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TORCH Report: Lenndy
25/08/2019

TORCH Report: Lenndy

It's Lenndy's turn to be evaluated: How transparent and stable is this platform?

Those not familiar with project TORCH are welcome to read this intro first.

I chose Lenndy for my second evaluation because they offer a similar model to Mintos, which makes for an interesting comparison. To clarify, Lenndy is a Baltic platform unrelated to the defunct UK platform Lendy.

To maintain the integrity of a surprise inspection, this report was not sent to Lenndy prior to publishing. However, Lenndy is welcome to post a reply or send me an official comment. Readers are also invited to comment on the criteria and findings. The post will be updated over time.


Table of Contents


Legend

Pass

Pass with remarks – there is room for improvement

Fail – needs to be amended

Info

Bonus

All screenshots were taken on the reviewed platform, unless otherwise stated. Red notes and markings have been added by me. Click to enlarge any screenshot.


Transparency & Honesty: Platform

Identity

Legal entity and actual office address are listed in the website footer.

Key people

Entire team is listed in About Us: names, roles and faces. The footer provides a link to the company LinkedIn, where the LinkedIn profiles of the team members can be found. In addition to the regular staff, Lenndy has two board members; I hope they actually supervise and advise the company, and are not just passive investors.

Track record

Lenndy’s foundation year, number and value of funded loans, repaid principal and interest, current portfolio size, and number of registered users, can be found across the landing page (for users who are not logged-in) and Statistics page. However, some data is missing or displayed in a misleading manner:

– The number listed on the landing page under “Investors” is similar to that listed on the Statistics page under “Registered users”, which makes me think that it includes non-active users. The act of signing up to a website does not make one an “investor”. Only the number of investors with an active portfolio is relevant.

– The landing page highlights the cumulative loan volume. The more significant outstanding portfolio size is only mentioned in the Statistics page.

– I recommend adding the historic monthly portfolio size to the chart. This is probably the best representation of growth and current position.

– The most severe issue: Only cumulative figures are displayed in the growth chart, with no way of seeing the monthly figures. This was one of British Lendy’s sins, hence it cannot be excused to other platforms.


I took the liberty of converting the cumulative figures into monthly charts:

Financials

Not published on the platform.

Ownership

Not disclosed on the platform. Updated 31/8/19: Lenndy’s CEO has informed me that the company is owned by 4 Lithuanian shareholders (and Synergy Finance is not one of them. We will talk about Synergy down below).


Transparency & Honesty: Originators

Identity

Each originator’s legal entity, website and country of operation are listed on the Loan Originators section.

Track record

Information about originators’ track record is published on the Loan Originators page. For two of the three originators, Lenndy lists the foundation year, cumulative loan volume and current portfolio size. However, these numbers are outdated (the real numbers are actually better), the date of last update isn’t listed, and it’s unclear whether the numbers include loans not listed on Lenndy (they should).

The third originator, Daily Credit, is more complex: It was founded in 2010 but began operating under a new SPV in 2018. Lenndy probably couldn’t decide whether to include the old portfolio as part of the new company’s track record, so they picked a rather strange solution: Daily Credit’s cumulative and outstanding portfolio size simply aren’t listed.

Loans outside the platform

Lenndy does not provide information about originators’ loans that are not listed on the platform, like the ratio of late and default loans and the ratio of collected debt. This information is important, as it can reflect the originators’ situation long before the release of the next financial report.

Financials

The latest financial reports of all three originators are included in the Loan Originators page. All three were translated to English, which is good. One is audited, two aren’t. The reports are basic, showing only financial information, without an overview of operations and portfolio stats. I would appreciate the addition of something like the presentations on Mintos (example – pdf).

Basic loan info

Loan country, issuing date, and information about the borrower, are displayed within each loan page – enough to feel that the loans are real.

Information about collateral

Lenndy deserves special mention for the amount of information available on pledged assets in secured loans. This may include: scans of signed personal guarantees, copies of real estate evaluations, and photos of the vehicle in car loans. These small details provide an extra sense of realness and trustworthiness to the platform and its originators.


Transparency & Honesty: Performance

Full loan book status

The Statistics page includes a severely problematic loan status table:

– There is no way of switching from amounts to percentages – users need to manually calculate the ratio of late loans. How much is €78,319.19 out of €4,504,617.75? This makes the data highly inaccessible, verging on unusable.

– Loans prior to their first payment should not be listed as “current”, as they have not yet had a chance to run late. These loans artificially inflate the ratio of “current” loans, interpreted by users as “repaid on time”. I recommend separating those loans into another column called “Recently issued”.

