Preface: A Paradigm Shift in Financial Services
Neha Manaktala – Click here for the full report
CEO and Co-Founder, DealIndex
Alternative Finance is a new phenomenon, and it is taking the world by storm. With over 1,250 crowdfunding platforms worldwide, this new model of collaborative funding is breaking boundaries and defying the status quo as to how issuers source capital. In light of this paradigm shift and plethora of platforms, we perceived the need to develop an alternative finance aggregator that would instantaneously display quality private investment opportunities from curated platforms, all in one centralised marketplace.
We embarked on this mission to pioneer an innovative dashboard to address the ‘pain points’ often faced by sophisticated investors who are keen to invest in private companies across all corners of the globe. It is throughout the course of this 12-month journey and vigorous research-driven process that we discovered the relative dearth of information on this burgeoning sector. This industry report thus aims to offer a comprehensive overview of this emerging sector, as well as to provide valuable insights on the complexity of the wider alternative finance ecosystem from various perspectives.
As we set out to develop DealIndex as an alternative finance aggregator, our first port of call was to define the term “alternative finance” and to research the key players underpinning this rapidly evolving sector. While alternative finance is primarily known for crowdfunding and P2P lending, we discovered entire asset classes, important functions of investment banking, including a supporting ecosystem of due diligence, risk management, and infrastructure that had transversed the offline and online world of financial services. We started to see how these seemingly disparate players in alternative finance – involved in different aspects of fundraising, and from all over the world – are interrelated. Assets including alternatives and M&A, represent significantly bigger (albeit challenging) asset classes and have started moving online. More importantly, we learned how these players mirror traditional investment banking services and had already started collaborating with the financial services industry.
Some of the themes underpinning alternative finance include:
- Increased transparency and access to otherwise closed off asset classes;
- Redefinition of the term “investor” across the entire spectrum of private and public asset classes. The crowd gets access to privileged deals and the world’s largest financial institutions have started investing in companies much earlier in the life-cycle of a company;
- Collaboration is a cornerstone of the industry as the syndication model takes hold with mobile, social media and millennials all generating network effects;
- Increased volume of funding activity in private companies & assets, and increased amounts of companies getting funded with customers getting involved in product development / playing a role in innovation as investors; and
- How technology, speed, and data have come together to reduce the inefficiencies in searching and accessing private investment opportunities, thereby saving issuers and investors time in the procurement
Alternative finance has already demonstrated its potential to change the way fundraising is carried out by private companies by implementing a much more democratic, transparent and efficient process for both entrepreneurs and investors. Issuers get increased access to diverse funding options, while online platforms alleviate the time, effort and costs associated with fundraising, in addition to generating increased marketing and product awareness.
Having been on both sides of fundraising, it is exciting for me to be part of the potential to improve the way different aspects of financial services are performed; all the while deepening collaboration, not just between alternative finance players, but with the financial services industry in general
The definition of investors itself has evolved since the advent of alternative finance and the surge of online platforms. Increasingly, we are witnessing changes to investment behaviour since the start of syndication of investment online. Furthermore, access to global investment opportunities has led to a more data-driven approach to investing.
Despite growing into a $16.4Bn industry in 2014, it is still a drop in the ocean compared to the $3.3Tn addressable market opportunity. Although crowdfunding is still often dismissed as a niche activity associated with rewards or donations, the industry has developed into an entire ecosystem that is constantly evolving. Growth has been exponential with players across the entire funding lifecycle offering diverse and alternative fundraising options. Most of these alternative finance players already have a significant amount of collaboration with the financial services world.
Finance is a singular industry with its ramifications permeating every single part of the economy. As an ex-Lehman Brothers investment banker who witnessed the Great Financial Crisis first hand in 2008, I am constantly reminded of these important principals. With rapid growth in the alternative finance space, comes the need for increased maturity in the industry and systems to contend with the unknown and untested impact of changing credit and interest rate cycles, liquidity squeezes, fluctuating asset pricing and valuations and the impact of the macro economic environment. Moreover, with increased funding rounds, shorter capital raising cycles, diversified and changing investor bases in private companies, structured offerings and more sophistication being applied so early on in the life of a company, comes the need for best practices to be applied from financial services. Due diligence, risk and portfolio management, research, liquidity channels / secondary market – these are all vital parts of finance and are now beginning to permeate alternative finance.
Alternative finance is removing information barriers and information inefficiencies that exist in the private market, opening funding conduits and channeling global liquidity. At DealIndex we take a global, curated approach to the alternative finance ecosystem. We give you a pulse of the market through the provision of data, research, analytics and context on the wider ecosystem. The availability of private company data is a game changer and everyday we are fascinated by the volume of data and patterns that emerge as we observe dealflow going live from different corners of the world across platforms, asset classes and sectors, all in real-time.
Having been on both sides of fundraising including at Morgan Stanley Investment Banking, Actis Private Equity and as an entrepreneur, it is exciting for me to be part of the potential to improve the way different aspects of financial services are performed; all the while deepening collaboration, not just between alternative finance players, but with the financial services industry in general.
I would also like to extend my grateful acknowledgement and appreciation for all our partners and to those who have contributed to this report. It would not have reached you in its present form without them.
Reference: Report produced by DealIndex (www.dealindex.co) – July 2015