For the last few years the AltFinance industry has mostly flown below the radar of major public institutional investors, preferring to take early stage money from venture capitalists and private equity houses instead.
But as the sector grows both in size and profitability, that's changing...fast! This week's deal between London stockmarket listed finance specialist GLIF and Platform Black is a sign of growing interest from City institutions in the AltFinance opportunity.
GLIF in particular is an interesting vehicle to watch - its traditionally invested in relatively sophisticated US corporate credit but under CEO Geoff Miller its now making an aggressive push into SME funding, increasingly using AltFinance platforms.
Earlier in the summer GLIF announced a big strategic investment in Funding Knight, a rival to Funding Circle in the Business SME lending - the Platform Black deal gives GLIF traction in the equally fast growing online invoice market.
Earlier this week AltFinanceNews caught up with the main players at both GLI Finance and PlatformBlack and asked them to explain the thinking behind the investment.
Geoff Miller (CEO AT GLI Finance) has been involved in the investment company industry as an analyst, fund manager and director since 1987. He has worked in many areas of financial services, having been a director of both private client wealth manager Brewin Dolphin and asset manager Exeter Asset Management, whilst in the investment banking arena was Director, Research of investment bank Bridgewell Securities Limited and Head of Research Marketing at Russian investment bank Troika Dialog. He is Chairman of Aurora Russia Ltd, listed on the AIM market in London, and a Director of various unlisted companies.
Louise Beaumont (CS&MO, co-founder at Platform Black) has 15 years’ track record of product and service development from idea generation through to effective commercialisation. She has developed and deployed successful growth strategies for businesses focused on the SME market, including Microsoft, Adobe, and Vodafone.
Q: What's the logic behind GLIF taking a big stake in Platform Black?
Geoff Miller - "GLI Finance is building a series of partnerships with platforms that provide secure finance to the SME sector across the globe. The particular attractions of Platform Black are its rapid growth and scaleability; the fact that it brings GLIF a platform that allows us to put capital to work in shorter duration assets than our other platforms; and its highly motivated and skilled management team who are absolutely focused on driving the business forward."
Q: What attracted you specifically to PB as opposed to other players in the sector?
Geoff Miller - "We have run a comprehensive due diligence process across the online platforms providing finance to SMEs. We seek relationships with businesses that do more than merely analyse credit scores and process data, as this is what the banks do and any short term advantage gained by relative cost of capital will not be sustainable in the long run. We want to engage with management teams that have built sustainable competitive advantage through their people, processes and relationships – and these are dependent on years of experience in finance - as well as a strong focus on proprietary technology. The team at Platform Black have demonstrated their capabilities through becoming the fastest growing online invoice trading platform; and what I think will sustain their competitive advantage is that their vision is one of working with the rest of the finance industry, and becoming an essential part of the industry, rather than trying to take on the industry in an adversarial way. In my view, the best alternative finance providers are those that work with the banks and other incumbent players to offer finance that cannot be provided elsewhere, rather than actively taking on the banks at the own game. The latter may be a successful strategy in the short term but longer term the returns will not be sustainable".
Q: How was the deal structured?
Miller - "The deal is a combination of equity and preference shares, to ensure that the management retain a meaningful stake, whilst we get a preferred return on part of our investment. The GLIF model is not to seek management control, but rather to work with the best management teams we can find to help them grow exceptional businesses"
Q: Why is invoice funding so attractive and what do you plan to do in the future working with PB?
Geoff Miller - "Invoice funding, from our perspective, is a great combination of short duration, good security, significant market opportunity, and very scalable. We expect to put GLI Finance's own capital to work on the Platform Black platform, as well as working with the management team on growing the business significantly in the future. There are enormous opportunities for Platform Black to grow from what is already a very strong base, and we will be exploring how we might work together to take advantage of these opportunities in the coming months".
Louise Beaumont from Platform Black - "Invoices are assets, and so they provide security for investors. Moreover, they are short term – for 30, 60 or 90 days, and as such invoice funding fits perfectly into the short term end of any balanced portfolio. The market is sizeable - £254bn for traditional invoice finance in the UK in 2012 – and there’s a large and growing finance gap for SMEs, estimated to reach £84 – 191bn by 2018".
Q: How big could the AltFinance space get over the next three years?
Miller - "Growth in AltFinance is currently phenomenal, but there is no doubt rising interest rates will temper the pace as cost of capital rises. It would take growth of several orders of magnitude before AltFinance becomes meaningful vs the mainstream banking sector. Where AltFinance is growing - and is here to stay across the cycle - will be in those areas in which it is uneconomic for the banks to compete. All of our existing platforms – BMS Finance, Platform Black and Funding Knight fit that description".
Beaumont for Platform Black - "AltFinance is predicted to reach £1bn per annum within the next three years in the UK – some market watchers believe that this is understated, and we do too. With regard to invoice finance, only 43,000 companies currently use the traditional full sales ledger service per annum. Some of the Asset Based Finance Association’s members believe that anything up to 500,000 companies could use invoice finance – and we believe a substantial proportion of these will want access to a selective cashflow on demand service that they can use on a pay as you go basis – remaining firmly in control of all of the costs. All of which means that Platform Black is perfectly placed to serve this growing market".
Q: Is GLI planning to increase its involvement in the altFinance space? What are you looking at next?
Miller - "We want to focus on building our existing platforms in the coming years, as well as potentially extending into trade finance and leasing which would fit well with our existing platforms. We’re also keen to extend our existing areas of operation in other geographical locations".
Q: What’s Platform Black going to do next with the investment? How will the partnership develop?
Beaumont - "We’re focused on growth, so we’ll be investing in sales and marketing, as well as in expanding our operations team to accommodate the significant demand we see from the market. As for our partnership with GLI Finance, we’ll be working with Geoff and the team over the coming months to define exactly how the partnership will develop – more news soon!"