Crowdestor didn't think we were being fair to them. So we let them tell you why
We recently published a post about corners of the P2P lending market that didn’t make any sense to us. The post was not specifically about the Baltic P2P site Crowdestor, but we did highlight some specific Crowdestor loans that we felt were problematic.
Shortly after publishing that post, Crowdestor contacted us. They were not happy with some of the points we had raised. This led to some robust discussions on several topics ‘behind the scenes’. In the interests of transparency and fairness we proposed to Crowdestor that we publish our discussions with them, and they agreed. We publish below responses to the questions we raised with Janis Timma (CEO) and Arturs Geisari (Head of SME lending).
For those that have not visited Crowdestor before, they are a P2P site based in Estonia. They offer loans to businesses, as well as real estate loans and what they refer to as ‘specialized projects’. They offer loans across many different industries and at many different risk levels. Interest rates are higher than normal (up to 28%). Some of the loans and structures offered blur the lines between debt and equity investing. The site is popular with investors looking for high returns, that are interested in choosing from a wide variety of projects.
Interview with Janis Timma & Arturs Geisari
You were not happy with a recent post which mentioned some of the Crowdestor loans. In what ways do you think we were not fair or wrong?
Janis Timma: We really enjoy reading your blog and think that you provide a tremendous added value to the crowdfunding and p2p industry, however your latest article seemed a bit biased. You have listed problems with some of our loans without the objective view- why the delays are happening. Besides, most loans are paying on time and do not have any problems. We believe that journalists and bloggers should tell the whole picture to make a correct judgement. To cast light on both sides of the coin.
Previously P2P lending bloggers have reported only good things about the industry, and now they switched to reporting negative aspects. For a fair analysis you must provide all the facts, covering problems and good things as well. When someone reads your article, they would have a feeling that everything at CROWDESTOR is wrong. It is understandable that now investors and bloggers are suspicious of investment platforms, however you as an influencer have to educate investors how to make proper analyses, and how to look at the whole picture, without panic or euphoria.
We were critical that some of your deals are effectively venture capital without the big upside. Is that a fair criticism? Do you think your investors realise that the risks are pretty high on some loans?
Artur Geisari: We agree, this is a fair criticism. Some deals should have an equity crowdfunding structure. We realise that and in the future are planning to offer such deals, where investors have an upside depending on the projects’ success. Regarding risks: we inform our investors as clearly as possible about the risks he or she is taking. We believe that investors have enough information in order to make a well-informed decision whether to invest or not. We disclose all details about the crowdfunded projects that we legally can.
Most sites publish their performance statistics so that existing and new investors can judge the performance of the platform. Why doesn’t Crowdestor do this?
Artur Geisari: CROWDESTOR agrees, that this should be improved. We have received numerous requests from investors and bloggers, who state that this information is important. We always listen to the investors’ feedback and try to implement the suggestions, just like with the new Investors’ Dashboard and Secondary Market. The good news is that we are currently working on the statistics section on our website and welcome any suggestions on what numbers should be displayed. You could also look at some licensed platforms in Germany and see that they don’t publicly publish statistics as well.
Can you give an overview of what the performance of Crowdestor loans have been so far? What % have repaid in full, and what % are running late or defaulted?
Artur Geisari: This information will be visible in the statistics section we are currently are working on. We don’t want to tell the number yet, as the calculations have not been finalized yet.
There’s a wide variety of loans on Crowdestor. How are you able to analyse and manage so many different types of loans across so many industries and countries?
Janis Timma: When you analyze the investment opportunity there is no difference if you are looking at the fish factory, or the furniture factory. The investment analysis is similar across all industries. Of course, there are some specific projects where we need local knowledge input or an advisory and we commission that. But in majority cases the lawyers, financial and investment analysts can perform their job in the standard manner, as this is our job.
Crowdestor is now providing PD (probability of default) and LGD (loss given default) estimates for each loan. How are you calculating these values?
Arturs Geisari: CROWDESTOR has partnered with a well-known certified credit agency which provides the PD and LGD rating based on mathematical models using large and credible databases. Besides that, we perform our own analysis to check if we agree with the numbers. We are one of the first platforms that have made publicly visible the PD and LGD numbers, our competitors show the internally calculated grade, without telling the calculation details. We have made this open to increase transparency and this is one of the things we are proud of. Later, when we have enough historical data, we will publicly show the comparison between the prediction number of our model with actual data. The details about the methodology we use while preparing the Credit Report can be found on our website here.
Crowdestor provided a loan that was secured on a Cambodian hotel. That hotel has now closed. Can you please explain the situation? Is it realistic to be able to enforce the loan in Cambodia and take possession? Investors are being given some options. Can you explain the idea you have to buy some other hotels cheap to try and make up any losses on the loan?
Janis Timma: Yes, repossession is legally possible. The hotels are built on the rented land (in Asia it is the case in many countries). The enterprise which owns the hotels is used as a collateral in this particular deal, so as the borrower can’t repay the loan, CROWDESTOR can take over the hotel-owning enterprise. Since the subject real estate belongs to CROWDESTOR investors, we will give them a choice- to sell the property at the current market price (which is depressed due to the coronavirus pandemic),or extend the loan.
CROWDESTOR doesn’t have to buy additional property. However, since tourist real estate is below market prices across Cambodia, we have a proposal to buy more hotels and cover the losses the current investors might incur. More details will come together with the voting instructions.
Why did you decide to help fund the production of mink fur? Do you have any ethical concerns about this?
