What is the Future of Alternative Finance?
Even as early as 2014, the alt finance market was reckoned to be worth £1 billion in the UK alone, according to analysis from the Liberum AltFi Index. And another report from the Cambridge Centre for Alternative Finance estimated that alt finance in the Asia-Pacific region was worth $102.81 billion just one year later, recording year-on-year growth of 323%. Such has been the expansion since, it is almost impossible to find accurate estimates regarding what the worldwide market would be worth today. But what is certain is that alt finance is a growth niche, and one that is only likely to expand further in the short to medium-term.
This is reflected in the number of alt finance 'unicorns' that already exist. Business Insider defines this term as alternative finance companies that have achieved a valuation in excess of $1 billion. The publication noted 18 months ago that 16 companies worldwide meet this definition, and there are similarly successful firms also operating in several related industries.
However, Business Insider also suggests that some of these early alt finance success stories will be fleeting. Just as in the dotcom boom, several alternative finance companies are inevitably overvalued currently, and we can expect the number to diminish, and market-leaders to be established, as the market reaches maturation. Indeed, the publication notes that even some of the most highly valued FinTechs have struggled to demonstrate tangible profitability.
Nonetheless, a report from the aforementioned Cambridge Centre for Alternative Finance explains how the market for alternative finance is growing in the UK. 'Entrenching Innovation' noted that the UK online alt finance market grew by 43% in 2016 alone. Julia Groves, Head of Debt-Based Securities (DBS) platform at Downing Crowd, considered this a clear indication that established investors are arriving in the crowdfunding market.
“What’s great to see is that investors are clearly beginning to share this view, with 59 per cent of investors surveyed in the report comparing DBS to the traditionally low risk fixed income asset class and 90 per cent saying they felt DBS platforms were the most clear and transparent in the crowdfunding market,” Groves commented.
One issue which has contributed to the rise of alt finance is the unsettled bank lending marketplace. With credit lines still having yet to stabilise following the 2008 financial crisis, the cost of lending still tends to fluctuate between different sectors. This means that many businesses are seeking alternative forms of funding, in order to get embryonic projects off the ground.
And the official figures certainly tally with this anecdotal impression. Business Insider found that business lending in the alternative finance space is the biggest growth area of the industry. Balance sheet business lending became the second-largest alt finance model in terms of origination volumes in 2016, reaching a $6 billion figure in the United States, and overtaking balance sheet consumer lending. This represented a quite formidable 167% year-on-year increase.
New Credit Lines
John White, editor-in-chief of the Bankless Times – a publication devoted to covering the alt finance industry – believes that there is a key reason underlining this growth in alternative lending. Many businesses struggle to gain access to traditional forms of credit, remaining ineligible for a commercial bank loan until they reach a $3 million annual sales mark.
Alt finance has simply opened up a world of new opportunities for such SMEs, meaning that they can take control of their business models and outcomes once more. White also believes that real estate crowdfunding will increase exponentially in the foreseeable future, which should lead to a diversification in the space, and possibly more consumer interest.
Real Estate Investment
One such example of alternative finance penetrating the world of real estate is Urban Exposure. This company has already become a respected player in the housing market, lending money to small and medium-sized housebuilders, many of which are operating in the student accommodation and private rental sectors.
Urban Exposure has already underwritten £700 million worth of loans, and recently listed on the London Stock Exchange, raising £150 million. The business also shows how alt finance upstarts can partner with the existing financial aristocracy to achieve more, as Urban Exposure is already responsible for running asset-management mandates for much bigger investors such as Starwood, LaSalle, Lloyds and Barclays.
As alt finance grows, so the authorities have realised that the concept is here to stay, and have consequently become more favourable to its economic potential. Reflecting this, financial regulators and related organisations from across the planet have formed the Global Financial Innovation Network, dubbed a 'global financial sandbox'.
The UK’s Financial Conduct Authority has become involved with this project, along with 11 other organisations, including the US Bureau of Consumer Financial Protection, the Hong Kong Monetary Authority, the Australian Securities & Investments Commission and the Dubai Financial Services Authority. The aim is to allow FinTechs to dip their toes in foreign markets, and establish new technologies, while enabling regulators to work cooperatively with these new companies in setting new standards for the industry.
As alt finance continues to develop, it has become increasingly clear that it will be a significant part of the financial system going forward. But this should be tempered with a warning that not all of the pioneers in the space will be survivors. Matt Harris, managing director at Bain Capital Ventures, noted in Forbes that the valuation of many early innovators in this space have declined, and that market volatility is still high.
However, Harris envisages an 'Alt Lending 3.0' concept, in which early innovators and originators benefit from a mature environment, in which capital is being used efficiently. In short, even Harris, who acknowledges he has been considered a sceptic, envisages a credible future for alt finance.
About the author: Christopher Morris is an experienced economics and finance writer, journalist and editor, whose bylines include the Financial Times, Sunday Telegraph and Times Educational Supplement. His work has also featured in Newsweek, Seeking Alpha and InvestorPlace, while he is a regular contributor to ValueWalk and Activist Insight.