Alternative Finance: the Outlook for 2016

Author

Date

6th January 2016

The Alternative Finance sector in general, and the P2P crowdlending platforms in particular, had everything going their way in 2015: low interest rates, traditional banks still dabbing their wounds, economy picking up, helpful new legislation (e.g. Innovative Finance ISA) from a newly-elected Tory Government, no major ‘car crashes’ in the industry and dramatically heightened interest from institutional investors. It is hardly surprising that the industry grew to a cumulative total of £4.6 billion lent (source: AIR) – indeed, it would have been more surprising if it hadn’t.

However, 2016 is likely to be a lot more challenging and will, I believe, start to “sort the men from the boys” – those who are in it for a quick opportunist buck and those who are in it for the longer haul. Interest rate increases cannot be far away now that America has made the first move in an upward direction. The big question is what impact is that likely to have on the savers who have been turning away from the banks and building societies in pursuit of a better return. In my opinion, this may affect consumers concerned about safety, but will have little effect on the outlook of HNW investors or institutions more used to balancing risk against reward.

Centre stage next year will be the FCA in its key role of granting authorisation to the scores of platforms that have applied – a vital step in stimulating the hugely influential IFA community to get behind P2P after the new Innovative ISA goes live in April 2016.

Finally, the scramble by the big institutional battalions to grab a piece of the Alternative Finance action is also set to gather pace. One of the final corporate actions of 2015 was the sudden departure of CEO Geoff Miller from GLI Finance, one of the great Altfi consolidators – a sure portent of things to come in an industry where the struggle for dominance has only just begun.

The other slightly disturbing question is whether in time, though not necessarily in 2016, the dis-intermediation brought about by the P2P revolution will fade away in the face of restored institutional dominance – bringing with it the need, once more, to pay the middle man at the expense of the ordinary punter. I do hope that does not come to pass. Then again, it is not always easy to turn away institutional money.

Crowdfunding the Gaming Industry

Author

Angus Dent

Date

24th November 201525th May 2016

An article in the Financial Times today highlighted the difficulty that the UK’s creative industry has had in securing funding from banks since the government started to advocate investment into the tech start-ups. The article specifically makes reference to the government-backed British Business Banks’s investment in a private equity fund worth £40 million that focuses on nascent media and gaming companies. Britain certainly can boast a range of success stories; King Entertainment, manufacturer of the omnipresent (and entirely vacuous, in my view) Candy Crush, was sold for $5.9 billion.

The majority of gaming companies however, fall into the SME bracket, and won’t suitable for the PE funds: the aforementioned fund run by Edge Investments will only back between 12 and 15 companies. Moreover, they have fallen victim to the bank’s decision to withdraw funding to small businesses; software companies are particularly vulnerable to “computer-says-no”-ism of the banks. Some of the biggest success stories of the past are subsidiaries of much bigger companies but continue to operate under their own brand name. For instance, Sports Interactive Ltd, the creative studio behind the Football Manager games, were able to benefit from the support of Japanese giant Sega. The company was initially loss making, however the profits have steadily increased to over £3 million last year.

Yet most games manufacturers are run by enthusiasts who aren’t happy to just sign over all of the equity in their business to a big corporate. Reward-based crowdfunding has been a fantastic way to exploit the willingness of fans to take a small portion of equity in a games manufacturer along with “tangible assets” such as a copy of the game, and the less tangible reward of increased standing within the game itself. The business is able to hold onto most of its own equity but can still receive funding. See my article on the success of Star Citizen for an example of the potency of gaming fans to drive a company’s growth projections through the roof. The article can be found here: https://www.archover.com/demystifying-crowdfunding-part-1-donation-and-reward-based-crowdfunding/.

