What is Bondora moving towards?

Having invested into Bondora for almost three years now, and having seen many radical changes happen over the course of that time, then yesterday’s announcement about both the primary market and secondary market being phased out to be replaced by either completely passive PMs or a more active chance to build your own API, the question arises – what exactly is Bondora moving towards?

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What is alternative finance at heart?

In the recent (I’d say 7+) years information technology has finally reached a level where it’s possible the radically disrupt classical business models via technological solutions. Most know examples of course being AirBnB and Uber, Transferwise, even Google as an overall idea and many others.

Fintech in that sense has been an interesting field to follow since at heart, innovation in the financial industry is mostly limited by how creatively you can find wiggle room between different regulations that try to stifle your growth and business model.

Quite a lot of new innovations have gone with the model of “It’s better to ask for forgiveness than permission”, and Uber is perhaps the best example of this in many ways due to actually being declared illegal in some places due to what amount to essentially cartel agreements that exist in the taxi industry.

For fintech, this has meant that many of the startups have started out being not regulated since they don’t fit into a traditional mould of what a credit institution should be. This is why many fintech start-ups first test their business model with a minimum viable legal work to see if it’s reasonable to pour money into actually working with all the regulations that will start pressing in from all sides once you’re a “real” business.

Bondora is one such example – they started out small enough to not be regulated, and now that they’re big enough certain steps need to be made. The first one was probably being voluntarily regulated by the UK financial inspection, but this was likely only a first step on a long path to the new Bondora business model.

What are the new changes about?

While the information so far has been vague in terms of what will happen (and when), then essentially Bondora will move from a one-time heavily individually (actively) managed investment to a more passive form, closer to a fund than a loan market in terms of how it’s going to work.

Now, where this gets interesting is if you follow what Bondora has been doing recently. Clearly they have done a pretty clear 180 from what they promised several years ago – more transparency and more tools for an investor are nowhere in sight, things that were heavily emphasised a few years ago.

Why the sudden change of heart? Bondora will probably never actually explain anything (since they never do), but it’s likely that this change will pave way for a bigger influx of institutional investors due to how much smoother it will be to use for portfolios that invest significant sums of money. Why institutional investors? – The reason is simple, small scale investors are unable to provide the money for expanding to new markets.

In some ways a more Lending Club-ish method of investing wouldn’t necessarily be bad, I mean it works for LC. Investors don’t really own the loan pieces, LC does, and you essentially buy a “bond” with expected returns. While this will likely drop overall returns, it should in theory also reduce risk. However, the success of their model is still heavily tied to the quality of their clients, so as long as they can guarantee that, then for the investor theoretically there shouldn’t be much difference in how the actual interface works.

Another key thing to keep in mind here, is that Bondora is in the process of getting a banking license. Pärtel mentioned this as well at the Opinion Festival, but it’s a move that makes sense if you want to ease your way into the big players, since the way banks are regulated is in many ways simpler than the (legal) loops that alternative finance needs to jump through. The recent announced changes certainly align with becoming a more “classical” type of business.

*I wanted to write a bit about the api as well, but there isn’t enough information yet. I truly hope they don’t accidentally make a Forex-like system though where you have to pay money to third parties to have the best chance to invest. Especially since most retail investors will never be able to compete with institutional investors.

 

Why I will probably not be investing via Fundwise

Today the first equity based crowdfunding site in Estonia launched, and while I fundamentally like the idea of investing into growing companies (more than giving them loans!), then I will probably not be investing through Fundwise for a while still, since I see some key issues in their whole model of working.

fundwise

Is equity funding smart money?

In the world of investing there exists an idea that some of the money invested is so-called “smart” money. This generally refers to angel investors or venture capital in terms of the investment being linked together with know-how. The problem with Fundwise being, they (either team or the businesses) believe that they are gathering up smart money, but inherently accessible-to-all crowdfunding will never be smart money. Especially in their model where the people who buy a piece are absolutely “silent” owners.

