Kelvin Teo, Co-Founder and Group CEO of Funding Societies, discusses how you can diversify your portfolio with alternative investments.
Philipp: So let's move on to part two, and that's an interesting section I want to talk about, and this is the first time we are really touching on that topic during this podcast is alternative investing. Kelvin, you guys are bringing alternative investing, in this case, peer-to-peer lending to SMEs, to people that might have not had access to that kind of asset class before. So what is your kind of view on what actually alternative investments are in the first place? And why are they interesting for anyone to have some exposure to?
Kelvin: Sure. I think alternative investment is very broad. For us, we are really specifically providing opportunities for the public, both retail investors as well as accredited investors as an institution, to invest into private credit or private debt investments for SMEs. And how it differentiates itself, this asset class differentiates itself from other asset classes. It's really in three, four ways. It is the only asset class that is liquid, convenient,[02:00] and also easy compared to perhaps other asset classes. And if I may just illustrate that there is no lock-in period, the lock-in period for private credit is relatively short, so SME loans are about six to twelve months long. Unlike say in the case of a unit trust, where you are required to lock in for two to three years. Typically for private credit, the lock-in period is six to twelve months. So it's relatively short term, and on top of that, you receive monthly repayments. Both in the form of interest and principal. So it's a relatively liquid asset class that is suitable for say, young professionals or investors who have a shorter time or investment horizon. And if you have selected a good platform, the whole experience is quite easy, because you don't have to spend time studying a stock, or learning about gold investments. You just need to ensure that your investment is diversified, that you do not over-invest in any single loan, and generally, you have a reasonable return. I think for us, we never promise investors, or we never encourage investors to chase, for, say double-digit returns. For us, we are oftentimes looking at middle to single digits, middle to high single digits in our returns. And our goal is really to help to preserve and grow the wealth of the public because if we make some investors really rich, I need to make some SMEs really poor. So it's a really delicate balance to protect and grow the wealth of investors and making it accessible to the general public, not just the ones that are financially-savvy, but also the ones that are still learning. I think that's been why we started Funding Societies.
Philipp: No, I think this is an interesting ending there from you, why you started Funding Societies. I think that goes hand in hand with what we're trying to do at StashAway as well. Giving people access to global investments with no entry requirements. [04:00] And people that didn't have access to such things before, so that's quite aligned there on that front as well.
Kelvin: If I may jump in. I think at StashAway; I think the reality is that you would like to have a very diversified portfolio. And that generally, I think the private credit space is less correlated to the public investments that StashAway offers. So actually, we see it as a very good complement with each other to really diversify the portfolio of the investors and provide a more stable return.
Philipp: Yes. I think this is where I actually wanted to go to with you next, is kind of, how you see - the asset allocation of every individual is also very personal because we don't know what. I'm in a different financial and life stage then maybe you are. So, I might have a different portfolio than you have. But, where do you see alternative investments in more of a generalisation kind of way in an asset allocation for an investor? Do you have a certain percentage that you suggest people had to have towards alternative investments? Or is it, again, very personal?
Kelvin: Sure. I think it is quite personal. We don’t have a statistically-driven recommendation on that front. I think it's quite a personal decision depending on, of course, your investment horizon, whether you need the investment to be liquid or not. If you need it to be liquid, then it will be a good choice. At the same time, it also depends on the amount of cash that you have. Because funding for platforms like StashAway and ourselves, Funding Societies, our entry investment is relatively low at $500. So consequently, you can actually build a diversified portfolio quite quickly. But if for other asset classes, where the entry point is relatively high [06:00], then in this case, it will be harder for you to allocate funds accordingly. So it's a relatively personal decision. But having said that, if you're putting all-cash within alternative investment itself, we strongly encourage that it's being diversified by industry sectors as well. Not just by the number of loan count, because every single borrower could potentially ask for two to three loans in the form of invoice financing. But really diversified by the actual number of borrowers with an equal dollar for each of them. Because if you overly-invest in any single borrower, concentration risk kicks in, and you can actually suffer losses just like in any other asset classes. So I think differentiation is key, not just within a private credit asset class, but also perhaps with other asset classes.
Philipp: No, that makes perfect sense. And Kelvin, just for listeners who may have not been or are not users with Funding Societies at the moment. Can you explain, so the user has to pick each loan themselves? Or is it something that you guys say, hey, if you give us five hundred dollars or ten thousand dollars, we will actually build a portfolio for you that does what you just explained actually?
