The tenth anniversary of the collapse of Lehman Brothers has been marked by a predictable and perhaps also very necessary round of stock taking on the part of commentators, policymakers and the great and the good of the financial services industry. A decade on, the question that is mainly asked is: ‘could it all happen again?’
There are some genuine and pressing concerns. While tighter regulation has ensured that banks are in a much better position to withstand the fallout from another crisis, no one would argue that the entire financial system has been fixed.
And as former Prime Minister Gordon Brown has pointed out, the world is in a different place. In the era of America first and Brexit, no one can be sure that the world’s leaders would be able or willing to act in concert to limit the damage from a serious financial meltdown.
But what hasn’t been so widely discussed is the way that innovative financial service providers and entrepreneurs reacted, not so much to the crisis itself but to the obvious gaps that it created in the marketplace. The rise of the private debt market and the rapid acceptance of new (at the beginning of the current decade) concepts such as Crowdfunding and Peer to Peer lending are testament to the fact that when businesses and individuals saw banks turning off the credit taps, innovators stepped in to provide an alternative. And that in turn created new opportunities for investors.
Witness the recent announcement from fund management giant M&G that it was considering setting up a investment trust focused on private (and also public) debt assets. According to reports on Citywire, M&G is planning to raise £250m to support a fund that will invest in a broad range of private debt assets. For investors, the fund will target payouts of 4.0% over Libor. This follows on from the launch of an M&G private debt fund focused on impact investing.
Stepping back to look at the bigger picture, industry analyst Preqin predicts that assets under management could rise to $2.5 trillion over the next ten years. Or to put it another way, M&G is by no means alone. Fund money has been pouring into direct lending.
One one side of the equation, the rise of the private debt market has been driven by demand from businesses and other organisations that would have once considered their banks to be their first port of call when capital was required. But the market is hugely attractive to investors – including the big pension funds – who see an opportunity for superior returns.
A Lasting Legacy
What all of this means is that the great financial crisis has left what appears to be a lasting legacy in the shape of a burgeoning private debt /direct lending market.
And away from the rarified world of fund management, the same can be said of P2P lending and equity crowdfunding. The founders of the pioneering crowdfunding and P2P debt platforms would probably not welcome the description but at the start of the decade, their offer to investors seemed like a relatively small and unimportant corner of the wider corporate finance market – almost a cottage industry. The first P2P Lenders were set up to attract retail investors. The first UK crowdfunding platform – Crowdcube – pitched its service at ‘armchair’ dragons who could invest as little as £10,
Times change. The P2P Finance Association (P2PFA) reported that UK members facilitated loans of more than £3.1bn in 2017 alone. Meanwhile, equity crowdfunding attracted more than £300m in investment, compared with around £200m a year earlier, according to OFF3R.
Perhaps more importantly, this area is no longer the realm of retail investors and armchair dragons. Funds, VCs, angels and High Net Worth individuals are all using the new platforms.
Ultimately innovation in the financial service sector can only be a good thing, particularly when it makes it easier for businesses to raise capital, while also offering superior returns to investors. If anything good came out of the financial crisis, it was the rise of alternative finance.
From the investor point of view, new investment opportunities are relatively easy to access through platforms and funds. As the sector has evolved we’ve seen the arrival of platforms specifically designed to tailor for High Net Worth individuals..
The Route – City wealth club’s Private Debt Platform is a case in point. Offered to the club’s Members the platform provides an opportunity to invest directly in secured loans to SME businesses with special requirements.
The great financial crisis was a disaster for those parts of the world that were affected and it has had a long tail of negative effects, including (until relatively recently) sluggish growth, economic uncertainty and political instability. But the fact that many businesses were able to raise the capital they needed even during some very tough times, was due, at least in part, to the emergence of alternative finance and the growth of private debt.
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