So, there is a fundamental issue here as to the actual plan of how Fundwise should work. Smart money investments are generally bigger in therms of the sum due to the investor knowing more, or being more aware and therefore trusting the project to be a bigger % of their overall portfolio. However, since crowdfunding is fundamentally accessible to all, then you can’t consider it smart money, therefore the large buy-ins for Fundwise start to work against them. (They buy-ins are as high as 600€ per piece).

How to diversify in equity?

This is obviously a trick question – you diversify like in most other crowdfunding investments, reasonably widely. This is where the problem arises with big buy-ins.

Let’s assume that they have 2 projects every month, the buy-ins are an average of the current projects, let’s say 300€. The person might not like all projects, so let’s say the invest into 20 projects per year. The projects last about 5-7 years, meaning that to run 20 investments per year for even 5 years, that makes the total portfolio value 30000€ before the money starts to recirculate. (Yes, I know this is very oversimplified)

This is why Fundwise will likely struggle to include small scale investors such as myself. To achieve meaningful diversification you have to invest so much money, and the delay for returns is so much longer than other similar investments (like social lending or the current real estate projects).

Especially when we talk to people who are just starting and have like a 5000€ portfolio – completely respectable after a couple a years of investing. Just a few investments into Fundwise would very quickly make up 10% of your whole portfolio. I don’t think that’s a reasonable risk level.

What I would invest in

Since it’s currently somewhat unreasonable for me to aim at building a portfolio (since in theory a diversified portfolio would work well enough), then I’d only invest if I saw a project that I’m personally in love with. For example I like the game building project, and that’s something I’d support but in terms of investing it’s a bit closer to a Kickstarter type investment than an actual make-money investment.

Also, I would make a portfolio if the buy-in was sooooo much smaller. I don’t understand why the pieces have to be so big since the people who buy into the project are absolutely silent partners anyway. Also, since you use crowdfunding such as this partially as a marketing tool, then why would more investors be a bad thing?

Expectations vs investor capability

I’d say that the easiest theoretical fix for them would be to realign the idea of who their ideal investor is. If they want so-called smart money they should be heavily marketing towards medium-portfolio investors (100K+), who wouldn’t care about the bigger buy-in and also bring some know-how to the table.

Another option would be to go truly crowdfunding and drop the buy-in like they have in some other crowd-funding portals to like 10-50€, max 100€. That would make it accessible to small scale investors in a way that it isn’t right now. This would also make more people invest – investing 600€ into a project might be above a lot of people’s comfort level, but investing 100€ into something you think is cool, would be a lot more viable.

Also, more work in marketing and communication would definitely help, but that’s the case with all current crowd-related investment portals.

Investing into high interest Bondora loans

Since people want to take out high interest loans, then of course someone has to offer them. Bondora’s new rating system means that HR credit rating clients will have their interest rates at anything from 50-90%, due to the increased risk levels associated with the group.

As some of you may know, I have a small running experiment, where I occasionally take in super high interest loans to track how they’re doing and whether the theoretically higher interest level (which will theoretically pay out 3x principal payment) actually compensates for the losses.

By now the first loans given out under the new system are old enough to start seeing some defaults, so a quick look into how my high interest loans (>50%) have actually done. As you can guess it’s not a pretty picture.

highinterestloans

I have a bit more then 20 high interest loans, less than ten of those are old enough to start drawing any sorts of conclusions from them. The first nine are 5-8 months old, which is a point where many defaults have already happened (a lot of loans default right at the start).

As you can see, out of the 9 loans old enough to look at, 4 have defaulted, 3 are delayed (one will default in a matter of days) and only two are actually paying, but out of those two one has had the payments rescheduled. Not a particularly rosy picture.

However, by this point the 9 loans have already paid enough interest and penalties to balance out one of the defaults in case no recovery ever happened, so you can clearly see the ridiculous interest at work here. Provided the two green loans “hold our” for a while more and keep paying, the investment will be well on track to zero-sum before recovery, which might not seem to be the case when you look at how depressing the overall picture is.

