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).

Portfolio update june 2018

It’s been a long while since I’ve done a portfolio update and a lot has changed, so I thought I’d share! Definitely some huge changes within the last year in terms of asset classes and I’ve had to make many changes to be more liquid to be ready to finance my new home (which will hopefully be finished in October).

Real estate is now pretty much gone from my portfolio. If you remember, I owned a small 12m2 dorm room style apartment in Northern Tallinn, which offered reasonable returns, but was also the most illiquid investment in my portfolio. Due to ridiculous price growth and lack of time and enthusiasm to manage the property, I sold it at the start of the year, cashing out a solid 20%+ yearly return, so overall not bad. Any exposure I have towards real estate now is real estate fund stocks and crowdfunding projects.

The rest of my portfolio is currently divided up between the stock market and P2P investments, with stock market investments totalling 25% of my investments and P2P investments 74%. The missing 1% is random trivia not worth mentioning here.

Stock investments are mostly single stocks from the baltic stock market, a total of 83.5% of stock investments or a total of 21% of portfolio, and some index fund investments, which total 16.5% or a total of a bit over 4% of total portfolio.

From the Baltic market positions which are bigger (more than 5% of total portfolio) are TKM (Tallinna Kaubamaja) and SAB (Šiauliu bankas), some smaller positions are in LHV (LHV bank), Tallink and the just-IPO’d Tallinna Sadam and a few tiny positions of SAF, TEL, APG, Merko, Eften. This is the lazy money I keep in my portfolio, mostly to buy and keep forever.

For index positions, these are currently much smaller than usually since I’m waiting for my home purchase to be finalised to finally start building an international portfolio, so it’s half invested into the third pension pillar (LHV Indeks pluss) and the rest is in a convenience index investing product that I’ve left ticking for tax reasons, kasvukonto (has a bit of EXSA, VAL, SPYW).

Social lending and crowdfunding are currently the core of my portfolio due to their high liquidity and current high returns. After years of testing through many different sites, I’ve kept only three among my investments, maybe will add a fourth when more finances free up or these shrink up (as Omaraha is currently).

Biggest portion of P2P investments are via Mintos, which is currently a whopping 40% of my portfolio, mostly due to the cashback and super fast secondary market. This is where my new home’s furniture money is currently earning interest.

Second biggest position, which has however been shrinking is Omaraha. Due to lower loan volumes and drops in interest rates, the effective returns are way below what they were even last year, and I’ve been slowly transferring money out to stop if from just sitting there. Will see how it goes. Currently at 24.5% of portfolio and slowly decreasing.

Last position is my higher risk part of the portfolio, investments into real estate developments mostly, which is Crowdestate. This houses a bit less than 10% of my total portfolio, however growth isn’t particularly fast since there aren’t too many projects. This is about the level I intend to keep this investment at.

There you go, current overview! At the end of the year I will have to liquidate some investments due to high expenses associated with hope purchasing, but hopefully once I sell the current home I’ll be able to patch up the damage and have a chance to add some new assets.

 

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.

How many P2P portals to include in your portfolio?

Since there is a significant amount of P2P portals now available compared to a few years ago, the question quickly arises – how many portals should you include in your portfolio? Is it better to focus on just a few portals, or should you attempt to diversify and reduce risk by including a large amount of portals? How does this change when the total sum of your investments gets bigger? Are there downsides to diversifying?

My current P2P portfolio

As time has moved, my P2P portfolio has changed a lot. I started, like many others with 100% Bondora, but have now completely exited it. I also tried Moneyzen, Viventor and Estateguru, which I’ve also not kept in my portfolio. It definitely took me a while to figure out a selection I like, and it’s constantly changing in time. Currently the balance is as follows:

Screen Shot 2017-07-17 at 12.47.32

P2P investments currently make up 47% of my whole investment portfolio. This means, that from my total portfolio the rates are: OR 24%; CE 13%; Twino and Mintos ~5% each. As you can see the exposure to Omaraha is rather big, the exposure to other portals is significantly less.

Liquidity

As with all investments, something to consider is liquidity. With P2P investments liquidity mostly comes from two aspects – firstly the length of the projects/loans (for example Twino’s 1-3 month loans vs Omaraha’s 5 year loans) and secondly the availability of a secondary market (and the speed of trading there).

For me, I’ve decided that for now, liquidity is not a huge priority for me, which means that I’ve allowed my portfolio to move towards longer term locked-in projects. Omaraha does not have a secondary market, and while defaulted loans have a sell-back function, it’s still a rather long term investment. CrowdEstate is also a long-term prospect, since while the projects are generally 1-2 years in length, the portal has a right to extend the projects and there is no secondary market to allow for an exit.

However, a part of my portfolio I’ve still kept rather liquid and this part is carried by Mintos and Twino. With both of these portals, I can easily pull out money from in a matter of days, so if for some reason I need to move money to another investment, or have need for cash, then this portion of my portfolio allows me to do this.

Risk

Now, assessing risk is a tricky thing in the P2P business. While you can look at overall history of the portals, a lot of them are new enough to not have much of a track record. Both Twino and Mintos in theory should be relatively low risk, however since Mintos has at least one loan originator that’s in trouble (and might go bankrupt), it’s clear that things can still go wrong.

The most ‘stable’ part of my P2P portfolio is probably Omaraha, due to the length of experience they have, and the overall stability of the market. However, Omaraha is also prone to all kinds of radical changes (such as the interest cap instated last week), which means that the portal risk itself might influence your long term strategy.

Crowdestate is clearly the most risky part of my P2P portfolio at this point, due to both the type of investments (mostly real estate development projects) and the risk of the real estate market overheating. This means that I will not really allow the volume of investments to increase too much there, I’ve mostly hit the point where I reinvest returned money, and add in less than I used to.

Time expense

With every new P2P portal that you add, there is both an investment of time and money. You need to invest time to figure out how this particular portal works, and how to achieve the best results. Depending on the portal this might require quite a bit of tinkering. For example, Omaraha has been offering great returns, but the time investment in managing interest rates there was also quite a bit of work. In comparison to Mintos or Twino, where you could pretty much just cruise by, using the autobidder function.

Since I invest though my company account, then any new portal also means more bookkeeping, and additional tracking. This means that there isn’t really much point in adding in a portal just to put a couple of hundred of euros into it, it becomes reasonable to add in another portal once the investment is in the thousands already. This means that while I’m currently at 4 portals, it’s not unreasonable to add in a fifth, there just has to be a reason for it – either it offers some different level of liquidity; there is a significantly different risk profile (different sector, country etc.), or an attractive risk-reward ratio.

How have you divided up your investments?