Hear what the leading players in the alternative finance space have to say about the industry!
The AltFi Sponsors’ Breakfast brought together key spokespeople from P2PCS, RateSetter, GLI Finance, Liberum, PwC, Rebuildingsociety, Microexchanges, Platform Black, LendInvest, Wellesley & Co. and CrowdShed.
Above the hubbub of chatter and chinking cutlery, AltFinanceNews Editor David Stevenson managed to extract some valuable insight from the various sponsors’ representatives. These are the people with their fingers pressed firmly on the beating pulse of the alternative finance industry – their comments are gold dust to anyone with an interest in the space.
On Government and ISAs
I think the intent is still there; definitely the policy intent is to try and make ISAs work for p2p lending. I think we’re now at the stage where they want to make sure it’s implementable. It’s reached a more technical stage than a policy stage.
There are an enormous number of government departments which are very interested in what we’re doing. There’s Cabinet Office, there’s No. 10’s Policy Unit, there’s Treasury, there’s obviously the Department of Business Innovation and Skills – including The Business Bank, there’s the FCA, and of course there’s the Office of Fair Trading.
Each of these departments have a particular perspective, and different timelines. When you talk to the OFT, for example, they’re definitely getting their teeth into it now for delivery in 2018, which is a longer time horizon than I’m used to working to. Given the economy is starting to grow, and small and medium-sized businesses need finance now to take advantage of market opportunity – now is the time for ever greater co-ordination and pace. The intent is there, and a great way to accelerate to the tipping point would be for The Business Bank to lead the charge by becoming the conduit between SMEs and the alternative finance providers who will meet their particular needs. Be it for working capital, debt or equity finance, The Business Bank should maintain an accredited list of providers so that businesses are not left floundering in the dark.
Well, the Business Bank is a good start. They’ve been very receptive to us, they’ve met us, and we’re aware of the application process to become a recognized distributor of government funds to SMEs directly through our platform. I would say that they could probably move faster – the alternative finance industry is used to moving very quickly – but I would say that the intent is there and hopefully in the next few months we’ll be talking about the practicalities of it rather than just the application.
Geoff Miller, Chief Executive of GLI Finance:
We have been through the process of application and got some funding through the Business Bank for BMS Finance – which is an offline business. I think the fundamental problem that the Business Bank faces, and they acknowledge that it is a problem but they’re not quite sure what to do about it, is that as a civil service-run business it will take at least 6 months to get a decision from them.
These platforms are growing at 10-20% a month. So, the Business Bank are looking at an application – which has to be factually based on the situation when they make the application – and 6 months later you could be dealing with a business that’s more than twice the size of the business that was actually in place when the application was made. I think in order to be of more practical benefit to the industry, they need to change the approach that they have to try and more quickly allocate capital into the industry, or allocate capital into a discreet entity that has gone through the approval process, which can then allocate capital itself. That’s the critical challenge that they face.
They are getting much more knowledgeable about the sector. I’ve spent quite a lot of time talking to people at the Business Bank who clearly understand all of the players in the sector now, but that doesn’t mean that they can actually put money to work as quickly as we, or they, would like.
On Institutional Interest
Geoff Miller, Chief Executive of GLI Finance:
We’re certainly seeing more platforms and that has been accelerating. I suspect that it will slow down once we get closer to regulation and through regulation because there’s then going to be a significant barrier to entry. But at the moment we are seeing a large number of platforms that are looking for funding.
I would say overall that the quality of proposal is now significantly lower than it was 6 months or a year ago, because those people that were really thinking about this industry, and how to develop a strategy to address it, were thinking about it 18 months to 2 years ago, rather than thinking about it 6 months ago and now getting to the point of looking for funding. There’s still one or two that are interesting, but broadly most of the people that were worth backing started working on this a couple of years ago and have already got their funding.
We track downloads of our research – and when we publish on something like Trustbuddy, which is a listed p2p company, we get ten times more downloads than usual. So there’s a phenomenal amount of interest from equity investors who I think frankly can see the astronomical returns that they can potentially get.
You can see that there’s a hell of a lot of money to be made by astute equity investors getting in on the ground floor. The more obvious opportunity for institutional investors is on the debt side. This whole asset class is just waiting to be securitized, and probably will be securitized around 4 or 5 percent, or lower. I think some stuff has been securitized below 4 percent. So it’s a no-brainer for institutional capital to get involved given where gilt yields are, and given where corporate bonds and investment rate bonds are trading in terms of yields. QE has pushed down yields right across virtually every asset class, but here’s a new asset class that hasn’t re-priced in line with other asset classes. It’s a real land-grab opportunity for institutions.
We definitely have interest from institutional investors on the mortgage side. I think that’s where it is going to be particularly interesting in the next couple of years. There’ll be certain platforms that will get that model right and that’s something that is hugely scalable in terms of potential. I think it’s a lot harder to get right than some of the other p2p concepts, like consumer and SME, where it is perhaps algorithm driven.
In terms of a space this is definitely the place to be, and we’re very happy to be where we are. We’re looking to push it forward – if you look at the figures for mortgage lending in the UK, we’re still dramatically less than half the mortgage lending levels of 2006/2007. We’ve got a long way to go, there’s a massive gap to be filled there and so there’s also a big space for alternative lenders like us.
On Changes and Opportunities
Henry Freeman, Founder of CrowdShed:
Crowdfunding may be a relatively nascent industry, but it’s already clear it will become a major if not defining force for raising capital in the future. The industry will evolve and we will see winners, losers and consolidation. The nature of platforms will change as well, for example currently most platforms tend to offer just one form of crowdfunding and often in a niche sector. CrowdShed is taking a multi-faceted approach, bringing together all forms of crowdfunding – reward and donation based as well as financial. This is an opportunity for businesses to attract investors who are also their ongoing and loyal customers... and they tend to be the best ambassadors a company can have! Individuals, charities and not-for-profit groups can also raise money for tangible rewards to attract the funding they need and charities can benefit from gift aid.
Ralph Hazell, CEO and Founder of Microexchanges:
I think the next big thing will be the secondary markets, and commoditizing the actual loans themselves. That doesn’t necessarily need to be in an institutional sense, it can simply be the platforms having properly traded markets – which I don’t think is happening quite yet, certainly not in the UK and I don’t think it’s happening in the US either. To help that happen we also need to have better data, and so we’re eagerly anticipating the Liberum AltFi Index!
I’m extremely excited about the opportunities arising and the growth in the sector. I see some really innovative business models and I think these will continue to proliferate. I think we all recognise that as the sector grows it will also start to mature. The imminent regulation is just one part of that: there will also, I'm sure, be consolidation, and yes company failures that you'd expect in any mature industry. But to answer your question, I’m very excited about working with alternative finance.
Join AltFi for its third annual Alternative Income Forum, exploring closed-ended funds (investment trusts) specialising in generating an income using alternative assets such as specialist finance, P2P lending, direct lending, asset leasing and more. Hear from the leading investors and fund managers in this rapidly growing market.