– Loans with and without a buyback guarantee are displayed together on the table. Since buyback-guaranteed loans cannot run late by over 60 days, they favourably skew the data for loans without a buyback guarantee. For example, if the default rate in a specific category is 5%, but half the loans in that category have a buyback guarantee, it means that the chance of default for loans without a buyback guarantee is actually 10%.

– Loans are never listed as “default” or “bad debt”, which means that the table does not reveal the risk of loans never being repaid.

– There is no indication of the completion terms of finished loans: Whether they were repaid on time, early, late, or bought back. This is especially crucial for single-instalment loans, whose performance can only be judged after they are repaid.

To improve transparency, honesty and usability, I recommend replacing the loan status table with the following dynamic charts:

Original design, made-up numbers. Free to use by any platform

Specific loan status

After investing in a loan, its status can be seen in the user’s Portfolio. However, on the list of loans available for purchase, you can only see the status by clicking each loan individually. True, you have to press it anyway to invest, but it’s still easy to miss the “Status” field inside the loan screen, and invest in loans that are already late by mistake. Until Lenndy fixes this, I recommend using the filters to only show current loans.


Full loan book returns

Lenndy chooses to advertise their flattering average interest rate, with no mention of actual returns: Not on the landing page, not on the Statistics page, and not in the 2018 overview blog post. Judging by my 6-month experience, actual returns on Lenndy may be significantly lower than the advertised interest rate, due to late loans.

Investor portfolio status and distribution

The investor Dashboard includes an overview of loan status. It’s possible to switch from numbers to amounts, but not percentages. Some of my comments under “Full loan book status” also apply here, but this display is less misleading. It shows defaults (but does not show bad debts), and also separates repaid loans from those sold or bought-back, a nice touch.

The Portfolio page includes a detailed list of loans owned by the user. It’s OK, but does not give a good enough overview of the user’s portfolio distribution among loan originators, loan status etc. I recommend using the interactive chart I suggested under “Full loan book status” for this page as well.

Investor portfolio returns

Lenndy shows investors the average Annual Percentage Rate of their loans, but not the actual returns. In my own Lenndy portfolio the average APR is 12%, but the actual return is 10% (XIRR, calculated in Excel).


Transparency & Honesty: Safety

Stating the risk

Lenndy’s landing page (for users who are not signed in) includes the words “secure” and “safe”. Risk isn’t mentioned on the page, nor in the introductory video, nor on the sign-up screen. For this alone, Lenndy would flunk regulation in several countries.

The FAQ does address risk, but in a slightly disorganised fashion: The relevant questions are spread across several FAQ categories, some near the end of the list. I recommend putting all relevant questions in a single category called “Risk” or “Safety”. Also, none of the answers explicitly states the risk of losing money if all protective measures fail. The word “loss” must be used at least once.

Measuring risk

Lenndy does not offer ratings for loan originators – but it isn’t really necessary as long as they only have 3. More importantly: The originators do not provide a risk scale for specific loans. This is particularly evident when comparing loans with and without a buyback guarantee:

Enabling self-assessment of risk

Lenndy came very close to passing this one with flying colours. For loans taken by individuals, they provide the borrower’s income level and source. For loans taken by companies, they reveal the business annual turnover. For secured loans, they provide abundant info about the collateral, including the LTV. However, there is no way to see the borrower APR for specific loans.

Why do I care? First, for transparency. Second, to better understand borrower risk. For example, I would never invest in a loan without BB guarantee with 75% APR. But 14% APR is a totally different story. Having this data may have saved the need for a risk rating (see above), and it’s something that Lenndy can easily add to improve their TORCH score. Remember, only the effective APR counts, including loan issuing charges.

By the way, when looking at Daily Credit’s website, I noticed that some of their loans have higher APR than the range listed on the Originators page.


Operations & Risk: Platform

Overview of operations and risk factors

Lenndy is a loan refinancing marketplace, where investor can purchase claims for loans already issued to borrowers by external lending companies. Having just 3 loan originators, Lenndy relies significantly on each of its business partner. With an outstanding portfolio of €11m, it’s also a rather small platform.

Loan refinancing marketplaces don’t usually use their own funds to finance loans or compensate investors, which leaves them unexposed to risk from loan defaults or loan originator bankruptcy. However, in 2018 Lenndy bought some equity in originator Daily Credit: This gives the platform more control and an additional source of income, but possibly exposes it to some risk from this originator.

