I seem to have a suspicious amount of favorites, but Crowdestor definitely has a certain special place in my peer lending investment heart. Interest rates are awesome and while they don't have a buyback guarantee, they have something even better.
Crowdestor
Crowdestor is a peer lending platform that lends to businesses and real estate development projects.
Founded in Estonia, Crowdestor started lending only last year, 2018. It is therefore a fairly new platform.
Crowdestor was founded by two guys, both fairly experienced in relevant fields:
- Janis Timma (CEO and co-founder, LinkedIn, Crowdestor)
- Gunars Udris (Product & services, co-founder, LinkedIn, Crowdestor)
Skin in the game
According to Crowdestor, for each of their projects they "take part in it as co-financiers and/or co-developers", which means they always have a vested interest in the financial success of a project.
For a minute, consider a platform that doesn't do this (and naturally also does not offer a buyback guarantee). For such a platform, all risk is offset to the investor, which incentivises to provide maximum amount of projects with maximum attractiveness (i.e. high interest, high risk). With such platforms, the overall profitability for investors isn't in the short term so interesting, as long as new investors continue to come in.
Crowdestor's skin-in-the-game ensures that both the platform's and the investors' interests are aligned, I really like that.
Buyback fund
The buyback fund is not a guarantee, and it shouldn't.
Think about an absolute buyback guarantee: what if the platform runs out of money when in a black swan event, two or three projects default at the same time? If the platform has bound itself legally to buy back these defaulted projects but cannot, what happens then?
Insolvency, in the worst case bankruptcy.
While the idea of a buyback guarantee is appealing, I always get a little scared when that is promised. How can someone promise that? A full buyback guarantee simply converts individual project risks into one large shield that, when it breaks, takes everything with it.
Platform risk is the scariest there is. Just look at how Lendy collapsed. They operated with a bad business model, eventually being exposed to the bad loans they had provided.
A platform needs to balance their own risk, too, in order to not get too risky for the investors.
Needless to say, I love the buyback fund. Why?
- It separates the platform's operational finances from the buyback finances
- It provides a clear, transparent mechanism to how potential defaults will be covered
- And in doing so, provides adequate buffer for a rocky road to the investors, while limiting the liability for the platform to something they can handle.
Perfect of both worlds in my opinion!
Why I like Crowdestor
You have got to love the interest rates: up to 21% recently! Imagine if you could actually get somewhere close to that long-term! Of course it will not be sustainable like that, but let's play with the idea. Have a look at my Crowdestor calculator for fun
Sure it comes with very high risk, but Crowdestor has, in my opinion, done some excellent job on mitigating that risk, namely in the form of the buyback fund.
Having skin in the game always gains some significant trust from me. It's important to have aligned interests for long-term success.
Projects on Crowdestor usually have collateral, too. In the case of real estate development projects, the collateral usually is the building. In the case of business loans it seems Crowdestor often has nomial ownership of some stocks until the loan is repaid. Collateral reduces risk.
Lastly, volume on Crowdestor is just right to me. There are always some projects on-going, but there's time to consider them. The descriptions on Crowdestor are also thorough. I much prefer having my time to get familiar with the project and decide if I want to invest.
I kind of like the fact that there is no auto invest: I expect other investors to make wise, logical decisions. This way, Crowdestor gets some feedback of how well the projects and their risk-to-return-ratios fit the appetite of investors. When auto-invest is there, it takes away the market dynamics and usually forces everyone to either use it, or abandon the platform altogether.
Auto-invest is like an index ETF: you buy what everyone else is buying. This continues until the whole house of cards collapses.
No, I prefer it without auto-invest when there's nice amount of projects on-going. I hope they never introduce one, but instead keep the balance with supply and demand.
Risks of Crowdestor
A platform this young always carries risk. Peer lending platforms aren't regulated, so a clever bunch will be able to make things look better than they are. Always consider whether a platform could be a ponzi-scheme!
Could Crowdestor be a ponzi-scheme? Sure. Do I think it is one? No.
The fact that the founders show up with their own names and faces tells a lot already (note: except that the same was true for Kuetzal and Envestio). They don't link to LinkedIn, but you can find them on there. Those profiles don't look made-up either. If they were running an illegal operation, they'd ruin their own lives. I trust that's not something they're willing to risk with their backgrounds.
Projects can go south. At the moment, the buyback fund is just above 100,000 € which is a decent sum, but not enough to fully refund some projects, would they fail completely without any recoverable collateral. That's of course a very unlikely event, but I imagine it could happen.
So, your principal is at risk, even if it is covered by the buyback fund.
I'm usually most worried about platform risk. Like I mentioned on the buyback fund, Crowdestor has managed to shield the platform from "buyback guarantee insolvency", by providing a cap for the buyback in the form of the fund.
Liquidity is a risk: there's no secondary market. So, if you have invested in a loan, there's at the moment no other way to get your principal back than to wait. Tough luck if you are in sudden need of money.
So there are risks, but I find them well in balance to the interest rates.
Full disclosure
I've invested in two projects on Crowdestor, a total of 6,200 €.
- INCH2, a fashion company with global sales and impressive growth
- Tvaikonis industrial business center, renovating old buildings for business use
My average interest is a very high 19.35% and so far have not had any default.
While Crowdestor, being a young platform, definitely carries significant risk, the interest rates in my opinion justify it. They show more transparency to projects than others and give lots of information. Plus, I like the way Crowdestor has mitigated the risk. Would their operation be larger, or would they have a bit more history, I'd give full five stars. Four stars ⭐⭐⭐⭐ is still very.
If you'd like to start investing on Crowdestor, please sign up using my affiliate link and thus help my blog. While I try to avoid recommending to invest in something specific, I do very much encourage diversifying in general.
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