- SoftBank-backed fintech startup OakNorth says it's been lending at record levels amid the coronavirus pandemic.
- The lender, founded in 2015 and valued at $2.8 billion, is profitable, making it a rarity both in the SoftBank Vision Fund portfolio and Europe's wider fintech disruptor scene.
- One of the world's biggest banks, Sumitomo Mitsui Bank, has acquired a $30 million stake in the company after using its credit intelligence software.
- OakNorth cofounder Rishi Khosla addressed ongoing IPO chatter, saying the firm wasn't looking to list but that a direct listing would make the most sense of any option.
- Visit Business Insider's 合约数字币和虚拟币homepage for more stories.
One of the world's largest banks, Sumitomo Mitsui Bank (SMBC), has acquired a $30 million stake in SoftBank-backed fintech OakNorth as the coronavirus pandemic pushes the UK fintech's loanbook to higher levels.
The investment comes after the Japanese bank became a customer of OakNorth's credit intelligence software offering, in an attempt to boost its commercial lending operations.
OakNorth, a UK-based challenger bank, lends money to small and medium-sized businesses, and rents its software to other lending houses around the world, quietly disrupting the $7.9 trillion mid-market lending space.
In 2018, it raised $390 million from SoftBank's Vision Fund as part of a wider $440 million round — one of the biggest funding rounds at the time for a UK startup.
We spoke to cofounder Rishi Khosla after the news of the SMBC stake on the state of the business.
The firm has benefited from the Coronavirus Business Interruption Loan Scheme, or CBILs, a UK government scheme aimed at helping small and medium-sized companies impacted by coronavirus by allowing them to borrow up to £5 million at preferential rates.
"Our [loan] originations were at levels never seen before during the summer, some of it from CBILs and a significant portion not from CBILs," Rishi Khosla told Business Insider.
The CBILs scheme has allowed fintech disruptors like OakNorth to rapidly expand their loan book to more British companies, whilst taking on limited risk as the UK government will pay back the cash if the business defaults.
More profitable than consumer fintechs
OakNorth isn't reliant on the CBILs scheme for growth and was profitable prior to the scheme. And while its banking business fuels its growth in the UK, the company's credit intelligence software is its golden ticket to expansion in other markets.
The software gives lenders a "granular approach" to the credit process, Khosla said. Rather than the conventional "top-down view" of a dozen macro sectors, OakNorth has built a new "framework to look at new loans."
"We have set up scenario analysis on 204 different economic subsectors," said Khosla. "Bank models are not set up for pandemic risk weighting and this current lockdown is in different circumstances to the last lockdown, meaning different analysis is needed."
When conventional banks assign loans, they often use a small set of macro sectors to determine the risk and cost of the debt. But OakNorth's software offers a more extensive and malleable process to more effectively determine the risk profile of a company. The promise is that banks can more safely allocate cash from their loan book and more efficiently set the price for companies.
The company's own research, 2019 annual report, OakNorth posted a pre-tax profit of £65.9 million ($88 million) for the year, up from £33.9 million ($45 million) the prior year.
Another funding round or an IPO is not on OakNorth's short-term horizon as it doesn't need the cash, Khosla said, though the firm has been subject to long-time speculation of a possible listing.
"Right now today, we would probably go for a direct listing, all things being equal, but we are not looking to list right now," Khosla added.
A direct listing (DPO) is an alternative means of publicly listing versus an IPO or the increasingly popular. In a direct listing, the company forgoes the protections of an IPO where a bank will underwrite the stock issuance; instead, the price is completely determined by the market. This form of float is suited to well-known companies that are not looking to raise capital from outside investors. A recent example includes US-based streaming service Spotify.
However, there is no need to go public to raise capital, Khosla said.
OakNorth's deal with SMBC came in the wake of a sale of a stake in the company by early backer IndiaBulls. Although the stake was sold at a discount, it had no material impact on the company's valuation, according to Khosla who added that an investor making multiples on their investment and gettingwas a positive.
"Our new investors are people we have intense regard for as individuals and as an entity. They are a strong commercial bank globally who have also signed a commercial contract," he said. "Having that endorsement from major bank as a client and an investor is very strong alignment."
SMBC is one of the world's lending heavyweights, offering OakNorth a "close sounding board" as it aims to further disrupt the credit space, Khosla said.
OakNorth is planning its expansion carefully, he said, focusing on the US and with an eye on Asia.
The startup has 35 workers in its New York office, with the world's deepest lending market a major target for the company's growth going forward. It also has some staff in India. The company recently hired tech veterans Jessica Reiter as CMO and Anya Darrow as VP of customer success in the US.