Yet there is every chance that a novel concept without an entrenched fan base could go unfunded. However, there is still the option of debt-based P2P lending if directors and major shareholders are unwilling to dilute their share in the company. Enthusiasts could invest in the business without the risk of just an equity stake, and established SMEs could continue to grow the business organically without the need to handover their brainchild to a corporate. Established companies with a debtor book to match, often funded by sponsors hoping to flog their product into the subconscious mind of the avid gamer, have consistent revenue streams from blue-chip sources. Sports Interactive, after all, had over £20 million worth of debtors in 2014, up from £16 million in 2013. These debtors were made up of retailers and sponsors keen to have their brand represented in the game. P2P lending could be the answer to the next generation of gaming companies looking to follow in their footsteps.

Why P2P Platforms are Slowly Usurping Traditional Savings Accounts

Author

Angus Dent

Date

6th November 201517th May 2016

The prospect of boosted savings returns has seen traditional savers become SME lenders through Peer to Peer lending platforms. In fact they are flocking in their masses, and both the banks and building societies are running scared. The Yorkshire Building Society has taken particular umbrage at what it views as “bad investment decisions” and “would urge anyone considering riskier investments such as P2P or equity-based investment to take independent financial advice before doing so”, according to a scaremongering article in the Daily Telegraph. It’s worth noting that such “independent financial advice” can of course be received at the Yorkshire Building Society for any Telegraph readers particularly affected by what they had read.

Yet it is hardly a surprise that the banks are launching their own counter offensive: they are losing out on bucket loads of low cost capital. The implementation of the Innovative Finance ISA next year should see even more switch to P2P lending, as they will be afforded tax breaks on profits earnt through peer to peer lending platforms. This is obviously good news for all the platforms, but is better news for existing lenders who should see more security as the money comes in.

Whilst there are risks when investing through Crowdlending websites, the larger platforms are doing everything they can to mitigate the risk to ensure that they can offer savers a viable alternative to banks. RateSetter, in my view, have the best offering from the big players. They have operated a provision fund since 2010 that proudly boasts a 100% record of reimbursing investors who have lost their money when a borrower has defaulted on repaying a loan. The fund contains over £16 million, offering more than 150% cover against claims. Every borrower contributes to the fund by paying a compulsory fee when they agree to lend over the platform, and should a default occur, the money is paid back in full. Should the fund become depleted for any reason, all outstanding loans would be redirected to the provision fund and pooled repayments would be shared back proportionately to investors to ensure they aren’t fully exposed to a particular default. To put this in perspective: the government guarantees the banks at the cost of the taxpayer. Furthermore, the guarantee only pays out if the bank goes bust and then only to up £75k. If a P2P platform fails, the FCA’s rules dictate there’s always an alternate supplier who will run off the loan book.

My response to Yorkshire Building Society’s view that investors are entering peer to peer lending with their eyes closed would be to say that investors are in fact more likely to act cautiously when lending across online platforms. People should always question what looks at face value and exceptionally good rate, and should always choose an investment on the value of its security first and foremost. There are enough platforms who operate provision funds, and who also demand borrowers take out credit insurance or in some cases personal guarantees. Transparency is, and should be, prioritised above all else; it is hard for banks to argue that platforms are complicated to use when it was the banks themselves that propounded the concept of “borrow short term, lend long term”, a notion that stimulated the financial crisis and the demise of the likes of Bear Stearns. P2P lenders instead advocate a “lend for 12 months, borrow for 12 months” policy that is wholly transparent. And with no leverage used to facilitate the loans, arguably the two major structural causes of the financial crisis won’t be an issue for Peer to Peer lenders.

Whilst more money is poured into Peer to Peer lending platforms, the alternative finance industry as a whole will see some consolidation as well. The bigger companies will obviously continue to get bigger, but the consolidation will also help smaller players offering niche services to replace traditional banking facilities such as invoice discounting and property lending. The result? More streamlined, better-run companies who prioritise lender security and endeavour to minimalize the risk for regular individual investors, who can offer a viable alternative to those sick of the miserable rates offered by banks, but without the appetite for investing in the risky world of stocks and shares.