Lenndy cooperates with Synergy Finance, an investment management firm that offers its clients the option to invest in a crowdlending fund. Two of the people operating the fund are Lenndy’s CFOO and Loan Analyst, and the largest share of the fund is dedicated to Lenndy loans. This might present some conflict of interest for Synergy Finance investors, but should not have a negative impact on Lenndy investors. It may, however, mean that the founders are more motivated to recruit investors into the fund (where they charge a 20% success fee) than as direct users on Lenndy.

By the way, Lenndy’s CFOO Tadas Krivickas is also a co-founder of a newer venture called FinTrust Group, and since May this year, he also works in an IT company. Industrious fellow! I only hope his other endeavours don’t get in the way of growing Lenndy’s core business.

Growth trajectory

Lenndy’s CMO Arturas Stu once told me that they follow the “Bentley approach” of putting quality before quantity, even at the price of remaining a niche product. While this seems like a legit approach, I do have two doubts about its viability. First, size contributes to the stability of financial institutions. Second, in a rapidly-evolving industry, stagnancy will leave you farther and farther behind the competition.

Indeed, while platforms like Mintos and Grupeer continue to evolve, Lenndy seems a bit stuck. The number of originators hasn’t grown since June 2018. Looking at the non-cumulative growth charts (look above), I see a positive trend since the platform launched in September 2016, but can’t say that it’s “taking off” like some other platforms. The growth is more linear than exponential.

Profitability

Since Lenndy doesn’t share its annual reports, we can only treat it as an unprofitable business. Unprofitable companies must either grow their revenue or reduce expenses to survive.

Regulation

Lenndy is physically based in Lithuania, known among the Baltic countries for its stricter regulation on crowdfunding. I suppose this is why Lenndy chose instead to be registered in Latvia, where no specific regulation has yet been enacted for crowdfunding platforms.

I don’t love the idea of dodging regulation, but can understand why a small company wouldn’t want to deal with the rather restrictive Lithuanian authorities. So I’m only letting you know that Lenndy isn’t strictly regulated. The topic of regulation isn’t even mentioned on the FAQ.

Safeguarding of funds

Financial institutions have a responsibility to protect their clients’ funds from embezzlement or in case of platform bankruptcy, by either insuring those funds, or separating them from the institution’s own funds.

Updated 31/8/19 – Corrected my own inaccuracy: Lenndy maintains separation of funds through a depository account (which serves as a trust account), as explained in this blog post and reflected in the Terms and Conditions: “The Users and Operators and (or) other third parties funds in all other cases are separated and kept in separated bank accounts”.


Operations & Risk: Originators

Overview of operations and risk

Lenndy currently works with 3 loan originators. In a blog post discussing originators’ 2018 annual reports, Lenndy made the following statement: “All originators earned a revenue more than last year and were profitable in 2018”. This kind of half-truths is one of the things the TORCH series aims to abolish.

In reality, while the revenue of all three originators increased, the profitability of First Finance dropped from €59k in 2017 to €26k in 2018. Simplefin turned from loss in 2017 to a small profit of €11k in 2018. Daily Credit achieved a significant profit of €2.7m, representing an unlikely 65% profit margin, which may be attributable to their old portfolio (prior to establishing a new SPV in 2018). No comparative data is displayed on the old company.

All three originators seem to have a sustainable business model, but I wouldn’t necessarily describe them as low-risk high-quality lenders. They are comparable to small or medium originators on Mintos.

No parallel listing

Lenndy does not accept loan originators that list loans on other platforms, which allows for better monitoring and reduces worry about originators’ responsibilities to other platforms. This information was given to me personally by Lenndy; I recommend adding it to the public FAQ.

Buyback Guarantee

Some of the loans on Lenndy have a Buyback Guarantee – in case a loan runs late by over 60 days, it is bought back by the originator. This lifts the risk of loan defaults from investors, but puts a heavier burden on originators, who need to compensate investors for payments not yet received. This risk is somewhat mitigated by the following fact:

Collateral

Most loans on Lenndy (65% in 2018, if I understand correctly) are backed by collateral, reducing the likelihood of unrecoverable debts.

Lending risk and regulation

Simplefin and First Finance are Lithuanian lenders offering business and collateral-backed loans to medium-high risk borrowers (judging by the interest rates). Daily Credit offers high risk consumer loans in Poland.

It is my estimate that borrower interest rates will be further capped in many countries (including Poland and Lithuania) over the next few years, which would affect at least some of the originators on Lenndy. Again, only a personal estimate.

Diversification

With 3 loan originators, 5 loan types and 2 countries, Lenndy provides investors some room for diversification – but not a lot. It should be seen as a secondary investment platform.


