All good things must come to an end. For the last few years the fast growing world of alternative finance has been enjoying something of a honeymoon, where nothing could go wrong and opportunity was boundless. Unfortunately in the last few weeks a series of unfortunate developments have reminded investors that investing in P2P lending and crowdfunding space is not for the faint hearted. I still think the potential for intelligent investors to make decent returns is very real, but we all need to learn some brutal lessons after a string of unfortunate events featuring green pioneers, inevitable crowdfunding failures and a Nordic p2p lending platform called Trustbuddy.
The more minor initial tremors started a few weeks back with the news that the Trillion Fund was ‘pivoting’ its business model. This excellent little outfit has, along with much larger sibling Abundance been a real pioneer in getting eco-loans into the mainstream. It’s backed a whole series of renewable energy projects – helped along by its infectiously energetic former CEO Julia Groves. Unfortunately the economic climate hasn’t worked to Trillion’s favour, what with the government cutting back on subsidies and competition intensifying in the crowd lending space. A few weeks back the platform announced that it would not be able to offer “any new renewable energy loans until we have a clearer view of what projects may be available and general investor appetite. In these uncertain times, the company will instead focus on offering technology and crowdfunding services to other businesses across all sectors”. It’s important to say that nothing has really changed with Trillion’s existing loans and the business is still very much around but this pivot clearly isn’t good news. But the much bigger Abundance platform – which has a different investment model – seems to be going from strength to strength having just announced that it is launching its own dedicated, internal SIPP for green investors looking to back its environmentally friendly projects.
Over in the mainstream (non-green) crowdfunding space there’s also been some rumbles with some investors beginning to ask awkward questions about various start-ups. Take SKARP Razor for example which was suspended by Kickstarter after crowdfunding 4 million USD. Kickstarter said that not only was there no product (no surprise here) but they also doubted that there existed a working prototype. You can see more at https://www.kickstarter.com/projects/skarp/the-skarp-laser-razor-21st-century-shaving
And how did SKARP respond to this put down? By moving the campaign to Indiegogo. Not a great move! In a much more mundane way last week we also saw Syndicate Room announce that it had suffered its first business failure – nothing special in that and handled in a very open way by the platform in an email to investors.
Yet what I find really surprising about recent events is that although crowdfunding is supposed to be fairly high risk it’s actually P2P lending that has provided the juiciest scandals involving platform failures to date. Ironically the regulators seem to regard P2P lending as much lower risk!
P2P lending platforms have gone bust in the past – a while back in December 2014 a small student focused outfit called Gradurates went under. My colleague Ryan Weeks has also published an excellent investigation into the collapse of another small lender called Be The Lender – you can see this online at http://www.altfi.com/article/1429_tales_of_platform_failure_and_the_concerning_case_of_jennifer_lodge.
But the biggest blow up to date has been the demise of a Swedish payday P2P lending platform. In fact the Trustbuddy debacle has the makings of a cracking little business scandal. Buccaneering Vikings, suggested operational fraud, suspensions, payday lending – it’s all there.
Trustbuddy had what seemed like a profitable business model lending short term cash to consumers at more reasonable rates than Wonga. Although it had been founded in Sweden it had moved across Europe with its online offering and had also pulled off a listing on the Swedish venture stockmarket, the OMX. The platform was even advertising for investor’s here in the UK.
And then just a few days ago it all seemed to go terribly wrong – resulting in the platform suspending lending activities. What seems to have happened is that TrustBuddy has reportedly been using lenders’ capital “in violation of their instructions”, or “without their permission”. In other words, it seems as though client money has not been held in accounts that are kept wholly separate to the TrustBuddy company account. TrustBuddy has indicated that there is a 44m SEK (£3.5m) discrepancy between the amount that the platform currently owes to lenders, and the available balance of the client bank accounts.
TrustBuddy’s new management team has also discovered that of the 300m SEK (c. £24m) that has currently been lent out by the platform, 37m SEK (c. £3m) is not assigned to lenders. TrustBuddy had also been re-assigning existing loans (a significant portion of which were non-performing) to new capital deployed by lenders. It’s not exactly clear how either of the above forms of misconduct played out, but both are in clear violation of internal and/or external regulation. The new management team's investigation has indicated that all of the above practices have likely been in place since TrustBuddy began operation.
