alternative investment report alternative finance 2015/2016

85 Pages·2015·9.46 MB·English

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ALTERNATIVE INVESTMENT REPORT
ALTERNATIVE FINANCE 2015/2016
DISCLAIMER PUBLICATION
This report is provided for general The information has been compiled from
information purposes and for use credible sources believed to be reliable,
only by investment professionals however it has not been verified and its
and not by retail investors. accuracy and completeness are
not guaranteed.
Reliance should not be placed on the
information, forecasts and opinion set The opinions expressed are those of
out herein for any investment purposes Intelligent Partnership at the date of
and Intelligent Partnership will not publication and are subject to change
accept any liability arising from such use. without notice.
Intelligent Partnership is not authorised No part of this publication may
and regulated by the Financial be reproduced in whole or in part
Conduct Authority and does not without the written permission
give advice, information or promote of Intelligent Partnership.
itself to individual retail investors.
2 2
FOREWORD
Welcome to the first alternative finance industry report,
written for retail financial services professionals.
EDITORIAL
Daniel Kiernan Writing this report has been a lot like trying to hit a moving target
Samantha Goins because the world of alternative finance changes fast and there are so
many developments: new platforms, products and innovations; new
statistics, records and research; wraps, regulations and tax treatment...
the list goes on, making it difficult to get your arms around the whole-
of-market and develop a full understanding of the sector.
This might not be an issue for the two categories of investor who
have been attracted to alternative finance so far: small retail
CREATIVE
Mar Alvarez investors who are early adopters and big institutions that have
the resources to carry out thorough research before deploying their
capital. However, we think that it IS an issue for retail financial
services professionals: regulated advisers, SIPP, SSAS and ISA
providers, wealth managers, compliance firms, accountants, tax
specialists and sophisticated investors.
SUB-EDITING There is a huge amount of wealth that sits in this retail financial
Guy Tolhurst
services bucket and there will be big benefits for both investors and
the alternative finance industry if that wealth can be deployed by
alternative finance - but there are unique challenges to overcome
before that can happen.
RESEARCH
Samantha Goins Anyone operating in professional retail financial services is heavily
Derek Skrzypek regulated and has treating clients fairly and consumer protection
Derek Casanas at the heart of everything they do. They won’t ‘dabble’ with their
Aditi Surana
clients’ money. Furthermore, they don’t have the resources to do the
research that is required to allow them to enter the asset class with
confidence. This report has been written with this group in mind.
We want to provide an accurate summary of where the alternative
MARKETING finance industry is today, how it got there and where it might be
Alex Evans
headed. We look beyond the volumes deployed by the platforms and
Michelle Powell
outline the various models on offer and assess the risks and benefits
associated with them. We discuss how to conduct due diligence on
alternative finance, what to look for and what questions to ask.
We solicit the opinion of industry insiders and forward thinking
PRINT
Four Way advisers - both optimists and sceptics. We look at regulation and
Print what that has done to the market, and we consider how this asset
class will start to fit into the retail financial services landscape.
Guy Tolhurst
Managing Director
Intelligent Partnership
COPYRIGHT © INTELLIGENT PARTNERSHIP 2015
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30 RISKS OF ALT FI
3 FOREWORD 35 PLATFORM MELTDOWN
6 OVERVIEW OF REPORT 12 THE ALT FI UNIVERSE 38 RISK MITIGANTS
7 ACKNOWLEDGEMENTS 14 OVERVIEW OF ALT FI 42 PLATFORMS IN FOCUS
8 EXECUTIVE SUMMARY 17 THE INVESTMENT CASE 50 GUIDANCE FOR ADVISERS
10 KEY FINDINGS 20 ALTERNATIVE FINANCE IN 2015 54 CONCLUSIONS
* Please note: unless otherwise stated, all charts and graphs have been provided by Intelligent Partnership
Intelligent Partnership is committed to
the very highest professional standards
as embodied by its accreditation and
membership to these industry associations.
