Nesta, an independent innovative UK charity, in association with the University of Cambridge has published ‘Understanding Alternative Finance: The UK Alternative Finance Industry Report 2014’. The report with support from the UK Crowdfunding Association and the Peer-to-Peer Finance Association, offers a glimpse into 9 broad alternative investment models:
- Peer-to-Peer (P2P) Business Lending
- Invoice Trading
- Community Shares
- Reward- Based Crowdfunding
- Donation-Based Crowdfunding
- Peer-to Peer Consumer Lending
- Equity-Based Crowdfunding
- Pension-Led Funding
- Debt-Based Securities
The report is broken up into 4 main sections. The first section provides an overview of alternative finance. Nesta then looks at the general awareness of alternative investments in the UK amongst consumers and small and medium sized enterprise (SMEs). Section three offers a glimpse into the alternative finance model from both funder and fundraiser perspectives. Finally, the fourth section discusses the current and future development of the UK’s alternative finance market.
The report takes a look at the following questions:
- What types of people and organizations use alternative finance platforms?
- Why do people and organizations seeking money turn to alternative finance?
- What makes the platforms attractive to people with money to donate, lend or invest?
- What is the socio-economic impact of alternatives and how do organizations and businesses perform after fundraising?
- How do people find information on alternative finance platforms and what do they think after using them?
Growth Statistics
Nesta reveals that P2P business lending has the largest market share in 2014 at £749m raised. P2P consumer lending is the second largest platform at £547m followed by invoice trading at £270m. Interestingly, equity crowdfunding with £84m this year has experienced the largest growth between 2012 and 2014 at a remarkable 405% in funds raised. The report found that the majority of platform users are investing £1,000 or more in their selected platforms.
Demographics
Interestingly, Nesta touches on the demographics of who is attracted to alternative finance. Compared to MainStay Investments’ recent survey – covered in one of our recent blog: ‘Women More Likely to Invest in Alternative Investments’ – Nesta found that three-quarters of those who successfully raise finance in the alternative market are men. The report found that users of alternative finance are mainly men, but women are more likely to invest in reward and donation based crowdfunding.
It is also interesting to see who in the UK population is attracted to alternative investments. Demographics – age, gender, region of the UK and income – are broadly covered in section one of the report.
Key Insights
- Alternative finance is a key funding source for individuals, businesses and organisations who often struggle to find sources elsewhere
- After raising funds using alternative finance, organisations reported increases in employment, turnover and profit
- Alternative finance has opportunities not just for wealthy men, but women, young investors and those with lower incomes
- While businesses have performed well in the short-term in the market, there is little information on long-term performance or impact
- There is limited information on how alternative finance enables cross-border investment activity and funding outcomes
Where the market is heading
Nesta projects that the UK alternative finance market will grow to around £4.4bn by 2015. The majority of P2P lending lenders plan to lend more in the coming year, and 86% of borrowers are ‘likely’ or ‘very likely’ to use platforms in the future.
It is uncertain whether newcomers to alternative finance will invest in the coming years. Based on one of Nesta’s surveys, 60% of potential investors said they are ‘unlikely’ or ‘very unlikey’ to begin using alternative investment platforms. These investors cited perceived risks and lack of information as key concerns. Like many others, these investors also perceived that traditional financial structures provide safer opportunities compared to alternatives.
It will be interesting to see how perception and greater access to market information will develop the alternative investment market.
Complimentary to IP Sector Reports
The Nesta report is complementary to Intelligent Partnership’s series of sector reports. IP’s recently published Real Estate Crowdfunding 2014 sector report[i] takes a detailed look at crowdfunding and the numerous investment options available in real estate. Building from this report, IP is currently working on a P2P sector report for next year.
Similar to IP, Nesta offers an overview of different investment models such as P2P lending and crowdfunding. Using both IP and Nesta reports investors and intermediaries can get an informative glimpse into alternative finance and the opportunities available.
Both reports showcase the alternative finance market’s contributions to the growth and vitality of the UK economy and how alternatives are influencing positive social impact and philanthropic giving.
Intermediaries and Investors wanting to learn more can access the ‘Understanding Alternative Finance’ report here.
[i] The Real Estate Crowdfunding report was commissioned by Angels Den, an established angel network with an online equity crowdfunding platform. Angels Den has raised over £18m to date and helped entrepreneurs get funding since 2007.