Listening to the latest episode of Animal Spirit podcast, the CEO of Cadre repeated at least five times that his mission is to ‘democratise finance’. Cadre offers to US accredited investors the possibility to invest in commercial real estate, an investment category that is normally only available via Private Equity structures.
RobinHood used the ‘democratise finance’ tag-line so much, combined with the fact that we now know what their real intentions were, that it should not distract us from the fact that there is a real need for it. It is undeniable that institutional investors and High Net Worth individuals have a better set of investment choices compared to retail folks. It is also true that not everyone has the same access to financial resources to fund their projects, companies and ideas. The advent of p2p lending, in its many forms, was a welcoming development to close those gaps.
My wife bought this book for my two years old daughter and she was immediately hooked the first time we read it to her:
Some weeks ago I received an email from Masterworks.io saying that one of Yayoi paintings was on offer on their platform. I do not have a spare half-million to go around and shop for an entire painting but now I can buy a piece of it for my daughter. Maybe it is an idiotic idea from a parent too obsessed with finance, maybe it would be an original present that she would like (not now obv, in some years, when ideally I could show her the painting AND some profits): in any case, having this option is better than not.
The COVID crisis in Europe exploded just after some platform-scams were exposed, further diminishing investors confidence in the sector. Scams are unfortunately common in finance, someone can write a history book on the evolution of financial markets and instruments chronicling only scams: they are a feature of the system, not a bug. Right now, multiple real estate developers in China are not paying interest in their foreign bonds, does it mean you should ditch all fixed income from your portfolio? What about Theranos and venture capital? Lot of smart people have compelling arguments calling Tesla accounting methods as a scam. The possible list in endless.
The bigger blame sits on us, the investors, and our return expectations from P2P (well, more on you because ‘I told you so‘ ahahahahah). Explore P2P published an update last week that included this comment about Crowdestor:
“We still think there is a space in the P2P market for high risk loans – however it requires very experienced and capable teams of loan underwriters and workout specialists”
I have no issue with this sentence if it was not linked to a platform that promises returns at 18% or above. Look, it is possible to achieve those returns in the fixed income space IF THE OPPORTUNITY IS A ONE-OFF, it is sustainable only for a limited period of time, for example if a new financial service is launched. If you lend money to someone, there is a point where an higher interest rate will not compensate for your risk, will only led the borrower to default. Your and the borrower incentives become misaligned and at that point, either the borrower is successful and go borrow at cheaper rate somewhere else, either they realise it is not worth the effort because the lender is sucking all their profits and default instead (that’s why loan sharks exist, for them the only way you can default is if you die).
Take the example of Uncle Warren during the GFC: he went to Goldman and offered them a convertible loan with interest at 10%.
- He never had any similar investment opportunity after that specific occasion. Might happen again in the future but after 13 years is definitely not something you build a platform on.
- Interest on the loan was set at 10% even if the risk of Goldman default was high: going above 10% would have represented an higher chance to bring your borrower to default, a little gain now (interest) for a bigger loss tomorrow (principal)
- The loan risk was repaid by the convertible part of the loan, an option to convert the loan into equity.
To take another example closer to the p2p world, LendingClub loan statistics show the same:
Higher risk loans, even if they come with higher interest rates, do not produce higher returns because defaults wipe out those paper profits.
In conclusion, the mistake is not chasing higher returns per-se, is doing so with the wrong instruments: equity is what you need.
Another, smaller, blame goes to us, the ‘bloggers’. Commenting on what other, more prominent sites do would be at least not politically correct; I can only say that every time I write about p2p investments, or investments in general, I try my best to highlight the risks and set expectations for returns at a reasonable level. But I am also old enough to know that this type of truth rarely sells. This is reason why I laugh when someone write to me that I am ‘like the others’ because there is a section on this blog with affiliate links. If that was the focus on this blog, you would definitely see a different, more appealing layout, more enthusiastic post and multiple, multiple way to consume content like YouTube channels and every other possible social network (and maybe a podcast).
