THERE have been accelerated efforts by the government in recent years to promote equity crowdfunding (ECF) and peer-to-peer (P2P) platforms as alternative sources of financing for small and medium-sized enterprises (SMEs) as well as new investment options for the public.
At the recently unveiled Budget 2020, for instance, the government has announced an allotment of RM50mil towards the co-investment fund (CIF) scheme for ECF and P2P financing next year.
Under Budget 2019, the government had also allocated a total of RM50mil for the CIF scheme to promote ECF and P2P.
In general, ECF and P2P investments could provide investors with very attractive returns, with rates that are comparatively higher than those of most other investment products.
It is estimated that ECF and P2P investments could produce an annual average return in excess of 10%.
Nevertheless, the high rate of return opportunities also implies that these products come with higher risk.
Potentially handsome gains
On ECF, investor interest in the platform is expected to pick up in a low interest rate environment, as investors seek to maximise returns on their financial resources, says Pitch Platforms Sdn Bhd co-founder and chief strategy officer Kashminder Singh.
“ECF has established itself as a viable investment tool for investors seeking higher returns. We foresee that there will be more interest in ECF in a low interest rate scenario, ” Kashminder says.
“These will be savvy investors who understand the risks of ECF investing and are aware of our advice to balance their investing portfolios with a mix of investments, ” he tells StarBizWeek.
Pitch Platforms runs the pitchIN, which accounted for 75% of the market share for ECF deals in Malaysia last year.
According to Kashminder, the potential for good returns is high in ECF investment as most companies that raise funds via ECF platforms tend to be “growth-stage” companies.
“In return for the risk associated with investing in these companies at that stage, investors stand to gain handsomely in the mid to long term, ” Kashminder says.
Studies suggest startups generally produce an average return ranging from 20%-25% per year. But investing in growth-stage companies can be very risky.
pitchIN on its website warns about the riskiness of ECF investing, saying early-stage companies face the risk of not doing well or could even fail. This means investors could lose part or all of their investments.
Kashminder, however, notes that pitchIN has been tracking the performance of companies that have raised funds on its platform over the past few years.
“Many (of the companies) are doing well, and investors, who have spread their investments over a few of these ECF companies, are on track to get good returns, as many of our ECF companies have seen their valuations grow, ” Kashminder says.
Low entry barrier
As for P2P financing, Peoplender Sdn Bhd (Fundaztic) CEO Kristine Ng notes the lowering of the benchmark interest rates could have a slight impact on rates charged to issuers or borrowers.
“This is because we need to take cognisance of the fact that the risk has increased in view of the impending economic slowdown, and investors will only be interested to stay invested if the return commensurate with the projected risks, ” Ng says.
She tells StarBizWeek in the event of a reduction in the overnight policy rate (OPR) by Bank Negara, only the lower-risk issuers/borrowers would likely enjoy slightly lower pricing in the P2P space.
“Investors would still consider putting their monies in P2P investments (to earn better returns), but perhaps, they would allocate smaller amounts of their funds into these instruments to better mitigate risks, ” Ng says.
She reveals gross return for P2P investors could range from 15% to 23% per annum, while net return could average between 10% and 14% per annum after deducting defaults and write-offs.
“As overall returns net of defaults and write-offs are still relatively attractive, and the management of investments in P2P is much more controllable by the investors themselves, I foresee the market to still grow significantly despite the possible slowdown in the economy, ” Ng says.
“Furthermore, the low-entry barrier to investing (in P2P) would still be a pull factor, especially among the Generation Y and Millennials, ” she adds.
According to Funding Societies Malaysia co-founder and chief executive officer Wong Kah Meng, a lower interest rate environment could enhance the appeal of P2P financing as an investment portfolio, which continues to provide investors attractive return despite the potential cut in the OPR.
“Essentially, lower interest rates by Bank Negara mean lower return for investors, who put their money in conventional products such as saving accounts, fixed deposits and bonds, which accordingly, make P2P financing a more attractive investment portfolio, ” Wong says.
He notes P2P investment’s interest rates remain unchanged, while at the same time, provide investors better risk-reward returns, even as return from conventional assets decline in tandem with lower interest rates.
“P2P financing is governed by the Securities Commission, hence, we are not directly affected by any change in interest rates by Bank Negara, ” Wong explains.
“For P2P financing, the interest rates that investors earn would depend on both the general level of interest rates in the country as well as the creditworthiness of the SMEs seeking financing, ” he adds.
Wong says his group is always looking at providing more investment products that can cater to investors with different risk appetite. For instance, its recently launched Dealer Financing product, which is also the first collateralised P2P investment in Malaysia, caters for the more risk-averse investors, to allow investors to obtain gross returns at 12% before tax and defaults.
“Given the current global macroeconomic environment, there is greater volatility among traditional investment options (such as stocks, bonds and unit trusts) and hence, P2P financing improves the overall diversification of an investor’s broader investment portfolio strategy, ” Wong says.
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