What does the Funding Circle / Zencap Deal Mean?

The big news at LendIt conference this week in London was that Funding Circle announced the acquisition of German marketplace Zencap. Zencap launched in March 2014 and facilitated SME loans in Germany, the Netherlands and Spain. Working with local teams, the IT infrastructure is run from the headquarter in Berlin.

Samir Desai announcing the acquisition

Zencap has originated more than 35M EUR loans since launch with a monthly volume of 4-5M in the last months. The vast majority of this volume was generated in German loans.

With the acquisition Zencap will become Funding Circle Central Europe and the founders Matthias Knecht and Christian Grobe will head this division. Knecht confirmed that Funding Circle paid in stock through a stock swap. All existing investors stayed onboard. No details on the valuation were publicly available. Knecht said at Lendit that talks between Funding Circle and Zencap started as early as Lendit 2014.

Allegedly Zencap has been trying to raise a new round since May 2015 but struggeled. A source from the VC scene told me that he thinks, that Rocket Internet – the backer of Zencap – might have concluded, that it is more important to prove that Rocket Internet is able to deliver successful exits rather than close another round which might not meet high expectations of onlookers.

What does the deal mean for Funding Circle?

I feel that Funding Circle essentially invests in the future outlook. The current volumes of Zencap are solid but not spectacular. So essentially the deal enables Funding Circle to jump from serving two markets to five markets (even though NL and ES are very small so far) without starting from scratch. They also get local teams that are familiar with the markets and their circumstances.
For Funding Circle Central Europe it means easy access to a large base of institutional investors that are already familiar with the Funding Circle brand and can now diversify into SME loan markets in continental Europe.

When I look at the platforms in continental Europe, Zencap is the obvious choice as acquisition target. It is the only platform with a SME loan model very similar to Funding Circle that already operated in multiple markets.

Knecht said at Lendit that he is looking at Italy and France as markets that look interesting for a further expansion.

What does the deal mean for retail investors?

Unlike on other marketplaces there will be no cross-border lending for retail investors on Funding Circle. Both Samir and Knecht explain that the mid-term outlook for this is that retail investors will be able to invest into loans in multiple geographies via a coming fund.
The German platform receives some critic from retail investors, which complain that it is less than perfect and reporting and processes need to improve. This got me wondering for a short while whether the British platform would be used to replace the IT for the continental European markets too. However when I asked Knecht at the conference, he said that there are no plans for that, and that Funding Circle would continue to run seperate IT platforms.

What does this deal mean for the industry?

This is a big step for the p2p lending industry in Europe. It is the first really big acquisition in Europe to expand into more markets. Also it enables a new possible exit route for smaller players. However when panel moderator Robert Stafler accordingly asked about this new exit route, I liked the quick-witted answer of Bondora CEO Pärtel Tomberg, that he sees Bondora rather as the company that buys smaller players than as the acquisition target.

It brings the general question when consolidation will start into spotlight. Could there be advantages if some of the many British platforms merge to form larger marketplaces? Is there a race to build the first truly pan-European marketplace? Could the first mover maybe profit from such a position if we do see some form of standartisation attempts by the European Commission materialize?

I talked to many attendees at the conference about that and got a diversity of opinions with no clear trends. Some of the US and UK platforms seem to think that a European marketplace with cross border lending is not an attrative aim to work on, whereas several of the continental European players are more open-minded about this or outright see that as a long-term vision.

What are your thoughts about what the Funding Circle buying Zencap means? Please share your opinion in the comments.

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