This article was written by Jeffrey Levine, founder of www.strategic-consulting.co focusing on initiatives in the fintech , forex and crowdfunding space. In it, Levine takes a look at the crowdfunding sector are draws similarities to that of the online gaming and trading industries.
The past few years we have seen a tremendous growth in crowdfunding platforms. By crowdfunding we mean investing by the man in the street – what is called in the industry a retail client. We are not talking about investor clubs or crowdfunding for qualified investors.
To go back to the source of the growth of this – one needs to look at the power of the internet that started the huge industries of gaming, online forex and CFDs, crowdfunding for projects, charities and now peer to peer (P2P) lending. This is fueled by the dual need to have some fun, and investing to make some extra money. One common feature is that the companies in this new world are new world entrepreneurs and not from the old school of business. There are almost no big names with prior track records.
The next step up in this trend is crowdfunding and we see this trend continuing and growing. P2P lending, and new lending companies are popping up like wild mushrooms. We are seeing this as a major challenge to banks and the big companies in the factoring space. The stats for 2015 are impressive. In the UK, the industry is in excess of $3 billion and in the US $35 million. This is driven by investors who are not able to earn any interest on their money. Returns for crowdfunding lenders are in the range of 5 to 7%. This implies that borrowers are paying around 9%+.
The next big growth is in real estate crowdfunding. In the UK, any targeted return of 5% is being snapped up. While this may look tempting – there are risks.
Another growth area is investing in private companies such as startups and established businesses. Crowdfunding continues to grow in popularity with private investors, who have suffered years of low interest rates on their savings. AltFi estimates that equity crowdfunding will attract £140 million in 2015, more than double the £59 million raised last year.
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Currently, there are limited crowdfunding options for financial investments like bonds and hedge funds. Under this model, a crowd platform would offer these products which are only available to qualified investors. There is some movement to get this changed. Blackstone has started to campaign to allow the retail investor to invest in hedge funds. Also, in South Africa, the FSB will allow the marketing of hedge funds to the retail investor under certain conditions.
With all this we are now seeing the beginning of a trend towards giving retail investors a greater choice. We are also seeing a move into this space in the Forex industry by IG. “IG Group, a global leader in online trading, has completed the acquisition of InvestYourWay (who offer managed portfolios) as part of IG’s strategic aim of expanding its product offering. This will assist IG in delivering on its partnership with BlackRock to offer a range of ETF-based investment portfolios.” (November 2015)
At present, there are very few forex brokers offering crowdfunding opportunities. This new market represents risks to the both the Forex market and private wealth management firms as the retail investor has more choice where to invest his funds. The opportunity is for these firms to embrace these initiatives. This is the new frontier.
So with all this rush and hype about crowdfunding, there are risks and concerns. There is a need to bring quality, higher earning investment opportunities to offer the investors. There is a need for the investors to earn a nice return with lower risks. There is need for crowdfunding firms with management that have a broad experience in managing, sourcing and evaluating opportunities. There is a need for transparency.
There is also a need for liquidity. All the above strategies give rise to a lack of liquidity for the investors. There is talk of crowdfunding exchanges creating a secondary market to buy and sell crowd fund investments. This trend is gaining momentum.
While all this looks very promising, the crowd funding models for investing in private companies and real estate are still very simplistic. In the UK, crowdfunding in companies is limited to UK companies and investors need to hold shares in these companies. In the USA despite all the legislation, crowdfunding is still mainly available for the accredited investor.
This industry is here to stay and despite its initial success it is still very much in its embryo stage. This area represents the future which will allow the average investor to take control of his investments.