Lessons from Kuetzal and Envestio

Trust-shattering events

In late December 2019 and early January 2020, it turned out that Kuetzal was probably a scam. A few days later, Envestio‘s website became unreachable, and the management team disappeared.

These events were a shock for many P2P investors, including me. Indeed, call me naive if you want, but I expected the main risk to be borrowers’ defaults, not that platforms would turn out to be scams. It’s well-known that scams abound in the crypto-currencies world, where transactions are anonymous; however, I didn’t expect them coming from companies with registered owners and (in case of Envestio) a rather well-regarded COO.

I was always well aware that investing in high-return loans or even simply through unregulated platforms (like most P2P platforms out there) are both risky activities to different degrees. However, the downfall of these two platforms has shifted my risk perception, by bringing in light the risk of being scammed.

This will lead to several adjustments to my current allocation, so that I don’t have to lose sleep over my investments. And of course, it will bring many changes to the website !

The need to reset our referential

When I started investing in P2P loans in November 2016 – more than 3 years ago -, very few blogs mentioned these investments. My only source of information was Kristi’s Money is your friend, so I started blogging in order to document my journey. At that time, I was happy with my returns as any figure above 10% yearly was great.

As my confidence in these investments grew, so did my portfolio’s size. I was happy to be able to diversify my portfolio, and it was extremely interesting to explore this new investing field !

Then, many new highly speculative platforms appeared; among them, several offered loans with interest rates close to 20%. While I invested cautiously in many of them (and actually warned my readers to do the same in both Wisefund and Monethera reviews), I let greed get the best out of me in Envestio’s case. And it also clouded my judgment, as this platform – as well as Kuetzal – were listed as being among my favorite platforms.

With the rise of high-yield platforms, we were unfortunately lead to believe that it was possible to invest without risk while getting very high returns. Suddenly, standard P2P or P2B returns were considered low. Why invest in loans yielding 12% when it was so “easy” to get 18% returns ? These events may have been very frustrating for hard-working people at honest platforms, who saw many investors lured to scams by promises of greater returns.

We need to switch back to more realistic return expectations, and support honest and transparent platforms which deserve our investments.

Consequences on the Alternative Investment’s website

I can’t escape the fact that as I’m updating this article in early February 2020, two platforms among my height favorite ones turned out to be scams. As a blogger, I of course have to consider my share of responsibility in this fiasco. And as an investor, I must take steps to prevent such losses of capital.

Platforms blacklist

As many of us lost money with Envestio and Kuetzal, we can’t afford to give suspicious platforms the benefit of the doubt. From now on, any platform with documented red flags will be added to my blacklist.

As a result, the last update to this platform’s review was overall very positive, and my only reservations were regarding the loans volume. My most recent rating for it (in summer 2019) was four stars out of five, and the company was featured among my favorite platforms – as was Kuetzal -.

The first step will thus be to blacklist platforms with documented red flags. I first considered simply removing their reviews from the website, but in this case prospective investors wouldn’t have the benefit of reading a documented warning.

I thus decided to leave them online; however, they won’t appear anymore in the website’s menus, in the competitors list for other platforms, in platforms comparisons or in the reviews index. Basically, the only pages linking to them will be my monthly portfolio reviews (as I’m still invested there). In addition, although I will update the reviews, I won’t grant them a global rating anymore. Finally, at longer term, the upcoming rating for platforms’ reliability (see below) will also be used to convey this warning.

Please note that part of this process is still manual, and I have a lot of posts and reviews to update; it’s thus possible that a few links fall through the cracks for some time.

Inspiration from other sites and being on the lookout for red flags

One thing I will do more in the future is look at other websites for their opinion regarding the platforms. And by “other websites”, I mean a few selected ones – which unfortunately are often buried deep inside Google’s results -.

I put a lot of value in the opinion from the team at Explore P2P; they did some very serious research regarding Kuetzal in the past, and never even listed the platforms which are currently on my blacklist. Kudos to them ! In addition, they’re my go-to reference when it comes to independent ratings for loan originators.

I also have a lot of respect for Kristaps Mors, who does a lot of due diligence on many platforms. His Substack article regarding TFGcrowd incited me to blacklist this platform. He also posts in a Telegram channel, aptly named High-risk investments.

Finally, a very quick daily read for me will be RPeerDuck‘s Twitter account. He’s an anonymous whistle-blower who warned not only about both Kuetzal and Envestio but also Fast Invest and Monethera in an interview with Explore P2P’s team. It’s a much less documented source than Kristaps Mors, but his feedback on platforms is invaluable to me. It’s also possible to read about his thoughts on the PeerDuckTales Telegram channel.

I also read several other Telegram channels regarding crowdlending, but currently 99% of the feed is just noise, so overall it’s a loss of time.

Ratings changes based on the platform’s safety and transparency

I need to give much more importance to platforms’ reliability – both in terms of investments safety and transparency -. In the medium term, I will add such a criteria in an explicit way, just like I do for the performance, buyback guarantee or ergonomics (it will probably replace the rating for Buyback guarantee). For now, I’ve updated the reviews for several platforms in order to take this aspect into account, and will take care of the other shortly. In particular, upcoming or already applied changes include :

  • Iuvo‘s review was greatly updated in order to point out the reliability of the loan originators, and the quality of the provided information.
  • EstateGuru‘s review already mentioned their great track record in terms of defaults recovery, but I still have to point out the advantages of their property-backed loans in terms of safety (compared to CrowdEstate‘s equity-backed or mezzanine loans).
  • I plan to increase PeerBerry‘s rating, as many loan originators are part of the very solid Aventus group
  • On the other hand, I will slightly decrease Grupeer‘s rating until they show more transparency regarding their loan originators, financials of the platform and ownership (as they promised to do in a recent blog post).
  • Similarly, I will also decrease CrowdEstate‘s overall rating, as several investors pointed out that they tend to remove disturbing questions regarding projects. A recent post at Money is your friend also pointed out severe deficiencies in term of communication.

Focus on actual returns

When I wrote my Bondster review, I granted it a rather good rating for the “Performance” criterion, although it was a recent portfolio; indeed, I based myself on the interest rates offered on the platform. One reader criticized me for this, and he turned out to be right : after many months, the XIRR for my Bondster portfolio only just crossed the 10% mark (versus around 13% in theory).

I never made it clear (in part because it wasn’t very clear in my mind) what this criteria stood for. From now on, I’ll only use the actual performance (I’ll probably rename it as well); this will impact several platforms, for example CrowdEstate (which offers high interest rates, but with an actual performance currently rather low) or BulkEstate. It will also force me to wait more before publishing an initial review !

Consequences on my allocation

While I was glad that my Kuetzal portfolio was small enough (around 2% of my total loans portfolio, as highlighted in my monthly portfolio reviews) to prevent large damages to my overall loans portfolio, it wasn’t the case for my Envestio portfolio. As a result, from now on, I will be more conservative in my allocation – both in term of platforms and allocation strategy -.

In particular, it means that I will enforce more strictly the guidelines I set for myself :

  • A maximum allocation per platform reduced to 10%.
  • A lower amount invested on each project – one reason why I lost a lot on Envestio was that I had a tendency to invest a lot in each Envestio project, in order to compensate for their small number -.
  • A reduced portfolio size for the platforms on my blacklist.

I will also focus on more conservative platforms. Among P2B (peer-to-business) platforms, EstateGuru will be the clear winner, as I plan to greatly expand my portfolio there. When it comes to P2P marketplaces, I will favor Iuvo, PeerBerry and Mintos – and focus on the reliability of loan originators, of course -.

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