A risk vs return analysis of my p2p lending portfolio
In the past year, I’ve tried out almost 30 European p2p lending platforms. In broad lines, they all follow the same business model: I lend money through them and I get paid interest, and they get a fee. But how do I rank them? If I was to make a top 10, I know which platforms would get into that list. I know Mintos would be my top 1 platform, but why is that?
Since I was trying to be objective, I made a list of criteria that make me like or not a specific platform. I also gave them a score for each category, and then I ranked them according to the score.
This scoring is not intended to be something similar to S&P ratings. They’re professionals with decades of experience in the lending business, while I’m just an amateur with some funds to spare. I’m using this scoring to understand better how I make investing decisions, and what are the criteria I’m using. In a way, this scoring is more about me than about the p2p lending platforms.
After giving it some thought, I realized these are the most important criteria I’m considering when investing in a p2p lending platform: transparency, loan security, track record, liquidity, account security, diversification, and returns.
Keeping 10.000+ investors happy and actively communicating with them is expensive. However, there are a few things p2p lending platforms do to make their operations more transparent and build trust with their investors.
The platform is open about its financials
This means the platform publishes periodic reports on their financials (either audited or unaudited). Good examples are Neo Finance, Mintos, Crowdestate, EstateGuru. Platforms that are open about their financials get 1 point.
The platform communicates in a timely manner
This is especially needed when there are payment delays or important business updates.
Good examples are Mintos treating their Aforti Finance issues, Assetz Capital asking investors to vote on decisions regarding problematic loans, EstateGuru sending periodic updates on what causes payment delays, and to a lesser degree Crowdestate. Each platform gets 1 or 2 points on this.
The platform is open about how they make their money
This means the platform has a page where they describe their pricing list or at least hint about their fee structure. Good examples are EstateGuru, Crowdestate, Investly.
Final scoring on transparency
Each platform gets 1 point for each one of the 3 criteria.
2. Loan security
Different platforms offer different securities on the loans offered.
Neo Finance and Assetz Capital let you invest with a provision fund. In addition, the loans have a credit rating, and the platform publishes periodic updates on the default rates on each rating.
Mintos, PeerBerry, Robocash, offer unsecured consumer loans with a buyback guarantee from their loan originators. Mintos excels in this category, as it also rates the loan originators based on their financial stability and track record.
Fast Invest offers a buyback guarantee by itself, but it offers no details on how they’re able to cover for it.
Wisefund offers on their business loans a buyback guarantee through a 3rd party partner that covers any defaults. Envestio, Monethera, Kuetzal, TFG Crowd also offer business loans with a buyback guarantee, but the details on how the buyback is covered are not open.
EstateGuru doesn’t offer any buyback guarantee, but all the loans are backed by real estate, so in case of default they can recover the invested funds.
Crowdestor offers unsecured and secured business loans, with a higher risk. To alleviate the risk of default, they’re building a provision fund that currently is in no shape to cover one single default.
I scored each platform based on this scale:
- Clear security – solid provision fund – 4 points
- Buyback guarantee – 2 or 3 points, depending on the solidity of the buyback
- Asset-backed loans – 2 points
- Limited security (like a buyback fund too small)– 1 point
- No security – 0 points
3. Track Record
This doesn’t resume only to how old the platform is. It also considers how many defaults the platform had and how long it took to recover the funds (if they managed to).
For each one of these criteria, each platform gets 1 point:
- The platform has more than 1 year of activity – 1 point
- Has closed projects – 1 point
- Low default rate- 1 point
- Defaults recovered – 1 point
It’s important to know how easy you can get access to your funds in case of emergency and at what costs.
Mintos has a very active secondary market where investors can sell their loans at any time, at a premium or discount, depending on what they have in their portfolio and how fast they want to get rid of their loans. Viventor, Crowdestate also have a secondary market, but with lower liquidity, so it’s harder to sell your loans on these platforms. EstateGuru has a secondary market but charges the sellers a 2% fee, so you think twice about the reason you want to sell your investments.
Envestio, Monethera, Wisefund, don’t have a secondary market, but they let you sell back your investment to the platform, for a fee. Fast Invest lets you sell back your loans to them, but you lose all the accumulated interest on those loans. It’s not as good as having a secondary market, but it’s still a good option in case of emergency.
