Chasing Yield – Advice Buying Assets from Crowdfunding and Marketplace sources

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I continue to believe there are some great innovators out there around marketplace lending and crowdfunding sources for business but most of these companies like P2Bi, Marketinvoice, Platform Black are still relatively small from an institutional investors perspective.  This is the reason institutional investors are so attracted to marketplace lenders like OnDeck, Prosper, and others that can generate significant consumer loan volumes.

Institutional investors now represent the majority of buyers investing in both marketplace lending as well as invoice auctions and other platforms.   As a retail investor, you must be an accredited investor in the U.S. to buy unregistered securities, although that has changed for investing in crowdfunding equity start-ups with the JOBS Act (although the U.S. has put tight restrictions on how much non accredited retail investors can, see It’s Official – Average Joe (Or Jane) can Invest in Crowdfunding

In addition, the FDIC’s new requirements to banks about purchasing and participating in loans originated by non-bank third parties, like marketplace lenders, will substantially increase the costs imposed on banks that wish to purchase marketplace loans.

But as institutional investors chase yield in this zero interest rate climate, there are certainly unique challenges.  Beyond the traditional investment world of benchmarking returns against other asset classes, buying trade receivables generated from the course of companies doing business or buying UNSECURED loans generated via online platforms to Mom & Pop businesses looking to buy equipment, handle new orders or buy inventory has risks.

  • We know without question, for example, that unaudited, management-generated financial statements are more likely to contain errors or misstatements than are audited financials.
  • We realize that there is more investor money chasing deals than deals chasing investor money. Economics 101 says yields will not be commensurate with risk in this scenario.  Excess liquidity was a principal driver of the original small business ReceivablesExchange pricing model.  We’ve been in such a period, in my opinion again, and it continues unabated given the zero interest rate short term world.
  • Be prepared to not have a say when things go bad. Brokers that have platforms that comingle investors to buy pieces of loans, in essence buying a fractional piece, are not necessarily the best agents to work the problem when the loan goes south.
  • Know what fees you have to pay as an investor, and how your broker is compensated – off the top or when receivables are paid back, etc.
  • Understand how APRs are set – how does the broker set the rates, or is it an open auction market like the original ReceivablesXchagne.

In today’s climate, with many deals going on today, the risk is underestimated and underpriced, in my humble opinion.  Look at what supply chain finance deals are going for, Libor +22, Libor + 30, it’s hard to make money.

So as they say caveat emptor or buyer beware.  Make sure you at least identify risks.  If you would like to speak to me about various platforms, market structures, broker, asset advisors, etc. contact me at dgustin at tradefinancingmatters.com

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