Interview At Look&Fin, the Successful Belgian Crowdlending Platform
We had the pleasure to meet Frédéric Lévy Morelle, CEO of Look&Fin, and to talk with him about his company’s business model, strategy and future challenges.
Look&Fin is a company that currently only focuses on crowdlending. Would you consider expand to equity-based or donation-based crowdfunding in the future?
No we would not. Since the beginning, we position ourselves exclusively on lending, and more precisely lending for companies. We are not going to open to equity-based or donation-based crowdfunding since they represent very different professions. Also, lending is the sector that enjoys the highest growth rate. Indeed, as we have a look at worldwide numbers, we notice that the whole crowdfunding market represented 34 billions of dollars back in 2015 and that crowdlending represented 70% of this volume. We observed the same trend in Belgium and in France. Therefore, focusing on it enables us to focus on volume, the latter being one of the most important factors to achieve a profit-making business model.
Another reason that explains this hegemony of lending activities on the market is that equity-based and donation-based crowdfunding are more based on empathy. As a matter of fact, either you donate money, or you give money in exchange of an uncertain reward, or you invest in a start-up’s equity with a significant risk. As far as lending is concerned, the first criterion of investment is the financial return. It can be considered as a new type of assets, along with bonds, stocks or real estate. Furthermore, this asset is very affordable, since you can lend starting from a few hundred euros and you actually understand what is behind it: an SME. There is a direct investment without passing through funds or asset securitization.
Now, if we look from the other perspective, it might be more interesting for companies looking for a financing solution to use crowdlending instead of equity-based crowdfunding, since there is no entry in the company’s capital assets. Why do some of them then still opt for equity-based crowdfunding?
Actually, companies that ask for equity-based crowdfunding are not in the same situation as the ones asking for crowdlending and vice-versa. Regarding equity, companies need it in a particular moment of their life: often at the beginning of their activities, as they do not yet make revenue nor have clients. They therefore carry a considerable risk as they get ready to launch a new product or service on the market. Where do they actually find this equity then? Usually from business angels and public, or private investment funds to which equity-based crowdfunding was recently added.
More mature companies such as SMEs are more directed towards crowdlending since they already have revenues, are profitable and therefore have an appreciable borrowing capacity. There is no interest for them to get diluted by equity investors, but the fact that equity investment allows for a higher growth.
On your website, it is mentioned that 67 projects out of 4093 were accepted since the creation of Look&Fin. How do you explain that so many projects do not succeed in their application? What are the most frequent eligibility criteria these companies do not meet?
To make things clear, these 4093 projects did not make it through the selection process and were therefore not offered to our investors. They did not fail to raise money.
Let us come back to the idea that crowdlending is a new type of assets: it is not because we do crowdlending that we accept everything. To the contrary, we are very selective as part of our approach since we work on our reputation. As of today, Look&Fin’s performance is 15 million euros raised, 0.7% default rate and 8.2% default-free yield. This is quite attractive in today’s context and we must work on keeping these numbers, which involves a rigorous selection.
To answer your second question, we first filter companies with three basic criteria, which are the following ones:
If one of these is not met by the company, we do not even consider its application. On average, the companies we work with have existed for more than ten years, make between 3 and 6 million euros of turnover – with some going up to 30 million – and have a reimbursement capacity with an EBITDA between 50.000 and 1 million euros. This is our core target.
As you practice such a selective skimming, are all the projects that you offer to your investors profitable? Based on what do you classify their risk from A to E?
Once the company matches the three criteria mentioned above, we can face very complicated analyses with very different levels of risk. Today, we are going to finance a 7 to 8 million euros turnover, 40% of annual growth and yet barely profitable company that requests us for the acquisition of a competitor. This will likely have impacts on its cash flows and reduce its EBITDA in the first instance, before synergies take effect. It is quite complex, and we need to take that risk into account.
It is very different from, e.g., a real estate company. We are indeed also working on an analysis with a company that includes 200 tenants with monthly rents and that plans on acquiring or making a new promotion. In this case, there is a much bigger recurrence of the revenues and the real estate park represents a big asset to support the debt, which tends to lower the risk.
Therefore it really depends on the cases.
