It was not long ago that the Chinese P2P/P2B lending market was praised as a disruptor in the lending space and potential challenger to the traditional banks / lending model. Just as how it rose rapidly into the spotlight, its (potential) downfall could be just as quick, given how the sector has been brought into scrutiny recently and that P2P lending platforms have collapsed at a rapid rate (Reportedly more than 400 from June through August, according to Shanghai-based researcher Yingcan Group, although more is expected to fall). On these platforms, one could lend to individuals looking to finance one-time needs (e.g. requirements), or for working capital for businesses.
Although the P2P/P2B lending model has taken roots in countries like China, U.S. and U.K., it is still in the relatively nascent stage in Southeast Asia. In China, the largest alternative finance model in 2016 was marketplace/peer-to-peer consumer lending with ~US$137B, equating to ~56% of the total market in China. In contrast, it was ~US$485M in APAC (ex-China). The rapid development of economies in Southeast Asia and the rise of the middle class brings with it a real need for the democratisation of finance, which P2P lending aims to solve. Industry-wise, retail & wholesale trade sectors saw the most investment dollars, followed by manufacturing & engineering, finance, and business and professional services.
In Singapore, SMEs are defined as enterprises with revenue of <$100M or employment with <200 workers. In 2Q18, those in the oil and gas industry have been under performing the most due to increased volatility in prices and regulatory overhangs and technology companies performed the best, while in 3Q18, technology companies performed the worst and non-cyclical consumers the best. Some avenues for credit access are the SME Micro Loan, SME Working Capital Loan, Venture Debt Programme (VDP) and SME Equipment and Factory Loan, which are done through traditional lending institutions which have seen some complaints on the slow and tedious process which seems ripe for disruption – enter Validus.
Who are they?
Co-founded in 2015 by former DBS Bank SME head Ajit Raikar and backed by Vertex Ventures, Validus is a peer-to-business lending marketing place, which helps small and medium enterprises (SMEs) in Singapore to secure short-and-medium term financing from accredited investors and financial institutions.
Its claim to fame is a robust risk algorithm, using AI and ML, that was developed in partnership with the Credit Research Initiative (CRI) team of National University of Singapore’s Risk Management Institute (NUS-RMI).
On 1 Aug 2018, Valdius claimed that it has surpassed S$100M (~S$151M from live counter) in funding for Singapore SMEs and businesses through its financing platform, which translates to an estimated average loan size of S$70K over 1,400 disbursements.
What is their value proposition?
Speed. Validus uses a fairly vigorous process to onboard customers, in certain industries, using the NUS-CRI, intense disciplined data approach – any public data, run a proprietary algorithm based on big-data analytics to say yes or no within 24 hours, in particular focusing on the following attributes:
- Their behavior (i.e. credit bureau scores), as smaller end SMEs (defined by Validus as those with revenue <$5M) tend to behave like their personal lives
- Cash flows
- The industries they belong to
This addresses a huge pain point of SMEs as banks tend to finance SMEs only against hard collateral and the turn around time for an application can be 2-3 weeks but they need quick decision making as they want to minimize time spent on raising capital.
Validus also claims to be the only P2P platform in Singapore that offers insurance cover for lenders–up to 90% capital protection for most invoice financing facilities and that investors have generated a net IRR of 8-15% across a diversified product range.
While their primary value proposition is matching investors and companies, they also make proprietary investments into some of the opportunities.
Some questions that come to mind are how big is the market opportunity that they are looking at is, how scalable their crowdsourcing business model is, and relatedly, what countries they could potentially expand into.
In Southeast Asia, the notion of credit-worthiness, propensity to repay and regulation could vary greatly across countries. While there are countries like Singapore that might have more sophisticated and established regulation for lending and collection structures, this might not necessarily be the case in less-developed countries. The higher non-performing loans and potential headaches around collections could be a problem to Validus. On this note, there might also be a need to secure strong local partnerships in order to operate in any country and to navigate country-specific nuances in the industry, to which the company can hopefully leverage on Rajit’s experience on.
- Credit brief on SMEs, a quarterly report jointly published by the CRI and Validus on the probability of default (PD) performance of listed SME firms across different sectors at: https://www.rmicri.org/en/sme/
- Weekly credit brief published by the CRI: https://www.rmicri.org/en/wcb/
- FinTech solutions in Singapore: https://validus.sg/2018/10/singapore-the-tiny-city-state-leading-southeast-asias-fintech-charge/
- In a radio interview on MONEY FM 89.3’s Midday with Howie published on 8 Oct, Ajit mentioned that going forward, SMEs will, in most countries, continue account for 60-70% of GDP and that SMEs need to start thinking about productivity gains, using smart technology, internationalizing their operations and innovation, with the largest pain point being access to financing