The minutes of the February Bank of England monetary policy committee meeting hit the headlines because of divisions over the need for further quantitative easing, something governor Mervyn King advocated but found himself outvoted on. Sterling fell on the news. Continuing worries about the failure of the banking system to lend drew less attention. The committee said that consideration of measures to support the flow of credit more broadly, including from non-bank lenders, was warranted but went into few details of who these lenders might be.
Could crowdfunders be part of the answer? The top four of them in the UK are responsible for close to £100 million of lending. The sector is growing fast on both sides of the Atlantic.
In January, UK equity crowdfunder Crowdcube became the first of its kind to receive approval from the Financial Services Authority, in a sign of growing acceptance of alternative means of finance such as crowdfunding, peer-to-peer lending and lender/borrower matching platforms.
Luke Lang, co-founder and marketing director at Crowdcube, says the approval is a vital step in ensuring that crowdfunding becomes mainstream in the UK. "If you ask people who work in the City to name three venture capital firms they should be able to do that, but the average person may not even know what a business angel is. We want to break down those barriers and move beyond just corporate finance to help businesses raise money."
The FSA has appointed an officer dedicated to overseeing approvals for the crowdfunding industry. Lang says he expects other crowdfunders to be encouraged and that now, with that extra layer of credibility from the FSA, the next step for Crowdcube is to start building relationships with entrepreneurs and partnerships with venture capital firms to propagate deal flow. The firm also hopes to expand internationally into Europe and North America.
Crowdfunding has stalled in the US as the Jobs Act regulation takes time to be finalized. "Its dragging on a little more than people expected, but there are lots of sites in the US that started planning the minute the Act was passed and now they are using the extra time to garner as much attention around their models as possible," says Kevin Berg Kartaszewicz-Grell, research director at massolution, the research and consultancy arm of crowdsourcing.org.
He says the next wave of crowdfunders are likely to be geography- or sector-specific. "There are already niche platforms out there that focus on niches such as photojournalism (Emphas.is), gaming (Gambitious), music (Pledgemusic) and then various green energy crowdfunders. There is a lot of potential there and the reason is that financing efforts always will be closely linked to the exchange of information; and the most efficient exchange of information happens between people who either already know each other, share an interest in specific projects, or perhaps both. Creating an ecosystem where this exchange is made possible is the hallmark of the crowdfunding model."
While equity and rewards-based crowdfunders await the green flag in the US, crowdlending platforms are booming. Peer-to-peer lending in the US has taken off over the past 12 months. There are still just two key players Lending Club and Prosper. Lending Club is the larger of the two, accounting for $1.4 billion of the $1.85 billion combined total of loans advanced. Lending Club has tripled in size over the past 12 months and expects to advance $1.5 billion in loans this year and $3 billion next year. It is now one of the largest personal loan providers in the US, on a par with Wells Fargo and Discover.
The appeal for investors in loans is clear. Ron Suber, head of global institutional sales at Prosper, says that it has become accepted by lenders as a "valid, uncorrelated, self-paying asset class". Suber says: "It pays more than cash, is less volatile than equities, does not get impacted by rising interest rates and offers a monthly income." He says family offices, particularly the second and third generations, have been drawn to peer-to-peer lending as an investment. "They are looking for a monthly income and it offers an alternative to dividend stocks."
Renaud Laplanche, chief executive of Lending Club, says his firm works with a number of wealth managers that use Lending Clubs loan portfolios "to provide predictable high-yield investments for their clients". Laplanche says financial advisers are often advising clients to allocate a portion of their portfolios to Lending Club. A large number of retail investors, he says, are using their retirement accounts to invest, as the structure allows for a tax deferment.
As peer-to-peer lenders become more mainstream, they are attracting greater interest from industry stalwarts and Wall Street firms. Morgan Stanley alumni John Mack and Mary Meeker are on the board at Lending Club and in December Larry Summers, the former US secretary of the Treasury, also joined.
In January, Prosper recapitalized with a $20 million round led by Sequoia Capital. And small-business lender On Deck Capital drew in $100 million last year from Goldman Sachs and Fortress. "Overall, were definitely seeing greater interest in many types of alternative financing," says Andrea Gellert, senior vice-president of marketing at On Deck Capital. "On Deck has certainly experienced this first-hand, where we are receiving greater interest from the capital markets than ever before. The capital markets are looking for high yields and are realizing that alternative financing mechanisms are good for their portfolios."
Suber adds: "Peer-to-peer lending has so much capacity as a growth industry. The credit card industry is about $900 billion and $200 billion of that would qualify for our platforms. Institutions and investors are realizing this could be a $200 billion marketplace and we are only now at around $2 billion."