By Ryan Weeks on 8th November 2016
Latest equity crowdfunding report from AltFi Data calculates 19.14 per cent IRR for industry.
The latest “Where are they now?” report, AltFi Data’s annual pulse check for equity crowdfunded companies, has revealed strong performance across the sector. The first iteration of the report – which was published this time last year – represented the first attempt to deliver a portfolio view of performance across the equity crowdfunding sector. The industry IRR, at that stage, was calculated at 2.17 per cent, increasing to 33.79 per cent when tax-adjusted.
Since then, the FCA – as part of its post-implementation review process – put the industry on watch, stating the following:
“Based on the outcome of the review, to help potential investors better understand the risks, we could consider whether to mandate additional disclosures, for example setting out how many businesses that raised funds have since failed and how many have had successful pay-outs.”
Seedrs became the first platform to carry out a “Where are they now?” style analysis on its own portfolio in September of this year. The platform calculated a 14.44 per cent IRR for its portfolio of early stage investments, rising to 41.87 per cent when tax-adjusted.
The latest report from AltFi Data, which was published this morning, is fuelled by a far richer data set than was available for the 2015 iteration. The report drew on data from 955 capital raises, spread across 751 companies, up from just 367 companies last year. To date, just 88 of those 955 raises have ended in failure, while 5 have delivered exits.
Taking a year-by-year view, 2013 is perhaps the most indicative cohort in terms of striking a balance between volume and maturity. 63 per cent of the companies in the cohort (which as a whole accounts for a little shy of £20m of origination) are still trading. Almost half of those have staged up-rounds, meaning that they’ve gone on to raise more money at a higher valuation. But the number of failures found by AltFi Data in the 2013 cohort has essentially doubled since last year’s analysis, from around 15 per cent in 2015 to a little over 30 per cent today.
More recent cohorts are performing well, but this is, at this early stage, to be expected. It’s important to bear in mind that the 2013 cohort is significantly smaller in terms of volume than the 2014 and 2015 cohorts (less than £20m in volume versus nearly £80m and more than £150m respectively).
Speaking at this morning’s launch event at Nabarro, AltFi Data CEO Rupert Taylor noted that, while not significant at this stage, problems appear to emerging sooner for the sector’s most recent cohorts. He said that it was “quite early for problems to have emerged” in the 2016 cohort, which has already seen a few failures.
As a more general point on volume, the report finds that equity crowdfunding sector originations have slowed in 2016. According to the report: “2016 looks set to be the first year in which the full year origination amount is dwarfed by the previous year.” Q3 2016 origination was particularly slow, with AltFi Data citing uncertainty stemming from Brexit as a significant factor.
AltFi Data’s portfolio return calculation of 8.55 per cent across the industry factors in changes in valuations and dilution (caused by the new issue of shares). When factoring in the effect of EIS/SEIS reliefs, which apply to a large proportion of equity crowdfunding campaigns, the IRR rises to 19.14 per cent. The report covers the sector’s largest six platforms: Crowdcube, Seedrs, SyndicateRoom, VentureFounders, CODE Investing, Angels Den.
Other highlights from the report include:
Chief among AltFi Data’s conclusions in the report was the suggestion that equity crowdfunding platforms should be making this kind of portfolio-level disclosure of their own accord, regardless of whether or not the regulator requires them to. Taylor called it an “essential ingredient” in allowing individual investors to bring scrutiny to bear upon origination platforms that do not use their own capital to fund deals.
But Taylor also argued that the best method of delivering this kind of disclosure in a consistent and comparable way is to act via an independent third party provider. “If the industry is serious about wanting to go mainstream, it needs to make it easy for due diligence to be done,” he said.
We’ve received a number of reactions to the report, which are displayed below.
“As the crowdfunding industry matures, we need a unified approach to reporting on the performance of crowdfunded businesses. AltFi’s independent and thorough analysis of the UK’s crowd portfolio is certainly a positive step for the industry and one we wholeheartedly endorse. Increased transparency of the due diligence process and ongoing performance of investments is critical for our maturing industry and investor confidence.”
Goncalo de Vasconcelos, CEO and co-founder, SyndicateRoom:
"It's been an interesting twelve months for the industry, with the highlight, for me, being the FCA's decision to review the sector.”
"Openness and transparency have been at the core of SyndicateRoom's ethos since it launched three years ago. We believe there should be regulation in place where investment platforms present their entire portfolio, including all details for companies - successfully completed funding rounds, to exits to those who have ceased trading. Only then will investors be truly informed and get fair and transparent access to the top deals. We need a culture shift - and we ask the crowdfunding industry to follow in our footsteps. Transparency around information available will be at the very heart of this culture and will create a sustainable market where investors are achieving their expected financial returns."
Now in its sixth year, the AltFi London Summit returns on 18th March 2019 to 155 Bishopsgate. Last year proved to be a crucial turning point for the key players building the future of finance. Leading platforms launched oversubscribed IPOs, digital banks proliferated and mainstream financial institutions started their own disruptive propositions. With 2019 certain to be another landmark year, more questions will be asked by regulators with investor interest in disruption also poised for more rapid growth.