I started investing in DoFinance in mid 2017 and I wrote a review in Nov 2019, so like 20 years ago. The VID was not kind to their business model. In a traditional p2p platform, an investor lend money to a borrower and gets their funds when the borrower pays back the loan. In a era where investors wants the yield AND the liquidity (Bondora G&G, wink wink), DF thought it would be possible to detach investments from the underlying loans, so that your investment could have a maturity different, and usually shorter, than the one of the loans it was funding. This strategy obviously works only as long as there are more investors putting money in then investors taking money out; once the tide reverse, Houston we have a problem.
The call to Houston was made around April 2020: investors spooked by the stock market plunging and several platforms that turned out to be scams run for the exit and DF obviously did not have the money. To compound the liquidity issue, borrowers as well stopped repaying their loans. DF was forced to change their business model and re-link each investment to the ‘faith’ of the p2p loans it was originally backing. DF conducted this process in a messy and not-transparent at all way: they were giving at max one update per month and usually those updates were just notes on the COVID spread in Poland and Indonesia.
As I wrote in my review, the lack of transparency is a feature of the platform, not a bug. Nothing that happened was a surprise to me. Annoying, but not a surprise…as they were not a surprise the posts of angry investors asking where their money was. When I receive a message saying that DF did a webinar to update investors, I was not sure I was ready to ‘invest’ an hour of my time for something that would quite surely be uninformative and messy. Unsurprisingly, the webinar 100% delivered on those expectations.
It is done in a not so good English, I would say almost cringy and I do not know how I survived: slides were awful, my two years old daughter brings home from nursery drawings that are more informative than those. In the end, the webinar was the perfect example of what DoFinance is: a platform done by people with good intentions but not a great deal of skills (or at least, not perfect at it).
Credit goes in cycles. After a recession, borrowers that did not go bankrupt pay high rates because there are only few lenders willing to take the risk. Rates are high and credit quality is good. As the time passes, rates and credit quality start to go down because profits attract new investors that also have ‘short memory’, they see the returns but forget about the risks. Lending money is a complicated business because these cycles increase and decrease the addressable market massively while the business structure (salaries, offices) tend to be ‘stickier’: there is a tipping point where risks outweigh returns and you would be better off staying on the sidelines…but you cannot because who is going to fire employees when the sky is blue? You can only pay salaries/rent (the majority of them) if you get fees originating new loans or using the extra profits from previous years. Calling the top is hard enough for investors, imagine if you have to do that while taking the responsibility of firing people that worked with you for the last five years. As the theory goes, technology solved part of this issue for p2p lenders because it lowers the fixed cost structure, it makes them leaner and more capable to navigate the ups and downs of the cycle.
Good Insights from the webinar
DoFinance is not in a great shape but it did not default (yet?) as other originators did. No one knows if we already saw the bottom of the cycle but if we did, DF has now an emptier field in front of itself and bigger opportunities to generate value.
They tried to lessen the impacts of the credit cycle investing in two uncorrelated, at least historically, markets: Poland and Indonesia. We can debate at length if uncorrelated markets still exist in a world that became more and more connected but at least they were going in the right direction.
They provided a good explanation on the recovery system in Poland, which is THE basket case within Europe for my p2p investments: Aforti (Mintos and Viventor), CBC (Iuvo), polish loans in Fellow Finance, no matter the platform it seems that if you had any involvement in Poland you came out short. In a crisis that globally had a greater impact on low income workers (the same people that more likely borrow from p2p platforms), it is hard to say what is due to idiosyncratic issues of the Polish system, what to a single platform and what to plain unluck.
Bad insight from DoFinance
It is different to say that the cause of your troubles is “something that never happened” and “something that never happened during our lending activity”. The origin of the turn in the credit cycle was a black swan (the pandemic) but the effect of the turn was not; DF should have been prepared for it with adequate reserve capital and instruments to enforce collections. Slide at 8:05 displays really low level of profits even in the years when things were going well.
What Buy-Back means for DoFinance: we are going to share part of our profits under ‘normal market situation’. What But-Back should mean for DoFinance: we are going to share part of our profits under ‘a full credit cycle’. By now even the most optimistic (not to say naïve) investor out there knows that the buyback guarantee many platforms offer is total BS; but this does not mean that it cannot be done the right way. For sure done this way means that a platform is keeping the extra profit when times are good but socialise the losses when shit hits the fan. 80 to 90% of the time defaults happen at the same time, this is how a credit cycle work; if you think that this is a black swan…maybe you need another job? If you have a good credit model and issue loans at 20% while ‘rebating’ only 11% to investors, the buyback guarantee make sense for both parties: you have infinite leverage on your IP because all the business activity is funded by the investors and they get a more or less stable return. You cannot say to investors “sorry, you knew you were investing in p2p loans” when you are giving them little bit more than half of the projected return. The buyback guarantee is not inherently good or bad, it might be good or bad depending on how it is implemented.
(I am not saying that it is easy to build a good, functioning credit model. In fact, I do not own and run a p2p platform that feature a buyback guarantee. I am sure I can run a p2p platform with THAT definition of buyback guarantee DF uses).
It is good to say that these investments have to be viewed in the long term…but you need a long term partner as well. Asking that everyone keeps their funds there only to keep the machine (sic.) working is quite silly: it is true that a ‘bank run’ would imperil DoFinance but if the underlying loans are sound there will be always someone to step in (while the equity investors in DoFinance will be wiped-out). When RBS went bankrupt here in UK, people that had mortgages with them did not have their debt extinguished, they simply started to pay to someone else (the UK Treasury, who became the new owner of the bank). Right now DoFinance is paying salaries with…my money. You are welcome.
There is no mention to the fact that even if investors have to wait for the underlying loans to mature they will get no interest for the time they wait.
Conclusion
DoFinance investor real return will be 11% (or whatever fixed rate they choose) minus the time they waited for their funds without interest minus the effective default rate. I had three good years on DF where everything worked perfectly, funds were paid on time and, as I do with other platforms, I took some profits out along the way. Since March last year, when all the chaos started, I was able to take out another 8% of my initial investment. My DF experience was definitely not a success but neither a disaster…and I think you should concentrate on this. I see too many investors getting crazy because things did not worked out according to plan; imagine if you could point that energy to something really productive. You survived to live another battle: great, let’s move on. No one would have really known from the start if Twino would have been better than DoFinance, we take a (hopefully) calculated risk and then re-adjust.
In a world where everything seems to only go up and to the moon like stocks, cryptos, collectibles and crypto collectibles, it is easy to look at the trees and miss the forest. I do not have the data so take my next comment as you wish. I think that 2020 has been an incredibly hard year for p2p borrowers: the fact that most of the platforms are still active is at least a good omen for the future of the sector. It is not easy to swallow a two year wait for Polish tribunals to clean up the VID mess while your neighbour is doing 120x trading NBA videos on the blockchain. If you are looking for income producing investments, I would still see 2020 as a positive year and the whole p2p sector as a good, maybe not great, place to be. And believe me, it is fine.
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