A skyscraper in Bogota, Colombia; a 95-unit condo development in Manhattan, New York; and funding to get Olympians from the training field in their home towns across to the splendour of the 2016 Olympic Games in Rio. The scope for crowdfunding is just about as broad as the modern economic marketplace itself, and the sectors that are benefitting from this financial innovation are just as wide- ranging. For my own account, I have contributed funds to the crowdfunding campaign of a private school in the British Midlands, and a scheme of new apartments in the city of Manchester, just to cite a couple, though I could just have easily invested into a restaurant business, a penthouse in London, or even a secondary loan provider. This diversity and flexibility is unquestionably a leading factor in the surge that this sector has enjoyed in recent years.
It should be recognised that crowdfunding is a two-way social interaction, and as the sector has become increasingly mainstream, it’s not just the recipients of the crowd’s funds that are benefitting. The individuals and businesses that place money into crowdfunded loans and investments are enjoying an ever- greater choice of, and control over, their personal portfolio investments. This ease in the ability to diversify across sectors, locations and investment amounts, means almost anybody can gain access to investments that suit their personal goals and risk appetite.
Hand in hand with this degree of choice and diversity is the varying level of returns on offer. In the UK there are crowdfunded and P2P (peer-to-peer loans to individuals and businesses) investments at almost all points along the risk spectrum, whether into low- risk property and business investments that can pay as little as three or four percent, or for those looking for higher returns there are property developers and trading businesses that raise money from crowdfunders at expected returns of 10%+ on a debt (loan) basis, or potentially even better (or worse, if the business doesn’t succeed) when investing to buy equity in a crowdfunded business.
To understand the ways in which investors and borrowers benefit from the crowdfunding sector, it might help to be clear on just how the system works. In simple terms there needs to be an intermediary, someone to aggregate the money from the masses of contributors (the ‘crowd’), and to effectively manage these funds, so a borrower can receive the money for the right reason and at the right time. These intermediaries are the crowdfunding and P2P companies, or ‘platforms’. This service of organisation and management is what crowdfunding platforms provide the marketplace with, where we could draw a loose comparison with the services of an investment company or a broker, with a key difference being that an investment company might offer an advised service to manage your funds, whereas in the case of crowdfunding the control and decision-making sits directly with the investor.
The transaction volumes in the crowdfunding and alternative finance (AltFi) space have experienced nothing short of a colossal rise over the past 3 years, and the sector has enjoyed an increasing position of prominence in the markets, including in the UK property market. As a year-on-year comparison of market share growth, April 2015 saw banks lend upwards of GBP 30 billion (approx. USD 38.2 billion) to SMEs in the UK, whilst in the same month of 2016 this had dropped to GBP 16 billion (approx. USD 20.3 billion). Whilst not all of this gap in funding was picked up by the crowdfunding sector, it was the alternative finance space in general that benefitted from the banks’ loss of market share. More specifically in relation to crowdfunding UK property, it was reported that last year alone, investors contributed GBP 609 million (approx. USD 775.7 million) to property investments in the UK.
As the broader property sector in the UK has remained robust, even in the current Brexit-era, other platform providers have told me that the pipeline of properties being funded continues as strongly as ever. As a model of funding that is increasingly being recognised as a perfectly acceptable way of funding developments, investors and property developers alike are on track to cross the line at GBP 1 billion (approx. USD 1.36 billion) annually in the not-too- distant future.
We have already noted the terms ‘crowdfunding’ and ‘P2P’, so it might help to define what these are, and how they differ. In simple terms, crowdfunding has increasingly become the default term for equity investing, where the money you contribute to a ‘campaign’ will buy you a stake or shareholding in the company behind the campaign. Alongside this is P2P, which is the debt-based equivalent, and allows a member of the crowd to loan funds alongside other crowd investors. P2P generally provides a fixed return on the funds loaned, and whether you contribute as debt or equity, pretty much every type of business can be funded under either model. Though this might suggest there are just two versions of crowdfunding, I’d be quick to point out that the variations between the models used by each platform are notable. Structured and hybrid offerings through to being sector specific gives both investors and fund- raisers ever increasing options for engaging financially.
So, where will it go from here? With the returns on offer from banks remaining paltry, and the yields on gilts and prime rental property being squeezed to a point of barely matching inflation, it appears to be a bright horizon for a sector where we provide solutions to those needing to borrow funds, and diversity, choice and highly competitive returns to those looking to generate an above average return on their money.
This article was first published in Palace Magazine 17
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