Average returns in Twino and Mintos

If there is one topic that investors get passionate about, then it’s returns. Looking at the current economic climate, then P2P returns are clearly quite good, but the somewhat downwards trend you can see happening is clearly causing dismay among investors.

Way back when, when I started investing in Bondora, it was completely possible to get 20% returns yearly due to the fact that the market was both new (therefor high risk), and pricing was vague at best (due to lack of precise credit models). However, in the recent few years the industry has clearly evolved to be more mature and less inefficient, bringing to investors loans with buy-back guarantees, which at times might have left beginners the impression that there isn’t much inherent risk left anymore when it comes to investing into P2P (which is clearly not the case).

The two favourites of the recent year or so have clearly been the two Latvian portals – Mintos and Twino, which offered large loan volumes with buy-back guarantees. For a while the interest rates were high enough that many people were a bit confused as to why the rates were that high, and were sure that the rates would be dropping in the near future.

It seems that we are somewhat starting to reach the point where returns will not be as high as they were anymore, and this is of course both good and bad – for investors who enjoy higher risks, the reduced returns are of course bothersome, for more conservative investors the lowered level of risk will of course be more appealing.

Twino

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Twino has already gone through one attempt to reduce the interest rates, which caused significant uproar among investors. They attempted to drop the interest rates to 10%, which caused investors to reduce their investments, which made them increase the rates once more, but they are still not back to the point where they started at (they used to be 12,9% & 14,9%; however now are 10-12% & 13% respectively.)

This means that while it’s still possible to generate >10% returns, then looking at the loan volumes they process the question arises – for how long? Since Twino is closing in on 10 million loans funded per month, then clearly there is enough investor money to go around, meaning when the higher interest loans run out, then the lower interest loans will get funded as well. Once enough get funded regularly, it would be reasonable to expect a drop in the rates.

Interestingly enough, a lot of investors in Twino seems to be super cautious about the longer term loans (24 months), which in my opinion seems a bit unfounded – largely because 1) they are resellable 2) a large amount of them get bought back early, meaning it’s not such a big commitment.

Mintos

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Now, with Mintos, the dynamic for the rates is a bit more complicated since different loan originators balance the interest rates between what they themselves believe to be fair and what the other originators are offering. This so far has caused a sort of a hierarchy to form between the different originators, meaning some loans disappear from the market very quickly (or get marked full by autobidders) while some remain “waiting” on the primary market.

While there have been fluctuations here and there between the interest rates offered, then it’s clear to see that the amount of loans with a buyback guarantee has been slowly but surely decreasing, meaning that investors are forced to do some more in depth analysis to figure out whether or not they should include lower rate buy-back loans or higher rate ordinary loans, which is rather complicated to do due to the lack of public information about the loan books of the originators.

Future of returns

Twino and Mintos do not exist in a vacuum – the amount of investor money available is dependent on the amount of projects listed on alternative sites and the returns offered there. However, if you look at the average returns offered by other portals, then >12% returns will be more and more unlikely as time goes on.

Just looking at the Estonian portals available, then Estateguru historical returns are <11%, for Bondora they have said they wish to hit 10% returns, for Investly the returns are <9%. Higher returns are offered by P2P portals which include more risk or a more complex model (Crowdestate for example inherently has much more risk, Omaraha’s premium for returns makes sense if you consider the fact that they have no proper exit mechanism available and the learning curve is rather steep).

It’s of course difficult to make predictions about the future, and how the markets behave, but I do believe that we are likely to be hitting the downwards slope of returns, which will in the long run bring us closer together to US/UK/Central European returns for P2P portals.

On the one hand this means a bigger faith by investors (investing their money at a lower rate), and a reduced risk rate (due to growth of the whole sector), on the other hand this will signify lower returns, and higher efficiency on the markets, meaning the >20% returns several investors have achieved are likely to be in the past. As someone who does believe that the effort/risk vs returns have been off balance so far, the returns lowering a bit is not an unexpected development.

Social lending portfolio (March, 2016)

Honestly, so many things were happening in P2P in Estonia in March that it was difficult to keep track of everything. Overall, big numbers, some chaos and interesting future perspectives would probably describe the month. Overall, I just got back from London and it was an experience in how far behind we are when it comes to investing being mainstream – you can hardly look anywhere in central London (or on the metro) and not see some sort of advertising for investing. Things are hopefully changing here as well, though.

Bondora personal portfolio

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I’ve started the process of wrapping up my private portfolio, which can be seen from the dip in interest earned (below 100€ for the first time in 6 months). What this means is that I am selling off defaults and old mispriced loans, that I want to get rid of. Current plan is to sell off the not-so-great parts of my portfolio within this year, and then do a sale for the better loans next January (so the tax obligation would arrive mid-2018).

