What has happened to Lendy?

Last week, on 24th of May 2019, the British peer to peer lending company Lendy has collapsed- it is the biggest peer to peer platform crash to date in Europe. Many investment professionals say that this is what comes with higher yields- higher risks, while many private investors became cautious- “is the industry risky, or it is a one-time event”. We are very saddened by these events as we do believe in the power of alternative finance and want investors to benefit from it, not lose money. In this article we have compiled important red flags that have led to this event, give advice on how to choose the reliable P2P platform and even have gathered opinion from influential bloggers in this space.

What has happened?

Lendy, the UK-based peer to peer lending platform has collapsed after the Financial Conduct Authority (FCA) has placed it on its watchlist at the beginning of 2019. This has happened less than a year after Lendy has received the license from FCA. Lendy is a Portsmouth-based company founded in 2012. Originally it has lent against marine assets, like boats, and later expanding to the property market, funding mostly bridge loans and promising a return of 12% to its investors. The Regulator had concerns regarding the ability to satisfy the minimum requirements of regulated firms.  The global firm RSM has been appointed as administrators to work out an outline on how to satisfy the creditors’ claims. The investors are not protected by the UK’s financial services compensation scheme.

What are the losses?

The outstanding amount is around Eur 180 million (GBP 160m), while Eur 100 million (GBP 90m) are in default.

What is the bridge loan?

The bridge loan is a short-term business loan aimed at closing the liquidity shortage. For example, the company plans to attract additional capital in the future, but currently has a scarcity of cash, so in order to pay current expenses a bridge loan might be taken. The bridge loan is usually up to 1 year and almost always has collateral.

Timeline

The first warning sign was the substantial decline in profit figures- in 2016 the company’s profit was GBP 2.6 million (~EUR 3m), while in 2017 the profit dropped to only GBP 605,000 (EUR 680,000). In 2018 the proportion of underperforming loans more than doubled.

October 2018: one of the lender’s borrowers has threatened to sue both the platform and investors, claiming Lendy has unfairly put GBP 8.2 million worth of loans into default. This case affected 5000 investors who have contributed money in loans issued by several offshore companies linked to a family trust registered in the British Virgin Islands, the developer of several prestigious properties in Marylebone, London. After this incident, the company has appealed to the FCA for help. During this time around two-thirds of a loan, the portfolio was overdue, according to an analysis by Financial Times (at least one day overdue; this was GBP 112m out of GBP 180m), whereas company reported only 12.3% overdue based on the 180-day term. The company insisted that such legal incident is regular in this business.

December 2018: Lendy has changed the senior management of the firm promising to make changes to almost every area of the business including financial control, compliance and collections procedures and governance. There were rumors, however, that creditors were unhappy with the CEO (co-founder) and wanted him to delegate his job to a team of more experienced professionals.

March 2019: FCA has placed Lendy under its special supervision, as it had a question regarding “its business model, leadership and financial position”. The terms of being on the watchlist included providing the regulator with weekly reports on its cash flows. The decision came around the time when Lendy had 55% of non-performing loans on its portfolio and another 10% past due.

April 2019: FCA has confirmed that it has imposed some restrictions on Lendy’s regulated activities. The regulator’s notice stated that “the company can’t dispose of, deal or diminish the value of any of its assets and must not in any way release client money without in either case the prior written consent of the authority.”

Red Flags

The events surrounding the collapse are unfortunate and we as an enthusiast of the alternative investment space are very disappointed by it. We don’t want investors to lose money, so we urge to look for red flags when investing with a p2p platform. With Lendy there were plenty and the collapse did not happen in one day.

It wasn’t really clear who was standing at the top management of the company. For example, the Peer2Peer Finance News has written that the COO has left the company according to his LinkedIn, but Lendy has refuted this information. Additionally, the company has seen a big turnover in the executive staff.

Lendy has financed the residential tower in Liverpool, UK contributing GBP 11 million. The project was bankrupt and went in administration in June 2018, however, Lendy did not report it as non-performing until October 2018. The administrators have valued the project GBP 8 million, whilst it was listed as GBP 17.9 million as a security on the platform. Lendy would receive only 62% of the loan when the administration of the tower would be completed.

Bloggers’ opinion:

As we have stated several times that despite the P2P investment industry is young, you should read the specialized blogs. There are several influential bloggers in the space, who are going extra mile to conduct research and share their reviews, this will let you feel like a part of the community. Some bloggers have written negative reviews about Lendy, so investors should have been aware of the possible problems. We have contacted several bloggers and asked some questions, about their thoughts on the current events. Here are their answers:

1. What, in your opinion, was the reason for Lendy to fail?

Claus Lehmann of P2P-Banking:  While not the direct cause of the failure, the ultimate reason leading to these events was the unsustainable level of defaults and unsatisfactory recoveries. It appears that Lendy took too many risks and valuations of the properties that served as security were (at least partly) inflated.

