Alternative finance is rapidly moving from the periphery of traditional financial services and becoming a mainstream asset class, with investors profiting from the attractive yields available. Last year was significant for the burgeoning altfi industry. According to information from AltFi Data, total loans through the five largest platforms doubled from £2.8bn to £5.3bn and the average return from these loans increased from 5.9% in January to 6.26% by December.
Reasons for success
Why has the industry developed so rapidly and what is driving its success? First, banks are still suffering from the hangover created by the great recession, are suffering an endless stream of fines for malpractice, and are having to increase their capital ratios, leaving both businesses and consumers looking for alternative means of accessing finance.
Second, in line with altfi becoming a more established industry, it is becoming able to attract more established companies looking to raise money rather than rather than just early-stage start-ups, with even listed companies beginning to use the industry to fulfil their finance requirements. AIM-listed Venture Life Group plc is issuing a convertible bond of up to £2m via our platform, UK Bond Network. Expected to return between 7% and 9% per annum to high net worth and sophisticated investors, the international healthcare company has a market capitalisation of over £20m and has a demonstrable track record of success. Importantly, convertible bonds offer growth company investors a method of obtaining exposure to smaller companies equity upside with a level of downside protection afforded through the debt structure.
But what’s next?
2016 might well become an even bigger year for altfi. But there are some important hurdles for the industry to overcome if it is to significantly compete with the investment establishment.
The first is around regulation. For altfi to confirm its place amongst the money mainstream, it must accept and support increased regulation. Platforms can expect increased scrutiny this year when the FCA reviews regulations, and any new regime needs to be robust enough to ensure investor and business security and platform credibility, while maintaining the sector’s agility. While altfi doesn’t necessarily need to be regulated exactly the same as traditional finance, it will only be once regulation is adopted in spirit as well as in legality – and the sector has successfully stamped out its own malpractice – that investors will see that altfi as investible an asset class as more conventional investments.
The second hurdle is adoption. Altfi is helping to democratise financial services and investment. Access to high-yield bonds was once the preserve of institutional investors. In 2010, the Order book for Retail Bonds (ORB) was established to address this problem and broaden access to private investors, but it has largely failed to achieve this aim. Now Altfi is making real headway in this area, opening up the small corporate bond market to a wider pool of individual investors, as well as companies seeking finance.
This year will see the launch of the Innovative Finance ISA. Already widely praised for both recognising and driving sector credibility, such products place altfi within a context investors are familiar with and trust. Combined with the reputational benefits of improved regulation, these have the power to incrementally but significantly alter the investment landscape, enabling altfi to compete with more conventional financial services and establish its place within the money mainstream.
By Chris Maule, CEO and founder, UK Bond Network