31 Mar Alternative finance industry soars in 2015
Looking back over the past few months, the alternative finance industry has gone from strength to strength. But what are the root causes behind this impressive growth, and what does the future hold?
Starting out as technology-empowered resources for SMEs failing to secure capital from banks that were either unable or unwilling to lend due to new regulatory frameworks borne out of the global recession, the alternative finance market has seen an unprecedented rise in value over the last few months. Investment reached £230 million in the last two months alone. Coupled with the Initial Public Offerings of large alternative finance providers Lending Club and OnDeck hitting £6 billion and £0.88 billion respectively, these figures are a clear illustration of the strong growth in this relatively new sector, and analysts now value the industry at around £700 billion.
Technology and timing
It’s the technology-afforded efficiency and transparency of these platform-based providers that has really impressed investors too, with Lending Club and other P2P pioneers such as Prosper leading the charge, enjoying 103% and 347% growth respectively over last year with combined total loans issued topping $10 billion. No doubt 2015 will see this growth continue and these figures are likely to be doubled come 2016.
.Alternative lenders are bringing in quick, simple, flexible and transparent solutions right when they’re needed the most – in the wake of a global recession that has forced banks to tighten up their processes and restrict lending. And it’s this combination of flexibility and transparency that borrowers are seeking. Lenders can make quick, smart decisions, increasing the value of their proposition while reducing their portfolio risk. And this also makes them very attractive to investors.
Stuart Ellman, managing partner with New York venture capital firm RRE puts it like this:
…lenders have the ability to do their diligence, see the risk and the interest rates, and make the loans they want to on an a la carte basis. Platform lending is simply more efficient for both the borrower and the lender.
Certain business verticals have proven to be particularly ripe for investment in alternative lending. SoFi persuaded investors (led by Third Point) that its technology-enabled student loans solution was worth an impressive $200 million during a recent funding round, while DriverUp, the first automotive-focused alternative finance firm, secured a $50 million Series A investment just this month.
Alternative finance becoming mainstream
The Lending Club IPO late last year marked a watershed moment in the alternative finance industry. The past three months have seen more press coverage around alternative finance than the previous decade, with the rising profile of Lending Club being a major factor. The industry’s move toward being mainstream will continue as the profile of alternative finance as a viable solution to working capital requirements grows.
Technology facilitating supply & demand
This move towards mainstream would not be possible without the necessary data and technology shifts that have occurred over recent years. People needed to be willing and able to apply for a loan online, the platforms needed to be able to connect to third party databases to make instant credit decisions, and investors needed to be able to make and execute loan-buying decisions immediately. This balance of technology-supported supply and demand required both data and systems that did not exist a decade ago.
Investors seeking high yield
With interest rates at a record low for the past several years, reaping any kind of high yield on fixed income investments remains difficult. Alternative lending has been borne out of a time when 3% is considered a high yield investment. High single figure yields or more are possible with the leading marketplace lending platforms, depending on appetite for risk.
Smart risk pricing
New investors are always dubious about the risks involved in potentially lucrative prospects. However, when subject to scrutiny, on the whole alternative lending providers have been pricing their risk/credit appropriately. Hence the leading platforms have been providing high returns for investors with relatively low risk. In the post-recession arena, investors are more concerned than ever before with the surety of their investments. They require more data and more transparency – something that marketplace platforms deliver on both counts.
The coming years will see a change in business demographics, with the millennial generation coming to the fore as business owners and leaders. Their technologically literate and online-savvy approach will no doubt provide a huge boost to marketplace lending. These are the people who have come to rely on the Internet as a way to get things done quickly and easily. Their comfort in applying for a loan or investing online, their appreciation for alternative methods of raising capital (think crowdfunding) and their general distrust of banks and ‘big business’ will prove to be a further boon for alternative finance as an established and trusted methods of bridging gaps in working capital.
2015 looks to be an exciting year for alternative lending. The speed, flexibility and transparency it provides already proving to be exactly what growth-focused business owners and yield-focused investors are looking for, its value as a proposition for both businesses and investors will only grow stronger and bigger.
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