altfinator’s investor manual on alternative finance · just as with crowdlending and equity...

1

ALTFINATOR’S INVESTOR MANUAL ON ALTERNATIVE FINANCE

www.altfinator.eu

This project has received funding from the European Union's Horizon 2020 Research and Innovation programme under Grant Agreement No. 792040

ALTFINATOR’S INVESTOR MANUAL ON ALTERNATIVE FINANCETips and tricks when investing in Alternative Finance

Ronald Kleverlaan (CrowdfundingHub)

2www.altfinator.eu


With the growth of alternative finance, the need for capital to distribute to (innovative) is also rising. Alternative Finance providers use different sources of funding to invest. What is the potential for a public, private or institutional investor to participate and what are the risks?

Disclaimer: The information and views set out in this document are those of the author(s) and do not necessarily reflect the official opinion of the European Union. Neither the European Union institutions and bodies nor any person acting on their behalf may be held responsible for the use which may be made of the information contained herein.

In this document we summarize the possibilities and provide tips and tricks for different types of investors.

3


www.altfinator.eu

INDEX

1. Private Investors .................................................................................................................................................................... 4

1.1. P2P Business Lending ...................................................................................................................................................................... 5

1.1.1. Costs .................................................................................................................................................................................... 5

1.1.2. Defaults and risks with crowdlending ................................................................................................................ 5

1.1.3. Guarantee scheme for defaults ............................................................................................................................. 5

1.1.4. Net yield of investment ............................................................................................................................................. 5

1.1.5. Selection of p2p business lending platform .................................................................................................... 5

1.2. Equity Crowdfunding ...................................................................................................................................................................... 6

1.2.1. Long investment cycle / difficult to sell shares ............................................................................................. 6

1.3. Business angel investment .......................................................................................................................................................... 7

1.3.1. Profit sharing crowdfunding ................................................................................................................................... 7

1.4. Tax incentives ...................................................................................................................................................................................... 8

2. Investing as institutional investor .................................................................................................... 9

2.1. P2P marketplace business lending ........................................................................................................................................... 9

2.2. Balance sheet lending .................................................................................................................................................................... 10

3. Investing as national/local government .............................................................................. 11

3.1. Invest directly ...................................................................................................................................................................................... 11

3.2. Guarantee schemes ......................................................................................................................................................................... 12

3.3. Tax incentives ...................................................................................................................................................................................... 12

3.4. Co-invest .............................................................................................................................................................................................. 12

4www.altfinator.eu

1. Private Investors

A s an individual investor there are several ways to use

alternative finance platforms to receive a financial (and sometimes social) return. This can be done by providing a loan (directly or through a fund) or invest in equity of companies. TIPS FOR PRIVATE INVESTORS FOR ALL TYPES OF INVESTMENT:

Invest only in what you understand If you understand an industry or specific company or their founders, you can make a better estimation of the risk, challenges and opportunities of the company. Don’t follow blindly a hype, otherwise you are just gambling.

Invest with spare money Only invest with money that you don’t need to use on short term and which you can miss if everything goes wrong. It is also important to set strict limits in advance on what you are able to use as investment. Stick to it!

Continue with investing Investing works best when you invest small amounts over a long period (months/years). This way you will automatically spread your risks because you will invest in positive and negative economic cycles.

Understand risk / return ratios A riskier investment will pay higher returns but has as a downside the chance of a bankruptcy of the company will be higher.

Make sure you use a professional platform Do proper research on the platform you are using to invest in innovative SMEs. Do they have license for the national or European regulator?

Are they part of the national and/or European associations and do they comply with a good code of conduct? What is their track-record and average default rate? Do they do a proper due diligence on projects? Do they have a good continuation plan, so that when the platform fails they can continue servicing the repayments?

Spread your investment Whether you invest in loans or equity, it is important to spread your risks to reduce the chances of loosing your investment with a default of one of the companies. It is wise to spread your investment in at least 25-50 different companies.

Diversify portfolio Different types of investment products have different risks. Equity investments in high-risk start-ups can deliver high returns, but also a high probability of loosing everything. A wise investor will also diversify her investment portfolio in different types of asset classes.

