Aug 102017
 

It seems like every month the stock market is reaching new highs. Stock investors like myself have benefited greatly from the second longest bull run in history. 🙂 But it’s becoming very difficult to find value in traditional asset classes such as stocks, bonds, and real estate. So I’ve been looking at cryptocurrencies recently. As with any potential asset class my goal is to measure the future potential benefits of an investment and compare it with the risks.

Anyone can create a cryptocurrency as long as there’s a community backing it. That’s why there are over 1,000 digital currencies in the world today. According to Coin Market Cap, the 3 most popular ones are Bitcoin, Ethereum, and Ripple, in order of market capitalization. There are many smart people supporting these digital currencies built on blockchains, which is essentially a public record of transactions. For example I’ve been following investor Brock Pierce on Twitter. He used to be a child actor in many Disney movies lol, but what Brock Pierce is doing today is very promising for the cryptocurrency market. According to his crunchbase profile, he’s been in the venture capital space for over a decade now and is trying to make Bitcoins more mainstream. In an interview last month with The Guardian, he predicts that the “underlying technology of blockchain is going to impact our world more than the internet has.” And he’s not alone. Patrick Byrne, the CEO of e-commerce giant overstock.com, firmly believes that Wall Street will be forced to accept Bitcoin technology faster than most people think. Byrne’s company was the first major retailer to accept bitcoin as payment starting in 2014, long before competitors like Microsoft and Dell.

One major barrier to entry with bitcoin has been the lack of acceptance among merchants. From a consumer point of view, there’s not much point in holding an asset that hardly anyone recognizes. But if cryptocurrencies really catch on with mainstream consumers then now may be a good time to buy and hold some digital coins for diversification purposes. The price of bitcoin has risen 500% in the last 12 months, according to coindesk. And the price of Ethereum has gone up over 2500%. Wow! 🙂 I don’t have any digital currencies yet but I’m tempted to put a small amount of money into either Bitcoin or Ethereum and hold it for the long term. One problem is that buying cryptocurrency can be difficult for Canadians. Both the established banking system as well as the government really don’t like blockchain technology because it’s decentralized and not easy to tax or control.

For anyone interested to gain exposure to the price of bitcoin without actually buying any, there’s a fund for that. 🙂 Investor Barry Silbert has been one of the most active angel investors in Bitcoin. He has funded over 40 bitcoin-related startups such as BitGo, BitPay, Coinbase, Gyft, Kraken, and TradeBlock. He also launched the Bitcoin Investment Trust, which is publicly traded under the symbol GBTC in the United States. This trust solely invests in and derives value from the price of bitcoin. This gives investors the chance to benefit from bitcoin price movement through a traditional investment vehicle, without the hassle of buying, storing, and safekeeping bitcoins. But personally I would rather own a digital currency directly so not to pay management fees, especially when I plan to hold for a long time.

When it comes to investing in alternative asset classes, it’s worth looking at digital currencies. I don’t intend on investing in Bitcoins right now. I will continue to do more research on it first. Even if I decide to purchase some in the near future I will keep my cryptocurrency exposure to less than 1% of my net worth. Bitcoin may outperform stocks over the next 10 years, but it also carries a lot of liquidity and volatility risk.

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Random Useless Fact

Potato chip bags are not full of air, but of nitrogen gas. This is done to prevent the chips from oxidizing and going stale in the bag.

 

Mar 202017
 

I’ve been using a peer to peer lending service called Lending Loop for several months now. It allows businesses to access financing from lenders all across Canada (except in Quebec due to excess regulatory hurdles.) There’s about 6,800 investors using the platform so far. I thought I’d share my thoughts about investing in Lending Loop. Discuss the advantages and risks. And answer some common questions readers may have about the process. 🙂


TL;DR

What works

  • Website design and easy to use.
  • Responsive support.
  • Using technology to solve business problems.
  • Reasonable projected returns (5% to 10% pre-tax) on investment given the risk involved.
  • Alternative asset class that is not highly correlated with the stock market.
  • Transparency and thorough reporting.