Contingencies: Preparation for Worst Case Scenarios

Mass withdrawal

Lenndy allows investors to liquidate their portfolios by selling loans to Lenndy itself, for a 5% fee. This puts Lenndy at risk in case too many investors try to sell their loans at the same time (for example, if a loan originator shows warning signs).

Lenndy must prepare for this scenario, run simulations, decide in advance at which point they would stop buying loans – and inform investors on this topic. Not just in the Terms of Service, but in an FAQ article specifying the threshold at which the sell-back option will be put on hold.

Fake loans

Loan refinancing marketplaces face the risk of loan originators running a Ponzi scheme by listing fake loans. In Lenndy’s case, I judge this risk to be negligible, for the following reasons:

– Two of the three originators operate in Lenndy’s home country, and the third is partially owned by Lenndy. This allows Lenndy to closely monitor all three.

– The rather small loan volume of all three originators does not seem like it’s being artificially inflated.

– Originators provide abundant information about borrowers and collateral, as well as scanned documents, making these loans much harder to fake.

Still, to give investors an additional level of confidence, I recommend adding an FAQ explanation of the different measures taken to ensure that loans are real.

Platform collapse

Lenndy addresses the possibility of its collapse in an FAQ article, as well as the Terms of Service:

“…in case of the Operator’s bankrupts, Donatas Šatkauskas [the CEO] will have all relevant information about the made Agreements and he will give to bank administrator as well as he will inform the Funders, the Primary creditors and the Borrowers about the Claim right’s transfer fact and following terms under the Agreement administrating.”

While this is enough to pass the test, I don’t love the fact that Lenndy assigns this responsibility to a single person within the company. Updated 31/8/19: Lenndy is currently negotiating with a law firm which will take over the responsibility of safekeeping this data in case of Lenndy’s collapse.

Originator collapse

The FAQ offers a detailed explanation of the process to ensue in case a loan originator becomes insolvent. This process can only be tested “in the heat of battle”, but in principle, this is the kind of information I like to see. It gives investors some peace of mind that the platform managers have actually prepared contingency plans for this scenario.

So far, no originator has collapsed while having active loans on Lenndy. Still, this should be viewed as a real possibility and risk.

No provision fund

Some platforms maintain a provision fund to compensate investors for defaults. I’m ambivalent about this practice, as the deductions needed to build up a significant fund can dramatically reduce returns, sometimes leaving investors no better off than if they had lost money on defaults. So I am just letting you know that this feature is not offered on Lenndy.


Bugs

Not part of the TORCH ranking, this section is meant to bring to Lenndy’s attention a few technical glitches and textual inaccuracies which may have an inadvertent impact on transparency:

  • On the Loans page, sorting the list by “Buyback” and “Days left” does not work. For example, “14 months” should not be treated as a smaller value than “15 days”. Also, the little up / down arrow should only appear on the column header currently used for sorting.
  • On the Contact Us page there is a broken link to LinkedIn (ironic, I know).
  • In the FAQ article “How liquid are investments?”, the following sentence appears: “Lenndy offers a secondary market”. No. You offer to buy back loans from investors for a fee. A secondary market is a place for investors to sell loans to one another, and that does not exist on Lenndy. The phrasing needs to be corrected.

Concluding Remarks

I see Lenndy like a piece of hand-made wooden furniture, lovingly carved and maintained by a small and dedicated team. It’s rough around the edges, but emanates a personal atmosphere lacking from mass-market competitors. When looking at the small details, I can see points where it excels. But when putting it side by side with an IKEA chair (Mintos) I notice the imperfections of the niche product, and begin to question its competitive edge.

If Lenndy and its loan originators are able to demonstrate sustainable profitability – then I don’t mind if they remain niche. However, when crucial financial information is missing and growth information is displayed in a misleading manner, there is a limit to how much we can trust a platform.

Personally, I have withdrawn a small part of my investment in Lenndy – not because I recognise any immediate warning signs, but simply as part of adjusting my allocation to my sense of security in each platform. This is the idea behind project TORCH: To correlate between trust and investment volume, and point out the things a platform needs to improve in order to gain more trust.

When I sent the previous report to Mintos, they said it contained valuable information, but chose not to comment, and so far have not improved on any of the criticism. Let’s see if Lenndy does better.


I am not a financial expert nor an investment professional. My observations are based on knowledge gathered online, as well as my thoughts and personal experience as an investor.

While I put a lot of effort in research and fact-checking, it is possible that some errors or inaccuracies have escaped my notice. Readers are encourage to point out any mistake or missing piece of information.

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