Overall I think it’s a reasonable plan because 1) secondary market is so slow at the moment that I don’t want to dedicate too much of my time to selling things 2) selling good EST loans at a premium won’t be an issue, so I might as well let them pay as they are, and then sell the ones that are too far from deadline once I actively pull out. I’ve transferred out 1K of money, which is going into stocks since it’s money invested as a private person.

Bondora business portfolio

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For my business portfolio, I am a bit torn. Bondora is not the highest returning part of my P2P portfolio (Omaraha is), however Omaraha is unable to offer enough volume and lacks a secondary market. So it seems that Bondora will have to remain the biggest part of my portfolio at this point. There was a slight dip in interest returns since last month a lot of the loans started with frontloaded interest payments, it should stabilize out and start climbing now.

Omaraha portfolio

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As time goes on, I have to admit, I am liking Omaraha more and more. It is clearly currently top when it comes to returns, since I haven’t had any defaults yet. However, they recently announced that all new defaults will have a buyback at 80% of principal value, which means that the potential loss isn’t immense – especially since most of my loans (90%) are 900+ (the highest) credit group. Looking rather stable, and aiming to get to 100/month in interest earned by some time in autumn. Will see, depending on how I manage the different proportions – adding money to Omaraha is heavily dependent on their volume of loans. I mostly just add money when what I have on the account has run out.

Mintos, Twino, Viventor

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I’ve essentially given up with my idea that Mintos could offer reasonable short-length loans and slightly replayed the proportions between Twino and Mintos. Of course, Twino has been slightly confusing this month, the biggest problem being that the autobidder is slightly broken at the moment. Viventor finally managed to get theirs working though, so there must be balance in the universe 😉

Currently Twino/Mintos stand equal in my portfolio (just added the money into Mintos later, which is why the interest returns lag). For Viventor, they seem to be doing OK, so I will probably add in a couple of hundred extra there just for their 1-month length loans. Mintos’s offers of 13% consumer loans and 13,5% car loans means that even though I’m not a fan of the loan lengths there, it does slightly pull ahead in the race of the Latvian platforms at the moment.

Crowdestate

I have this dream, that one day CrowdEstate’s IT system will work as intended. At this point it seems like they are still suffering from issues when a new project releases, which made this project fun – since I was in London I had to find a Starbucks for wifi and then suffer through the horror of using their website on my mobile phone. I really want them to do well, but issues like this take away a lot of goodwill that investors would otherwise have.

Estateguru, Moneyzen & Investly

Estateguru is impressing with volumes, however as stated before, not adding any money currently since my portfolio there is private (no word of a secondary market for a long time now).

Moneyzen did not manage to get the new regulatory license on time, which means that no new loans are being given out. Which makes me reasonably happy that I ‘only’ have 500€ there, but it’s not being reinvested, so not good overall.

Investly seems to have gotten their pipeline for factoring (invoice selling)  going, there seems to be a reasonable amount of invoices listed, which is making me consider actually finalizing my registration and testing them out.

P2P and investor communications

One of the main reasons why P2P has been able to evolve so quickly is the Internet – you are able to provide access to investments to people with ease, removing all the pesky time consuming elements of real life interaction. Theoretically this should also mean ease of communications – access to information should be unlimited and all investors should be happy. In theory this is the case, in practice investor relations seems to be a rather vexing problem for many P2P sites.

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What do investors want?

You would think that this question is not really that difficult to figure out when it comes to investor relations. The key things most investors want to know – what is happening to their money, are there any changes/risks they should be aware of, and they want live updates for the current situation. However, in the past month there have been many communications disasters, that others should surely learn from. I’ll go through some of them to explain what I mean.

Twino will-they-won’t-they interest debacle

A while back the Latvian P2P site decided to drop their set interest rates from 14,9% & 12,9% to 10%. The announcement was made rather out of the blue and went into works the next day. Not good – people need to know things in advance. Today, however, after two weeks of hassle (suspiciously sudden buy-backs, their IT system currently miscalculating interest / xirr), today they announced that some loans will be back to 12% interest.

Out of all the things that investors do not want, number one is uncertainty. If you make decisions – let investors know (enough time in advance!), and explain thoroughly why you are doing something. Overall, they received the ire of many investors over the recent troubles, and it will leave a mark on their reputation.

