Seasons Of Change
In addition, in looking at general business conditions, the management of recent IPOs (such as Rocket, Guild, UWM, and Home Point Capital) has demonstrated that most of these companies are subject to the same seasonal and economic fluctuations that other lenders are. The ability to achieve consistent net income margins and sustained profitability is not evident in some cases. There are good and bad quarters, good and bad years. The fact that 2020 was a record-breaking year for most lenders in terms of volumes and profitability has nudged the majority owners of some of these lenders to want to “take their chips off the table” and sell at what they view as the high of the market.
Analysts apply a variety of models in their valuation analysis, but most can be grouped into three types: the Market Approach (based on market multiples derived from other publicly traded companies or actual sales of comparable companies or assets), the Cost Approach (based on the value of the underlying assets and liabilities of a business to estimate the equity value of the firm, including servicing), and the Income Approach (based on the premise that the value of a business depends on its future earnings).
Enhancing value are servicing assets, a low cost structure, or an exhibited way of doing business that competitors don’t have. Factors that detract from value include a minority ownership position (with its lack of ability to make decisions, or even have a say in them), offering a “vanilla” product mix or service that thousands of competitors have commoditized, outstanding legal or repurchase issues, a heavy dependence on refinance activity, a high geographic concentration, and a high exposure to an increasing rate environment.
Liquid Logic
In general, lenders “going public” recently has been about providing liquidity for their existing owners. Rocket, for example, used gross proceeds from its recent offering to buy out shares from existing shareholders rather than plowed back into the business. Guild used a small percentage of its outstanding common stock to purchase shares from certain Guild shareholders, providing an ongoing liquidity mechanism by which inside shareholders could cash out their shareholdings.
But an influx of capital can also be used to acquire and implement new technology, make acquisitions, acquire bulk servicing rights, expand with bricks and mortar into a new region, or enter a new channel. Having a lot of IPO cash can improve recruitment and retention. Ask yourself, how many of the lender IPOs in the last six months are focused on future business rather than cashing out existing shareholders?