6 things alternative finance investors need to consider
The alternative finance industry has seen phenomenal growth in recent years, with loan origination sky rocketing and net returns maintaining a strong position despite low interest rates across the majority of the investment landscape. This, combined with a number of supportive government initiatives such as the Innovative Finance ISA and the Open Banking Standard, is helping to improve trust and understanding of the sector, but what else do retail investors need to consider before investing in alternative finance?
Ahead of GLI Finance’s attendance at the UK Investor Show this Saturday 30th April we outline some of the key questions.
1) Can I trust the platform?
Transparency is key. Look at the track record of each platform and if there are any dips in performance question why, and what was done to prevent this happening again in the future. Look at what constitutes a loan default, as some platforms prefer not to recognise late payments as defaults once they have been repaid. The fact that the industry is being put under increased regulatory speculation is only a good thing for investors, but you must still remain vigilant when doing your research.
2) Is the business model sustainable?
You need to be comfortable that the business model has ‘legs’, whether the platform is on the path to profitability, and whether it has the financial backing to achieve growth. The ability of the platform to run a successful business seems straightforward enough, but it is a vital consideration for retail investors. It is important to remember that alternative finance is not yet fully covered by the UK investor compensation scheme in the same way as other investment options, so it is even more necessary for investors to have a sound understanding of their chosen platforms.
3) Am I covered by the investor compensation scheme?
If the sector has some structural weaknesses, perhaps the regulators can help rectify the situation? On the plus side there is a willingness to ensure that underwriting, business models and capital adequacy are improved; on the minus side, existing regulations are not yet substantive enough to address these issues. The FSCS recently announced that they may be able to compensate investors up to a value of £50,000 if they have received “unsuitable advice” about investing in the sector, but this has yet to come into play.
4) Do I have a diversified portfolio?
Having got comfortable with a range of platforms through which to invest there is then the question of getting the spread of investment necessary to reduce the specific risk of any one particular credit – this means analysing a range of loans. Having achieved that spread, the portfolio will then need to be refreshed continuously to maintain diversification.
5) Should I invest through a fund?
For those investors not wishing to spend a significant amount of time managing their exposure to this asset class, there is another option available. Wrapping the AltFi assets in a closed-end fund structure means that the assets are managed and liquidity is provided through the fund vehicle rather than via the underlying assets. Investing in a fund can help by carrying out the necessary due diligence on individual platforms and loans for you. You do, of course, need to spend time choosing your fund – some funds specialise in SME loans, whilst others invest in consumer loans as well as SME funding.
6) Should I invest?
Why should investors consider the AltFi space? There are risks, but with it come rewards; there are many different strategies adopted by platforms and plenty of opportunity for platforms and funds to genuinely add value for the investor.
Ultimately investors need to be able to trust their due diligence that the platforms or funds that they are planning to invest in know what they are doing with their money: it’s important that you have a full understanding of your chosen vehicles so you can make an informed decision on both investment risk and return.
How can I learn more?
Andrew Whelan, Chief Executive Officer of GLI Finance, specialist provider of finance to small and medium sized businesses, will be speaking at the UK Investor Show and we look forward to seeing you there.