Janis Timma: CROWDESTOR most likely would not participate in the building of the new enterprise producing mink furs for ethical reasons. However, this is an existing business, which has experienced low demand due to the coronavirus pandemic- the annual sale of mink fur on the commodities exchange where stopped due to the travel restrictions. So, we looked at this case as an investment opportunity. This was an asset, which has great return potential once the crisis will be over, so the decision was primary based on the earning upside potential.
Films are very high risk investments. It’s estimated that 60-80% fail to recover their costs. Does it make any sense for a P2P investor to provide debt finance for a film? It seems like they have all the downside and not much upside if it is successful.
Janis Timma: The movie success rate varies from genre to genre and very often low budget horror movies bring the most return on investment, reaching more than 19,000%. The action movie [we are funding] that features Hollywood heavyweight star Mickey Rourke, almost certainly will have a positive ROI. We often offer a success fee. In the case of Warhunt movie, it was 18% fixed interest rate + 12% success fee. The currently listed deal – the movie production company is offering additional 2% from all turnover during operations in the first 24 months.
If a Crowdestor investor had invested in every project so far, what do you think their IRR (return) will be based on the current status and outlook for the loan portfolio? It seems like it may be negative?
The number will be finalized and be visible in the statistics section on the website. The number is definitely not negative, as the delayed projects are related to the current crisis and is a recent phenomena. It is normal that businesses across different sectors are affected.
What’s the background to the credit team at Crowdestor? Which banks were they working at? What roles did they have? Do you have someone on staff who is experienced at workouts and restructurings?
Artur Geisari: All Credit team members have studied at Stockholm School of Economics in Riga (SSE). I started my career at Ernst & Young in 2011, later taking on various positions in finance and asset management. Prior to launching the SME division at CROWDESTOR I founded and ran lending businesses.
Our Financial Analyst came to CROWDESTOR after working for over two years at Deloitte in the Financial advisory division. The third member of credit committee who is also a business product owner at CROWDESTOR has joined CROWDESTOR after 5-year career in banking where he worked as Private Banker and an Investment Specialist. Our Legal expert on the credit committee have worked in the major Scandinavian Bank as a Head of Workout Unit for four years, took Head of Legal department in Latvian Bank, and Head of Legal at the insurance group. Also, we have two employees who worked for many years in debt collection and debt restructuring. We have created the mathematical model, which have made the scoring automated, partnering with advisors who have made scoring models across the globe. This is one of the core strengths of our SME lending division.
How many loans are you currently engaged in litigation with your borrowers?
Janis Timma: Currently we are involved in two litigation processes with our borrowers.
Janis, Artur thanks for answering our questions and giving us your views
Final thoughts
We have never believed that ‘everything at Crowdestor is wrong’. We have always felt that Crowdestor could be an interesting option for certain types of investors. Investors need to be willing to take a higher than average level of risk and be sophisticated enough to analyse and select the best projects available. For investors that choose carefully, the reward is potentially high high returns. Our main concerns so far have been around insufficient disclosures to analyse the risk, a lending policy that seems overly broad, and a concern over whether investors were underestimating risks involved.
One of the biggest ‘gaps’ has been the lack of statistics provided on the performance of Crowdestor’s loans. We are glad to see that the management team are committed to addressing this. Crowdestor has also significantly improved the amount of financial information provided about each borrower. They are now also providing PD and LGD estimates, which no other sites have provided so far (although we have some doubts about the values quoted so far). This is a big step forward and it will make it easier for investors to analyse the risks on future deals.
Some people will look at the credit underwriting team at Crowdestor and see a lack of ‘grey hairs’ / experience. Others will be more relaxed about this. Either way, it’s going to take time for Crowdestor to develop a lending track record. At the moment, given the lack of statistics, investors are not really able to see what that record looks like.
As many of Crowdestor’s clients lack sufficient equity capital, we could imagine Crowdestor shifting their attention in the future towards more deals involving crowdfunding, warrants and convertible funding instruments. That could be a big opportunity for Crowdestor if they are able to structure and execute these types of deals well.
If you would like to learn more, you can visit Crowdestor here
In the meantime, he has really earned the title “Lying Baron of Riga”.
Who still invests here, is himself to blame…
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Not 1 of my projects is current. Bad information and if a statement like this : he is hard working professional with the best intentions to repay all loans. Very funny,unfortunately, I can’t laugh because I’m afraid of losing my money……
How many projects do you have Mathias? Crowdestor has promised to release portfolio statistics soon, we are looking forward to seeing them. Suspect that they won’t look too good.
They promised to update the “provision fund” every month but there have been no updates since the beginning of the year. Updating these numbers takes less than a minute and doesn’t need any website enhancements. This makes me believe that the provision fund is pure bogus, its not in a separate account.
The fertilizer project was their downfall, at least in my view. That’s what made me decide to stop investing and exit crowdestor. They failed miserably on the due diligence of the project and took way to much time to react when there were many signs that the explanations made no sense (June or earlier vs September when they finally decided to do anything). Actions mean much more than words and their actions failed to protect investors, in my view.
Agree very much with this. Therefore, I feel that they still have a long way to go not only in DD, but also how they deliver any updates.
However, there are also many investors, who do not consider all the risks and just invest, because they want to earn quick money. And with Crowdestor having high returns, this creates another problem as they are not able to sufficiently evaluate risks.
I am even thinking they should set some minimum or make each investor read the fine print like equity sites do.
Nevertheless, Crowdestor for me is a great learning opportunity. I love their equity campaigns as I realised that I’m definitely not an SME person. However, I’m also more cautious and now merely watching where they will go.