Investing: Chasing yields in times of uncertainty

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This article first appeared in The Edge Malaysia Weekly, on January 16 - 22, 2017.


It has been a rocky road for Southeast Asian currencies such as the ringgit, rupiah and Philippine peso. Even the Singapore dollar was not spared from the turbulence, as analysts report that it is unlikely to sustain its recovery against the greenback this year.

However, this does not mean there are no opportunities for higher yields in the region. Sunil Aranha, CEO of ThinCats Australia Pty Ltd, says peer-to-peer (P2P) lending is a great diversification opportunity for investors looking to get good returns in this low interest rate environment.

“With the currency the way it is, people are looking at investing in places such as Australia, where they can hedge their risk and control or stem the depreciation of the value of their currency investing in Australian companies and getting returns in Australian dollars. lending via P2P platforms, investors are still able to generate returns of up to 15% annually,” says Aranha.

Launched in February 2015, ThinCats Australia is a joint venture with ThinCats UK, which was established in 2011. Aranha says the company started in Australia because of the immense opportunities in the country’s lending space. It has 2.1 million small businesses and banks lend about A$73 billion to these companies every year.

“About 91% of that lending is controlled the four big banks — Commonwealth Bank, Westpac Banking Corp, Australia and New Zealand Banking Group and National Australia Bank,” he says.

“All the bank lending for small businesses are done using real estate as collateral. So, if a small business is growing but does not have real estate, it will not be able to get a loan from a bank. This is also the case for small businesses that have been operating for less than two years.”

As the market is estimated at A$10 billion per annum, ThinCats aims to create a platform that will attract individuals and self-managed super funds (Australia’s superannuation trust structure provides financial remuneration to up to four members in retirement) that are chasing yields and open them up to the idea of lending to high potential, quality small businesses.

However, investors in Australia are generally conservative and tend to put their money in traditional asset classes such as equities, bonds and properties, says Aranha. “They are conservative. But the same token, everyone is quite keen nowadays to look for opportunities that have good yields since bank interest rates are so low in many jurisdictions around the world. These people will allocate a certain amount of their portfolio to higher risk investments.

“P2P lending is a new fixed-income asset class and it takes time for people to accept it. We currently have 389 registered lenders (investors), which is considered quite low. Our potential is huge — there are about 400,000 high-net-worth individuals in Australia alone and we also have investors from Malaysia, Thailand, Hong Kong and the UK.”


High capital, high returns

ThinCats’ loan values are high, from A$50,000 to A$2 million, so the platform only caters for sophisticated investors. According to the Australian Securities and Investments Commission, sophisticated investors are those with an annual income of at least A$250,000 for the last two years or who have A$2.5 million worth of assets.

On the ThinCats platform, a A$100,000 loan typically has about 25 lenders putting in A$4,000 each. These lenders may have also put A$4,000 into other loans, as they can put up a total of A$100,000 in 25 companies, says Aranha.

“Effectively, lenders will be able to diversify their risk like a bank, and get good returns while helping a small business get money it would not have got from the bank. This will allow the business to grow, hire more people and buy more equipment. Eventually, it will have a positive impact on the economy. This is what ThinCats does — putting those people together in a marketplace,” he says.

The platform’s average interest rate per annum is currently 13.9%, with no losses recorded yet. There are no institutional investors on the platform yet and half the lenders are managers of super funds. Although the minimum amount lenders can put up for each loan is A$1,000, most of them lend between A$5,000 and A$10,000, says Aranha.

In the context of underwriting loans, ThinCats operates very much like a bank, he says. “The borrower fills an application for the loan using an electronic process, where we ask for things like past financials, future projections, tax returns, the assets and liabilities of individual borrowers, and directors of the company.

“They also provide us with a 100-point check (personal identification system adopted the Australian government). Once we have all that, we use technology as well as our own judgement to decide whether the loan is eligible to be listed on our platform and whether the borrower can pay back the money. Usually, the loans are for two to five years.”

Although ThinCats does not decide on the lenders behalf where the money should be placed, it is very strict about the loans listed on the platform as the quality of the borrowers can make or break all its deals.

“A lot of platforms today use technology or algorithms to make lending decisions. In our case, because our loans are bigger and not homogenous, we use technology to get information on the borrowers to help with our decision. But we do not let the technology decide for us. It is still a human decision,” says Aranha.

Until a completely reliable artificial intelligence comes along, he still prefers human-led decisions as it is too risky to rely solely on technology. “That is why I believe we are more ‘fin’ (financial) than ‘tech’ (technology) — because we are still like a bank, but we are offering loans to the marketplace. The marketplace has technology, the lenders see the technology, but the actual relationship or decision to lend money or put a loan on the platform is very human and slow,” he says.

On the ThinCats platform, loans can take four to five weeks to process. But Aranha strongly believes that this is for the benefit of both the lenders and borrowers. However, there is always room for improvement should better technology become available.

The platform recently tied up with DomaCom, a crowdfunding firm that purchases residential properties. This provides lenders the opportunity to gain exposure to property assets as well as the ability to lend funds at an attractive interest rate with a lower risk profile.


Looking for larger participation

The company came up with the name ThinCats to suggest that it is the opposite of fat cats — a political term used to describe rich and greedy entities that use their capital to leverage the work of others.

So far, 33 companies have taken loans worth more than A$4 million via the platform. ThinCats aims to facilitate A$20 million in loans in the next 12 months. It is seeking funding to tie up with an unnamed party who will provide it with up to A$30 million — A$3 million in equity and A$27 million in loans. The platform is also looking to connect with larger groups to increase its presence in the market.

“We would like to reach out particularly to those who are looking at other investment markets, whether they are family offices, individuals or debt funds,” says Aranha. “Large family offices, for example, have fund managers managing up to A$4 billion and they have access to all sorts of investments. P2P lending is a very good opportunity for them.”

Aranha believes that investing in small businesses will catch on globally and that it is certainly a viable option in terms of diversification. “I have personally used all my self-managed super fund money on the platform because I prefer to lend to a business that is doing something to pay me back than to buy shares in a company. Here, I can see what is going on and what the company is all about,” he says.

“Additionally, for the big companies, the larger shareholders are institutions. They can move the market and no one else knows what is going on. The whole equity market can go down, geopolitical matters can affect it and so can many other different factors. Here, it is smaller businesses.

“Yes, it is risky and if the economy fails, the businesses will fail. However, these small businesses will make a profit if they have enough money to grow and they will be able to share that profit with you returning the money you lent them. I feel this is something that will gain more and more acceptance.”

Prior to the advances in technology which enabled P2P lending, lenders were not able to access the borrowers’ information in an open and transparent way. At the time, reliable fractional investments were not an option for individual investors. But now, there is no longer a need for middlemen, which contributes to the democratisation of finance, says Aranha.

“However, to be clear, we are not trying to disrupt the banks as we are only doing what the banks are not. Instead of disrupting, we are complementing them. What we are telling banks is that we lend to these small businesses that are not eligible for their loans to help them grow. And when they have grown and done well, they can go to the banks,” he adds.

Malaysian investors are allowed to lend via ThinCats Australia, provided that they qualify to be a lender on the platform. The platform has been approached parties interested in helping it penetrate the Malaysian market, but it felt that it was too early in the game, says Aranha.

“That was in April last year and we felt that we were still establishing ourselves. However, when we are ready, we will certainly look at markets such as Malaysia and introduce something partnering local players,” he says.