Crowdestate server meltdown debacle

As crowdfunding real estate has reached new levels of popularity in Estonia, therefore from previous server issues it might have been reasonable to assume an epic server meltdown was in the cards for them. As it stands, with the newest project they listed the servers died even before the bidding started, which resulted in a full 3-day delay while the IT team managed to fix the issue.

Overall, a server meltdown is excusable, since they probably didn’t assume that such a level of popularity would reached so soon. However, the bigger issue here ended up being the fact that the communications that accompanied the problem lacked severely, and even though many e-mails were sent out (eventually), then once the project was reopened, then it was reopened before the announced time (has happened many times), therefore a large amount of interested investors were left out, which caused further displeasure.

Invest into investor relations

While in the classical sense investors aren’t the site’s clients but the people who take out loans are, then in the long run investors have much more of a say in how any site does. Bad feedback from investors (who, for example, write blog posts), creates a lot of the external feedback that people find when they are looking for information. It’s worth it to invest into investor relations and if sites are unsure about what kind of info investors want, then asking the investors works rather well.

Recently the three sites that probably deserve most praise are 1) Mintos – they send regular press releases, talk on FB (and stopped sending e-mails 5 am after I requested it! ) 2) Investly -they have employed a full time investor relations person, who answers all sorts of obscure questions that bloggers such as myself have (for example info about legal aspects of factoring), 3) Bondora (surprisingly!) – CEO’s personal presence in the FB group, plus increased amount of newsletters and blog posts.

 

Factoring / invoice financing as an investment opportunity

Most P2P investors start by investing into loans – either loans to people or to small businesses. However, as time goes on, the opportunities offered by P2P portals expand, and one of the newest, which is quickly expanding, is factoring (also known as invoice financing).

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What is factoring / invoice financing?

The core idea of invoice financing is to help businesses manage their cash flow. If company A is a small business that bills a big business, company B, then factoring allows company A to sell the bill instantly with a small discount to investors instead of having to wait the full period for company B to pay the bill.

For an investor the chance here is to invest into short term claims, mostly in the ranges of 1 month – 2 months, allowing for reasonably quick turnover with similar returns to other P2P investments. Theoretically, since in this equation company B is generally a reasonably big company, with a good payment history, then risk should also be reasonably low.

Who offers invoice financing?

Currently there are two P2P portals that can be easily accessed by Estonians that allow you to invest into invoice financing. The Estonian Investly, which offers factoring in addition to SME loans. The second option is the Latvian marketplace Mintos that lists investments from different originators. (Currently Debifo, hopefully more soon.)

The process of invoice financing is essentially identical to investing into other P2P investments. You can set up automatic investment settings to make bids, but you can also spend time to manually look into the information provided about the business to assess its reliability.

Recovery process

One of the key issues with P2P investing however is assessing likelihood of defaults happening and how the recovery process works from there on. I asked both Investly and Mintos for a short comment about recovery.

Mintos: Loan Originator monitors all incoming payments and the system tracks late payments. In a case of unexpected payment delay, Loan Originator contacts the Borrower to discuss the situation and to decide on the next necessary steps to receive the full payment. In most cases, the discussion acts as a reminder to the Borrower to contact the Purchaser regarding the payment. If the payment is late and the Borrower does not cooperate, Loan Originator contacts the Purchaser directly to resolve the issue.

Investly: Investly actually enforces a repurchase obligation. There is in depth info about this in their user’s agreement6.12.2. If the repurchase term has passed since the due date of the Invoice (Repurchase Term) and the Client has not fully paid the Invoice underlying the Claims assigned to the Investor, the Invoice Seller shall be immediately obligated to repurchase the Claims from the Investor and the Investor shall be obligated to re-assign the Claims to the Invoice Seller for a fee (the Automatic Repurchase Obligation).

How does invoice financing help diversify your portfolio?

One of the key elements of investing is diversification, especially when it comes to P2P investments. However, diversification is more than just having multiple loan/investment pieces, it’s also diversifying across different areas that’s important.

Currently the three key points that factoring offers you are:

  • Chance to invest into the success of SME businesses
  • Generally short term investments
  • Likelihood of acting differently from P2P loans in different economic cycles

However, there are also some potential issues:

  • Difficult to assess risk (rather new area even for P2P)
  • Recovery process doesn’t have tested history (yet)

I am personally currently investing into a few Debifo invoices to see how the system works. Since I’m more interested at the moment in adding in short term investments, so factoring could be a potential option here to balance out all the long term 5-year P2P loans that I have in my portfolio at the moment.


If you happen to want to start investing into Mintos, then they have an affiliate program if you wish to support my investments there. Click here.