What can be improved

  • It’s currently not eligible for RRSP/TFSA 🙁 This is a problem due to the asymmetric tax disadvantage of debt instruments.
  • Font on site can be hard to read due to small size and low contrast with background, especially the Q&A sections in the Marketplace.
  • Limited financial history for borrowers. It would be nice to see 4 or 5 year history for more established businesses.
  • Lack of a discussion forum. It could be beneficial for lenders to have an online space to correspond openly with each other about loans in the marketplace. The Lending Loop subreddit has restrictions about what information can be communicated.

Full review below…


 

What is Lending Loop?

There are many small and medium size businesses in Canada that have trouble raising money to expand their operations. Applying for debt can be a challenge because traditional banks are hesitant about lending money to entities with erratic income streams such as restaurants, contracting, etc. Large financial institutions generally can’t allocate the appropriate resources to underwrite small deals with the sophistication they require and struggle to price them according to the actual risk. As a result a lot of high quality deals simply fall through the cracks.

This is where Lending Loop (LL) comes in. It’s a crowd sourcing platform that raises money for growing Canadian companies. Based in Toronto, Lending Loop is Canada’s first (and currently only) fully regulated peer-to-peer lending platform. It operates an online marketplace that connects small and medium-sized businesses that are looking for debt financing with Canadian investors. It allows all investors, regardless of wealth or income, to access a high-yield fixed income asset class.

How Does Lending Loop Work?

Businesses can apply for a term loan product with flexible terms. The amount could be as small as $5,000 and as large as $500,000. Most loan durations are from 3 months to 3 years, but some can be as long as 5 years. Once approved, the loan goes into Lending Loop’s Marketplace where investors have 30 days to fund the project. If the loan becomes fully financed before the funding period expires, the loan will go through a finalization stage for a few days before it starts going into scheduled payments.

Investing with Lending Loop is safe, in the sense that it is a properly regulated company with government oversight. Lending Loop is registered as an Exempt Market Dealer in most provinces. But of course the individual loans on the platform are subject to scrutiny and due diligence just like any other investment. So it’s up to individual investors to decide which companies they want to lend to.

First Impressions

Registering on the Lending Loop site as an investor is a pretty simple process. I filled in some online forms and provided some personal information such as my address and Social Insurance Number (for CRA purposes.) Then I answered an investor questionnaire to assess my personal preferences and risk tolerance. I obviously got the “very aggressive” result. 😀 The last thing I did was connect my TD bank account with Lending Loop using the information from my cheque book so I can transfer funds back and forth. The entire process takes about 1 to 2 weeks.

The overall site design is pretty clean and easy to navigate. The main dashboard page gives a broad overview of my account situation.

The Marketplace is where all the action is. 🙂 This is where investors can shop for the best loans. There are usually around 5 to 10 different loans looking for funding at any given time. The companies are listed in order of when they first appear on the marketplace. There’s a brief description about each business, and the nature of their loan.

Clicking on any individual loan will take you to the detailed page where you can see the company’s financial details, what the owner intends to use the loan for, and other Lending Loop investors who have already committed to investing in the loan. There’s even a Q&A section within this area where lenders can ask the borrower questions.

lending loop marketplace details

 

About the Loans 

The funding process begins with a loan application. Borrowers are required to be incorporated or a partnership for at least 1 year and have generated a minimum of $100,000 in annual revenue. Once this minimum criteria is met, Lending Loop’s credit assessment team performs a formal review of the loan application.

Lending Loop uses its proprietary evaluation and scoring system to assess a company’s creditworthiness. Factors in the credit evaluation may include:

  • A business credit score obtained from a credit rating agency, which may take into account payment and delinquency history, delinquency patterns, years in business, years borrowing, the business’ size, and industry segmentation, among others;
  • Various financial metrics such as the business’ debt service coverage ratio, debt-to-tangible net worth, and working capital ratio, among others;

Once a loan is approved it is added to the Marketplace and assigned a Lending Loop Credit Rating. This rating, consisting of a rating from A+ through E, is intended to quantify the level of risk associated with a particular listing and corresponds to an estimated loss rate for the loan. The higher the rating the lower the default risk. 🙂 Here is a look at the Lending Loop interest rates for each risk band.

lending loop risk band interest rate ranges

These interest rates are what the borrowers pay. Lenders are charged a servicing fee amounting to an annualized rate of 1.5% of the outstanding principal amount owed on a loan every time a monthly payment is made. For example, if a loan rated B has a posted interest rate of 11.5%, then investors can expect to actually receive 10% yield on their investment if all goes well.

