Bondora Investments Using Decision Trees – Review of Progress – Part 4

This is part 4 of a series of guest posts by British Bondora p2p lending investor ‘ParisinGOC’. In part 1, part 2 and part 3 published in December 2014 you could read how he used the data to built decision trees to identify lending opportunities. Now you can read how that strategy worked out.

Introduction

In August 2014, I realised my portfolio of P2P loans at Bondora was not performing as I would wish. There was an urgent need to change the way I selected loans in which to invest the money I had at my disposal. My search for a better way of selecting loans lead me to use Decision Trees to analyse the loan data available from Bondora using “RapidMiner” – software available to download for free.

It is now over 6 months since I described my original work to construct the Trees. This follow-up article chronicles what I believe is the success of my efforts to date whilst also describing the multiple factors, both within and beyond my control, that mean that, whilst I feel very comfortable with the progress made to date, others may feel that I have just been lucky!

The journey since I created my first Decision Tree and started to make purchasing decisions based almost totally on their outputs has been one of constant change. Detailing the changes to elements over which I have no control has shown me how they contribute to what I believe is success as much as my own efforts to improve the selection processes. Describing the change in the Decision Trees as well as their use in the dynamic Bondora environment has left me feeling that, without constant monitoring and review of both the process of creating the Trees as well as their use, it may still be very easy to snatch defeat from the jaws of victory.

Key to ensuring the veracity of my protestations of success has been the maintenance of a consistent approach to my selection and lending process. To this end, I will describe those changes to my process that I can control and explain how and why such changes have taken place. In short, I have maintained a restricted buying policy, investing only the minimum amount (5 Euros) at any one time and, latterly, only buying a maximum of 2 loan parts (of 5 Euros each) in any one loan, depending on the outputs from the Decision Trees and my own mood at the moment of purchase.
I realise that this last phrase is not at all scientific, but the fact that my Portfolio of c.12000 Euros was not performing as expected was for me, a non-trivial affair and some emotional response has to be accommodated.

I have already stated that I believe my efforts have been successful. This is based on the fact that the rate of default (Once a loan principal has been overdue for 60+ days, it is labelled as “defaulted” – Bondora FAQ) in my portfolio has returned to historical, pre-2014 levels. Up to this time, even though I had come to realise that I needed to actively manage my portfolio, my selection of loans was done almost entirely using the “Portfolio Manager” – an automated, parameter-driven purchasing function provided by Bondora and supplemented by instinctual analysis of the descriptions of the Loan Applications available to invest in.

Simple Chart - Held Loans and Defaults

 

Looking at the simple chart of Held Parts/Defaults, the number of defaults in held loans rose significantly over the summer of 2014, coinciding with a big increase in both the number and value of investments on my part. Referring to the same chart, it can be seen that, even though the number of investments remains close to summer 2014 levels, my defaults have fallen to the numbers experienced earlier, at much lower volumes.

With my new-found confidence that I have a process for selection and management that appears to be sound, I have started to increase the volume of Loan Parts purchased so that the value is now approaching Summer 2014 levels of investment.

Progress to date

Graphical representation of Progress

I will use a more detailed graph showing the volume of Loan Parts purchased, those subsequently sold, those “Overdue” and those in default (still held by me as well as sold) to hopefully illustrate the performance of my selection and management processes. Continue reading

Queue Up for P2P Lending!

When was the last time you stood in a long line outside your bank branch, patiently waiting to deposit money into your savings account? Imagining a scene like that seems ridiculous at a time with near-zero interest rates in an increasingly large number of developed countries.

But there where you would least expect it, in the Fintech world of fast-moving bits, some startups actually are imposing measures to throttle influx of investor money in order to balance it with borrower demand. Welcome to p2p lending (short for peer-to-peer lending). The sector is experiencing tremendous growth rates. With attractive yields for investors some platforms struggle to acquire new borrowers fast enough for loan demand to match the ever-rising available investor demand.

One challenging factor is deeply ingrained in the business model of p2p lending marketplaces: once a new investor is onboarded and found the product satisfactory, he is most likely to stay a customer for years to come and reinvest repayments received and maybe the interest also. On the other hand the majority of borrowers are one-time customers. They take out a loan typically just once. While it may take years for the borrower to repay that loan, in most instances there is no repeat business for the marketplaces. So the marketplaces have to constantly fire on all marketing cylinders to win new borrowers in order to keep up and grow loan origination volume.

This has sparked some outside of the box thinking, e.g. the partnership of Ratesetter with CommuterClub to win their loan volume, which is in fact mostly repeat business.

Winning investors has been relatively easy for many of the p2p lending services in the recent past. Investors are attracted typically through press articles or word of mouth. One UK CEO told me he never spent a marketing penny ever to acquire investors.

But what happens on the marketplace, when there are so many investors waiting to invest their money in loans, but loans are in short supply?

