Crowdestate communications disaster

Since a lot has happened with Crowdestate in the past few months and due to Estonians having a serious advantage when it comes to accessing information on issues, then I thought I’d take the time to do a short write up for non-Estonian investors involved in CE projects to get a clue of current issues.

To start – several projects funded by CE have failed. It’s yet to be seen how many have been fraud cases or maliciously badly run, but failing projects in itself is not something to cause too much alarm over (because projects can fail). The issue to raise alarm about is the accompanying PR disaster that has seriously shaken investors’ faith in how well CE manages things.

The beginning

It’s hard to say when exactly things started going a bit wrong but the first big *bang* was the Q-Haus project. Fortunately/unfortunately this case was covered by Estonia’s biggest business newspaper Äripaev. They have a made-up investor (Toomas) who has started to invest into P2P as well. In LHV forums ( a local bank) people were discussing this project – that there is something wrong and the company’s (the Sponsor’s) name had been changed in he business register.

This prompted several investors to (luckily for them) sell. After the name change (CE was unaware of this it seems), a claim for bankruptcy was filed and this info was up on the Äripäev news section *before* any announcements were made on the CE website. This means that investors who either read the LHV forums or the Äripäev news site managed to sell their loan parts before the majority of investors knew anything (and before trading on the CE secondary market was closed).

All other investors who finally got the info through the CE website could no longer do anything. The delay in information being given out was unacceptably long and raised issues on how this info was shared in the LHV forums and CE team knew nothing. By the time the bankruptcy announcement came the business had been cleaned of all assets.

The second issue

Now, this prompted a lot of investors to look deeper into what was going on in their portfolios and this caused a bit of a panic sales push on the secondary market. Another such project which people were talking about on the LHV forums was Baltic Forest. This project has been funded with 10(!!) different rounds and recent updates were not promising. The company was missing payments claiming slight issues while LHV forums once again had discussions of large management issues and likelihood of project failure.

Within not too long official notice was given that the company was indeed in serious trouble and filing for debt management and freezing all payments for at least 6 months. This raised multiple questions on how well CE due diligence works. Turns out that while final rounds were being funded via CE the company’s auditors were already raising alarm bells. At this point info was given that debt management process was started due to failure of securing more working capital from investors, which in all likelihood means anything other than failure is a rather optimistic outlook, especially looking at the total number of millions currently owed.

While all this was happening then Hm Seafood was also struggling for payments and payments were stopped. Info was promised to investors after a meeting and nothing so far.

In the background.

While the business funding issues were piling up, development projects were also piling up problems. Most notably, Tammelehe, for which due diligence issues were once again raised. In the terms for new rounds it was written that the money would be given out provided that previous goals had been achieved. This was brought under question when an investor visited the construction site and took pictures to show an essentially deserted construction site.

Now, the cherry on top of this disaster cake came via Facebook. As in, there is a small group of CE investors who have a FB discussion group and there (and only there!!) Loit (the CEO) wrote, that Tammelehe has been on their radar since spring (!!!) as a potential fraud case. This info was not shared on the website or their blog or newsletter. Investor backlash was rather serious to such a communications blunder an of course this was covered extensively by Äripäev.

Another project that raised red flags was Lepa tee  / Metsa tee. Two projects by the same developer (Kristjan Sild). Before funding the first project with the help of CE, he had gone through personal bankruptcy. As stated in the prospect for the first investment, CE team suggested giving him a chance. Key mistake here was that while the first project was already showing issues they allowed a second separate project to be funded, increasing investors’ exposure to his person. Currently a call has gone out to push for bankruptcy.

In the background Latvian projects are also struggling, more info will probably be out about them soon as well.

To sum up

  • CE had information about things happening and did -not- share this with investors in a timely manner
  • CE had information about things happening and shared this information in a dumb way – through a Facebook group
  • CE missed out on key events happening (company names being changed, board members being changed, assets being moved)
  • CE failed to check whether previous projects / rounds were going well enough to justify allowing further rounds being funded

As a result:

  • investors have justified questions about how due diligence is done at CE
  • investors who did not follow information through other channels (such as LHV forums, Facebook, Äripäev) will end up taking losses that active (or informed) investors managed to avoid
  • serious loss in trust has occurred
  • a very large amount of negative coverage has been given to P2P investments in Estonian media

Crowdestate exit

No, nothing is wrong with Crowdestate, the reason why I’m exiting (for now) is that I need to cash out some part of my portfolio for expenses related to my new home. Currently I need to cash out the second 10% for the down payment + something in the range of 20-25K for the kitchen + other furniture. This means that I had to take a long hard look at what is in my portfolio.

The first 10% for the down payment came from the sales of my 12m2 rental apartment – the price was good, I didn’t enjoy dealing with it and I got a very good exit point with good returns. Then I’ve had a year to earn money (the more money I earned, the less I had to take out from my portfolio), but being home with a small baby there’s only so much you can work.