All loans are amortized using the declining balance method over the term of the loan. So similar to a mortgage, the loan is paid back in monthly installments with principal and interest until the loan balance is gradually paid off. All Lending Loop interest rates for loans are fixed.

Small loans under $30,000 are usually funded very quickly, within a couple of days of being published on the marketplace. But larger deals worth $150,000 or more can take weeks to fund or sometimes fail to become fully funded so the loan doesn’t go through and committed investors get their money back.

Currently there aren’t any liquidity options as there is no secondary market, so lenders would be fully paid back only at the time of the last payment.

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Aug 252016
 

Stepping into the Venture Capital Market

The stock market has been so boring lately! According to the Wall Street Journal, the last 30 days have been the “least volatile of any 30-day period in more than two decades.” But luckily stocks aren’t the only type of investments out there. 😀 Remember earlier this month I wrote about how to make money in private businesses? Well, one thing lead to another and now I am the proud owner of some equity in a growing business. It’s a small online company based out of California. It needs funding to grow and I’m looking for investment returns, so here we are. 🙂

Goodness gracious me. This means I’m officially an angel investor now! *plays heavenly music*

16-08-angel-investor-liquid

In today’s post I’ll talk about my new business investment, my decision making process, the due diligence involved, how much money I put in, and potential risks. But unlike a publicly traded stock, I cannot discuss details about this company’s financial situation since certain information isn’t publicly available.

Note: To keep things simple, all $ figures in today’s post will refer to U.S. dollars unless otherwise stated.

Tune into the Music 

Private equity can come in the form of investing in a local bakery, buying an established franchise, or equity crowdfunding via an online broker. I went with the crowdfunding method because it’s quick and easy, haha. 😀

Once I decided to put some money into venture capital I looked around for opportunities in this space. One particular company that caught my attention was 8tracks.com, which is a bit like Spotify. It’s an internet radio and social networking website revolving around the concept of streaming user-curated playlists consisting of at least 8 tracks, hence the name. 🙂 Users create free accounts and can either browse the site and listen to other user-created mixes, or they can create their own mixes. 8tracks sees itself as Pandora’s younger, cooler sister, haha.

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Aug 082016
 

Introduction to the World of Private Equity

When there are fewer bargains to be found in the stock market, investors will seek alternative ways to make money. So what else is out there besides stocks?

One viable option may lie in the enthralling world of private equity! 🙂

16-08-private-equity

Investing in the stock market is like working in a knife factory; after a while things can get dull. But private companies can be much more exciting! For decades private equity has produced higher returns than the stock market! It does this by sacrificing liquidity. Unlike publicly traded stocks, private equity shares cannot be sold easily as there is no secondary market. Investors normally have to wait years for a return.

Private companies can also use more leverage to increase their profits. To illustrate, the average debt-to-equity ratio of the S&P 500 is about 33%. But a leveraged buyout (LBO) deal will typically set a private company’s debt-to-equity ratio at 75%, or sometimes even as high as 90%. This intrigues to me on a philosophical level. As most of you already know, I also have a tendency to pile on the debt when acquiring new assets, hehe.

In the past only institutional investors and privileged asset managers had access to private equity. But not anymore. U.S. officials recently passed Title III of the JOBS Act. This essentially creates a regulatory framework for which retail investors can finally access private equity deals. This was not possible even a year ago. Wow, what a time to be alive!

In today’s post we’ll explore this fascinating asset class for retail investors, and how I might be taking my investments in this amazing new direction! 😀

So what is private equity? Generally speaking, it’s an asset class consisting of equity securities in companies that are not publicly traded on a stock exchange. Small but growing companies are very capital intensive and often have to spend a lot of money in the beginning to market itself and boost market share. But money doesn’t grow on sprees. So businesses rely on private capital as a way to fund their operations. Investors gain by having part ownership, or even executive influence sometimes, in these companies.

Some private equity deals are huge and often make it into the mainstream news. The CPPIB, which is the largest pension fund in Canada manages over $275 billion in net assets. It had the foresight to invest $300 million into a private company called Skype in 2009, which gave the pension fund a minority stake. Just 2 years later, Microsoft made the largest acquisition in its corporate history and purchased Skype for $8.5 billion. The initial $300 million investment turned into nearly a billion dollars for the sovereign wealth fund. Yay! Canadians who receive government pension benefits should celebrate. LEGO is another prime example. It’s more profitable than Mattel and Hasbro combined. Businesses like these always attract the attention of private equity investors for obvious reasons.

