What’s Happening in the Alternative Finance Market in Australia

In past coverage, AltFi has reported that the Australian Alternative Finance industry is at the very start of its journey, perhaps where the UK and US industries were approximately five years ago. Insiders have big expectations for the future growth of this sector, but they admit that in reality significant growth will take some time to materialise.

According to Glenn Hodgeman, – a local expert on marketplace lending – it’s worth putting into perspective that the four Australian banks enjoy a dominant market share in the lending space. He observes that Australia isn’t like the US where there are 260 million people or Europe where they are many countries to target. Australia is a country of only 23 million people (with approximately just 450,000 high net worth individuals) and market awareness needs to be boosted before P2P products really take off.

P2P lending platforms

The UK peer-to-peer lending industry was born ten years ago with the launch of Zopa – the UK’s largest peer-to-peer lending platform – to fill the credit gap banks left behind them after the Global Financial Crisis. Since then, the sector has boomed globally especially in the US and in the UK.

In Australia, the AltFi revolution seems to have started much later, when Matt Symons and Greg Symons founded SocietyOne, the first fully compliant peer-to-peer lending business in the country, in 2012. In the following three-year period a number of other P2P lenders have launched. The main players include:

• SocietyOne: SocietyOne was the first P2P lending platform launched in Australia. Investors have access to a variety of creditworthy borrowers and can build a unique, diversified portfolio of personal loans based on individual investment goals and risk appetite. The minimum investment is currently $25,000 and no maximum investment is indicated. Borrowers apply for loans ranging from $5,000 to $35,000 with flexible loan terms of 2,3 or 5 years. Interest rates are determined by borrowers’ credit profile and financial behaviour.
• RateSetter Australia: RateSetter was the first UK platform to take on the relatively uncharted waters of Australia in October 2014. Clients (individuals, companies, trusts and other entities) can invest anything from $10, up to an unspecified maximum, but the company reserves the right to cap the amount of investments. RateSetter offers borrowers loans from $2,001 to $35,000 for a timeframe of 6 months up to 5 years.
• Thincats Australia: founded in late 2014, ThinCats Australia was born of a joint venture with ThinCats UK, which holds a 25% stake. ThinCats Australia lists loans for auction on its platform. Investors buy into deals starting from $1,000. The maximum bid is the total loan amount. For fixed rate loans, lenders bid fixed amounts on the loan. For variable rate loans, lenders choose the amount they wish to bid as well as the interest rate. Borrowers can apply for loans ranging from $50,000 to $2m, repayable in fixed monthly instalments over periods ranging from 6 months to 5 years.
• DirectMoney: recently listed on the ASX, DirectMoney was the first P2P business model to float in Australia. The company refers to itself as a marketplace lender and not as a P2P lender. The minimum investment term for an investment in the platform is 3 years. Investments start from a minimum of AU$ 20,000. Borrowers apply for loans of between $5000 to $35000 for a period of 3 or 5 years. Interest rates are fixed from 8.5% per year and an establishment fee of $575 is charged as well.
• MoneyPlace: the newest P2P lender having launched in November 2015. The platform focuses on investment diversification and offer investors tailored portfolios. Expected returns start from 7.8% per year. Borrowers apply for loans up to $35,000 for terms of three to five years, receive funds in 1-2 business days and are not charged either hidden fees or for extra repayments. Interest rates start from 8.9% per annum and users may repay their loans starting from $310 per month.

Equity Crowdfunding platforms

• ASSOB: ASSOB matches entrepreneurs, job creators and business pioneers seeking growth capital with investors desirous of investing in high growth opportunities.
• OzCrowd: OzCrowd is a platform through which Australians can crowdfund almost anything, from personal to charity-related projects. To date there have been over 1,935 completed campaigns, raising more than $5m.
• VentureCrowd: VentureCrowd is Australia's first multi-asset class equity crowdfunding investment platform. It offers three distinct products: VentureCrowd Startups, which allows investors to participate in high growth ventures as well as giving entrepreneurs access to a new source of early stage funding; VentureCrowd Property, which allows investors to participate in alternative real estate opportunities as well as giving developers access to a new source of funding; finally VentureCrowd Credit, which allows investors to participate in alternative debt investment opportunities as well as giving borrowers access to a new source of funding.
• OfferBoard: OfferBoard has built a system to facilitate the availability of capital for emerging growth companies, raising funds in the range of $2-200MM. The company is committed to identifying high growth industries and monitoring market trends to identify and present companies that meet its investors’ criteria.

Regulatory framework: P2P Lending

The Australian Securities and Investment Commission (ASIC) mandates that P2P lending platforms must be set up as managed investment schemes. This means that online lenders must have an Australian Financial Services Licence (AFSL) – a licence given by ASIC that allows people or companies to legally carry on a financial services business, including selling, advising or dealing in financial. In addition, platforms must comply with the Corporations Act when they provide their services.

Regulatory Framework: Crowdfunding

The current regulatory framework for equity crowdfunding is much more complicated than for lending. While a number of markets such as the United States, Italy and New Zealand have welcomed the arrival of crowdfunding by quickly regulating the sector, Australia seems to be lagging behind.

In 2012, the ASIC indicated that equity crowdfunding may fall within the framework contained in chapter 6D of the Corporations Act, which is very restrictive and obliges corporations to present significant amounts of documentation in support of fundraising rounds.

However, small businesses and start up companies might also be able to use the 20/2/12 rule for small-scale fundraisings, which is apparently less restrictive for companies that are willing to raise funds of less than $2 million from less than 20 investors over a 12-month period. In addition, the scope of Australian equity crowdfunding is limited to institutional and sophisticated investors i.e those who earn at least $250,000 a year or have $2.5 million in assets.

Many argue that the current equity crowdfunding regulation in Australia is too restrictive and it is likely to choke the sector’s growth. For a more detailed analysis about the regulation of the Australian equity crowdfunding sector, click here.

Bottom Line?

According to a report recently published by Equitise, small and medium enterprises employ around seven million Australians, produce more than half a trillion dollars in output and make up almost 100% of innovative businesses with expenditures of almost $6 billion each year on research and development. And yet SMEs are experiencing extreme difficulty in accessing new funds to expand their operations.

Alternative finance platforms represent one way of making a dent in the funding gap. The industry genuinely seems to be at a tipping point, but many observers argue that the government needs to act promptly in order to capitalise on this opportunity before being left behind.

If you want to know more about the alternative finance space in Australia, be sure to book your early bird tickets for the AltFi Australasia Summit event before they run out on Jan 31st.