution.
Thirty per cent of sales are through the direct online channel and 5 per cent are through partner arrangements with other financial services companies.
According to the pro forma profit and loss statement in the prospectus, revenue grew from $24.4 million in 2015/16 to $55.8 million in 2016/17. The company is forecasting revenue of $101.5 million in the year to June.
The company made a loss of $5.4 million in 2015/16 and $2 million in 2016/17. It is forecasting a net profit of $1.6 million
At the offer price of $3.64 a share the company will start trading on a very high price-earnings multiple.