Clearly this is terrible news for Trustbuddy’s shareholders – the platform’s Board of Directors has apparently informed Nasdaq OMX and the Swedish FSA about the findings. The Swedish FSA demanded that TrustBuddy cease offering its services with “immediate effect”. All TrustBuddy services have thus been suspended, meaning investors may not currently make any withdrawals or deposits. Trading in the company’s shares was halted on 7thOctober. A planned rights issue – which was scheduled to run from 14th October until 30th October – has been suspended. To make matters worse the Board of Directors has apparently filed a report on the matter with the Swedish Police Authority.
Now it’s iimportant to say that Trustbuddy had a very different model from the mainstream alternative finance platforms here in the UK. It was effectively a pay day lending using tech to leverage a pan European business. That’s very different from the big mainstream platforms like Zopa, Funding Circle and Ratesetter.
I’d also put my hands up here and admit that I was personally surprised by the Trustbuddy story. In various financial organs I’d written that its model seemed interesting and the shares compelling. Luckily I sold out my shares in Trustbuddy way back at the end of last year – after a run in with the regulators in Denmark – but I’m still at a loss to explain what went wrong.
One question remains at the forefront of my own mind – how the hell did a platform involved in an incredibly high margin business (lend out for hundreds of per cent but give investors 12%) manage to lose money so spectacularly? Is the hard truth that lending to deeply subprime consumers simply a mugs game? Frankly if neither Wonga in the UK nor Trustbuddy in Europe can make a brilliant robust business franchise out of lending to poorer customers, what hope has anyone else?
What lessons can we learn from this genuinely transEuropean meltdown ? The first big one is that investing in alternative finance is not SAVING. It is risky and it is investing. It is not a home for widows and orphans money. That doesn’t mean that it’s only for spivs and speculators just that like anything alternative within investment this should be a home for only a small percentage of your total portfolio.
Next up the alternative finance space needs to think long and hard about public markets and IPOs. Being brutally honest it now seems that Trustbuddy was too immature to list on the stockmarket, and corporate governance was seemingly very weak. What rules and corporate governance needs to be in place first? Should businesses be at least three to five years old before listing?
I’d also suggest that as an investor you should always follow the money. If one reads local Nordic coverage of the Trusbuddy affair ( you can see an excellent summary at this local website http://digital.di.se/artikel/miljonbedrageriet-i-trustbuddy-sa-har-gick-det-till ) you’ll guess that we might be dealing with something approaching a Bernie Madoff like pyramid investing scheme, with inflows shuffled around to satisfy liquidity concerns. I have no inside knowledge of what was going on but it all sounds depressingly familiar – who was keeping a watchful on customer client accounts and liquidity flows? It’s the question every financial journalist will now focus on as well as every institutional investor.
But I’d leave you with one last takeaway. On the day that the Trustbuddy story broke, successful UK p2p lending platform LendInvest also announced its latest results, reporting its second annual profit only two years after launching. The company recorded a profit of £3.1 million and £15 million in revenues for the year ending 31 March 2015. In 2014, LendInvest achieved a £1.2 million profit and £5 million in revenues. A bit of background on Lendinvest. The platform launched in 2013 and has to date originated £390m of loans for 698 properties with an average loan size of c.£550,000 and an LTV of 65.3%. The bulk of lending, 85%, is in London, as well as 6% in the South East, 3% in the South West and 6% elsewhere. It is the fourth largest UK P2P lender and already supplies loans to 10% of the £3 billion short-term mortgage market and if reports of a new fund launch are correct, it might be about to become very much bigger in the next few years.
Apparently LendInvest is planning to launch a £150m investment trust focused on property-backed peer-to-peer lending early next year. The fund will target an 8% yield from loans made on the LendInvest Platform, which currently consist of bridging loans of up to 36 months secured against residential properties. A fund sounds an excellent idea and there are also rumours that LendInvest itself might list as a business on the stockmarket – I’ll keep you posted.
But for me the most important point came in a comment from LendInvest’s boss Christian Faes following the announcement of his excellent results. Christian observed that “the world of P2P is a slightly bizarre one in that there’s a lot of talk about how much platforms are lending. But for the industry to mature, investors should start looking at how viable underlying business models are, rather than simply how much a platform has lent. Lending money is easy. Lending money well is much harder. At LendInvest we are lending substantial volumes but, more crucially, we are a profitable business without having to rely on external funding to stay alive.” And what’s true of alternative finance is also true of virtually any disruptive business sector transformed by technology. Bet on profitable businesses with sound business franchises where the revenue lines are transparent and obvious.
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