Crowdfunding – Overview, Yields and Defaults
Where are we, what have we done and are we doing ok? All that in todays post.
Crowdfunding with Geldvoorelkaar.nl
As part of our diversified portfolio we currently also invest into crowdfunding projects. The platform we selected is “Geldvoorelkaar” (GVE). (Note: this is not an endorsement or affiliate link, all is available in Dutch only. Below are a few more options presented for your consideration!). The main reason for choosing this platform is that they are one of the biggest players with a well-managed site, approved by the AFM (Financial Authority of the Netherlands), have clear conditions and information. You can invest with as little as €100 and a generally have good selection of project available. They tend to fill up very quickly, so there is definitely a great demand for this type of investments.
Another reason for choosing this particular platform is that they appear to have very stringent selection criteria for projects. Based on a post on their website (see here, Dutch only) only about 1 in 15 are actually published on their site (numbers based on commencement since 2011). We like this, as it shows the project have been evaluated properly and the risks are assessed, qualified and quantified. This allows you and me to make a more educated risk based decision before investing. They use several external parties to provide a third party assessment, which they include when the project is published.
Some other things to consider, you are currently allowed to invest up to €80.000 per person in crowdfunding with GVE. There are no limitations in the number of projects you are allowed to invest into (albeit with the minimum of €100 per project, you will max out at a theoretical 800 projects, without re-investments that is.)
A total of 1077 projects were published on GVE up to mid-2016, totalling €88M, that is quite a bit of money. They must be doing something good, right?
How does it work?
The idea is as follows, you loan a certain amount of money to a project of your liking via the crowdfunding platform. The project owner will pay it back within a certain period of time (roughly between about 12 and 120 months, most are however around the 48-60 month period), via the platform. You get a fixed payment each month, which consists of a principal payment and interest. You can compare this with your mortgage payment, but in this case you are performing the role of the bank.
Interest percentage range from about 5.0% to 9.0% for the majority of the projects. Interest percentage is subject to the classification of the project and in combination with what the project owner is willing to pay. The crowdfunding platform also charges you fees depending on the duration of the project (e.g. 0.3% per year of the loan value, paid upfront at commencement of the project, but is reimbursed if the project defaults).
There are also a couple of other options, these include:
- a hybrid options that have a 6 to 12 month interest payment only (paid per quarter), after which the normal repayment process starts (so principal and interest payments);
- There are also projects that return the principal completely at the end of the project (usually after 6 to 18 months), with quarterly interest payments during the project period;
- The latest and newest option is to invest in project and are able to convert your principal into shares of the new company. The longer you wait, the cheaper the shares are to convert your principal into. The idea is that you start to receive dividends when the company start making money and/or sell you share after a few years for the value at that time (usually book value).
Our Project Selection Criteria
We use two main criteria when investing:
- the Graydon PD percentage (Probability of Default in year 1) needs to be below 1%; and,
- The CreditSafe score needs to be above 50 points, this is a measure how financially healthy the company is (e.g. how well they are able to repay the loan).
Other criteria we use as based on some more subjective assessments (e.g. do we like the project, do we see a market for it, etc.) and is there is personal backing of the loans (in case of payment issues, you may be able to recover some of the loan).
Our Current Investments
When I started to write this post (a couple weeks back), we had about €10.000 invested in about 33 projects at the time. Based on year 1, we had a net yield of 7.4% (after payments of GVE fees) and no defaults! Mr.CF was happy and positive.
On the day I wanted to upload the post to the website I had a message from GVE. One particular project failed and the owner had applied for bankruptcy. In short, this is a write off and there goes the 7.4% yield out the door. Based on these initial losses, the yield has already dropped to 7.0%. Still not bad, but one or two more defaults and Mr. CF will start to cry and wonder why this was a good idea in the first place.
How often do these defaults actually happen? Based on historical data (Dutch Only) this happens commonly between 20-24 months of the project and in about 5% of the cases (i.e. out of the 930 projects, 45 have been suspended based on numbers by GVE). Note that this should be an under estimate of the total percentage considering many of these project are still running and can still default!
Another blogger (Dutch only) whom has been using crowdfunding projects a lot longer then we have, got higher default percentages (potentially around 10%), pretty much whipping out a large portion of the envisaged yield. However, it is all in the numbers and a detailed assessment is required to find actual yield upon completion of a larger set of projects. Time will tell.
The above examples also prove that this type of investing is certainly not without risks, despite risk management from two sides (GVE and you).
Considerations and Path Forward
Crowdfunding is a great way to help small companies and social groups start businesses or obtain goals. However, it certainly is not without risks and defaults will quickly whip out your yield. It might not be the best way to invest the money from and ROI point of view. But may provide you with a good feeling that you are helping other people (If you like altruism, you could also donate your time and/or money to charity….)
For now we will put further investments on hold to see how our current portfolio will develop. We have also decided to limit our crowdfunding to no more than about 1-2% of our total portfolio (down from the previous 5%). The primary reason for this is the realization that your ROI upper bound is limited by what you see advertised, but the downsides can be well in negative territory with limited to no chances to recover these loses (albeit a collection agency might get some money back, but never the full amount that was owed to you). The main reason is that when a project defaults, you loose your ROI and part of your initial investment. That is a double hit! Now your ROI on the other projects has to first payback the money you lost on the default, before it can start to make you money again on the initial investment value you used.
A simplified linear example to show the principle (the actual calc is a bit more complicated due to the combined principal and interest payments each month): You invested €1000 in 10 projects (i.e. €100 each) all lasting one year. Your ROI is 8% per year = €80 at year end + all your principle back = €1080. For argument sake one project defaults halfway the year (€40 should still have been repaid to you) with only 50% recovery from the debt collectors (i.e. you will still get €20 back of the €40 owed). In this case, you will end the year with : €1056 (loss of €20 investment and €4 in missed interest). So one default dropped your ROI from 8% down to 5.6%. Still not bad, but if two project default or debt collectors cannot recover principle, you might end up with a very low ROI, if not a negative ROI! This is a scary thought, especially as you most likely will see defaults in your portfolio.
At least with ETF’s/shares, in most cases, you have the luxury to wait and see them recover (and perhaps still get dividends in the mean time). This is not an option with crowdfunding: gone = gone! A paper loss almost automatically translates into a real loss. Keep that firmly in mind when investing in crowdfunding.
Our plan is to provide a bi-annual update on how the investments are doing and what our yield looks like. But we are done with investing into crowdfunding for now (the exception might be real estate projects, these are a bit more “stable” and have better investment recovery opportunity and lower risk to default).
Alternative Crowdfunding Sites and Resources
There are also others available in the Netherlands, which include:
http://www.fundwijzer.nl/ (in Dutch only, a nice overview of the many parties and projects available)
https://www.collincrowdfund.nl/ (very similar to GVE, slightly smaller company)
https://www.oneplanetcrowd.com/nl (for sustainable projects)
https://www.leapfunder.com/ (English, primarily for people/companies needing money)
https://massafinanciering.nl/ (also similar to GVE)
and many, many more. The ones above we have not used personally, so cannot comment on how well they do or compare to our personal experience with GVE. If you did, please do let us know what you think!! Always good to have a better understanding of the alternatives available.
Do you invest in crowdfunding? If so, how are your experiences. If not, why?