Alternative Finance: A Paradigm Shift In Financial Services

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.

While alternative finance is primarily known for crowdfunding and P2P lending there are entire asset classes, important functions of investment banking, including a supporting ecosystem of due diligence, risk management, and infrastructure that have transversed the offline and online world of financial services. 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. Alternative finance players have already started mirroring traditional investment banking services and started collaborating with the financial services industry.

Some of the themes underpinning alternative finance include:

1. Increased transparency and access to otherwise closed off asset classes;
2. 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;
3. Collaboration is a cornerstone of the industry as the syndication model takes hold with mobile, social media and millennials all generating network effects;
4. 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
5. 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 process.

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.

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 for alternative finance. 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. 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.