Bruce Davis co-founded ethical crowdfunding platform Abundance, helped to launch Zopa and is a director of the UK Crowdfunding Association. He talks to Peer2Peer Finance News about ethical finance, voting with your money, and what he really thinks about Zopa launching a bank…
Even by the standards of peer-to-peer lending, known for the deep-rooted desire of its protagonists to do things very differently from traditional banks and financial services providers, Abundance Investment is a pretty alternative type of alternative funder.
For a start, it specialises not in the usual fare of loans to consumers buying new kitchens or TVs, or small- and medium-sized enterprises looking to expand, but rather in funding what it calls “socially useful” investment.
That’s largely been green energy in the form of wind turbines and solar farms but also includes the construction of GP surgeries, recycling used cooking oil into bio-diesel and, most recently of all, affordable housing.
“When we look at a project, we always put two tests against it – one, if we get involved will we produce something socially useful? Whether that’s affordable rent, making public transport greener, or producing more renewable energy,” says co-founder and joint managing director Bruce Davis.
But the term socially useful is not, he adds, a euphemism for poor returns, as some old city cynics used to say about green investment back in the day.
“The other test is, is there an investment return there? Because we are not doing this for charity,” he continues.
Neither does Abundance aim to be a financial ghetto for starry-eyed do-gooders, another criticism often aimed at any investment that dares to make sustainable or ethical claims. Rather, it’s aimed at ordinary people with a bit of money put by who’d like to see it doing some good in their local community, instead of living a very quiet life sat in a moribund savings account.
“There are about eight million people in the UK with money to invest who are basically altruistic in their nature,” comments Davis. “They have £100bn in investable assets and make up about a third of the active investor market.
“But they are a bit cautious about doing anything alternative. So what Abundance is saying is that ethical investment is not just a niche. It’s not alternative to care about the environment. It’s a very mainstream problem that affects us all.”
Hence the specialisation in renewable energy, from the wind turbines which were its bread-and-butter in the early days, through solar PV to more recent innovations including a Cornish geothermal power plant and a couple of pump-storage hydroelectric projects in Scotland. In type, if not in size, exactly the sort of long-term infrastructure investments which are normally the preserve of governments and pension funds.
“Traditional infrastructure financiers have got the scale where they only want to look at big projects, but we tend to operate at a slightly smaller scale – multi-million pound rather than multi-billion,” explains Davis. “There is a whole swathe of infrastructure investment that happens sub-£10m where there is a shortage of capital and finance. We can fill that gap.”
Returns vary from around four per cent to as much as 12 per cent, he says, depending on the level of risk.
Read more: Abundance launches IFISA offer
The nature of those projects also leads to another one of Abundance’s quirks, at least by comparison to most in the P2P sector: it is an investment rather than loans-based model.
The projects it backs are funded through debt instruments called debentures, legal documents issued by a company to an investor which specify the terms of their debt. Holders of debentures get a pretty early place in the queue of creditors should the worst happen and a business fails, but they are also more suited to the extended timescale of a typical Abundance project, which can stretch to several decades.
“We chose that route because we were investing in infrastructure which has long-term revenues and is relatively low risk,” says Davis.
Abundance began 10 years ago, founded by Davis and two colleagues, entrepreneur and environmental policy expert Karl Harder and ex-UBS corporate banker Louise Wilson. The idea, like so many alternative finance start-ups of that era, was partly inspired by the scandals that emerged during the financial crisis.
“The small guy just got squeezed out of the public markets and it was a bit of a response to that,” explains Davis. “We were saying that investment doesn’t have to work that way, it’s just how it has ended up.”
Abundance has made investments totalling £70m in around 30 projects, making it a very small, even if perfectly-formed, player by comparison with the big P2P platforms. Davis is unapologetic.
“The reason we are not as big as RateSetter or Funding Circle is that our pipeline is much more targeted at particular areas and markets,” he says. “But we don’t need to be as big in terms of capital invested, because our money is invested for longer, we’re not rotating it on a one or three year basis.”
The complex nature of its projects – which can involve local authorities and other funding bodies as well as main contractors and sub-contractors – also means that due diligence can be extensive.
