Alternative finance in rude health, finds Cambridge report

The nascent sector is increasingly funding smaller firms and start-ups.

The UK online alternative finance market grew 43 per cent in 2016 to £4.6bn, according to a new report from the Cambridge Centre for Alternative Finance.

The year, 2016, saw the industry increase in terms of market volume by £1.6bn from £3.2bn in 2015, suggesting alternative finance is rapidly becoming an increasingly important source of funding for start-ups and smaller businesses with nearly three-quarters of that for small firms.

The report said peer-to- peer business lending was the largest market segment in 2016, growing by 36 per cent last year to reach £1.23bn, followed by peer-to- peer consumer lending at £1.17bn (up 47 per cent) and peer-to- peer property lending at £1.15bn (up 88 per cent), as the market diversifies.

About 72 per cent of all 2016 UK alternative finance market volume, or £3.3bn, was raised for UK start-ups and small- or medium-sized businesses, up 50 per cent from the previous year, as 33,000 firms used alternative finance channels in 2016 compared with 20,000 in 2015. In contrast to this rapid growth, the UK retail investor and lender market has been relatively stable.

The five largest alternative finance platforms accounted for 64 per cent of total market volume in 2016.

There were few new entrants into the market, and more than 35 UK online alternative finance platforms became inactive in 2016 through merger or closing down.

The trend toward greater involvement in alternative finance by established financial institutions continued, with funding from institutional investors such as pension funds, asset managers and banks accounting for 34 per cent of peer-to- peer property lending, 28 per cent of peer-to- peer business lending, and 32 per cent of peer-to-peer consumer lending.

Invoice funding came in at £452m, equity-based crowdfunding at £272m real estate crowdfunding at £71m, and reward-based crowdfunding at £48m.

Surveying more than 8,300 investors and lenders in online alternative finance, as well as 77 crowdfunding and peer-to- peer platforms in the United Kingdom, the report found in the six years 2011 through 2016, there has been a total of £11bn in UK alternative finance market volume.

“Online alternative finance has become an ever more established component of the UK financial landscape,” said Bryan Zhang, executive director of the Cambridge Centre for Alternative Finance.

“With equity-based crowdfunding now accounting for 17 per cent of all seed and venture stage equity investment in the UK, and peer-to- peer business lending providing an equivalent of 15 per cent of all new loans lent to small businesses by UK banks, alternative finance has entered the mainstream and is likely here to stay," he added.

While the growth is certainly at healthy levels, Zhang adds that as market consolidation accelerates there is greater pressure on alternative finance platforms to distinguish themselves through better services and more innovative products.

The report, entitled Entrenching Innovation, had the support of CME Group Foundation. The Cambridge Centre for Alternative Finance is based at University of Cambridge Judge Business School.

A full copy of the Cambridge Centre for Alternative Finance report can be found here.