What is the interest for a company to go through a crowdlending platform instead of a bank?
It actually also passes through a bank. What we offer is subordinated loans: we provide bank leverage, making it easier for our client to get a banking credit. As a concrete example, a company needed 3 million euros to acquire a building: it asked 2,5 million euros to the bank, 300.000 to us and raised its equity by 200.000 euros. The reason the bank accepted the credit is that there were 300.000 euros provided by Look&Fin, which is almost considered as equity since we do not ask for any collateral. For the borrower, our main advantages in comparison with banks are that there is no collateral needed and we can provide the funds way faster. Consequently, banks and crowdlending platforms are complementary.
You therefore play a role of intermediary between the project (the company) and the banks. Do you also make a screening of what the banks offer or do you favor partnerships with those?
We generally work with big retails banks. Usually, they bring us a file with a part of the financing saying that they do not want to carry the whole risk on their shoulders. On the other hand, we sometimes receive files we do not want to be the only ones on. We therefore tell the company that we are ready to provide a certain amount subject to its procurement of other types of financing. Then, either we propose it to our banking contacts, or the company gets in touch with its own bank.
How can an investor become a Premium lender at Look&Fin? And what are the advantages of doing so?
A premium lender account is very specific to Look&Fin since we are, as far as I know, the only ones to use this Premium class. The main idea behind it is to segment our investor base between:
- Freemium accounts that are open to everybody for free, and
- Premium accounts, free as well but that could become chargeable in the long term.
We have two different profiles that do not have the same needs and that we do not approach in the same way. On the one hand, there is a crowdlender who is going to invest 500€, which is the minimum required at Look&Fin, in about twenty projects for a portfolio of 10.000 to 15.000 euros. On the other hand, we have an investor who is going to lend 50.000 euros per project for a total portfolio of 500.000 to 1 million euros at Look&Fin.
The latter is the reason Look&Fin created the Premium class. Its advantages are multiple:
- Firstly, the investors can digitally provide information about their investment criteria in order to be kept aware of the offers that match their interests.
- Secondly, on these offers, Premium investors have an exclusivity period which can last 24 to 48 hours, which means they are invisible to Freemium investors and Premium investors whose investment criteria do not match.
- Thirdly, they are offered a higher interest rate than their counterparts.
- Finally, which can be seen as paradoxical, the maturity of the offers will be shorter than for the other crowdlenders.
Consequently, either the selected Premium members fulfill directly the fundraising target or they take a part and the rest can be subscribed by the other lenders.
Among these Premium lenders, are there big and small investors?
Small investors are mostly Freemiums, since the minimum amount to invest at Look&Fin is 500€. We reason on the principle that if you do not have a minimum of 15.000 euros invested, you are not diversified enough. Therefore, if you are planning to invest less than this amount, we are going to send you a warning saying that we think your investments are not diversified enough and that it could be risky for you. But this is at peoples’ own peril, we do not force them to hold a minimum total amount as long as they have invested 500€ per project as a minimum.
There are other crowdlending platforms such as Prexem that propose some protection funds. Is it a good idea according to you (in case of reimbursement default)? Would it not impact the profitability of the loans? What would be the best alternative to propose to risk-adverse lenders?
What we need to clarify is that crowdlending is a type of risky assets, since there are no guarantees. Risk-adverse people are therefore not targeted. The guarantees some platforms try to offer are not real ones and principally serve as marketing techniques. Indeed, as of today, no insurer accepts to bear that risk since the industry is still quite young. There exist insurances against other specific types of related risks but that does not mean that you will systematically be reimbursed, even partially, in case of default. Let us remind the fact that this is risky capital and that it is of utterly importance to work on the selection. If there was a guarantee offering a 100% protection, who would pay for it? Not the platform since the borrowers would not accept the offered rates and not the lender either, since a franchise on the guarantee would jeopardize his return. This could actually be compared to an investment in the stock market: no guarantee but significant returns that pay for the risk taking.
Let us now focus on the market in general: how do you think the future will be for the crowdfunding market in Belgium? Do you feel like new entrants could represent a substantial threat to you? What about banks (Hello Crowd, Bolero)?
