Billion Dollar Unicorns: Lufax May Be Risky, But Valuations Remain Lofty

According to a BusinessInsider report on the Peer-to-Peer (P2P) lending industry, the total loans generated by P2P lenders in the US grew 128% to $6.6 billion in 2014. The US is the biggest P2P lending market in the world in terms of loan volume, but other countries are catching up. In 2014, Europe grew 144% in P2P loan volume to $3.9 billion. China is not to be left far behind as is evident from the Billion Dollar Unicorn status of Chinese P2P lending firm Lufax. 

Lufax’s Offerings

Shanghai-based Lujiazui International Financial Asset Exchange (Lufax) began their operations in 2012 as a P2P lending company. Today, it has expanded beyond P2P lending to become an online marketplace for trading of financial assets. Since its founding, Lufax has become the largest Internet finance company in China. Similar to the models of Lending Club in the US, Lufax helps connect individual borrowers who need small loans with investors who are willing to lend out funds.

As of February this year, Lufax had more than 7 million registered users on their platform. They have helped arrange for more than 200,000 P2P loans helping raise over $2.5 billion in loans. Lufax earns a commission on the loan it arranges for the borrowers. Loan fee is typically around 4% of the loan amount and is charged to the borrowers. Investors flock to the site because of the possibility of higher returns. Market reports estimate that as of February 2015, investors were able to earn returns of 15% on their investments compared with China’s benchmark rate of 2.5%.

Keeping the Chinese market requirements in mind, Lufax has also set up storefronts for their operations. They have almost 100 storefronts spread across 80 cities in the country helping people get loans.

The company is now expanding into other financial assets as well. They are planning to expand into the institutional investor market by enabling buying and selling of financial assets such as asset-backed securities. Lufax plans for further expansion within China retail finance – a market that is projected to grow four to five times a year. Research group Yingcan Group estimates the industry quadrupled to $17 billion in 2014.

While Lufax may be operating in a high growth industry, the Chinese P2P industry is fraught with concerns. Regulatory authorities want to impose tighter scrutiny on the industry given its size and the impact on the economy. The report from Yingcan group revealed that out of more than 1,500 lending platforms operating in China in 2014, 275 went bankrupt or were unable to repay funds. The researcher estimates that number to grow to 500 in 2015. Lufax itself has been in the news recently as market reports suggested that they had recorded a write-off of 320 million Yuan (~$50 million) in their paid-in-capital due to these losses. Lufax has denied such reports.

Lufax’s Financials

Lufax’s detailed financials are not known, but given that they earn 4% on loans, they have generated about $100 million in revenues within three years of operations. Recently, the company received a $485 million venture funding from BlackPine Private Equity Partners, CDH Investments, and China International Capital Corporation which helped them leapfrog into the Billion Dollar club. The funding valued them at a rather high $10 billion.

For comparison, for the last reported quarter, Lending Club helped raise $1.91 billion in loans and earned revenues of $96.1 million. They are currently trading at a market capitalization of $5.2 billion.

More investigation and analysis of Unicorn companies can be found in my latest Entrepreneur Journeys book, Billion Dollar Unicorns. The term Unicorn was coined in a TechCrunch article by Aileen Lee of Cowboy Ventures.

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I receive many emails from entrepreneurs who want to discuss their specific businesses. I’m very happy to discuss your situation during my free online 1M/1M Roundtables, held almost every Thursday. During each roundtable, up to five entrepreneurs can pitch their businesses and receive my immediate and straightforward feedback.

To give entrepreneurs all over the world access to Silicon Valley’s knowledge, methodology, and network, I founded the One Million by One Million (1M/1M) global virtual incubator. 1M/1M aims to nurture a million entrepreneurs to reach a million dollars each in annual revenue and beyond, thereby creating a trillion dollars in global GDP and ten million jobs.

For those still testing the waters of entrepreneurship, I’ve written my Entrepreneur Journeys book series to inform and inspire. My newest book, Billion Dollar Unicorns, is now available from Amazon.

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Photo credit: Michael Coghlan/Flickr.com.