What is it like to be in professional services and working with an incredibly fast-growth sector?
In 2014, UK peer-to-peer and crowdfunding platforms made £1.74bn available to firms and individuals, with growth of 168 per cent in Britain and 144 per cent across Europe. This year, those volumes will likely have doubled.
Accountancy firm BDO has been working with platforms and the companies that list on them for several years now. And this year, it has invited hundreds to a series of industry events in London and Cambridge. I spoke to partner Gary Hanson about his experience of this burgeoning sector, asking him what excites him, and where his concerns lie.
Tell us about the funding needs that the crowdfunding industry has responded to.
In a post-recovery UK, traditional methods of finance have dried up for the smaller firms, despite them playing a vital role in increasing growth. Big banks aren’t fulfilling market requirements – there is far more demand from business than what is being serviced, and that is why the alternative lending market is cementing its place as a legitimate solution to the liquidity shortage.
Regulation, consumer attitudes and the rise in technology have all contributed to the boom in non-bank finance. Crowdfunding, peer-to-peer lending and challenger banks are making substantial inroads. But these lenders must look to the future to ensure their own sustainability in an increasingly volatile environment.
You work with lots of companies that are listing on platforms – either to secure loans or raise money in return for equity. Do certain platforms work better for certain businesses?
Each of the platforms does have its own identity and slightly different requirements and processes. This includes the types of shares on offer, the requirement for a lead investor, the supporting financial information and legal support. I don’t think that there’s a sector bias for certain platforms, but companies choose based on each one’s terms and conditions.
How could the process of listing be strengthened?
As it stands, the work we do is only dictated by any comfort that the company wants ahead of posting their figures and projections. Some companies that don’t require a statutory audit because of their size ask for us to complete one for that extra security and to demonstrate solid governance practices.
But if you issue a prospectus ahead of an IPO, the amount of due diligence that has to be done is worlds apart from what happens on these sites. I’ve never been to someone looking to raise on a platform who isn’t expecting a hockey stick when it comes to performance. They are always very optimistic.
There could be a bit more care around it. That could mean throwing businesses into a format, with more consistency across platforms. That’d be very difficult to do, of course.
The other element in all of this is that investors must remember that due process and a financial report do not guarantee that a company is going to be successful. Further regulation is arguably a step too far, though. What would be preferable is further reminders from platforms that investments can go down as well as up.
What about due diligence?
The legal due diligence is extensive, but it is more to protect the company than any potential investors. It can also be very expensive, and when companies are early stage, it seems inequitable for small funding rounds for them to have to pay away large legal costs. That said, if I were raising the money, I would like the comfort!
This doesn’t extend to financial due diligence, and I would like to see some sort of reporting become the norm. For investors, it’d mean that they could take some comfort that at least the tyres had been kicked.
That said, in today’s climate, the expectations of the investing public would have to be carefully managed and the scope very clearly explained. I love the fact that, in France, crowdfunders state explicitly that the investors can expect to lose their money!
What industry developments – good or bad – should we expect to see in the near term?
As it becomes more professionalised and investors become more aware, you will end up with a risk hierarchy. That will affect returns – in the same way it does in traditional financing.
But I am concerned about the amount of debt sloshing around at the moment – it won’t all be recoverable. With invoice financing, for instance, at least there’s an underlying asset – as opposed to just lending into the crowd. We’ve had so many schemes in the past where borrowers have borrowed more to pay back what they’d been advanced. Let’s hope we don’t see the same in crowdfunding.
The industry is so dynamic at the moment, and there are a lot of people looking at it and coming up with innovative developments. A fund that invests across opportunities on a platform would be a logical thing for those running the platform to do.
Unfortunately, investors still aren’t educated enough around what buying Class B and C shares means – that you’re not entitled to anything unless there’s a big sale down the road. Peer-to-business lending makes sense, but equity is a harder sell in many ways.
However, provided you’ve got proper equity – with pre-emption rights – I don’t see why not. I’d just want – expect – a sensible return.