Dear investors, Grupeer is proud to announce that the Grupeer rating is finally out!
You probably already know that behind the loan deals that you see on the platform lays enormous work involving risks professionals, lawyers, and investment analysts. More than 70% of all potential loan originators (LO) are rejected, as they do not pass our tough scoring model or other due diligence requirements. However, our clients have asked for more transparency and more tools to make an informed decision on what investment deals to include in your P2P investment portfolio.
Together with our due diligence team, we designed the rating, which shows the relative risk level of our loan originators. Please, bear in mind that the LOs with high default risk is not placed on our platform a priori, so we do not measure the risk of default. The rating measures the reliability level and helps us to manage the risks of our portfolio of offerings. This is also a great tool for our clients to rebalance their portfolio in line with their risk appetite and investment goals.
What was measured
So, if the risk of default is not measured, what is then? Our risk rating scoring model (RRCM) analyzes 30 different criteria, which can affect your portfolio’s overall risk level. The RRCM is Grupeer’s intellectual property and we can’t give exact scoring algorithm as it is a proprietary model. However, we can disclose some variables and statistics which were taken into account. Our analysts looked at the portfolio of the Loan Originators, investigating the loan term, internal default rates, loan portfolio diversification policy, debt vs. equity ratio, and borrowing vs. issued loan portfolio. Additionally, some positions from income statements were taken into account such as net profit margin vs. turnover.
The business model also was analyzed, including the development stage of the company, internal policies, possession of a scoring model, agency problem, etc. From a macroeconomic perspective, the market share and the geography of the loan originator were looked at. There are many other factors, that were analyzed. The weights of these variables also affected significantly the rating.
The rating: letters
The rating goes from A to F. The A/B is considered the category with the lowest risk. This is possibly due to the loan originator being among the leaders in their own market with a very low internal default rate. The C/D is medium risk. The LOs in this group is possibly expanding and/or developing the new product, which is fueled by working capital raised on the Grupeer platform. E/F is an acceptable risk or the lowest risk score that we included on the platform. For this loan originators, Grupeer is helping to fill the gaps in the cash flow.
What about Auto-invest?
Currently, only the rating was released. Once the business agreed on the methodology, we are applying to rate our loan originators, IT team will add this criterion in the coming releases. By the end of the year you will be able to add the Grupeer Rating criteria into your Auto-invest algorithm. In the meantime, please adjust your Auto-invest to include those originators, who you are willing to invest in, given their Grupeer rating.
What does LO rating means? Does A rating mean that the LO is totally safe and the F is likely to fail? The answer to both questions is no. The most important pillar of any investment is that any investment possesses the risk. There are the safest examples, like US treasury bonds, which currently yield less than 2%. The very essence of an interest yield is that you get paid, for the risk you are taking, while making an investment.
The risk of default is called credit risk, but there are many other risks associated with the investment.
- The liquidity risk is the risk to resell the security on the secondary market for a lower price than purchased.
- Concentration risk is associated with the low diversification- when a lot of your money is concentrated on one asset or platform.
- Inflation risk- while money “sits” in the assets, their real value (or purchasing power) may go down due to the inflation. So, the interest rate should be higher than inflation. In the P2P investments, this risk is low, due to the high yielding nature of these securities.
- Longevity risks- the risks of not saving enough and living longer, than your savings were planned for. We have dedicated the whole article on this topic here.
- Market risk- risks of losing the value of your investments, because of the overall economic situation. This risk is particularly relevant to the equity markets, as stocks usually move together with business cycles. For the P2P industry, this risk is low, as P2P lending is also known as alternative investing and it by definition has alternative business cycles.
- Foreign investment risk- here the investment can be negatively affected by the moves in foreign currency and exchange. The losses can arise when you have exposure to investments in volatile currencies, so you need compensation for that additional risk in the form of a higher yield. On the Grupeer platform, all currency risks are taken by the Loan Originators, so we don’t pass it to our investors.
Interest & Risk
As discussed above interest rate is the price for taking the risk. The higher the risk- the higher the interest rate. Usually this is the case, however, some loan originators are offering the higher interest rate, than LOs with a lower rating. There are several reasons for that- besides compensating for risk, the interest rate is a powerful tool to manage the demand and supply. Some LOs are willing to raise funding quicker, than others, so they are offering a higher interest rate.
Why we are doing this
Grupeer is working towards increasing transparency. We constantly listen to the feedback from our clients and trying to incorporate the changes that will be beneficial to everyone. Sometimes clients reach us directly and give suggestions, and sometimes we initiate the dialogue ourselves. This happened in May 2019, when we have conducted a large survey called Net Promoter Score (NPS), which aimed to evaluate how happy our clients were. Also, we invited investors to tell us, what are the most urgent improvements that they want to see on the platform. The Loan Originator ratings were one of them. We are happy that our clients trust us and we want to strengthen this trust by working on getting better.
The LO ratings will give a clearer picture of what risks are associated with each loan originator. The next step in this direction will be the inclusion of LO rating criteria in the Auto-invest function. The rating is stable and won’t vary, however, the revisions will be made on a semi-annual basis. Our risk analysts, however, are monitoring the financial performance of the loan originators, on an ongoing basis. So, if the change in rating happened between the revision periods, due to some external factors, our clients will be informed immediately.
We hope that the rating will significantly improve your investing experience!
Your Grupeer team!