It’s early days in the revolution, but there are already promising listed businesses to buy, says David C Stevenson.
The alternative finance sector has been growing at a phenomenal rate in the last few years, and I suspect that there’s even more upside to come. Yet anyone looking to put some of their money to work in this constantly evolving area needs to move carefully – there are huge opportunities, but there are also some very obvious risks.
Over the last few months I’ve detailed many of these risks in these articles, but it’s worth repeating one key challenge again: the need for diversification.
None of us knows quite what will happen to this sector next – we could see even faster growth, but we could also experience platforms shutting down and an increase in defaults, which would in turn hit your upside.
The key to surviving and prospering from this immense financial disruption is to make sure you are invested in different platforms, which are in turn lending and investing with consumers and businesses, using both secured and unsecured lending.
I also think that investors in alternative finance need to balance both income and capital gain – investing in peer-to-peer (P2P) loans will obviously produce an income, but there won’t be a capital gain, whereas crowdfunding platforms offer mostly equity-based opportunities with capital upside.
In effect, I think you need to bet broadly on all the key market trends. The tables below from AltFi Data show the remarkable growth rates for different parts of the alternative-finance spectrum, as well as by platform.
Annualised growth rates for many platforms are running at a rate of hundreds of per cent per annum, but crowdfunding equity is still the smallest bit of the industry – tens of millions of pounds have been invested in platforms such as Crowdcube, Seedrs and SyndicateRoom, compared to hundreds of millions in market-leading outfits such as Zopa, RateSetter and Funding Circle.
Yet, crowdfunding equity also presents an obvious challenge – I personally don’t know of one business listed on any of these platforms that has successfully given an initial public offering (IPO) on the London market, or had a very large, meaningful ‘exit’ to date – ie, a capital realisation.
That’s not to say that the start-ups and growth companies listed on the likes of Crowdcube and Seedrs won’t produce some stunning successes, but it’s still very early days. By rights, we shouldn’t expect a wave of realisations for at least another few years.
Personally, I would be looking to build a mini-portfolio of small stakes in obviously high-growth businesses listing on these platforms, but that’s a subject for another article later in the autumn.
So investors looking for a capital upside in particular should probably be looking in a different place – at the platforms themselves. The bad news here is that few of these platforms in either the US (dominated by the likes of Lending Club and Prosper) or the UK are listed.
The big development within the next few months will be Lending Club’s US listing – possibly as early as November. This will be a massive multi-billion-pound opportunity for Lending Club’s venture capital and tech backers to cash in on the growth of this consumer P2P business.
I would confidently expect this IPO to be a great success, with the likes of Funding Circle watching closely. My sense is that this UK-based platform is still some way away from a US or UK listing, but a successful Lending Club IPO could prompt a big rethink.
My hunch is also that the Lending Club bandwagon will shift attention to the two small alternative-finance businesses that are in fact already listed on the world’s stock markets. These are TrustBuddy from Sweden and GLI Finance, which is from the Channel Islands but listed on the London market.
We might also see investors moving even more money into the income-focused closed-end fund called P2P Global Investments, run by a team based at hedge-fund manager Marshall Wace and listed on the LSE.
I think any of these three listed businesses could see significant capital gains in the next year or so, although the last (P2P Global) will probably see the smallest capital gains because it is a more avowedly income-orientated fund.
Let’s start with TrustBuddy (Stockholm: TBDY), in which I own shares. This Swedish-based platform is in effect a P2P consumer lender that rivals Wonga in the short-term loans markets.
Its interest rates are much lower than those charged by Wonga and it operates in a number of discrete geographical markets, including Denmark, Spain, and Poland. Its average client is usually a professional or middle-class younger woman looking either to use the free 14-day loan facility, or to take out a loan for a few months.
TrustBuddy’s interest rates are pretty high and will vary between customers and countries, so many ethical investors might feel nervous about this lender, but TrustBuddy has been growing at breakneck speed – and has just acquired a UK P2P business to kick-start expansion here.
