What is the best option for Elderly Savers?

Author

Date

15th December 2015

An article published in The Telegraph last week showed just how far the national media is from providing adequate advice to savers looking to explore the alternative finance sector for investment opportunities. The offending article on this occasion was published in the “Personal Finance: Savings” section, written by James Connington. Click here for the article: http://bit.ly/1mlDZLC

He writes against the backdrop of the imminent end of the Government’s one year “pensioner bonds”, which will not be renewed in all likelihood. This leaves savers, and particularly elderly savers, on the hunt for short term, secure accounts that offer a decent yield with plenty of security.

In attempting to recommend viable alternative options, Connington repeatedly makes errors in his article. To start with, he seems to have been misled into thinking that “high interest current accounts” are “risk free”, clearly forgetting the plight of Northern Rock less than a decade ago, that saw regular savers embark on the nation’s first “bank run” in 150 years as they feared their savings in “risk-free” accounts would be lost in the event of receivership. Furthermore, the Government have announced that the Financial Services Compensation Scheme will only cover deposits of up to £75,000 in January 2016 despite regulators striving to avoid a repeat of the Northern Rock fiasco. Many pension pots will be larger, of course.

The high interest current accounts cited by Connington are also not a suitable replacement for the outgoing “pensioner bonds”. For example, TSB Classic Plus requires the saver to put in £500 pounds monthly up to a maximum of £2000 pounds overall, and set up internet banking. Once again, I stress that that the article is geared towards those who invested in the pensioner bonds, and therefore by default is aimed at elderly savers. I’m not saying this account wouldn’t work, say, for a young professional, but I doubt it would appealing to a pensioner.

His next suggestion that elderly savers should aim to invest in longer term fixed-rate ISAs and bonds is laughable, really. Not only is the time-frame inappropriate, but the yield is pretty feeble as well. The article then suggests “regular saver” accounts; again, would these accounts prove suitable for elderly savers? 6% per annum is offered on a sum of up to £300 per month in the First Direct regular saver account. You don’t need me to tell you why tucking away a limited amount like £300 per month (so a total of £3600 for the whole year) is inappropriate for the elderly; the pensioner bond allowed investment up to £10,000 after all.

Connington finishes his article with a measly 44 words on “Investing”, where he states that a high-risk investor can expect to earn 6% per annum with no guarantees of a return. At no point in the article is Peer to Peer Lending mentioned or even hinted at as an option, and considering the Innovative Finance ISA comes into force a month after the “pensioner bond” will come to an end, it is a sign of the weak journalism that is a theme in Mr Connington’s article. The investment risk in lending money through platforms is far less than investing in the stock market and the returns are healthier. Invest through the right P2P Lender and the risk is negligibly more than a bank account (see RateSetter and their provision fund if you need persuading on that one) and the returns are in a different league. And before anyone accuses Peer to Peer lending through online platforms as too complicated for the elderly, it is worth noting that the median age of an ArchOver investor is above the pension age in the UK. There are a range of loan terms to choose from to suit the lender, and the diversity on offer allows investors to spread the risk far more than in a savings account.

The P2P revolution has begun; even the banks know that, as shown by their willingness to work with the P2P lenders. The Government can see it- just look at the British Business Bank’s announcement today that they are going to work with RateSetter to lend money to SMEs. It is time that national print journalism kept up with the times as well.

Are the big institutions embracing the wisdom of Crowdlending?

Author

Angus Dent

Date

9th December 201525th May 2016

The fallout of the stress tests has generally been good news for the Banks. As I discussed in my earlier post, Standard Chartered and Royal Bank of Scotland, however, struggled and only got over the line by promising to keep back more capital. RBS announced that they had shed some of their riskier assets, including Irish property loans to the tune of £1.62 billion that seemingly had the potential to bring rich reward; the spectre of the burst of the Irish property bubble clearly enough to put the bank off. Therefore, it isn’t exactly a surprise that RBS recently announced plans to lend money to mid-sized businesses in conjunction with three global asset managers, namely AIG, M&G and Hermes Investment Management. The partnership will aim to provide finance to between 75 and 80 mid-sized businesses with loans ranging from £25 million to £100 million.