  • If the marketplace does nothing or little to steer it, then those investors that react the fastest, when new loans are available, will be able to bid and invest their money. This is the situation e.g. on Prosper, Lending Club and Saving Stream.
  • The marketplace has some kind of queuing mechanism. This is typically coupled with an auto-bid functionality. Examples of this are Zopa, Ratesetter and Bondora.
  • The investors are competing during an auction period by underbidding each other through lower interest rates. Examples of p2p lending services with this model are Funding Circle, Rebuilding Society and Investly.
  • The marketplace can lower overall interest rates to attract more borrowers while the resulting lower yields slow investor money influx.

The UK p2p lending sector is eagerly awaiting the sector to become eligible for the new ISA wrapper. Inclusion into the popular tax-efficient wrapper will attract an avalanche of new investor money to the platforms.

“That’s going to be a challenge for the industry,” said Giles Andrews, CEO of Zopa. “Once the dates are worked out, the industry will need to plan for that together, and we may have to do something we have never done before, which is to limit the supply of money. It’s not good to have people’s money lying around [awaiting new borrowers] or to lower standards of borrowers.”[1]

So there is some speculation that UK p2p lending services could impose temporary limits on new investments.

The investor viewpoint

The aim of the investor is to lend the deposited money easy and speedy into those loans that match his selected criteria/risk appetite. Idle cash earns no interest and will impact yields achieved (aka cash drag).

For the retail investor none of the above mentioned mechanisms are ideal. The “fastest bidder wins” scenario means he would either have to sit in front of the computer most of the time or be lucky to be logged in just as new loans arrive. The queuing mechanisms are disliked as they can prove to be very slow in lending out the funds and can be perceived as nontransparent (see the lengthy and numerous forum discussions on the Zopa queuing mechanism). Underbidding in auctions does provide the chance to lend fast, but at the risk of setting the interest rate too low and this requires a strategy and can also be time consuming. Continue reading

Update: Current Status of my Bondora Portfolio

In October 2012 I started p2p lending at Bondora. Since then I periodically wrote on my experiences – you can read my last review here. Since the start I did deposit 14,000 Euro (approx. 15,600 US$). My portfolio is very diversified. Most loan parts I hold are for loan terms between 36 and 60 months. Together the loans add up to 20,616 Euro outstanding principal. Loans in the value of 2,397 Euro are overdue, meaning they (partly) missed one or two repayments. 2,623 Euro principal is stuck in loans that are more than 60 days late. I already received 13,261 Euro in repaid principal back – this figures includes loans Bondora cancelled before payout. I reinvested all repayments.

Bondora Investments 04/15
Chart 1: Screenshot of loan status

At the moment I have 0 Euro in bids in open market listings and 741 Euro cash available, which is rather high but it will take only 2 to 3 loans that match my investment criteria to allocate the money.

Bondora 04/15
Chart 2: Screenshot of account balance

Return on Invest

Currently Isepankur shows my ROI to be 27.22%. In my own calculations, using XIRR in Excel, assuming that 30% of my 60+days overdue and 15% of my overdue loans will not be recovered, my ROI calculations result in 19.6%. Continue reading

How I Selected My Preferred P2P Lending Marketplaces – Part II

This is part II of a guest post by British investor ‘Pete’. Read part I first.

The number P2P / P2B platforms in the UK has increased quite quickly over the past few years and I have currently settled on 3 further UK platforms that suit my needs and I strongly believe will be with us long term. In saying this I am not in possession of any privileged information and I am not by inference making any adverse comment about other platforms.

In alphabetical order

Ablrate

One of the new platforms (launched July 2014) that I have chosen to invest in and so far I have had a very positive experience. Specialising in secured Aircraft leasing and Plant and Machinery I have had the chance to diversify into a market that I knew little about before I started on my ‘due diligence’. The market may be new to me but there is a wealth of responsive experience behind Ablrate and coupled with a website update and promised increasing flow of loans I anticipate that my exposure with Ablrate will continue to grow. One interesting ‘innovation’ available on certain loans is ‘Instant Returns’. With long draw down times on some loans the potential for ‘dead money’ is large, instant returns circumvents this issue.

Assetz Capital

I have been investing with Assetz Capital since the second quarter of 2013 and have built up a diversified £ five digit portfolio of secured loans which continues to grow1. As with Ablrate there is a good, responsive and experienced team behind the web site, something that has become more than apparent when dealing with the occasional distressed loans that we must all expect when investing. Assetz Capital have big plans for expansion (they have already grown considerably since I started investing) and a relatively recent change to the way loan parts are bought has removed a very large percentage of the ‘dead money’ scenario that many of us early adopters experienced, not universally liked, I for one view it as a very positive move that has helped to push up my return on investment. I look forward to new opportunities this year.

1 I do not invest by choice in the provision fund protected ‘Green Energy Income Account’ preferring to take on the risk in return for a slightly higher returns.

Wellesley & Co

Again I was one of the early adopters and took advantage of some very attractive introductory rates that were offered. The loan and repayment terms suited my needs perfectly for tax planning purposes. Since then the rates have unsurprisingly been lowered and whilst Wellesley & Co have expanded rapidly and their range of investments on offer has expanded I find myself already invested in those areas with other platforms so I am running full term with my current investments whilst keeping an eye open on what is on offer.