Lars Wrobbel of Passives Einkommen Mit P2P: As far as I know, Lendy’s default rates were too high and the collection process was insufficient in the end.

2. What precautions investors should take in order not to lose money?

Claus Lehmann: Some investors exited after the level of defaults heightened during 2018. However, at a certain point in time, it was no longer possible to exit via the secondary market as demand had slowed down to nearly stop and there were only sellers left and nearly no buyers. One measure that helps to minimize risks and potential losses is diversification over multiple p2p platforms (geographically and by loan types).

Lars Wrobbel: It’s hard to give here advice, but we are a big community and should take the benefits out of it. So, wherever there is more and more bad news about a platform and we are starting to feel uncomfortable with it, we should become aware. Try to investigate the situation and make a decision to continue or stop the investment.

Jørgen Wolf of FINANCIALLY FREE: Always diversify! Low-interest rates might not always an equal low risk (and vice versa.) Join the discussion in Facebook groups and benefit from the combined experience of other like-minded investors.

3. What is the future of P2P investment industry/ will it be affected by the crash of Lendy?

Claus Lehmann: I think it might increase the scrutiny of the FCA in the supervision of the platforms. Also, it might affect lender trust in other UK property platforms at least temporary.

Lars Wrobbel: Honestly, I don’t think that this will have a big impact on the industry. The platform was more popular than Collateral last year, but still not in the focus of most of the investors.

Jørgen Wolf: I’m very sad to hear about the crash of Lendy. The P2P/P2B investment industry is still fairly new and it takes enormous amounts of trust to build a good reputation. Every time there’s one failing company, it sets back the whole industry. Investors will inevitably start questioning the good work, even platforms with a good reputation has spent years to build up. That is very unfortunate. However, Crowdlending will continue to grow stronger over time – the concept itself is too good to fail.

What’s next?

Many industry participants in the UK are criticizing the FCA for being too restrictive to the new industry, saying that excessive regulation harms innovation and protecting the conservative banking system. On the other hand, FCA is claiming that some P2P platforms were encouraging private investors to take on more risk than they should. FCA wants p2p lending to be exclusive for wealthy and knowledgeable investors, which is contradicting the democratizing nature of p2p investment industry.

As an investor, you have to read the information available on the specialized blogs, as many influential bloggers in this space have warned that they do not wish to put their money with Lendy. Additionally, the red flags were there- if the platform is engaging in dishonest business, there will be news in the press which may raise questions. And finally, you should understand that this is the new industry, it will have to survive several economic cycles to remove several players. As this is an alternative finance industry, yielding above the market returns, be prepared for additional risk and always diversify your investments between the projects, products, and platforms. Keep calm and carry on!

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3 Comments

  1. I’m very happy to see Grupeer addressing this topic head-on. However, an objective analysis can also be provided by external parties, like the bloggers you interviewed, or financial/real-estate experts.

    As an investment platform yourself, it would be more interesting to hear your insights about what Grupeer, specifically, is doing to prevent a similar catastrophe. Remember that while Lendy’s actions seem silly in retrospect, they originally seemed like good ideas – the company thought it was doing the best to ensure its success and that of its investors. But apparently it didn’t.

    Here are a few of my own suggestions:
    1. Detailed loan volume / performance statistics (we’ve talked about this, I know it’s in development). By the way, most Baltic platforms display misleading statistics, where most loans seem to be “current” simply because they were issued a week ago. Honest statistics should include an option to see only the status of loans which were supposed to be fully repaid.

    2. Sharing platform financials. Does Grupeer publish financial statements? If not, how can investors know if the platform is even profitable, or if profits are down? The same goes for every loan originator, and their financial data has to be up-to-date.

    3. To take safety a level higher, you could create a fund to compensate investors in case a loan originator or Grupeer itself goes bankrupt, or alternately, insure at least part of the money invested through the platform.

    4. You could appoint an external, unbiased company to periodically run due diligence on Grupeer, its loan originators, and specific loans (especially development projects). This is the step that was most likely to save Lendy, if they had taken it.

    Just a few ideas. These are the sort of actions that really prevent catastrophes, as well as build investors’ trust.

    • Ido – I think you’ve hit on something there with point 4.

      Why isn’t there an impartial third party auditor who can come into these P2P platforms and highlight the key risks, metrics and trends? I would pay good money for such a report on the platforms where I hold the most.

      I guess the reason is that P2P platforms wouldn’t be willing to entertain this notion for fear the results woulds scare away potential investors.

      We have activist investors in the stock market, who force the boards of big companies to adopt these kinds of industry best practice methodologies – maybe the P2P bloggers should all come together and try and force transparency amongst platforms, for the good of the investors.

      Now I’m just dreaming…

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