Event report – The launch of From Peer2Here: How new-model finance is changing the game for small businesses, investors and regulators - A CSFI report by Andy Davis
Earlier this week we attended the launch of a new report on the UK Peer to Peer sector by Andy Davis, former editor of the Weekend FT.
The report titled ‘From Peer2Here: How new-model finance is changing the game for small businesses, investors and regulators’ talks about the progress that the sector has made since the Centre for the Study of Financial Innovation (CSFI)’s last paper five years ago on SME finance in the UK called ‘Seeds of Change: Emerging Sources of Non-Bank Finance for Britain’s SMEs’ (also written by Andy Davis). The timing of this new report is very appropriate given the massive expansion in the sector over the period.
CSFI jointly sponsored the event with the City law firm CMS (formerly Cameron McKenna and now incorporating Nabarro and Olswang)
Andy was joined on the panel by CMS partner, Sam Robinson and Paul Murphy, the editor of FT Alphaville, the influential financial blog created by the Financial Times.
The report celebrates the successes of these new initiatives and the increase in scale that has resulted in the Innovative Finance sector being a significant player in the SME and personal lending space, competing with banks and other lending institutions; in some instances beating them at their own game. UK P2P finance providers have written £4.5bn of term loans to businesses with financial institutions providing about half of all funding to P2P lenders.
As you may be aware, new regulations have been created for P2P since the Financial Conduct Authority started overseeing the sector in April 2014. Another new development that has boosted the sector is the introduction in April 2016 of the new Individual Savings Account (ISA) created just for the P2P debt sector- the Innovative Finance ISA (IFISA). Only fully authorised platforms can become ISA Managers and open IFISA Accounts for lender/investors. We are due to launch our IFISA before the end of May.
For an overview of the IFISA – read more here: What is the Innovative Finance ISA
Within the same space but on the other end, the report showed that crowdfunding equity has attracted large amounts of investment incentivised by the Enterprise Investment Scheme (EIS).
For risk spread investors increasingly rely on automation as a tool for allocation of lender funds. Andy said that two main themes were present in the P2P market today- freeing up the SME loan market and creating competition for the banks and giving direct access to debt and equity assets (of unlisted companies) to a wide audience of investors.
Paul Murphy welcomed the report by his former FT colleague and although he was impressed with the sector growth, he was sceptical about some of the more frivolous crowdfunding equity offerings, including one that had developed an algorithm that altered its beer production formula every week based on feedback from consumers!
Paul also expressed concern about Fintech valuations, citing the example of Gazprom that was trading at twice historic earnings as compared with Lending Club (the largest US Peer to Peer lender) which floated on a price equivalent to 60 times prospective earnings. He admitted that his colleagues had long since abandoned any notion that their perception of value was any more accurate than the market’s.
The report acknowledges the inroads that peer-to-peer lending platforms have made but also brings to light the challenges that they face. With the growing pressures that platforms have to deal with, Andy suggests that a hybrid model will develop. Direct lenders will look to P2P platforms to bring their loanbook to the mass market and P2P platforms may start to do balance sheet lending.
The line that divides the traditional from the alternative lenders may be blurring but there is still much work to be done before the P2P industry is considered a dominant market player.
Read the full report here.