This brought me to having to look over my P2P portfolio. The stocks I own I do not want to touch – even though there are some positions that I could sell with significant profit, then stocks are not a very high part of my portfolio and I’d prefer to reduce my P2P exposure.

Long story short, my top 3 positions are Mintos, Omaraha and Crowdestate. Out of those three Mintos is most flexible so exiting that was not reasonable (if I need more cash suddenly it’s easiest to get it from there). Omaraha I’m exiting naturally since the interest rates are just that low, so you cannot give out loans that would satisfy my expectation. This leaves Crowdestate, which is most open to market risk (in my opinion), and locking in the returns there seemed reasonable.

So for the last three days I’ve been playing around with selling my portfolio on the secondary market. I must say, it’s actually been… surprisingly easy? I was prepared to have some projects that maybe wouldn’t sell all that well or having to wait much longer for sales to happen, but it was surprisingly quick.

I also didn’t get greedy with the pricing – I did have a price offer that gave the person buying the piece a close-to-expected return of the project, and I locked in slightly-above what was expected on almost all the projects. This is reasonable in the sense that as most projects I own have run for a while, there’s enough info to see whether the risk of failure has increased or decreased as time’s gone on.

Currently I only have a handful of projects left, most of them ending very soon, so it was reasonable to wait them out. My new home should be ready in October, and then my finances can balance out again and I’ll be able to see what and how I’ll add back from CE. Overall, I was pleasantly surprised at the ease of exit (the majority of the pieces were bought by bots though, only a few by hand, so keep that in mind when pricing things).

Crowdestate – still overrun by investors

While some other P2P portals have to work to get more investors to come on board, then Crowdestate is struggling with a different issue – there is just too much money to be used and not enough projects available. While this is also not a good problem to have for a site – if investors get too frustrated they will leave the site since they cannot employ their capital, then it’s great fuel for potential growth.

However, from the investor’s point of view it is rather annoying. Having enough money is good in the sense that projects get filled – it hardly ever happens that your money gets booked and then returned later (having earned no interest while booked), and if a project does fail there are some fundamental reasons why investors do not find it attractive.

The downside of having that much money however is that it’s quite impossible to actually get into most projects by hand. The current setup is that autoinvest has priority over manual investments, and autoinvest is not capped the same way pre-booking is (you can invest however much you want via autoinvest).

This means that most projects that are smaller than 500K are pretty much set to be filled by autoinvest. More people will start using the strategy that I do – when I see a project that I like I temporarily turn on autoinvest – and there will be even less of a chance to manage to invest by hand. In that sense it’s good – no more wasted time waiting by the computer and clicking refresh and cursing when the page refused to load.

So, there isn’t that much reason to log on when projects go live anymore. Another reason to log on could be the secondary market, but within about a week of development bots were built to trade on the secondary market, so it’s impossible to buy anything manually (unless the returns are pretty low) or for some reason all the people who run bots run out of money (which will probably not happen). So the secondary market did provide an easier way to exit, but the purchasing function is unusable for a regular investor.

All in all this means, that there isn’t much to do. If you see a project the best way to manage to invest is to set up autoinvest (and remember to turn it off later), and go enjoy the warm summer weather. Definitely a much more passive and less time restricted investment than it used to be. Now, if there were a few more projects :)

Crowdestate now has a secondary market – good or no?

It’s definitely interesting that after years of hoping and waiting for Crowdestate to open a secondary market, there are interestingly a few downsides to it that are tied to the current situation on site and the economic situation.

The good

It’s definitely good to have an option to sell investments. Due to a large amount of projects having a ~2year deadline, then the flexibility of being able to sell, means more people would probably have the courage to lock in their money into projects.

Also, the secondary market will be an interesting way to play around with increasing your earnings, people can be quite emotional when buying, especially since with CE projects the fear of missing out is rather big, so people might want to buy into deals if they miss it.

The bad

I think the biggest issue currently is the fact that adding a secondary market is likely to make it even more difficult to get into projects. People would be motivated to make multiple bids (automatic bids) through more than one account and then sell one of the pieces. I know that I had this idea, so I’m assuming others did as well.

This means that there will likely be even more autobidders active, which means that even less of chance to get into projects manually. One of the last projects listed was pretty much completely filled with automatic bids, meaning manual access was impossible.

While playing around like this means potential for better income (essentially making profits from reselling pieces), then I’m seeing a lot more disappointed investors who aren’t able to participate in projects. But who knows, maybe they’d be happy to have the chance to buy from the secondary market?

Overall, the best fix for this would be to have more projects listed to decrease the competition for investors to get into projects, but currently it seems like there isn’t much in the pipeline, and I’m unlikely to increase the amount I place per investment due to wishing to keep some level of diversification (currently capped at 500 per project) and therefore like most other p2p investors I’m also currently moving any free money to Mintos to take advantage of the cashback offers.