Institutional investors' share of alternative finance market growing, says new report

Out-Law News | 22 Feb 2016 | 11:58 am | 2 min. read

The proportion of online alternative finance provided by traditional institutional investors, such as banks and investment funds, is growing, according to a new report.

The shift is particularly noticeable in peer-to-peer (P2P) lending, where 32% of consumer loans and 26% of business loans were funded by institutional investors in 2015, according to research by the Judge Business School at the University of Cambridge and Nesta, the innovation charity. Over 1,000 institutional funders were actively involved in some form of alternative finance in 2015, while 45% of platforms reported institutional involvement: up from 28% in 2014 and just 11% in 2013, according to the report.

The UK's alternative finance sector grew by 84% in 2014/15 to reach £3.2 billion worth of investment, according to the report; with real estate finance taking up the biggest market share with £700 million worth of investment. Although this was a "significant" increase, the percentage growth recorded last year was just over half of the 161% growth recorded in 2013/14, the researchers said.

Fintech expert Warren Mead of KPMG, which part-funded the report, said that the figures showed so-called 'alternative' financial options "finally join[ing] the ranks of the mainstream".

"From the recognition of regulators, to industry pioneers being bestowed with New Year's Honours, it's clear the market has come of age as an integral part of the lending landscape," he said.

"But while this evolution gives the industry the platform to grow, it also brings its own set of challenges. Being part of the financial establishment doesn't sit well with its original social purpose. Incumbents are also playing catch up with their own digital investment, and are closing in on the disrupters' lead. Meanwhile, platform failures within these growing networks are inevitable," he said.

When asked by researchers about what they perceived as the biggest risks to the future growth of the alternative finance market, 57% of surveyed platforms responded with the potential collapse of one or more well-known players in the market due to "malpractice or fraud". In their report, the researchers referred to the collapse of Swedish P2P platform Trustbuddy last year "due to suspicion of misconduct, including misuse of client money"; and suggested that the growth of the UK market would "inevitably bring with it examples of platforms not playing by the rules".

Respondents also ranked the risk of default and business failure, cyber security risks and the potential for future policy changes in regards to tax incentives for investors as presenting high risks for the future growth of alternative finance. As an example, the report pointed to one crowdfunding platform which had "pivoted away from their model focusing solely on renewable energy" in response to UK government cuts to renewables subsidies.

The researchers surveyed 94 leading alternative finance platforms accounting for over 95% of the "visible" UK online alternative finance market as part of their research. These included P2P lenders, invoice traders and equity-based, rewards-based and donation-based crowdfunding platforms, among other models.

P2P business lending maintained the largest share by volume of the UK online alternative finance market, lending nearly £1.49bn to UK SMEs in 2015. Of this, at least £609m came from the real estate sector and was used to provide capital for mostly small to mid-sized residential and commercial development companies. This figure accounted for 3.9% of new loans to UK SMEs based on the British Bankers' Association's 2014 baseline, or 13.9% of new bank loans to the smallest businesses over the same period, according to the report.

Consumer lending via P2P platforms reached £909m in 2015, a 66% increase from 2014's total; while invoice trading increased by 20% from £270m in 2014 to £325m in 2015. Equity-based crowdfunding was one of the fastest growing alternative finance models in 2015, with a 295% increase in the amount raised between 2014 and 2015, according to the report.