I try to read blogs and forums to get ‘a pulse’ of the p2p industry. If crypto is considered at best as a fringe, curious topic by mainstream financial media, p2p coverage is relegated to that one per year article about 200 Chinese companies that went bankrupt the same day. Given the opacity of the sector, I find myself ofter surprised by the amount of confidence, and by confidence I mean money invested, by some of you guys out there.
I consider p2p an extremely difficult business. And risky. That is why you can get double digits returns. Consider the companies that went public:
- Lending Club debuted at $120 and is now worth $13
- Funding Circle got listed at £364 and now trades at £99.9
More than 60% losses and it is a bull market for stocks. Not a thriving business, eh? Mintos, one of the platform leaders in Europe, in 2018 made less than 5m in revenues (it is harder to talk about profit here because they can have it but still invest to grow the top line, à la Amazon, and therefore do not show it at the end of the year).
Why I consider it a difficult business? Take the Mintos example again, because I consider it one of the best platforms in Europe as well. A p2p platform has to balance investors and borrowers: too many investors and they will have a cash drag (money sitting uninvested in their account, earning 0%), too many borrowers and the platform would not be able to originate loans on a timely manner (the original promise of p2p was indeed to give loans faster than a bank). A normal business to thrive has to grow its revenues (and profit), a p2p platform has to grow investor and borrower bases IN SYNC! In the AirBnB section of this book, they explain how easy it was for those guys (spoiler alert: not so easy):
In June Mintos launched Invest & Access, a new product to make investing, and cashing out, easier. Offering >10% yield is not enough for today investors, they want the yield AND the ability to cash out at any time. Still not convinced it is a hard business? Imagine now.
I&A disclaimer states “you should be able to access your money any time under normal market conditions”; this is the legal, and honest, way to admit to investors that there is a liquidity mismatch between their desire, I want my money any time, and their investments, usually loans up to five years. The only way Mintos can cash you out on a day notice, is to find another investor that is willing to buy your loans; under normal market conditions Mintos is confident to find willing buyers easily. How long did it take to break those normal market conditions? 6 months. The alleged reason of the break was that the Central Bank of Kosovo revoked the license to one of Mintos loan originators.
So, going back to the title of this post, what type of investor you should not be?
The type that freaked out because of the Kosovo event
If you did not have to Google if Kosovo has a Central Bank for real, kudos for you. Look at the list of places where Mintos originators work: not exactly developed world. Do not be surprised if shit happens. That is where the high yield comes from. First time I looked at EstateGuru and the property security I asked myself: what is the probability Russia pulls another Ukraine and blows away my collateral? Not 0%. Mintos offers diversification to mitigate this risk, use it.
I actually covered IuteCredit, the loan originator under scrutiny, in another post. This is how their bond reacted to the event:
Seems like a dramatic drop due to the graph scale but in reality is just a less than 4% loss; on a bond that pays 13% annually, is less than four months of accrued interest.
The “why they do not have a reserve for this?” type
You can have the yield or you can have the reserve, but not both. If Mintos has to set aside some cash to cover redemptions during periods where the request to cash out are bigger than the money going in, that cash will have a negative return in EUR. There is no other way to solve the liquidity mismatch. Mintos decided to offer you the yield, if you are not happy with this invest elsewhere, but from the start, not after the fact.
The Bondora Go&Grow type
Ok, this is more my pet peeve, as you may know if you read my reviews here. If you believe, contrary to my opinion, that Bondora is legit, then this is the reserve alternative discussed above: you get circa 4% less per annum compared to I&A (6.75% max) but Bondora let you withdraw any amount without any limitation. Last week I read this and I half joking commented how absurd (or a good indication of the non legitimacy of the business) that Bondora has a full time Influencers Manager but not a full time CFO. As I wrote above, this is a complicated business, even more if you originate loans by yourself (Bondora) and are not simply a platform for other originators (Mintos). The CFO is the person that ties everything together, the one that manage the liquidity mismatch (Go&Grow is their flagship product), the company financial resources and the origination risks. If by your own admission, the CFO has not enough to do to justify a full time one, I am not sure you understand the business you are into. I never saw a bank without a full time CFO, I saw multiple Ponzi – pyramid schemes with kick-ass marketing functions.
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