Starling Bank: fintech flies too close to heat of reality

Disposition effect encourages investors to sell too early when gains appear, while avoiding crystallising losses. Illiquid investments should offer some protection from the latter, right?

Consider Starling Bank, the profitable fintech challenger bank. Last month it reported startling earnings growth in 2022. Yet its top investors chose to slash the bank’s valuation by half earlier this year. Starling’s chief executive Anne Boden, a shareholder, resigned not long after.

This markdown followed a sale by Jupiter Asset Management of its holding in Starling held in open-ended funds. It was transferred to Chrysalis, a listed fund that invests in private companies for Jupiter. An independent valuation concluded that Starling was worth about £1bn.

There were good reasons. After a bonkers 2020-21, funding for private investments has since dried up. Also there seems little prospect of selling the bank via an IPO. In the UK, IPOs have collapsed this year, down 80 per cent year on year in value, according to EY.

Valuations of start-ups during funding rounds are often unreliable. Dividing the reported equity injection by the percentage holding received appears to show that hundreds of millions of pounds of value have been created. Never mind that the shares probably all have different rights. Or that the price really depends on the next buyer.

Even the revised valuation looks a little pricey at six times last year’s pre-tax profits, against similar banks such as listed Paragon or OSB at about four times. Yet neither are nearly as profitable as Starling. Its profit jumped six times last year to £195mn, helped by the purchase of buy-to-let mortgage originator Fleet Group. It generates a 70 per cent return on its equity with very high capital buffers.

Early stage companies should have high growth. Not many are profitable. Yet Starling offers both. Private companies are learning about the pitfalls of illiquidity.