4
INDUSTRY ANALYSIS CONCLUSIONS APPENDIX
56 THE PLATFORMS
58 PERFORMANCE
60 TRANSPARENCY
61 THE CONSUMER JOURNEY
63 COMPARING THE BIG THREE
66 DEFAULTS 78 GLOSSARY OF TERMS
68 ADVISER SURVEY 79 BIBLIOGRAPHY
71 PLATFORM SURVEY 76 CONCLUSIONS & OUTLOOK 80 ALT FI PLATFORM REGISTER
73 INVESTOR SURVEY 77 SWOT ANALYSIS 86 CPD AND FEEDBACK
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5
OVERVIEW
Our intention is not to provide the We’ll also look at some of the big And that’s basically it 37,000 words
kind of market statistics that AltFi developments that are happening right over 80 pages with lots of explanatory
Data does (although we do leverage now and have really big implications for charts and diagrams thrown in. If it’s
some of their work), or to produce the how alternative finance develops - from all new to you, by the end of the report
kind of academic papers that NESTA ISA and SIPP acceptance, to high street you’ll have a great understanding of
and the University of Cambridge do bank referral schemes and the influx where this industry stands today and
(although they are a crucial resource of institutional money. We’ll give our what it means for you. And if you’re a
for us). Our intention is to view the view of what we think is good and bad veteran of the scene, it will summarise
asset class through the eyes of retail about all of these exciting changes. some key issues all in one nice handy
financial services professionals and document, and hopefully present
There’s a section that looks at things
provide some of the answers they some new research and ideas for you.
specifically from the point of view of
will require if they are to successfully
investors and advisers, and we think By the way - we’re focusing on UK
engage with alternative finance.
about the practical steps they can based platforms here. We touch on
The report doesn’t have to be read take if they want to get involved in the overseas alternative finance markets,
cover to cover, from start to finish - it’s sector. Frankly, it’s not an easy task and some of our UK platforms are
not a novel and you can get just as for advisers to invest their clients’ branching out internationally (and
much value from it by dipping in and money in alternative finance at the given the online nature of alternative
out of sections that take your fancy. moment, but we reckon that more and finance, it easy for investors to access
For those of you who like to get a really more of their clients are going to hear overseas platforms), but this report is
quick summary of what we have to say, about it, and it’s going to be an asset all about the platforms UK investors
the key findings are on page 10, the class that more and more of them will can invest in right now, based here.
executive summary is on page 8 and the invest in. Advisers need to be wary of
conclusions and outlook are on page 74. clients developing satellite portfolios
in alternative assets that are not part
However, the report does follow
of their assets under influence, as they
a logical order - we’ll start at the
won't form part of any valuation of
beginning by defining just what
the adviser's business. As a minimum
alternative finance is, where it sprang
advisers should ensure they have a
from and where it’s at today. We’ve
working knowledge of the sector so that
tried to structure the report so that we
they can discuss it with confidence.
start off at a very high level, and then
go into each topic in a little bit more As with all of our reports, we’ve been
depth as the report goes on. So even out there and surveyed the opinions
if you are starting from a position of of some of the big stakeholders - in
no prior knowledge at all (we know this case we conducted one survey to
from talking to advisers that this is establish the levels of awareness of
exactly where some of them are at) the alternative finance amongst advisers
report will still be readable and useful. and another survey to see just what the
And if you already know the basics, alternative finance platforms thought
there’s also some in-depth analysis of advisers. We also carried out “meta
for you to get your teeth into. (Note studies” (looked at the other available
for newcomers: there’s also a glossary research) of investors and potential SME
at the back if you find yourself getting investee companies and finally surveyed
confused by some of the terminology). SIPP operators to complete the picture.
We’ll go on to assess some of the Finally, our market analysis is what
benefits and risks of investing in drives a lot of our commentary - we
alternative finance and take a deep dive take a thorough look at the platforms
into the surprisingly diverse alternative and products that are out there to
investment universe - there is a huge build a complete picture of what
variety of business models and USPs comprises the market for investors
out there and one of the myths we right now, and we share that with
want to dispel for our readers is that you in the market analysis section.
all the platforms are the same.