Moreover, institutions with a low cost of money, such as family offices, schools and county councils, will be drawn into investing over peer to peer lending platforms rather than leaving their money to stagnate in bank accounts. Local government treasurers would be particularly keen to lend to platforms that subsequently lend the money to constituents or local SMEs in an attempt to further support their local community. This could see an increase in localized Peer to Peer lending companies such as Folk2Folk, who operate solely in the West Country.

The result of all this? Bad news for banks, good news for savers and SMEs.

Crowdlending, Crowdfunding and Football

Author

Angus Dent

Date

27th October 201517th May 2016

Generating a sufficiently large cloud of individual investors is one of the major obstacles for any young crowdfunding or crowdlending platform. Myfootballclub.com, however, didn’t have that problem: founded in April 2007, by November the “Society” of members was 20,000 strong, eventually growing to more than 50,000 members. They soon completed the takeover of Ebbsfleet United FC and through raising the profile of the club were able to save it from debt and eventually win a trophy, all the while allowing the fans to democratically involve themselves with the day to day running of the club. The transfers and playing budget were crowdfunded and members could vote on matters ranging from kit sponsorship to team selection. Yet membership numbers started to decline as interest dwindled, and eventually the club was taken over by a Kuwait-based consortium who cleared the urgent debts of £100,000. Funding Ebbsfleet United entirely through a crowd had temporary benefits, but ultimately the financial commitment was insufficient. Myfootballclub was ultimately about enthusiasts indulging in a hobby rather than investors making money. However, surely there is an opportunity to combine the two?

Football fans are an odd bunch. Aspirational to the point of delusion, insatiably demanding and harbouring passion that borders on neurosis, they would be the type of shareholders every director of any other business would swim through hot acid to avoid. For fans, a chairman who is deemed to run a football club “as a business” is the paradigmatic taboo. The Premier League’s inception saw England’s game of the masses catapulted into a corporate beast that at its best has the power to transcend cultural, geographic, racial and religious boundaries and at its worst has torn the game away from the working class who cannot afford the cable subscription to watch it on the television, let alone the ticket prices to watch it live.

The “corporate beast” of the Premier League…

Yesterday, the definitive “beast” of English corporate football, Manchester United, appointed a former director of Ladbrokes PLC into the newly created position of Chief Financial Officer at the club. For a club (business) valued by Forbes at $3.1 billion, the creation of such a crucial position in every other business seems massively overdue. The title may only be a ceremonial amalgamation of what has existed before, yet the position of CFO firmly entrenches the corporate structure that fans see as the scourge of modern football. The disenfranchisement felt by certain factions led to the creation of FC United of Manchester, a club run solely by the fans. It remains to be seen whether the club can keep the democratic structure as it moves up the leagues, when raw enthusiasm is won’t be enough to withstand the financial constraints.

Yet running a football club in a sensible, corporate manner can bring rich reward, on and off the pitch. Take Swansea City, a team who avoided relegation from the football league in the most dramatic of circumstances having been rescued from liquidation months earlier by a hastily assembled consortium. A member of that same consortium, lifelong fan Huw Jenkins, was appointed Chairman within a year. Within ten years, the club had an annual profit of £14.6 million, had won the League Cup and most importantly was established in the Premier League.

What, then, can offer a blend between the unavoidable corporate structures that a club needs to take advantage of the huge popularity of football, and the necessity to give some power back to the fans? For me, the answer could be crowdlending. Allowing fans to earn interest on money lent to their football club will offset the spiralling costs of going to games and cable television subscription. The clubs themselves would benefit from the publicity, as Ebbsfleet did, and receive finance from lenders who understand the club, without putting too much power in the hands of the uninitiated. Yes, there are problems: clubs would have to be very cautious not to exploit the trust of the erstwhile fan, and would have to ensure that the loan can be paid back with revenue that is both unaffected by performance and is guaranteed income over a structured term. Moreover, authoritative bodies such as the Football League and Premier League will be quick to put pressure on any practices that put a club at higher risk of liquidation. Yet the opportunity for fans to use crowdlending platforms to support football clubs financially would benefit all involved and ensure that football clubs can give back more to fans.