Financial Technology (FinTech) is revolutionizing the financial services industry, including the way investors participate in alternative investing. From Ally (online banking) to eTrade (online discount brokerage) to Prosper (peer-to-peer lending), to HealthiosXchange (equity crowdfunding), technology is redefining the way we bank, trade stocks, lend money, and invest in companies. Fueling the transition to online marketplaces are tech-savvy Millennials who find visiting banks and participating in offline investment groups an inefficient use of resources/time and more costly than online alternatives.
One of the most promising FinTech platforms is crowdfunding. Equity crowdfunding (leveraging the Internet to raise equity capital from accredited investors) is projected to raise $700MM in 2014; 7% of the expected $10BLN crowdfunding industry which includes donation, reward, and peer-to-peer lending.
So where will this alternative investment capital come from, and is it a zero sum game for incumbents? From Angel Groups? From Venture Capital?
These are the thoughts on the minds of many incumbents as the crowdfunding wave continues to wash onshore and begs the question, will equity crowdfunding disrupt markets (~iTunes to the music industry) or can it be a vehicle for expanding the amount of investible assets? The latter seems more likely given financial markets are highly regulated (protecting incumbent positions and their traditional funding source ~pension funds, insurance companies) and the enormous amounts of untapped capital not participating in alternative investing including $6.5 trillion of IRA assets. However, capital is taking notice of alternatives for good reason.
The attraction of alternative investing (i.e., private equity) cannot be underestimated. Multiple studies (source: Wiltbank) illustrate a managed portfolio of managed early-stage investments (i.e., Angel), in the long run, can produce average annual returns of 25%, far superior to the S&P 500 and even hedge funds. In addition, alternatives have emerged as a “go-to diversified tool, capable of dampening volatility and increasing resilience within a portfolio, largely due to their ability to deliver non-correlated performance relative to stocks and bonds” (New Opportunities in the Alternative Asset Marketplace – Millennium Trust Company).
But what has limited capital from moving into the alternative sector and how is FinTech improving the risk/reward dynamics encouraging more investment in the space?
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Crowdfunding image © Can Stock Photo Inc. / teshimine