The European market for online alternative finance grew by 144 per cent last year to almost €3bn and could hit €7bn this year as companies look to tap new sources of capital, according to a new report.
The analysis, published on Monday by the University of Cambridge Judge Business School and professional services firm EY, reveals how what was once a niche market has become a small sector that is still experiencing rapid growth.
Small and medium-sized enterprises and start-ups have been increasingly turning to online alternative financing platforms such as equity-based crowdfunding and peer-to-peer lending. This has come as a result of mainstream banks curbing lending as they try to manage higher capital requirement demands in the wake of the financial crisis.
P2P lending platforms use online technology to connect borrowers with lenders, providing cheaper finance than high street banks without assuming the credit risk of holding loans on their balance sheets. Crowdfunding has proved popular with early-stage businesses with stakes being sold online to “crowds” of investors who can put in as little as £10 each. The sector has also attracted investors who are seeking yield in an environment of record low interest rates.
Robert Wardrop, executive director at the Centre for Alternative Finance at Cambridge Judge who co-wrote the report, said: “Alternative finance, at least in some European countries, is on the cusp of becoming mainstream.”
The report found that the UK dominates the European market for alternative finance, at €2.34bn in 2014. Last year, Funding Circle, a UK peer-to-peer lender, raised $65m in a funding round that attracted US tech investors Union Square Ventures and Ribbit Capital.
Meanwhile, UK hedge fund Marshall Wace raised £200m last year for an initial public offering of P2P Global Investments, the UK’s first listed peer-to-peer fund, which it supplemented last month with a £250m share issue. And earlier this month, Hargreaves Lansdown, the UK fund supermarket, announced plans to set up its own P2P lending platform to tap into the fledgling industry’s rapid growth.
The authors estimate that the analysis covered up to 90 per cent of Europe’s online platform-based alternative finance market.
The UK’s market for alternative finance dwarfs countries in mainland Europe. It is followed by France (€154m in 2014), Germany (€140m), Sweden (€107m) and the Netherlands (€78m).
Andy Baldwin, chairman of global financial services at EY, said: “The UK market’s success has in part been driven by investors’ search for yield after the Bank of England’s quantitative easing programme, so it will be interesting to see if the EU’s recent QE programme sparks increased activity in Europe.”