Overall, I’d say that the results so far are as expected, a high default rate is unavoidable with such high interest rates and HR risk group, so I wouldn’t recommend testing this out of you’re trying for a conservative portfolio. For those chasing higher turns in the long run and hoping for recovery, it might work out quite well in the end. This is the part of my portfolio that I track for fun, so it only makes up ~2% of my overall portfolio value.

Building a portfolio strategy

When you’re just getting started with investing, then your portfolio strategy is pretty much aggressive growth all the way. After a while though the issue of balance starts coming to play, which is what I’m starting to struggle with right now.

How much of what should you have in your portfolio?

There are about as many rules as you can imagine about this. One thing that people generally agree on is that your portfolio should have more than one asset class included. For me, I have three – social lending/crowdfunding, stocks and real estate. Beyond that though things get complicated – how much of what should you have? When to rebalance? How to rebalance before a crisis? How to take into account cash flow vs capital growth?

correctportfolioIf I visualize the more actively managed part of my portfolio this is the result. The equity I own in the Sõle apartment is worth just about as much as most of my other investments combined. This sets my portfolio to something like 50% real estate equity/20% stock market/30% social lending.

Is that a good or a bad balance? On paper it seems fine since no asset class is above others, and real estate is a capital heavy type of investments. However, if I purchased another apartment then real estate equity would take up almost 70% of the whole portfolio balance – not a good way to go in my opinion. Also, whole social lending grows organically quite quickly due to money being reinvested then with stocks you need to contribute actively, especially for Baltic stock.

So, in a way I’m currently trying to figure out a strategy for how to balance my portfolio better. I’m fine with taking larger risks since I’m still young, which would mean contributing more to social lending. However in terms of a potential crisis real estate might be better in terms of steady cash flow, even if it does eclipse other types of investments in terms of capital value. I’m leaning towards not letting any asset class climb above 50% of portfolio value but that might be a tricky balancing act if I want to get further into real estate. What’s your strategy on this?

 

 

My Bondora portfolio (2015, June)

Though I’m currently enjoying a lovely 34 degrees and sunshine in Valencia, then not all is sunshine and rainbows in my Bondora portfolio. Firstly, the influx of defaulted loans is steady and secondly, since I’ve slowly reduced money invested monthly as well, then actual numbers of interest earned have also dropped.

investmentsjune

As you can see, this month ended with red + yellow loans actually totalling over 25% of current portfolio value. One of the reasons for this is that I’m now seeing the influx of defaults from the second half of last year when I added in increasing amounts of funds. This will likely look even sadder in the next few months when I reduce the money invested further. Not that I’m looking forward to the moment when 20% of the pie will be defaulted loans but that is not completely out of the realm of potential options.

Interest earned

interesttotal

As stated, there was an actually almost 3 euro drop in interest earned, mostly due to more loans defaulting. The final total for the month of June ended up just below 100€ (99,16€), which is a bit sad since I hoped that I was over the 100€ hump for good. I’m hoping July will perform better, but so far there hasn’t been a particular influx of payments like there is at times in summer. Also, the recovery of defaulted loans wasn’t particularly great this month either, the total recovered was barely over 5€.

newdefaults

Compared to May I actually ended up with so many new defaults it was a bit surprising, 15 more stage 1 loans was a bit more than expected in comparison to the recovery. It’s still a very long time horizon plan to see anything from recovery but it’s clear how this is demotivating to see – the default rate of loans in my portfolio is getting quite high despite the fact that I’ve heavily steered towards lower risk grade loans in the past few months.

investmentstotal

Looking at the overall investments, as stated, I’ve reduced the amount I invest in Bondora per month to about 100-120€ or so, depending on how much free funds I have. This slows me down in terms of my goal for Bondora portfolio size for the year 2015, but across all social lending platforms I’m on track for 10 000€ principal value, since while Moneyzen is doing slow, then I’ve added Estateguru into my portfolio as well. Time will tell how the second half of the year will play out.