Just do it The best way to learn investing is by doing it. Start with small amounts and experiment with different types of investment to find the best investment source for your personality and purpose.

Don’t follow blindly a hype, otherwise you are just gambling.

Costs

5www.altfinator.eu


1.1 P2P Business Lending

1.1.1

W ith peer-to-peer (P2P) business lending a group of investors provide together a loan to an entrepreneur.

The platform is facilitating the process and will get a small fee for evaluating the investment proposal of the company, a success fee for matching the investors and the company and a fee to manage the loan portfolio for the investor. As investor you will also be able to support the company additionally by promoting the company and/or using their services. This way the investor has a direct influence on the success of the company.

A platform will ask a fee from the company when the funding is successfully raised. Sometimes they also charge the investor a percentage. Beside this success fee most platforms ask a monthly/yearly fee for managing the loan for the investor.

A loan provide to a company through p2p business lending has some risk of a default. This way the investor will lose some of their investment. If the company provided some collateral, the alternative finance platform has the opportunity to try to recover some of the loan to reduce the losses.

Some national governments and the European Commission (EIB: European Investment Bank / EIF: European Investment Fund) provide guarantee funds to reduce the risks. Through these funds some of the losses are covered. This way the risk for investors to lend money to an (innovative) SME will be reduced.

It is important to recognize the different type of p2p business lending platforms to be sure to spread your risk. Some platforms focus on specific industries, or size of companies, such as small start-ups, or larger SMEs. With some platforms it is possible to choose and pick the companies you lend to and with some platforms this will be done automatically for you. It is important to find the best match for you.

At all times it is important to review if platforms are member of the national and/or European association. Most of them check their members and have a stronger code of conduct, to protect investors.

Regarding the return of p2p business lending, an investor has to take into account the direct (costs for using the alternative finance platform) and indirect (defaults) costs.

Defaults and risks with crowdlending

Guarantee scheme for defaults

Selection of p2p business lending platform

Net yield of investment

1.1.2

1.1.3 1.1.5

1.1.4

6www.altfinator.eu


Long investment cycle / difficult to sell shares

1.2 Equity Crowdfunding

1.2.1 W ith equity crowdfunding,

the individual investor will participate directly or indirectly in the shares of the company. In most cases the crowdfunding shares are grouped in a SPV to have one new shareholder in the company. This way voting will be delegated to the chair of the SPV. The economic benefits of holding the (certificate of) shares will be for the investor.

Most of the shares bought in an equity crowdfunding campaign are difficult to trade. Because the shares of the companies are not listed on a public exchange. The investor has to wait for a formal exit (sale of the company or IPO) to be able to retrieve the investment (and profit) back.

Some alternative finance platforms are experimenting with a secondary market to make trading easier, but this is only used by a small number of platforms at this time.

7www.altfinator.eu


Profit sharing crowdfunding

1.3 Business angel investment

1.3.1 A business angel is typically an experienced entrepreneur or high-net-worth individual who will invest directly in

innovative SMEs. They will get shares in the company.

Just as with crowdlending and equity crowdfunding it is important to spread your capital also with this type of investment in several companies. From the 10 companies you will invest in, perhaps only 5 will survive in 3 years time and only one will be successful and generate enough profit to cover the losses of other investments.

The biggest risk in business angel investing is to take over the role from the founder/entrepreneur. As a business angel it is possible to coach/support the entrepreneur, especially by providing access to your network or expertise in a certain industry but keep your distance from the entrepreneur.

The best way to learn about business angel investing is to learn from experienced business angels. In every country there are different groups of business angel networks. Most of the business angels discuss potential investments with other business angels and co-invest together.

One specific risk-sharing model for private investors is profit-sharing crowdfunding. Just as normal crowdfunding, the individual investors can participate in an investment in a company. But instead receiving a fixed interest rate or an equity stake in the company, the return is based on the profits the company makes.

8


www.altfinator.eu

1.4 Tax Incentives

S ome countries are providing tax incentives to invest in risk capital (equity) for innovative start-ups and/or for investment schemes in loans (for example EIS/SEIS in UK).