6
ACKNOWLEDGEMENTS
We couldn’t do this without the help and support of a number of third
parties who have contributed to writing this report. Their contributions
range from inputting into the scope, sharing data, giving us their insights
into the market, providing copy and peer reviewing drafts. Their input is
invaluable, but needless to say any errors or omissions are down to us.
SO A BIG THANK YOU TO:
77
EXECUTIVE SUMMARY
OK, enough preamble - let’s get down to brass tacks. What have we found out?
#1. ALTERNATIVE FINANCE IS GROWING FAST
Well, you probably already know that in 2013 to £1.74 billion in 2014 (Source: over £100 million. And this is not a trend
even though alternative finance accounts ‘Understanding Alternative Finance’, that is slowing down - take a look at the
for a very small percentage of the retail NESTA and the University of Cambridge). growth curve on the chart below. There’s
lending, business lending and equity AltFi Data measures the cumulative total more on the growth of the market on
fundraising markets, it’s growing fast: amount of money deployed by the peer- page 28.
the market doubled in size year on year to-peer lending market at over £4 billion
from £267 million in 2012 to £666 million and by the crowdfunding market at
(2006-2015)
LIBERUM ALTFI VOLUME INDICES
Cummulative volume £m P2P Consumer Lenders P2P Business Lenders Liberum AltFi Volume Index Crowdfunding
£4b
£3b
£2b
£1b
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Volumes in the Alternative finance market have grown exponentially Source: AltFi Data 2015
#2. ALTERNATIVE FINANCE IS MATURING
As the sector is growing, it is also products, regulation and the deployment unique challenges with them and it's
maturing. We think that key milestones of taxpayers’ money via alternative not clear to us that all of the platforms
such as the bank referral scheme, finance are all indications of a maturing really appreciate that there are a lot
SIPP and ISA acceptance, institutional market. However, each of these of potential pitfalls ahead. We discuss
investment, creation of retail investment developments also brings their own these developments on page 9.
First First Launch of Launch Brewdog First P2P
P2P crowdfunder market data of funds record platform to
lender (CROWDCUBE) indices investing crowdfunding lend over
(ALTFI) in P2P raise £1bn
ALTERNATIVE FINANCE MILESTONES
First Banks Cumulatively,
provision fund Regulation ISA mandated to P2P breaking
(RATESETTER) acceptance refer customers through £4bn
to P2P barrier
#3. ALTERNATIVE FINANCE IS NOT A HOMOGENOUS ASSET CLASS
This is not a homogeneous asset a healthy market that has something to models and what we believe the pros and
class. There are over a dozen different offer everybody. However, each variation cons of each are on page 38, we discuss
operating models in the market and has its own risks and rewards making the risks and benefits of the sector on
as well as generalist funding platforms it harder to get your arms around the page 31 and we suggest a due diligence
there are five specialists. We think that whole-of-market, which is a problem process on page 48.
this diversity is excellent and the sign of for advisers. We go through the various
8
“Peer-to-Peer lending has become an innovative and accepted alternative to traditional savings
and investment products. Very soon it will cease to be viewed as alternative finance, but
mainstream" John Goodall, Landbay
#4. ALTERNATIVE FINANCE HAS THREATS AS WELL AS OPPORTUNITIES
CONSOLIDATION
FAILURE
FRAUD
VERTICAL INTEGRATION
OVERSEAS EXPANSION
CAPITAL RAISING
REGULATION
The alternative finance industry is still developing - it’s probably not even half way along this growth curve Source: Mark James, PwC
Does the sector suffer from a bit of fraudsters successfully targeting On the other hand, opportunities for the
hubris? We think some parts of it do, the industry; platforms failing to sector include the introduction of retail
Crowdfunding and it occasionally feels a bit like the comply with regulation as they move investment products, using the ‘big data’
dotcom scene in ‘99. There’s inevitably from interim permissions to full they hold on consumers to develop
going to be a shake out at some point in authorisation; higher than forecast ever more accurate credit scoring
the near future. lending losses in the peer-to-peer algorithms, tie ups with mainstream
sector; or consumers getting ripped off finance and ‘challenger’ banks, and
Potential threats that we see hovering in the crowdfunding sector. We think tie ups with online behemoths such
over the sector include: a platform that some of these threats will take out as Amazon or eBay. Check out our
failure due to undisclosed losses; a some of the platforms, leaving behind SWOT analysis on page 75 and our
loss of consumer data or a platform a smaller, more consolidated and more outlooks and conclusions on page 74.
falling victim to a cyber-security attack; resilient alternative finance industry.
