At the recent Crowdfest event in Shoreditch, it was asked: is crowdfunding advisable?
The question was posed by Julia Groves, Head of Crowdfunding at Downing, who was addressing an audience of IFAs. Groves admitted that the answer is far from straightforward and she went on to explain various scenarios and crowdfunded products that could be appropriate and worthy additions to client portfolios.
Crowdfunding typically finances projects or businesses by raising contributions from direct investors via an online platform. In return, investors can receive shares in a company or earn interest. It is a very diverse market ranging from high-risk, potentially high-reward equity-based crowdfunding, through to asset-backed bonds. The majority of the UK crowdfunding market has been attracted to the debt end of the spectrum since loans are typically to more mature businesses with established revenue streams.
According to ‘Pushing Boundaries,’ the 2015 UK Alternative Finance Industry Report by Cambridge University and Nesta (February 2016), in 2015, the vast majority of the UK market at 88% was debt-based, and almost £1.49 billion was loaned to UK SMEs via peer-to–peer (P2P) business lending.
Groves has spent much of the last six months travelling the length and breadth of the UK speaking to intermediaries, many of whom raised genuine concerns that they believe prevent them from advising their clients on crowdfunding opportunities.
Groves believes that intermediaries generally fall into two categories. Either they are comfortable embracing crowdfunding as they have advised clients for years on VCT’s and EIS, so are familiar with products with arguably a similar risk profile. However, there are many who might advise clients but they have considerable reservations around crowdfunding platforms, the quality and credibility of the due diligence being carried out on offers and the integrity of the company behind them.
These are legitimate concerns and Groves says that as with any investment, key questions need to be addressed. “Advisers need to be comfortable that they know where the money is going – is it to a person or a company? They should also be aware of how established the company is and the risk associated with the end asset. Importantly, they should be aware of how involved the platform provider has been in conducting due diligence and are they acting as security trustees for instance?”
Debt-based crowdfunding is regulated by the Financial Conduct Authority, giving investors a layer of protection. As long as firms have the correct permissions to advise on these investments and advisers have the appropriate qualifications, they are permitted to give advice.
Two of main drivers steering investors towards alternative investment strategies such as crowdfunding are the current low interest rates, and the rule changes around EIS which have pushed these products much higher up the risk spectrum than they were previously. There is huge potential for this market to grow significantly, particularly through the introduction of the new Innovative Finance ISA and through SIPPs, as more retirees take advantage of pension freedoms.
Groves says this is one of the key reasons for Downing entering the crowdfunding space and developing its own platform. “Downing’s annual monitoring fee is contingent on investors having been credited with capital and interest in full. This should give some reassurance that we are aligned with investors and have confidence in the quality of the offers.”
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