Earlier this month, the University of Cambridge Centre for Alternative Finance in conjunction with Nesta released their 2015 report on the development of alternative finance. With a focus on the UK, the report, entitled “Pushing Boundaries”, highlights the enormous growth the industry experienced last year. Let us step you through the important trends and movements in the industry.
- UK alternative finance reaches £3.2 billion
Overall, the UK online alternative finance industry grew 84% to £3.2 billion in 2015. Zoom in and we see a staggering 295% growth in funds raised on equity crowdfunding platforms, up from £84 million raised in 2014 to £332 million in 2015.
- Equity crowdfunding contributes 16% of UK venture financing
Of the total £332 million raised on equity crowdfunding platforms, £245 million went towards venture financing, estimated as representing 15.6% of the total seed and venture-stage investment in the UK. This is a powerful statistic, highlighting the importance and growing reliance of equity crowdfunding in early-stage investment.
Key movements in the industry:
- Real estate is hot
The most popular niche of alternative finance in 2015 was online real estate financing. The combined debt and equity used to finance investments and loans for real estate amounted to £700 million.
Peer-to-peer real estate lending for businesses now represents 41% of total volume of peer-to-peer business lending, the average size of which was £522,333. Interestingly, the equity-based real estate financing model saw a larger average loan size of £820,042. See our post on real estate crowdfunding for more information regarding this model.
- Small businesses are winning
20,000 SMEs raised alternative finance through online channels, receiving £2.2 billion in business funding. Taking a closer look, small business peer-to-peer lending represented approximately 13.9% of total new bank loans to small businesses in 2015. Total online business funding rose by 120% and, even more encouraging, total number of SMEs being served increased by 186%.
The total alternative business lending to SMEs reached £1.82 billion and represents an area where institutional lenders' market share could be challenged - as it stands, this represents only 3.4% of SME lending by UK banks, up from 0.3% in 2012.
Speaking of institutional investment:
Big movements have been seen in this space over 2015 - institutional investors have ramped up their involvement in the online finance market and now represent a significant presence. No area shows this significance more than in the peer-to-peer lending market: 32% of consumer peer-to-peer lending and 26% of business peer-to-peer lending in 2015 was funded by institutional investors.
Investment came from private institutions such as mutual funds, hedge funds and traditional banks, as well public institutions such as local authorities and the British Business Bank.
What are the biggest issues facing the industry?
The largest risk to the future growth of the market, according to UK alternative finance platforms, is platform fraud or malpractice. The report noted, however, that to date systematic fraud or malpractice has been extremely rare at the platform level. The likelihood of this occurring is dependent on platforms' own efforts to reduce it and transparency for investors, backers and donors.
The online alternative finance industry continues to develop in an encouraging and exciting manner, "pushing boundaries" of market growth and innovation. The tremendous power of the industry in democratising finance is clearly shown through the positive developments in small business and real estate financing.
We expect 2016 to be another big year echoing the UK's success, as regulators, investors and businesses around the globe continue to embrace alternative means of finance.