PeerBerry, Robocash, viaInvest, don’t have a secondary market, but most of the loans available for investment have a maturity period of 30 days, so it’s easy to exit all your investments in a few months.
Grupeer, Crowdestor, TFG Crowd investors have no option to exit their investments before the loan matures.
With these in mind, this is the scoring I gave each platform:
- Secondary market – 3 or 4 points, depending on liquidity
- Short loan term – 2 points
- Buyback guarantee (with fees)– 1 point
- No exit – 0 points
5. Account security
I wouldn’t want my funds to disappear from my account just because the platform owners were lazy and didn’t implement basic security measures. Fortunately, most platforms only let you withdraw funds to accounts you also deposited funds from. The only exception that comes to mind is Kuetzal. They ask you to type in the bank account you want to withdraw your funds to. I really hope they do a manual check before approving the withdrawal requests.
So, this is the scoring I’ve used:
- Does the platform use 2-factor authentication to let you in? – 2 points
- Somewhere in between – you can only withdraw funds to verified bank accounts – 1 point
- Does it send your password in plain text to your email? (like Kuetzal or Monestro) – 0 points
Long term, I would keep my p2p investments split into at most 5-6 platforms. This would mean the loans I invest in need to be sufficiently diverse to allow me to invest my funds in different loan types from different countries.
Mintos has hundreds of thousands of available loans, from different geographies and different loan types. This is at the high end of diversification.
At the other end, there’s Bulkestate. Bulkestate has just a few loans, all from Riga. They’re very good in that area, but I can’t diversify my portfolio on this platform.
Each platform got the following points in this category:
- No diversification – 0 points
- Diversification on geography – 1 point
- Diversification on loan types – 1 point
- Diversification on number of loans – 1 point
This is one of the most important aspects when investing in a p2p platform. P2P lending is a higher risk investment than many other options available, but people still invest in it as long as the returns are high enough to offset the risk.
I used as a benchmark WiseAlpha’s Robowise Balanced Portfolio to score the p2p platforms. WiseAlpha’s portfolio advertises a 6% annual return on investment by investing mostly in senior secured bonds. Investing in corporate bonds is not risk-free, but any p2p investment has a much higher risk than bond investments. I gave the p2p platforms an extra point for each 2% average return over the one advertised by WiseAlpha.
Final scoring on all categories
In my initial scoring, I’ve also added time to get invested as a separate category. This is directly dependent on the loan volume available on the platform and the number of investors financing the loans. Then I realized it is already reflected in the track record and returns categories, so there’s no point in adding it to the final score.
My initial thought was just to sum up the scoring on each category and then rank the platforms according to this sum. I’m not doing scientific work here, so it doesn’t really matter what weight I give to any category, or what formula I use in order to build my ranking. A sum would do just well and the best part is that I’m not overcomplicating it.
Then I realized the first 6 categories can form a safety score. Based on this safety score I can evaluate the final category, the returns. I could see if the higher returns are actually worth the risk.
Here is the final scoring. To still keep it simple enough, I’ve just multiplied the safety score by the returns score, and based on this I got the final ranking(risk vs return score).
From a safety standpoint, at the top is Mintos, Assetz Capital, and Neo Finance. Their score is almost perfect, 19 and 18 points out of 20. I agree with this intuitively, and I like that I can back my feeling with some sort of data.
At the bottom of the safety score, there’s Kuetzal, TFG Crowd, Monethera, Trine, Wisefund, Bulkestate, Envestio. Again, I agree with the scoring, and I like that the data is backing my feeling. Even with the buyback guarantee, Kuetzal, TFG Crowd, and Monethera are still new platforms, with no track record, and present a higher risk. I consider Trine risky because I don’t have much experience with it, but this could change in the future.
Risk vs return scores
The leader of this ranking is Mintos, far away from the next platforms EstateGuru and Viventor. And indeed, I consider Mintos to be the best European p2p lending platform to invest in right now.
At the lower end, there’s Trine and Abundance. Both of them offer lower returns than most other platforms, and the security offered is not enough to make it worth investing in them. However, I invest in Abundance and Trine projects for ethical reasons, not necessarily for profit. If something comes out of it, even better, but high profits is not my main goal here.
Let me know what you think about my ranking. If you use a different system to evaluate p2p lending platforms, which one is it? I’d like to know and get better at it.
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