But not all deals are measured in billions of dollars. One segment of private equity revolves around venture capital and smaller companies.

 

What is Venture Capital?

Venture capital describes early stage financing that investors provide to startup companies or small businesses that are believed to have strong growth potential. Venture capital is an essential source of money for startups because with limited operating histories they often don’t have access to traditional capital markets such as stocks or bonds to raise money. For investors the upside potentially can be very high, but so is the risk. Investing in a startup company is one of the riskiest decisions one can make, which is why due diligence and a thorough understanding of the market are crucial to consistent profitability.

Last year CNN Money reported that there are 141 privately held startups worth more than $1 billion in the world. The term “unicorns” is often given to these impossibly rare phenomenons. Private companies are valued based on how successful it raises money. If you’ve ever seen an episode of Dragon’s Den or Shark Tank you will probably see it in action. For example, if an investor agrees to pay $5 million for a 25% equity ownership in a startup then the company is said to be worth $20 million because 5 ÷ 0.25 = 20.

The popular ride-sharing company Uber launched its mobile app in 2010, and it’s latest round of funding already values it at over $50 Billion, making it the world’s most valuable startup! To put that into perspective, both GM and Ford are also worth roughly $50 Billion each. But GM and Ford are publicly traded companies and unlike Uber, they actually produce and sell real cars, lol.

Venture capitalists invest about $30 to $60 billion a year in the U.S. Although most venture capital (VC) funds aim to beat the conventional stock market most of them do not. However, top-performing VC funds have consistently outperformed the S&P 500 and Russell 2000, including across multiple vintages. This means finding competent managers is super important as the lion’s share of profits go to the top quintile of VC investments. So now that we know what VC is, let’s explore some options.

 

How Equity Crowdfunding Works

Crowdfunding sites are very popular. We’ve all heard of platforms like Kickstarter or Indiegogo. Most crowdfunding sites like these offer the backers rewards, goodwill, or swag, but not money. But other crowdfunding sites are created specifically for raising investments and act as financial brokers between investors and entrepreneurs. There are two main ways to crowdsource for investment capital; Equity Crowdfunding, and Debt Crowdfunding. For the purpose of this post we’ll just be looking at the former.

Equity crowdfunding is the online offering of private company securities to a group of people for investment purposes.

16-08-crowdfunding-begging-hungry-invest

The way it works is that investors would give money to a startup that they want to back. Their money is pooled together with other venture capitalist and private equity firms. In return they receive partial ownership (AKA equity) in the business. The value of this equity will go up if the company succeeds, or go down if the company fails. Once the business grows large enough it would either be acquired by a larger firm, or file for IPO and become listed on the stock market. During this exiting process ownership of the company changes hands and the initial investors get their money back, hopefully with a decent profit. 🙂 An equity crowdfunding website would facilitate all of these transactions. It would be similar to Kickstarter, except backers receive equity in a business instead of a lame pre-order.

There are a lot of equity crowdfunding sites to choose from. You can see a full list on Wikipedia. But below are some names that I’ve looked into so far and shorted listed for my own personal use.

  • AngelList  Only accredited investors can invest at this time. $104 million total invested sum.
  • CrowdFunder For funding small and medium size companies. 12,000 investors. $100 million total invested sum.
  • SeedInvest  Mostly deals with tech startups. 100,000 investors. $50 million total invested sum.
  • Wefunder Crowdfunding company in San Francisco. 70,000 investors. $22 million total invested sum.

Minimum investment is usually $1K or $2K but it depends on which website and even which specific company you want to fund. The following SEC regulations apply to all equity crowdfunding platforms in the U.S.

  • If either your net worth or income are below $100k, you may legally invest up to 5% of the lesser number.
  • If both your net worth or income are above $100k, you may legally invest up to 10% of the lesser number.
  • No one may invest more than $100,000 per year, even for accredited investors.

Although there are lots of ways to invest in private companies not everyone should do it. As we’ll see in the following section, with high potential returns comes high risk and volatility. If you don’t like financial roller coaster rides then hold onto your stomach.

 

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