Funding Circle has been through a rough few years. After floating with a value of close to £1.5bn in 2018, share prices rapidly declined, with its market cap reaching as low as £125m in January of this year.
That was when Richard Staveley, portfolio manager of Rockwood Strategic Investment Trust, began looking at the company, and discovered something shocking.
“We started due diligence in it, and it had over £225m of cash on the balance sheet,” Staveley said, describing the situation as “completely nuts”.
The market was just “not interested” in the fintech’s stock, despite the enormous pile of cash it was sitting on.
So the investment trust bought in, and began engaging with other institutional shareholders, as well as the board and management of Funding Circle.
“We said, come on, this is ridiculous. You’re sitting on all this cash,” said Staveley. “Some companies with a growth mentality will say they need it for the growth, but we’re saying no, you’ve got to buy back some shares.”
Rockwood is now the ninth largest shareholder in Funding Circle. It makes up around 14 per cent of the trust’s portfolio, which focuses on UK smaller companies with an activist investor lens.
Staveley explained that Funding Circle, which provides loans to small businesses, had fallen out of favour with the market due to being loss-making, “but they consistently said that they were getting close to making profits,” he added.
Other issues included missing some of the company’s growth targets, and that Covid loans had “sucked up a lot of the demand from the SMEs for loans,” he said.
“They’d also never really done a proper cost-cutting programme, and there were 11 people on the board,” the manager added.
Rockwood specialises in buying into UK companies that need to be turned around. The trust recently bought into Capita, a former FTSE 100 darling that has seen its stock price sink 90 per cent in the last five years.
Companies either make a strong stock price turnaround due to engagement from Rockwood, or are eventually bought out by private equity or other listed companies if the stock price fails to increase.
“They saw us buying, they know our reputation, that we’re not going to stop buying until we get things going,” said Staveley.
Following the engagement, Funding Circle has announced two sets of buybacks for tens of millions of pounds, while the group’s finance director has changed.
The group’s US division has also been sold off, which was significantly more loss making, allowing it to just focus on the UK.
“They have announced a cost cutting program, and as a result, ahead of time, they’ve hit their very first profitability ever in first half of this year,” boasted Steveley.
Thanks to the strong turnaround, the group’s share price has skyrocketed, with its market capitalisation now coming in above £400m.
Staveley said that the effects of his activist approach take six to 18 months on average, but Funding Circle was “one of the quickest”, taking only three months, which took him by surprise.