The partnership will allow RBS to benefit from extra due diligence carried out by the asset managers, as well as allowing the bank to further diversify risk. The funds benefit from exposure to an established market that was previously restricted to traditional finance providers. However, the link comes as a result of asset managers increasingly acting as “shadow” banks with companies approaching them for finance. The new partnership will see RBS continue to carry out the brunt of client negotiation directly with the borrower, whilst the asset managers carry out their own due diligence and credit analysis.

The primary (only) benefit to the borrower would be the consolidation of parties to negotiate with; however I would reason that dealing with scrupulous, profit driven asset managers alongside the sluggish, outdated bureaucracy of the banks will hardly speed the process up for borrowers. The relationship is aimed at a niche group of businesses that are already backed by private equity companies, so the move to “Crowdlending” is certainly a tentative, experimental one. It does nothing to combat the issue that the banks aren’t lending to SMEs, the lifeblood of the British economy. But it does show that the banks are willing to share their clients with other finance providers to ensure that a solution is available.

This is all very good news for Peer to Peer Crowdlenders who aim to fill the SME finance gap: expect to see more partnerships with banks emerge that allow banks to continue to lend to small businesses to the extent that their capital resources allow, with specialist crowdlending platforms plugging the gap. Indeed, only yesterday, AltFi reported the news that ThinCats had sold a 73.4% stake in the company to ESF Capital, a European specialist investment firm, in the process appointing ESF Capital CEO John Mould as ThinCats CEO. The view here is that the linking with an investment firm will bring significant new money to lend SMEs, and Mould’s appointment will certainly facilitate that. After all, Mould is the former COO and CFO of the aforementioned Hermes Investment Management- RBS could be the first of the “Big Four” banks to start lending across a Crowdlending platform to UK SMEs; and in all likelihood it will be followed by the others.

The Autumn Statement: the Upshot for Alternative Finance

Author

Angus Dent

Date

1st December 201525th May 2016

The Chancellor’s Autumn Statement has come and gone without much focus on the alternative finance sector. Back in July, the Innovative Finance ISA (IFISA) was propositioned amidst much fanfare from P2P lending platform CEOs keen to see investors receive encouragement to lend money from the government. Yet the March budget was a little light on the details of the ISA’s mechanics, and very little has been revealed in Osbourne’s Autumn Statement. Here is the subparagraph concerning the IFISA in full:

“The list of qualifying investments for the new Innovative Finance ISA will be extended in Autumn 2016 to include debt securities offered via crowdfunding platforms. The government will continue to explore the case for extending the list to include equity crowdfunding”

So, still no place for equity crowdfunding: this should not change before April 2016 and it is unlikely to be a feature of the ISA whilst the government continues to fear that investors are ignorant of the differences between debt- and equity- based lending. Debt-based securities are included, however; good news for Wellesley and UK Bond Network particularly. The good news for P2P lenders to SMEs comes with the declaration that Credit Reference Agencies (CRAs), such as Experian, will have to provide equal access to all finance providers. This will ensure that P2P lenders are afforded the same privileges as banks and will go some way to ensuring investors can feel confident in the SMEs they are lending to. Competition in the market place can only be healthy for the UK economy.

Coupled with the budget’s release came the outcome of the Bank of England’s stress tests, that saw Standard Chartered and RBS labelled the weakest lenders. The general consensus seems to be that the banks have learnt from their mistakes, yet the reality that two of the top seven banks in the UK are deemed not to have enough capital strength is still a stark warning that the UK banking system is not as resilient as it needs to be. Yes, nobody failed the stress tests, however all the banks have still been urged to hold back more capital despite evidence that they are handling their risk more carefully. The upshot for alternative finance providers? The government is trying to level out the playing field, whilst the banks still face restrictions in the wake of a financial crisis that they caused. The government clearly want the banks to remain cautious and drive economic growth from a wider pool of alternative sources. The ISA won’t bring in a flood of investors in the first year necessarily, but in five years’ time expect to see SMEs benefitting from the wisdom of a bigger and better educated crowd.

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.