Bondora

I also invest in one non UK platform, Bondora. This would probably be regarded as the ‘odd one out’ in my list of platforms. Far more volatile than the other platforms that I invest in Bondora has expanded rapidly since I started investing in the second quarter of 2013. I have experienced several changes to the platform, some which I have liked and several that I have not. I have experienced new markets being opened up and some eye watering rates of default in these new markets. That said and in spite of the treatment of defaults by the UK tax man and the strengthening of the Pound against the Euro (@16% since I started investing) my return after tax has remained positive. I spend more time on this relatively small percentage of my total investments to keep the returns positive than I do on any of the others. Continue reading

P2P Lending Experiences of a British Expat Living in the Eurozone

This is a guest post by British investor ‘JamesFrance‘.

Since retiring and leaving the UK to live in a warmer dryer part of Europe, I fortunately found myself able to live on less than my income, so had the problem of how to best manage these savings, which I wanted to protect from inflation and if possible achieve a positive return on by some type of short term investment. Unfortunately I never found a British savings account which would accept money from non residents, so I was obliged to accept a very low interest rate from my existing UK bank. I do have other long term investments so was prepared to take some risk to achieve a better return.

I had seen articles in the British press about Peer to Peer lending, which tended to refer to the big three, Zopa, Ratesetter and Funding Circle, none of which were prepared to allow a non resident to open an account, so I soon forgot about that as a possibility.   In August 2013 I read that another P2P business lending platform, Thincats, was joining the P2P finance association. I decided to look at their website and was surprised to learn that they could accept non resident investors.

Thincats is really for those with larger amounts to invest, having a minimum bid of 1000 GBP per loan, so it is difficult to achieve adequate diversification for relatively small sums without using their syndicates, which I didn’t find interesting, so I took the plunge and made 10 loans.   Needing 1000 GBP per loan meant that after that it took me some time to accumulate enough for my next bid, so I had the problem of uninvested money not earning until my next loan drew down.   I also found that some loans were repaid early which was reducing my returns because of the drawdown delays.   I think this would be an ideal platform for those with large amounts to invest, as they have a good flow of loans, there is plenty of information about the borrowing companies and once their new website is launched the process should be much easier.   A minimum 25 GBP fee for selling a loan on the secondary market makes it expensive to sell smaller amounts, which means that after several repayments a sale would not be economic.

By this time I was finding other possibilities with the help of websites such as P2P-Banking.com, where I read about isePankur in Estonia, which has an English language version and seemed ideal for any spare Euros languishing in my Euro account and only earning a secure 1% interest. isePankur now renamed Bondora, has been quite exciting to invest through as there have been many changes to the auto bidding system since I started there in September 2013, so just as I became used to the way my chioices were working out, it was all change so I had to start again to think of a good strategy.   They have been expanding rapidly and now issue personal loans in 4 European markets.   The defaut rates for their Spanish and Slovakian loans have been very high, so I have been avoiding those areas since that became apparent, which means time consuming manual investment because the auto bid system no longer allows choice of country.   I do not sell overdue loans on the secondary market, so my returns on the platform will be completely dependent on the eventual recovery of the defaulted loans, which will only become apparent after a few years.   The interest rates are high so I have accepted the level of risk involved. Continue reading

P2P Lending Marketplace Bondora Fuels European Expansion Plans

Bondora LogoP2P lending service Bondora, headquartered in Tallinn, announced that they raised 5M US$ Series A round led by Valinor Management to fuel further expansion plans for cross-border lending in Europe. Richard Fay and Ragnar Meitern also invested. Bondora was the first p2p lending service doing cross-border lending for retail investors. Bondora is currently facilitating loans to borrowers in Estonia, Spain, Finland and Slovakia from investors in all European countries. Bondora states that investments on the marketplace have consistently yielded premium returns to investors while simultaneously delivering competitive rates to borrowers through efficiency and lower interest rate spread.

Uniting European markets under the roof of a single platform creates a huge opportunity given the size of the population in the continent and the volume of outstanding debt. Thus, Eurozone countries alone account for 340 million people and EUR 1.1 trillion in outstanding consumer credit debt, a market equivalent to US. Lending to borrowers in markets that are independently relatively small (even Germany, the largest economy in Europe is only approximately twice the size of California in terms of GDP) allows earning premium returns due to lack of competition among traditional lenders.

Pärtel Tomberg, CEO and co-founder of Bondora, said he hoped the cash infusion from Valinor Management, the hedge fund run by David Gallo, will allow his company to build the more complex infrastructure needed to make more cross-border loans. ‘The goal is really to become a global market,’ Pärtel Tomberg said in an interview. ‘There are no precedents in the world on many of the things we want to do.’

The company also wants to attract institutional lenders from the US.

A possible mid-term competitor might be Lending Club. But Lending Club said in the investor conference call on Tuesday that they will focus on the US market and will not use the capital raised in their December IPO on international expansion plans in the near future. Renauld Laplanche is however monitoring international developments in the market: ‘We’ll see what model is really the winning model in any particular geography.’ Continue reading