Check the requirements and limitations with your local tax advisor or government. Professional alternative finance platforms can also explain these incentives.

9www.altfinator.eu

2. Investing as institutional investor

P ension funds, insurance companies, banks and other

institutional investors can invest a part of their capital in these new asset classes that are available through alternative finance. Instead of direct investments in companies, they can use alternative finance providers to distribute and manage some of their investments or they can lend directly to alternative finance providers that will lend these fund on their own terms to SMEs.

2.1 P2P marketplace business lending

T he peer-to-peer marketplace business lending platforms combine the funding from several resources and invest the funding in innovative SMEs. Because this is not their own money,

this is called “offbalance” funding. The business case of these platforms is to collect a fee for every transaction and manage the loans.

For an institutional investor the large loan books are interesting. They can easily spread their capital (for example €100 million) automatically in thousands of individual loans.

10


www.altfinator.eu

2.2 Balance sheet lending

A nother possibility is to invest directly in alternative platforms. These platforms need funds to lend to their clients. They get the funding from institutional investors as a direct loan

and lend the money on their own terms to SMEs. Because they are taking the funding on their own balance sheet and take all the risks on defaults, this is called balance-sheet lending. For institutional investors this type of funding is interesting, because they have no additional risks and are receiving a fixed interest-rate based on the fund they provided. The specific financial product that is offered by these platforms can be very divers. Some offer “normal” direct loans, but other focus on invoice-trading, provide mini-bonds or are offering a lease solution.

11www.altfinator.eu

3. Investing as national/local government

F or governments there can be different reasons to invest and support alternative finance initiatives, such as promoting sustainable or circular companies,

support financial inclusion or support the growth in specific industries. As government there are different ways to support alternative finance investments. Directly it is possible to provide funding through only platforms, just as the way institutional investors are using it. But governments can also provide guarantee schemes, tax incentives or co-invest directly in individual projects.

3.1 Invest directly

T he British Business Bank provided funding

a couple of years ago to boost the alternative finance industry. Alternative finance platforms were able to request funding to be distributed via their platforms based on specific criteria. This boosted the first growth of alternative finance in the UK and helped the platform to attract additional funding through institutional investors.

12


www.altfinator.eu

3.2 Guarantee schemes

3.3 Tax incentives

3.4 Co-invest

T he European Investment Fund (EIF) provides specific guarantee schemes for microfinance and social entrepreneurs for alternative finance providers. When companies are not able

to repay their loans, a part of the loan will be repaid by EIF. This way the risks for the provider is lower and they are able to provide more and larger loans for innovative SMEs. Some national governments also provide these guarantee schemes for alternative finance platforms. It is a very good way to stimulate additional investment.

N ot only with direct investments, but also with indirect investments through tax-incentives, it is possible for national governments to boost investments through alternative finance.

The UK EIS/SEIS and Belgium tax schemes for innovative SMEs created a strong growth in investments in alternative finance.

L ocal government can use alternative finance platforms to co-invest in local projects and SMEs. Instead of providing direct investments or grants through the government, they can

follow the (local) crowd and co-invest in projects that are supported by private investors. This way the investment will be done in companies that have local support and the local government can outsource (some of) the due diligence to alternative finance platforms and the crowd.

This project has received funding from the European Union's Horizon 2020 Research and Innovation programme under Grant Agreement No. 792040

WWW.ALTFINATOR.EU

[email protected]/Altfinator /AltfinatorH2020

CIVITTA EESTI ASEstoniawww.civitta.com

GLOBAZ SAPortugalwww.loba.pt

POLITECNICO MILANO 1863Italywww.polimi.it

UNIVERSITY OF MANCHESTERUnited Kingdomwww.research.mbs.ac.uk/innovation

ECWTNorwaywww.ecwt.eu

INNOMINEHungarywww.innomine.com

PEDAL CONSULTING SROSlovakiawww.pedal-consulting.eu

CROWDFUNDINGHUBNetherlandswww.crowdfundinghub.eu

ZABALASpainwww.zabala.eu

MEDIAPARKLithuaniawww.mediapark.com

altfinator’s investor manual on alternative finance · just as with crowdlending and equity...

Documents