Along with the stimulation of home-grown private placements and securitization, the EC’s Capital Markets Union is also targeting the growth of crowdfunding and peer-to-peer lending as a means to stimulate credit to Europe’s smaller corporates.
Encouraging more individual Europeans to lend to, and borrow from, each other will unlock household savings and put them to work for the benefit of the pan-regional economy.
This is certainly true and the growth of crowdfunding is undeniably a good – if worryingly unregulated – thing. As the sector matures, however, its credentials as a fresh source of funding are looking a little shaky.
Nestled among the thousands of individual lenders on the books of the major P2P lending platforms are a growing number of familiar names – names of very large institutional players. According to industry estimates, such lenders now account for 80% of funding at some US crowdfunders.
The IPO of a platform such as Lending Club may well entice new money to the sector, but these firms are also raising lots of equity from some very familiar names.
P2P Global Investments, which is the first UK-listed, permanent capital vehicle to participate in P2P lending, was launched last year and has established relationships through which it puts money to work via online lenders in both the UK and US. A look at its backers reveals that Woodford Investment Management, set up in June 2014 by star UK fund manager Neil Woodford, breached the 12% ownership threshold in P2P’s ordinary shares on July 10 and also owns more than 10% of its 40m C shares as well.
Holding more than 27% of the fund’s ordinary shares is none other than Invesco, where Woodford spent the preceding 25 years before setting up his fund.
The involvement of established players is to be expected as any new financial sector matures. But having initially been hailed as the answer to the established financial order some of these firms are starting to closely resemble it. Lending money to small businesses that is overwhelmingly raised from large institutional firms has been done before. By the banks.
Peer-to-peer lenders are victims of their own success. The returns on offer from sharing the risk of a pool of loans were always going to lure in the big players. For the latter the risk assessment is akin to that of a pool of credit card assets. However, as these lenders get bigger and bigger and more and more institutionalised they cease to be the disrupters and just become banking 2.0.