“We have a team of project finance experts and it takes from six weeks to six months,” explains Davis. “There are projects which fall by the wayside because they don’t want to go through the due diligence – maybe they thought crowdfunding was an easy option.”
The fact that Abundance is strictly a self-select platform is another distinction in an increasingly auto-pick world. It matters because it maintains the connection between investor and project, says Davis.
“That’s what is important to our investors – getting a return that hopefully reflects the risk on one side, and seeing real impact in the community on the other.”
Abundance’s latest new development is an experimental affordable housing project in Liverpool, Merseyside Assured Homes. A three-year bond paying 4.5 per cent aims to raise £4.25m to fund the construction of 30 homes that will be offered at affordable levels of rent.
“We’re trying to change the way we build houses, not to build and sell on immediately,” says Davis. “We build them and then lease them to housing associations who will provide the houses as a service for up to 50 years.
“We are not making bets on future land values, we are creating an asset for the community.”
As well as offering affordable rents, Abundance says that homes built this way will be on an assured tenancy basis.
“That’s a much more stable home than the usual private rented model where tenants might only have a month or two’s notice,” Davis adds.
Davis is also proud of Abundance’s pioneering early work with the regulator on what subsequently came to be known as crowdfunding.
“We came up with a model that allowed direct investment into a project like a wind turbine using a regulated platform, and we were the first to be regulated,” he states.
The platform was authorised in 2011 after two years of hard work with [former financial regulator] the Financial Services Authority (FSA), he says.
“We actually asked to be regulated – the FSA didn’t know what to do with us. They said no-one had ever asked to be regulated before. Louise Wilson really fought that battle.”
This led to the business model which allows not only Abundance to operate, but also platforms like Seedrs and Crowdcube where retail investors can put up cash for equity in a vast range of start-up ideas. It’s all part of Davis’ world view around the democratisation of money.
“Democracy doesn’t just mean voting in elections, it’s about your money,” he comments. “If your money is invested in something you don’t agree with then you have a choice – live with the guilt, or move it.
“All crowdfunding is doing is saying that now you have that choice – you can back someone’s home improvements on Zopa, fund some local infrastructure with us or back a tech start-up on Seedrs.”
What’s the difference between crowdfunding and P2P? There are even two separate trade bodies, the UK Crowdfunding Association (UKCFA), of which Davis is a founding director, and the Peer-to-Peer Finance Association (P2PFA).
“The members of the P2PFA are all loans-based crowdfunders. The problem is that P2P doesn’t have a regulatory definition,” he says. “On the investment side, you have us, Seedrs, Crowdcube, a range of different models. Rather than being focussed on one model, the UKCFA is focussed on promoting diversity and innovation. The fees are lower and anyone can join – we have 35 members.”
He does admit that there is a lot of overlap between the two, and that both bodies work closely together on areas of common interest such as the introduction of the Innovative Finance ISA which has been a shot in the arm to all.
“We’ve seen north of £20m-25m going into our ISA over the last two years and it’s continuing to grow,” Davis reveals.
The ISA wrapper has also helped boost the average sums invested in Abundance, from around £5,000 per individual to around £8,000.
“In the main we are talking to people with cash or stocks and shares ISAs but that wasn’t really their choice,” he says. “We sensitise them to the question of what they are doing with that money. They’ve got long-term goals for it so they should invest in something long term.”
Davis’ own long-term plan for Abundance is straightforward. “To maintain momentum and grow the business to the point that we can continue to grow profitably,” he states. “The aim is to achieve that in the next two years.”
With a background in ethnographic research examining ‘the social life of money’, he was involved in the original pre-launch team which developed the idea for Zopa. What does he make of the fact that it is now turning itself into a bank?
“I am a purist but I understand what they have done it,” Davis says. “They need to expand the types of credit they can offer and to diversify the types of capital they can use. “They are a million miles from our world in terms of competition, but Zopa wants to build a sustainable business and I am all for that because it has been a force for change. Abundance couldn’t have existed without Zopa, we all owe them a debt for that.”