By Mike Baliman on Thursday 28 January 2016
After a few years of the “Fintech Revolution”, and after over a decade of the slower-burning but ultimately more transformational “P2P Revolution” it’s timely to consider when “alt” becomes mainstream, just another asset class for your portfolio.
It’s always a bundle more fun being young and fancy-free, being the indie/rebel whether it be in Star Wars, the Beer Market or in Fintech.
We know the story of old age, stiffness, rigidity, lack of fitness and general ossification – whether in old soldiers or in banks.
But what happens in the middle?
What goes on in between?
Well one big sign is the award of establishment honours – by definition the rebels have become captured by the prefects.
Another is being admitted into official tax sheltering vehicles – ISAs just over the horizon.
Another is getting bogged down in the minutiae of precisely how ISAs et al will work.
Another is having your own return indices for the sector.
Regulation means you are officially over-seen by the state.
One could go on – but I think the general trend is clear. AltFi – at least the P2P/marketplace lending end (equity crowdfunding is still the less grown-up market - eg The Strange Case of Missing Data on UK Equity Crowdfunding) has “arrived”.
Perhaps we are just a couple of IPOs away from Alternative Finance just being a “normal” part of Finance.
Yet there are still lags. Being admitted to a club means abiding by the rules. If you want to be a grown-up you need to act like one.
Many newly-regulated P2Ps are just not going to make it and will fall by the wayside. It remains to be seen how “gracefully” this happens … it’s one thing to tick regulatory boxes around living wills, fall-back servicing arrangements and the like. It’s quite another when the lights go out and staff run for the door.
There remains minimal-to-zero quantitative risk information provided by platforms. Or in simpler terms none of them really tell you how much money you might lose in normal circumstances (and only two do in the worst of circumstances).
More challengingly, like next to all of us, as adults things don’t always go in a straight line. Success never lasts. Setbacks happen to us all and as much as anything our mettle is tested when climbing back off the canvas after a near knockout blow.
It’s easy to mistake a following wind (gale?) for sheer sailing talent. Commentary has focused around the impact of a bear market on losses – and that’s quite valid. However in practice the less-mentioned effect is likely to be seen sooner – namely illiquidity and rising interest rates.
Right now if you want to take your money out of a longer term agreement there will probably be someone to take your place. And as rates are pretty unchanged you may get out at a reasonable price.
But when the tides stop flowing in and when rates have gone up – investors may not be able to sell at a good price or any price. It will be interesting to see how the so-far squeaky clean reputation of the sector is impacted by being seen as more of a “locked-in” vehicle than it had ever been before.
With rare exceptions P2P has grown-up very fast.
But before you put a few too many eggs in that basket do recall it’s not quite as grown-up as mainstream finance.