#5. ALTERNATIVE FINANCE CAN HELP THE ECONOMY
The government estimates that there
PLUGGING THE FUNDING GAP
is a £1bn annual funding gap for SMEs
400 £250m £260m £268m in the UK, and alternative finance is
£179m
£) 200 helping to address that. According to
e ( AltFi Data, the UK’s peer to business
m £m
lenders provided £339 million of
u 14Q1 14Q2 14Q3 14Q4
ol -200 capital to UK SMEs in the first three
v £-128m
rly -400 months of 2015 and have consistently
te £-339m outperformed the government’s
r
ua-600 Funding for Lending Scheme. Read more
Q
-800 about the benefits for small businesses
£-732m
FLS P2P Business Lending -800m on page 28 and some more of the
Alternative Finance can help plug the funding gap non-financial benefits of investing in
alternative finance on page 18.
Source: AltFi Data (alfidata.com)
#6. ALTERNATIVE FINANCE CAN PROVIDE UNCORRELATED, LOW VOLATILITY INCOME & GROWTH
(2006-2015)
LIBERUM ALTFI RETURNS INDEX
6.5%
6.0%
5.5%
5.0%
4.5%
2006 2007 2008 2009 2010 2011 2012 2013 2014
4.0%
Source: AltFi Data 2015
Finally, we shouldn’t forget investment basics. Peer-to-peer investments offer the prospect of lower levels of volatility and higher yields
that are not necessarily correlated to the mainstream bond and equity markets. According to the Liberum AltFi Returns Index (LARI) –
the only index to track actual investor returns in the sector, the aggregate absolute net return over the last three years from the three
biggest UK peer-to-peer lenders is 18.05%. Equity crowdfunding opens up an asset class that was previously out of reach for many retail
investors, giving them access to some significant tax breaks and the potential for some very high returns on the successful investments.
99
KEY FINDINGS
In the UK, alternative finance Total investments in 2015:
18.05% is the
has originated over
£4.6bn
£2.29bn aggregate absolute return
of investments to date
over the last 3 years from the
3 biggest UK peer-to-peer
lenders (as at 30 September 2015)
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov
Crowdfunding Peer-to-peer NO OF PLATFORMS
has originated lending 55 P2P
33
£145m has originated CROWD-
FUNDING
£4.8bn
2
£145m £4.8bn
INVOICE
FINANCING
P2P MARKET PEER-TO-PEER PLATFORMS CROWDFUNDING MARKET
NOV 2015) NOV 2015)
( offer forecast yields ranging (
24% from 4% - 15% a year and 36%
ZOPA CROWDCUBE
terms from 6 months to
FUNDING CIRCLE 19% SYNDICATE ROOM 19%
5 years
RATESETTER 18% CROWDBNK 3%
offers offers There are 3 funds investing in
CROWDFUNDING CROWDFUNDING
investors low cost access to access to AIM and ISDX alternative finance listed on the
London Stock Exchange
listed shares, which can be
tax reliefs in the form of EIS
held in ISAs and qualify for
and SEIS benefits
relief from inheritance tax
has already of the advisers we of platforms either
93%
plan to market
deployed over surveyed were not aware
to advisers in the
73%
that alternative finance
£200m in the alternative future, or do so
platforms are regulated
finance market already
If you only read this far, we’d still like to think that it’s been useful and informative for you and you can see what we’re trying to
achieve here - we want one single, comprehensive and well researched overview of this emerging asset class that looks at things from the

�perspective of the advisers and financial services professionals who serve retail investment consumers. If you read on we'll flesh out this
picture for you, so that by the end of the report you can talk to your clients knowledgeably and with confidence.
10 10