This is the fifth post about Bondora, and the second in a row: I promise I will stop.
When I started investing in p2p loans years ago I envisioned the potentiality of this new ‘asset class’ for retail and institutional investors. My dream was to start a proper fund that invested in these loans, bringing it out of the dark of internet and give it a proper, regulated if possible, status. Then my passport reminded me I am a lazy Italian and I started a new episode on Netflix*.
But while tinkering about it, my first dilemma was how to manage the fund liquidity. You cannot build it like a Private Equity fund with a lock up of 5 years because no investor, especially retail, will ever give you money. Plus the underlying loans themselves provide a liquidity event every month, so there is a (limited) possibility to generate liquidity if a (limited) part of investors want to cash out. Maybe leave the investors the option of inputing a selling order today that will be cash out in the next quarter (something similar to what Funding Circle is doing now)? ETFs were becoming bigger and bigger: there is the possibility I was distracted too much by their ever-present liquidity, trying to solve a problem that was not even there in reality.
(I still believe this is a feasible business model, I invested in Orca on Seedrs and constantly look for other opportunities).
Fast forward half a decade and here it comes, Bondora Go&Grow, the product that solved my problem. Ok, it is not a regulated product and I am pretty sure their terminology will not stand a financial regulator scrutiny, but still their formula clearly give investors the confidence they can withdraw their funds whenever they want. The fund wrapper was also necessary in my mind to be able to raise enough funds, Bondora did it without it so…even better!
Not only Bondora managed to raise a lot of capital, they raised it very cheaply: 6,75% for an internet start-up that originates unsecured consumer loans is bargain. It gets even better: 6,75% is a cap on investors gains but it can go DOWN if Bondora decides to do so; it is like Bondora bought a put option on its origination business from its investors, unlimited upside with limited downside sounds extremely good…if you are Bondora. For the non-financial savvy readers, this is the opposite of a stock, where the investor risk is limited (the price you paid for the stock) but the profit is unlimited (check any “if you invested in Amazon IPO” meme).
Everything works great in Bondora marketing / sales department. On the other side, Bondora origination business is a complete train wreck. So here my question to Bondora CEO: why do not keep what it works and ditch what it does not? In practice, why do not continue to raise money but instead of investing it in loans originated by Bondora, invest other loan originators, like a fund, or a fund of fund if you prefer, would do? It would have an higher cost base, require a different kind of due diligence but the assets would have a positive expected return, something that now is clearly missing and makes the whole model unsustainable. Go&Grow investors already have no visibility on the loans that back up their investment (yes, there are those blog posts…ok), using other originators with better credit models will not diminish their experience.
Lot of companies, successful ones, do that. Apple credit card is not made by Apple, even if they would have the financial resources and technical skills to create the product; it is made by Goldman Sachs. Why? Because Apple is good at marketing and distribution and the user does not care who is behind the credit model. Yes, in a rational world an investor (not a user) should care what is behind your product…but do they? Revolut core engine is build by Currency Cloud, so that Revolut can focus on what they are great at, the customer side of international transactions. I know these are not the best comparison in strictly financial terms…but I did not want to use the words ‘Mintos’ and ‘Iuvo’ (wink wink).
I think that Go&Grow was a nice idea that clearly hit a need in consumers, in particular the goal-based saving part, backed by a great marketing strategy. The jury is still out to demonstrate the idea is feasible in practice. That said, also all the biggest financial scams are built on excellent marketing and sales, but I am trying to spin some positivity here.
*The solution to my liquidity dilemma is to use a closed-end fund, like many did in UK.
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