Will Crowdfunding Threaten Institutionalised Lending?

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The Market Mogul | | Aug 14, 2015

VPC shares since listing

Recently equity, reward and debt crowdfunding through to peer-to-peer loans have received much attention as private investors provide funds for individuals, startups and more established SMEs seeking capital for expansion. Nesta reported that the UK alternative finance market generated £939m in 2013 and predictions for 2017 are reaching £15bn annually. With high recent and predicted growth in this sector, will these platforms begin to threaten institutionalised lending? As investors, should we be directly crowdfunding fledgling companies and gaining income from P2P lending or investing in the emergent alternative finance funds?

Risk for direct investors?

The main criticisms of crowdfunding are well worn. Some concerns over the lack of regulation of the sector were alleviated by new FCA rules in spring 2014 for loan-based and investment-based crowdfunding platforms. These regulations are due to be reviewed in 2016, but their presence is already providing investors with a higher level of security. The incipient sector regulation also hints at another issue with alternative finance – its age. As such a new market, it is as yet difficult to assess the success of crowdfunded ventures. We shouldn’t expect conclusive evidence for another few years. However, initial research does suggest alternatively financed startup failures are surprisingly low.

Dr Richard Swart at UC Berkeley reported that whilst 70% startups generally go bust, only 30% of crowdfunded fail.

Defaulting rates are also unexpectedly low – one recent study reported that 75% of crowdfunded businesses fulfilled their promises to stakeholders, albeit not necessarily in the period initially anticipated. Whilst these default rates may increase, many platforms, such as RateSetter, which recently revealed a £6.1m protection fund, have contingency funds to safeguard investors should debt rise.

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Alternative finance has real potential to draw entrepreneurs away from banks. The investments on crowdfunding platforms are more diverse – it has been reported that in 2014 female-directed companies received just 4% of conventional venture capital versus 43% via crowdfunded platforms. A greater variety of people are investing too, with many sites allowing investments from as little as £10.

Many have been skeptical of ‘the crowd’, however analysis of crowdfunder portfolios demonstrates an understanding of risk and investment. Portfolios tend to be broad rather than narrow focused – on Funding Circle the average lender pledges just £157 to each of 67 companies. Crowdcube recently launched a venture fund, allowing those with over £2,500 to rely on a fund manager for investment research and appraisal and portfolio monitoring. A managed portfolio of up to 10 companies provides another level of reassurance.

Alternative finance funds

In the last year, alternative finance funds have begun to emerge. LSE listed income-focused closed-end fund P2P Global Investments caught the attention of a variety of respected fund managers. Neil Woodford and George Luckraft have both invested in the fund run by a team at hedge-fund manager Marshall Wace.  The first 14 months of the fund have been slightly underwhelming – the shares peaked at 1185p in early February but sank to 1040p in July and are currently sitting at 1074p. The company valued the shares at just under 1000p. The lack of data for comparison and the young age of the fund make predictions difficult.

See:  Get the Leading Global Industry 2015 Crowdfunding Report  (member discount)

Both Woodford and Luckraft subsequently endorsed VPC Specialty Lending, launched in March. Woodford Equity Income also directly holds a stake in RateSetter, one of the biggest UK P2P platforms. According to Bloomberg, other funds involved in P2P trusts include Aviva Investors, City Financial, Invesco Perpetual and Jupiter Asset Management. However – these holdings form only small proportions of the total portfolio. For example, P2P Global and VPC Specialty Lending comprised 1.46% of Woodford Equity Income at the end of March.

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The National Crowdfunding Association of Canada (NCFA Canada) is a cross-Canada non-profit actively engaged with both social and investment crowdfunding stakeholders across the country.  NCFA Canada provides education, research, leadership, support and networking opportunities to over 1100+ members and works closely with industry, government, academia, community and eco-system partners and affiliates to create a strong and vibrant crowdfunding industry in Canada.  Learn more About Us or visit www.ncfacanada.org.

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