At the beginning of December I started to place some investments in EvoEstate; one day I received an email from them about a new platform they were adding to their portal and…they had me at introducing Evo Alternative.
The platform is called Heavy Finance, a really unique marketplace to invest in mortgage loans to help businesses in farming, forestry and infrastructure. Meb Faber gave me the farm-investing bug and since then I kept looking for opportunities; unfortunately almost all of them are reserved to accredited investors (unless you want to buy an actual farm or piece of land, obv), the only one I could access so far was to add $LAND to my equity portfolio.
HeavyFinance is the only platform I know providing an opportunity to invest in loans backed by heavy machinery. Compared to investments backed by real estate, the significant benefit of heavy equipment as collateral is the liquidity of this type of asset. Tractors are easier to sell than a building and should not lose much value in times of uncertainty, unless there is a widespread systemic crisis: in case of default, heavy equipment can be sold rather fast because the potential market is international and it’s easy to move vehicles from one country to another. Even in a ’08 – ’09 type of recession, people will still need to eat, farmers might not have the means to upgrade their machineries but there should be a market for old and cheaper ones.
The value of a building can substantially deviate from its replacement cost, its lower-bound value, while the range of possible values attached to a tractor is quite narrow: from a Loan-to-Value point of view it is easier to assess the risk associated with an HF loan compared to EstateGuru, for example. Lastly, farmers take personal legal responsibility and this should be a further proof of their full commitment to repay the loan to the investors.
Another, very idiosyncratic reason why I have positive expectations about HF is its founder, Laimonas Noreika, In 2015 Laimonas founded the direct lending peer-to-peer platform FinBee and I started to invest with it in 2016; while it remained a relative small player, I had great returns from it and hope he found the right buyer to pass on his legacy when he sold it in 2019. This is a new opportunity to invest with him.
Platform features
Other than standard consumer lending p2p, your interest will be paid on a monthly basis, while the principal amount invested will be repaid at the end of the project (each project has a specified duration – 12, 24 months, etc.). Projects offer returns between 10% and 15%: final return depends on the amount you decide to invest, with the spread between lower and higher return typically at 2%.
You can invest a minimum of EUR 100 in each crowdfunding project, which is not great if you have limited capital (i.e. you are not p2p-millionaire) and want to have a proper diversification; there is also a secondary market, which should provide liquidity in case you need funds before the project maturity and opportunities to grab investments at a discount when the next crisis will arrive (I say SHOULD because I did not try the platform yet and not every platform that advertise a secondary market has a real one. FinBee has a proper one so I am quite positive on this).
Pros:
- Diversification: in a portfolio of investments, even outside the peer to peer sector, this is a new asset class and offers you exposure to a specific risk; in the future, if HF expands in Europe, diversification within the platform will also increase.
- It is a new platform but has none of the uncertainties related to one: its founder as a proven track record, it is vetted by EvoEstate and Startup Wise Guys, it is regulated by the Central Bank of Lithuania. Which also means…
- …High yields compared to risk: in a stable, established market I do not think you would get double digit returns for collateralised loans; these days you can buy a car and get a loan in the 5% range if you have a decent credit score. HF returns are high because of the novelty of the product and, as HF report in its blog, the unwillingness of banks to lend to this type of borrowers.
Cons:
- Paysera account: “In order to ensure the principle of separation of funds between investors and the HeavyFinance platform, HeavyFinance has chosen Paysera’s payment system as the payment operator.” This is what they report on HF website. The platform is regulated by the Central Bank of Lithuania, which means that investor funds have to be segregated from the platform itself. This set-up should prevent frauds and increase security for a new platform. All good but my idea is that they simply did not want to do the KYC themselves and introduced unnecessary friction (which is not a good omen for a start-up). If you invest in HF via EvoEstate you can sidestep this and reduce the minimum amount to €50…
- Taxes: “interest paid to foreign resident individuals is classified as Class A income and will be subject to personal income tax (PIT) deducted and paid by HeavyFinance. For this reason, foreign residents will automatically be charged 15% personal income tax before paying interest, which will be transferred to the State Tax Inspectorate (STI). No PIT is required for the payment of penalties/interest to foreign residents.” FinBee has the same drawback, taxes are paid at source and irrespective of your personal circumstances; this is not a trivial cost.
- Small Addressable Market: I do not know how many tractors et simila there are in Europe, but if you exclude the ones manage by large corporates (who can finance themselves via other, cheaper channels) and you add risk management filters to lend only to good credit counterparties, you should end up with a small sample. Way smaller than other p2p sectors like consumer credit or real estate financing. If HF gains some traction with investors and returns prove to be stable, I expect yields to dive into mid single-digit, 6-7% pre-tax. Private Equity funds are sitting on so much ‘dry powder’ that one might even buy the whole company and keep the deals for itself.
Conclusion
All the right ingredients are there for Heavy Finance to became a success story but please consider all the (usual) risk associated with this type of investments. My late-Christmas wish is that they raise some capital on Seedrs soon, because I think in the medium term the real juice might be there.
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