By Andrew Whelan on 12th September 2016
Andrew Whelan, chief executive officer of GLI Finance reveals why the scene is set for more institutional demand for alternative finance.
The latest economic data has baffled the Brexit naysayers who from the 24th June have been prophesising the equivalent of a fiscal apocalypse. Indeed in the weeks since that historic day we’ve seen volatility rear its head in almost every form; from stock markets, to sterling and even the House of Parliament. It’s been a funny old summer and that’s before we get to England’s performance at the Euros.
But where are we now? Mark Carney has shown his hand, cutting interest rates to an all-time low and leaving institutional investors grappling with rock bottom yields, whilst bank de-risking has continued apace leaving many small and medium sized businesses struggling to gain access to finance.
It’s against this fascinating backdrop that the alternative finance sector finds itself with a unique opportunity to further its maturation into a mainstream part of the financial services sector. Increased demand from SMEs seeking funding, paired with higher than average investment returns are currently making the industry very attractive to institutional investors with the firepower to drive significant origination scalability.
However, before the market can really capitalise on this potentially transformational opportunity, we must first look at some of the key areas that need be addressed to ensure its appeal as a viable institutional asset class.
In the wake of industry scandals such as those seen at TrustBuddy and Lending Club it is more important than ever that the sector is able to instil trust in potential investors.
In order to achieve this it must first develop and then adhere to an independent, comprehensive regulatory framework which will help improve standards and increase transparency across the market. Only by adhering to the most stringent levels of compliance will the sector be able to meet the strict investment mandates and guidelines that govern institutions.
If the industry’s key stakeholders can work together to ensure the successful implementation of such a regime, the potential impact is huge. According to the University of Cambridge’s latest alternative finance industry report, only 26% of peer-to-peer business loans were funded by institutional investors last year indicating substantial opportunities for growth providing the industry is able to drive up standards, increase reporting transparency and continue to demonstrate a solid track record.
It’s a basic rule of investment that higher yields often come accompanied by greater risks and that appropriate levels of diversification to offset these are crucial. The explosion of the sector in the wake of the financial crisis has ensured access to a variety of platforms offering a range of products from consumer lending, B2B funding, invoice discounting, marketplace lending and peer-to-peer to name but a few.
Crucial though has been the development of a range of innovative fund structures providing institutional investors with access to a diversified set of assets through a relatively small number of investment vehicles. Not only that, but these entities provide a way of benchmarking performance bringing with them more transparent reporting standards that institutional investors are comfortable with.
Ensuring this data is collated, accurate and readily available to investors will further strengthen the asset class’ credibility whilst allowing them to more effectively manage their exposures in line with their risk tolerance.
Despite the enormous growth experienced by the industry in recent years, the market is still poorly understood by many and the key to further growth going forwards will lie in its ability to better educate investors.
Though many are familiar with the more common forms of alternative finance, such as crowdfunding and peer to peer lending, greater understanding around the lesser known types of finance is needed. Institutions must understand the nuances in the sector so they are better informed, and as such more likely, to invest in the product.
Government initiatives such as the Open Banking Standard and the Innovative Finance ISA have helped push alternative finance out into the mainstream, but more still needs to be done to encourage institutions to move away from the traditional asset classes of yesterday into the new opportunities of alternative finance.
The potential relationship between the alternative finance industry and institutional investors could prove hugely beneficial to both sides. By positioning itself as an attractive asset class to secure further institutional investment in the future the alternative finance sector will continue to grow and develop. Such growth with enable it to further prove its credibility alongside traditional lenders and inevitably change the definition of mainstream banking forever.
Andrew Whelan, Chief Executive Officer, GLI Finance.
AltFi is returning to Amsterdam for its second annual Summit in the city. The inaugural event last year was a roaring success, with key figures from across Continental Europe's alternative finance and digital banking sectors highlighted. These included Jeroen Broekema, managing director of Funding Circle Netherlands, and Mieke van Engelen, head of innovative partnerships at ABN AMRO's standalone lending platform, New10.