P2P and crowdfunding platforms offer retail investors unique opportunities and it will be sad (at least for me!) to see the whole sector to fail or even just stop innovating because of the above mentioned mistakes.
So today I had a look at a new, promising platform! I did not open an account (yet) so please take all the below just as material to put them on your radar, nothing more. As usual, do your homework before taking any action.
If you ever wondered if it is possible to be equally interested in the crypto space and becoming a nineteenth century landlord, here I am. So far I have been able to get access to farmland via a stock…and it did not disappoint:
Now there is a new investment vehicle in town: Landex, a crowdfunding platform for farm and forestland.
Outside of real estate, farmland is a great income-producing asset that has a multi-century track record. Farmland has low correlation with stocks and bonds because the primary source of farm income, crops, is a pure non-cyclical product (unless you decide to grow avocado or quinoa I guess). In addition, farmland valuation do not change as fast as stocks do while it provides great inflation protection. Because of this asymmetric risk profile, farmland is unlikely to “go to zero” but the effects of climate change have definitely increased this risk compared to the past (<tinfoil hat /on> for Landex, there is also a non-zero risk of being wiped-out by a Russian invasion/war <tinfoil hat /off>).
In terms of yield, farmland returns should be in the high single digits, with roughly half coming from farm yields and half coming from land appreciation. That’s the theory. In reality, as shown by LAND, demand and offer dynamics can accelerate or disintegrate those projected returns; (il)liquidity plays a prominent role here.
From the whitepaper:
Landex is based on crowdfunding with multiple investors financing a purchase through an Special Purpose Vehicle and fractional ownership. The platform wants to give investors a wide choice while doing thorough due diligence. Landex is well-equipped to assess and have listing of the following land types:
- Farmland – typical farmland investment where we lease the land to farmers
- Forestland – we manage the forestland and sell the crops
- Carbon land: a subcategory of all the above, lands that have a significant part of their returns coming from carbon income. Regenerative agriculture, reforestation lands and improved forest
management, etc. - Biodiversity land – types of lands that do not have a commercial crop. Naturally protected areas, wetlands (swamps, mangroves), natural grasslands, etc.
- Development land – land purchases with the idea to turn them into residential or commercial areas
With financial markets dedicating more and more attention to ESG-related topics, Carbon land can be a source of ‘free’ carbon-credits that can be sold to polluting industries. The European Union established the first international trading system for CO2 emissions in the world: trading started in 2005 and price for a metric tonne went from EUR 15 to EUR 59 now. If you take a look at the current energy crisis in Europe, you can understand why this type of investment might be valuable in the future.
Landex has just launched. The next development steps are introduction of an autoinvest feature and a secondary market. Landex does not charge any fees for investing, but optional usage of the secondary market will incur a small fee.
These are the items I am most bullish on:
- Operational improvement – if advantageous to the investors, we will change land use type to residential development land or renewable energy production. Finding the locations for these developments is a data issue, so we are especially well suited to solve it
- Carbon project development – We have in-house know-how how to create carbon projects. Carbon project development is a relatively complicated and costly process – needing know-how and economies of scale – that most small-to-midsize landowners lack.
- Access to carbon financing – Carbon asset (carbon rights, claims and credits) markets are heterogeneous. There are superbuyers (Microsoft, Shell, Shopify, etc. – a growing group) that are willing to pay significantly (10-100x) more for carbon assets but only when these assets can be sure to deliver on their promise to capture carbon without sacrificing biodiversity. We are working together with these players through intermediaries that need the highest level transparency and foolproof monitoring systems to be able to achieve such prices for their carbon assets.
The “Final Exit” process is not super clear, I hope they would adopt a solution like those collectible platforms where investors can vote to accept of refuse a third-party offer. The Final Exit fee looks fine, 20% of the gains above 10% yearly return.
I have mixed feelings about the founders. Initially I thought they were too young – not experienced enough…then my daughter came to reclaim my attention and I remembered why you need to do these things when you are in full strength and do not have other ‘life distractions’. They have put together a strong team of Advisors, who ideally should bring the experience the executive team may lack.
I will start investing in the coming months and ideally write a full report after a year.
What I am reading now:
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