Factoring Q&A from Investly’s investor event

Yesterday I attended Investly‘s first ever investor event. The goal of the event was to give investors a clue as to what’s happening with Investly and to probably create a bit of hype about factoring being released.

(Before I go further, I’d like to point out that these kinds of events are good marketing and go a long way in terms of creating goodwill towards a business! Even though it was somewhat chaotic, in a world where everything is digital, investors still want to see the people they’re trusting their money with!)

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What is factoring?

Essentially factoring is one company selling its invoice to a third party to receive funds early. For example business A does a service for business B and bills them for x amount of euros, with a 3 month deadline to pay. The problem being, business A needs the money quicker than 3 months – therefore they sell the invoice with a slight discount to a third party and get the money instantly and the third party gets paid by business B once the deadline has arrived.

Generally in this scenario business A is a smaller company who needs to manage their cash flow and business B is a bigger company where the wheels turn very slowly. For an investor this means they put up the money to buy out the invoice from business A and get compensated once business B pays off the bill when the actual deadline hits.

Factoring by Investly Q&A

At the event Siim Maivel (CEO of Investly) talked a bit about their plans for factoring and the people got to ask questions about how it’s set to work. Since it’s a completely new product then it’s important to communicate all the potential risks of this type of investment. (This is my personal summary based on the discussion, not a word-for-word transcript, so keep an open mind).

Why factoring?

  1. Multiple businesses were taking out loans from Investly for the purpose of managing their cash flow. They might as well have been doing it with factoring instead of taking out a loan.
  2. Investly tested factoring as it currently is on the market and concluded that it’s a product that’s too complicated as-is, getting factoring from a bank requires too much legal knowledge to make it viable for most small businesses.
  3. Factoring will start off in a closed beta – the system is ready and new investors will be let in based on a waiting list to test the scalability of the system.

How will fraud be detected? (the fake invoices problem)

To start, in addition to thorough background checks for both businesses to prevent issues there are minimum requirements to qualify for the service. Initial estimate is that the business will have had to report for at least 1 year of business, and have about 30-40k of cash flow per year.

What are the expected returns? Minimum invoice size?

Returns will be based on the sales discount, which is likely to be 1-2% for 30-day invoices and 2-4% for 60-day invoices. (On a monthly basis). This will include Investly’s fee as well, meaning that less than 1000€ is probably unreasonable to take into work.

What’s the potential market for this?

So far they’ve had a “sign up if interested” mailing list working on their site, and the interest has been ‘big’. Siim claimed that in England, 90% of the businesses who use factoring have not used it before due to difficult access, making the potential market bigger than current factoring market would imply.

How will defaults be avoided?

  1. If a ‘client’ defaults due to fraud, despite Investly having done due diligence, ordinary debt collection processes will start.
  2. If the client fails to pay due to a bad financial situation – Siim estimated this to be unlikely due to the company towards whom the invoice is placed is likely to be a bigger company and be less likely to suffer difficulties.

How quickly will the funding process work?

Due to the short term aspect, speed of processing requests is important. Hope is to do it in a day or two, future automatisation is planned, but currently not at the top of the list of developments.

What could be the monthly amount of invoices processed (is a 100K invoice likely to get funding)?

Currently there aren’t enough investors to probably work with such big sums. There are talks with anchor investors to get the initial ball rolling, so hopefully reasonably sized invoices will not be problematic.

What/who is an anchor investor?

Someone who can invest more than 100€. (Meaning, this isn’t an actual ‘status’ that gets perks of some kind at this point.)

Is there a limit for participation per invoice (can one person buy up a 3000€ invoice for example)?

Currently no such limit has been set. If the demand for a specific invoice is big, then the auctioning system will actually end up increasing the purchase price, making it a better deal for the company selling the invoice. (Apparently there’s a lot of complicated math behind it).

Would partial sales of an invoice be possible?

Not at the moment, not enough reason to put in the work for it. Would be easier if someone just split a bigger invoice into multiple smaller ones if a partial sale is important. (For example bill 2x50K instead of 100K if they just want to sell half.)


My personal opinion is that factoring as an idea is a great product. As a small business owner, I am familiar with cash flow issues, especially if you don’t have too many clients. The theoretical market share could be quite big, provided that they get the pipeline going, and manage to get enough investors. Since a lot of the invoices are relatively short term, it’s not as capital intensive in some ways.

I’m interested in how the IT system holds up and how the auctioning system will work, so I hope for more detailed information on that in a bit. Overall, it’s good of them to try to expand, since they’re tapping into a market where they have almost no competition. In some ways that’s good, in some ways problematic since they have to put a lot of effort into making sure everything works as it should.