The Rise And Rise Of Peer-To-Peer Investing
I normally receive my copy of Money Week on a Friday, and look forward to settling down to reading it over a boiled egg and toast on Saturday mornings. It is normally filled with articles on investment opportunities in established ‘public’ markets, like blue chip shares and commodities.
Issue 692 (23rd May edition), however, had two large articles on the emerging world of alternative ‘private’ finance, and the rise and rise of peer-to-peer investing.
The first was entitled “How to set up as a Dragon” which focused on equity ‘crowdfunding’, the second called “Financial innovation can rescue savers” which extolled the virtues of peer-to-peer lending websites.
I first became aware of equity crowd-funding when a friend told me some years ago about Crowdcube, which was one of the very first such equity crowdfunding platforms set up in the U.K. This platform allowed private investors to invest micro amounts of money into start-up companies, and to start to build up portfolios of small investments in this high-risk, but exciting world.
The beauty of all these platforms is that, what was the preserve of venture capital firms, is now available to the average investor, and providing a much needed lifeline of capital to the entrepreneurial ecosystem. 523,000 new companies were registered at Companies House in 2013, and a significant number of these will seek capital from private sources, so the emergence of crowdfunding websites is extremely timely, and necessary, particularly with bank lending to emergent companies being practically non-existent.
The Government’s Enterprise Investment Scheme and Seed Enterprise Investment Scheme have added impetus to the popularity of crowdfunding, as investors get very generous tax reliefs for every £1 invested into a start-up. Believe it or not, a tax payer paying the highest rate of tax can, in certain circumstances, get protection equivalent to 86.5% on his or her investment, so investing the maximum amount allowable annually of £100,000 into SEIS eligible companies, could cost as little as £13,500 in the event of failure. If, however, the same £100,000 investment turned into £1,000,000, the same investor would pay no capital gains tax at all !
No wonder crowdfunding or ‘investing with the crowd’ is gaining in popularity.
Peer-to-peer lending does exactly what is says on the tin!
Anyone can now completely avoid one’s bank, and borrow money, either for oneself, or for one’s company, from other individuals through websites such as Zopa, RateSetter or Funding Circle. Zopa is the most established such website, having organised it’s first loan back in 2005, and has since lent over £500m through its platform.
What struck me about the article in Money Week on peer-to-peer lending is that the lowest risk loans on Funding Circle’s website can offer lenders a 6% return on the money they lend through the system, which is incredibly tempting by comparison with the virtually non-existent rates one gets on one’s savings account in high street banks.
Not surprisingly, the hedge funds have sniffed an opportunity in this democratisation of the lending landscape, and those smart boys over at Marshall Wace have created an Investment Trust called P2P Global Investments, raising £200m to invest into loans across all the better known peer-to-peer lending websites.
What Marshall Wace doesn’t know about making money, isn’t worth knowing, having been one of the most successful hedge fund managers of all time, and the fact they are making moves in the peer-to-peer scene speaks volumes, to me at least.
So, what’s encouraging to me is that online investing platforms, and investment ‘marketplaces’ are finding their way into the mainstream and the public consciousness at a significant pace, and financial innovation is absolutely widespread, with the U.K. leading the world in this new paradigm.
SEE ALSO: Introducing Match Capital
We at Match Capital get asked all the time what our role is, in this new world, and what is the innovation we are bringing to the table.
What we are trying to do is help entrepreneurs identify who are the most relevant investors for their particular proposition. Obviously, an entrepreneur can upload his opportunity to a crowdfunding website, and hope for the best, but what we aim to do is actually identify who exactly are the investors the entrepreneur should approach, in what order, with the tools to be able to open up dialogue with those relevant investors.