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What would a US interest rate hike mean for crowd finance investors?

January 12, 2017 • By TAB team

In spite of the uncertain political outlook, US equity markets continue to soar, with the Federal Reserve anticipating further US economic strength in 2017 and ongoing selling in US bond markets. A fresh Fed rate rise across the Atlantic looks like a ‘when’ rather than an ‘if’.

In spite of the uncertain political outlook, US equity markets continue to soar, with the Federal Reserve anticipating further US economic strength in 2017 and ongoing selling in US bond markets. A fresh Fed rate rise across the Atlantic looks like a ‘when’ rather than an ‘if’.

So, what would this mean for crowd finance investors in the US, but also elsewhere?

With higher interest rates potentially returning to cash accounts, investors may be tempted to turn away from disruptive alternative asset classes – such as early stage companies funding via crowd finance – which are traditionally viewed as ‘risky’ or, at least, ‘riskier’. Why take undue risk after all? If low-risk cash products in the US start offering attractive single-digit yields – let’s say, in the region of 2.5% to 5% - there is less need for unnecessary risk taking. With this in mind, a rate rise could be bad news for the part of crowd finance that seeks to deliver financial returns alone.

But let's not get too far ahead, even if the Fed were to hike from its current position (0.75%), there would still be a long way to go before rates become attractive to investors and start to draw back investors. With the 1-year US interest rate benchmark still only offering, at best, between 1.5% and 2%, the market isn’t predicting strong returns on cash any time soon. When we compare this to the UK, where we're based, the fundamental economic outlook hasn’t changed. There is no rate rise expected from the Bank of England for a number of months. Therefore, investors both in the UK (and beyond) are still incentivised to seek out new opportunities in crowd finance.

Those crowd finance opportunities may be into business or individual loans, where a cash return is the primary focus, or into longer term assets, such as SME equity, bonds or debentures. Or perhaps less common models of royalties or revenue-sharing, which are found both in the US and Europe.

It’s also worth considering that, with rates rising, traditional lending methods – via banks and other finance houses – become less appealing as lending rates for these loans rise too. Hence, the prospect of raising finance from the crowd (be it equity, debt, rewards or another form) becomes even more attractive, as the alternatives become even less affordable. Sourcing high-quality deals is a constant imperative for all platforms, so at a time of rate rises, there is a natural opportunity to re-emphasise values and offerings.

It will be interesting to see how the US crowd finance community reacts to a seemingly inevitable Fed rate hike at some point during 2017. More cautious investors may look to shift capital elsewhere, seeking the marginally higher rate of return and the safety that a cash product provides. But, for investors who understand the crowd finance space, the new asset types and deals available, and the philosophy of a connected financial planet, there’s every chance that this new environment may simply continue to fuel growth opportunities.