Kelvin: Sure. You are able to do both. So in 2016, so we started off as giving the power to the people, enabling everyone to pick the loans that they are interested in. Before we open up a crowdfunding exercise, we will email to the investors and inform them that hey, this crowdfunding will be happening in a few hours’ time or tomorrow. You can access our platform to review the fact sheet or the report of that particular SME to see if you're interested to invest. But later on, we found that hey, our loans are crowdfunded within minutes or sometimes seconds [08:00], making it very hard for some investors to participate. And it also increases concentration risk, when that happens sometimes investors overly-invest in one loan, because finally I can get in, let me put in more money. So in 2016, we have pioneered what we call auto-investment, is basically a machine bot that you can program. You can easily program it by giving it standing instructions on the type of loans that you're interested in, as and when the loan that meets your criteria is available. You will automatically allocate your funds to it. So it helps to indirectly create a portfolio for the investors, and help them to diversify further.
Philipp: All right, thanks for that explanation. I think you shed some good light on what they can do on your platform and how you can help them actually build out that portfolio if they're not as knowledgeable. If they don't want to go through the research process of looking into each individual loan you have on the platform themselves, so that's awesome. So, you guys pioneered a way of giving out loans to SMEs, getting investors access to this asset class within the alternative space. Where do you see other alternative investments become available to retail investors? Because I think always the problem is alternative investments all sounds good.
People want to get access, let it be private equity, or hedge funds, or commercial real estate deals. Where else do you see this market of alternative investments get down to the retail level, and not just be available to all accredited investors in the future?
Kelvin: I think it really goes down to the development of the fintech sector, the financial technology sector. Unless powered by technology, it's actually very hard to offer [10:00] some of these alternative investments to the masses to retail investors. And, I think in the case of Singapore, or perhaps Southeast Asia. Fortunately or unfortunately, the more robust alternative investment space that has taken root is basically a roboadvisor, and I think StashAway is a very notable example, and of course, private credit, which is where we are pioneering and driving. With the other investment verticals seem to still be at a budding phase, so I think it would take some time for maturity.
Philipp: Yes, no, thank you. So this is for the listeners that are looking at future entrepreneurial ideas, maybe there are some opportunities there as well for them to now, after this conversation, maybe that sparked their interest to think about different business plans of bringing more alternative investments to the masses. So to close it up, I do have a quick question for you. And it's obviously on everyone's mind right now; everyone is working from home. COVID-19 has a tremendous impact in the world and also here in Southeast Asia on small to medium-sized businesses, right? What are you guys seeing in that space since you're hands down in it? And how does it affect the peer-to-peer lending space at the moment?
Kelvin: Sure. I think COVID is a hard time for most people and most companies and industries. For us, there are three main implications; I think on the borrower's side, SMEs generally need more capital or need more financing support in this period of time. But the credit risk of them has also increased as well because of the recession. And therefore, our approach towards it is really how can we be leveraging our experience and data. [12:00] How can we be selective in terms of lending? So still helping SMEs but at the same time being responsible to the investors. So that's on the SME side, so there's a heightening credit risk that we need to manage. And on the investor’s side, there is a risk of credit crunch. So we do see some other platforms where investors' funding has reduced. Primarily because investors choose to conserve cash in the face of this market uncertainty, or some investors may have withdrawn money because they have lost money in the equity market, and they are facing margin calls. So there's a risk of credit crunch on the investor's side. I think we're very fortunate that since late-2018, early 2019, we have been actively diversifying our funding sources. So we tell investors to diversify, we ourselves also, of course, diversify our own funding as well.
Kelvin: So, we've been able to ensure a pretty stable flow of funding to continuously help SMEs. And of course, for the third implication is really on Funding Societies itself. Given that we are able to lend less during this period of time, it does hit our overall revenue and cash flow. And I think we are fortunate that we have received Series C money during April, actually around quarter one. Because we kind of foreseen that 2020 will be a hard time, hence we actually started fundraising in the middle of last year. That's enabled us to have sufficient capital, to actually ride through this difficult period.
Philipp: Yes, I was going to go back there because you mentioned that early on in the talk. And I think that's a fantastic news in this environment to be able to raise a Series C and really set yourself up for the next few years. And these things are cyclical, right? So things happen, but being strong from your balance sheet [14:00] as a company and having the funding will really help you probably take advantage of this time as well, and really grow and help these SMEs come through this period. So hey Kelvin, I think this was awesome, I think we got a sublime insight into your personal history, entrepreneurship, what sparked it and how you founded Funding Societies with your friends from school. And what it has become now as the peer-to-peer leader here in Southeast Asia, as well as covering this space of alternative investing. So again, thank you very much for being here. I really enjoyed chatting with you. And I'm sure we might be doing this again in a few years’ time and see where all of us end up being.
Kelvin: Thanks a lot, Philipp, thanks for having me.
Philipp: Thank you, Kelvin.
In this episode, Kelvin Teo, Co-Founder and Group CEO of Funding Societies, discusses how alternative investments, specifically private credit, can be a good diversifier to add to your investment portfolio. He also shares with us how Funding Societies makes P2P investing accessible to investors.
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