According to numbers from TrustBuddy’s house broker, Liberum, 2013 saw revenue growth of 109%, whereas this year we should see a 64% increase followed by an 83% increase next year. The platform should move into profit in 2015 and, according to Liberum, TrustBuddy currently trades at 6.0 times 2014 adjusted net revenue, a big discount to its peers.
TrustBuddy is at the forefront of using big data and social media to make smarter loan decisions and, given the likely lofty valuations about to be applied to Lending Club, I think TrustBuddy could suddenly become very popular, especially as it moves into profit next year.
Next, I’d be looking carefully at Jersey-based GLI Finance (LSE: GLIF) run by CEO Geoff Miller. This London-listed closed-end fund used to invest in riskier US corporate credit (through vehicles known as CLOs), but has been spinning these off over the last few years, mostly into a new London-listed vehicle called Fair Oaks.
GLI Finance is now focusing on providing finance for small to medium-sized enterprises and already has substantial non-alternative-finance investments in this sector, including a business that lends to fast-growing tech companies.
But GLI Finance is aggressively building a portfolio of stakes in businesses within the alternative-finance sector, including invoice-funding platform Platform Black, as well as Finpoint UK, Trade River Finance, the European Receivables Exchange and Proplend.
GLI Finance not only invests money into the equity of these platforms, but also puts its own money to work ‘on’ to the platforms, ie, it lends money out via these platforms to other small-to-medium-sized enterprises. This dual income/equity strategy allows it to produce enough income hopefully to back up its dividends.
Researchers at Edison think GLI Finance will pay 5.3p in dividends in 2014, equivalent to a yield of just under 10% – as well as giving investors an uplift in the capital value as the platforms become valuable.
Investing in GLI Finance already gives you a book value of loans and equity investments that amounts to 48.5p pershare versus the share price of 54p, which makes it perhaps the safer choice for investors looking for a capital uplift plus a steady dividend.
The last option is P2P Global Investments (LSE: P2P) closed-end fund, which raised £200m to invest in a portfolio of P2P loans made available on platforms throughout the world, including Funding Circle, Zopa and RateSetter, as well as US platforms.
The target is to produce an income of between 6% and 8% per annum from these investments ‘on’ platforms, although the managers will only hit that income once they are fully invested. My guess is that should happen by spring next year at the latest.
The shares are already trading at a premium to the book assets (£10.73 versus assets of £9.85), which means investors have already made a capital gain, plus there’s the prospect of that dividend yield.
The fund’s managers do charge a fee for managing the growing book of alternative-finance assets – a 1% basis fee plus a performance fee of 15% – but once that income stream does come online, I suspect we could see yield-hungry investors chase the shares even higher.
Assuming that the income payout does hit 80p for every £10 invested within the next two years, we could see the net yield drop to 5.5%, and that’s even after an increase in national interest rates to 1.5% – implying a share price of over 140p.
• You can read more about alternative finance at my site, www.altfi.com.
| Industry growth rates | |||
|---|---|---|---|
| Cumulative volume | 2014 volume | Last 12 months’ growth rate | |
| Liberum AltFi volume index | £1.96bn | £899.8m | 164% |
| P2P consumer lending | £911.2m | £321.7m | 99% |
| P2P business lending | £697.9m | £390.9m | 251% |
| Invoice financing |
£301.1m | £158.4m | 257% |
| Equity crowdfunding | £45.0m | £28.8m | 386% |
| The top six platforms | |||
|---|---|---|---|
| Cumulative volume | 2014 volume | Last 12 months’ growth rate | |
| Zopa | £600.0m | £161.2m | 67% |
| Funding Circle | £341.5m | £141.9m | 143% |
| RateSetter | £311.25m | £160.5m | 217% |
| MarketInvoice | £227.5m | £124.8m | 270% |
| LendInvest | £106.4m | £90.5m | 1,588% |
| Wellesley & Co. | £73.8m | £69.9m | 24,500% |