I firstly think that, from a macro point of view, the market is very deep. We had a 100% growth every year until 2015. In 2016, with the latest numbers we have, the market reached 55 billions of dollars, which represents a yearly growth of 60 to 70%. Out of this, markets are very different around the world: out of these 55 billion of dollars, 45 represent the United States only. Besides that, the United Kingdom makes a little more than 5 billion, while continental Europe only accounts for 1 billion dollars. The potential growth ahead of us is thus significant as we look at the United States which are said to be ten years ahead of us regarding crowdfunding. An interesting research even showed that, compared to the historical data of the US, Europe is following the same trend.
Regarding the entry of new actors, the market is huge and therefore provides room for everybody. There should therefore be no fear and, on the contrary, this entry should be seen as a way to evangelize and create a market. By the way, it is sometimes better to be second or third than first, so that we can enjoy the fruits of the first’s investments. Hello Crowd or Bolero could have such a logic.
This is theoretical, but we think the future would hold a higher concentration rather than a multitude of small actors. For instance, in France, 90 to 95% of the collected amounts are from the first five platforms, including Look&Fin. In the United States, the market is controlled by less than ten actors. Today, we are increasingly solicited by smaller platforms for a concentration phenomenon. We think that the companies that will survive are the best-capitalized and the most selective ones.
Finally, regarding banks, they of course have a big strike force and could begin to acquire as well.
What about the situation in Belgium? How is it going and what would be your approach, knowing that the average Belgian person is rather risk-adverse?
Indeed, we are currently in Belgium in a wait-and-see attitude. There is a lot of money on the saving accounts since Belgians do not always know they have alternatives. We offer them to boost their savings by investing in the real economy, which raises more and more attention. It is today a drop in the bucket but, as we launch a file for 300.000 euros and get 450.000 euros in 40 seconds since the webpage did not have time to refresh, it becomes quite obvious that there is popularity for this kind of platforms.
We assess the crowdfunding market in Belgium to have reached 11 million euros in 2016. In comparison with what banks generate in terms of flows/financing, it remains quite limited. But, as I have said before, the potential ahead of us is huge.
Is this the reason why you allow other EU citizens, like French and Dutch, to invest in Belgian products?
Exactly. The idea of crowdlending is not to invest locally as it has been said at one point. I come back on the notion of financial offer: it is an innovative placement and, therefore, nothing must prevent a German lender to go and invest in an SME in Toulouse for instance. Today, we select Belgian and French borrowing projects and our lenders are split among five European countries.
How does it work from a regulation point of view? Is it difficult to achieve regulative criteria?
This is indeed quite constraining and complex. To make it simple, I will say that this is the reason why we are today limited on 2 markets Belgium-France from the borrower point of view. Indeed, we need to be approved by the regulatory bodies (FSMA in Belgium, AMF in France) and to play by the rules. There are regulations which seem to be taking shape with agreements related to this type of activities.
There is the FATCA regulation for an American citizen who possesses money on the European continent, which mentions that banks and other organisms have to report. Does this represent an obstacle to you? Or is it rather a reason for which you would deny investments in your projects by an American?
We do not have to comply to FATCA, but we have a whole procedure of KYC under which we must identify the beneficiary, the lender must first provide a proof address and a copy of his ID. But these are more AML measures than FATCA and, in our situation, we do not go through a bank but rather through a payment institution that generates IBAN itself, making the onboarding lighter.
By the fact that we do not lend on our balance sheet, we are actually not targeted by legislations such as Basel and Solvency. Being an intermediary, we do not have all these huge constraints about fixed assets, equity, etc.
How do you explain the fact that Look&Fin has become one of the largest crowdfunding platforms in Belgium? In what way does your organization differ from its competitors in the country?
As a matter of fact, this market is currently really a niche market. Since the beginning, we have exclusively offered lending to our investors. I was working in the private equity before and I got the idea of working only on lending since I did not think equity would become a mass-market product in the long term. Indeed, it causes dilution, modifies the valuation of companies that are already difficult to value and there is a high risk of illiquidity. We therefore began to propose crowdlending and to offer returns to our investors.
What is difficult though with lending is to get the money back with a certain return. Indeed, unlike equity, there needs to be a reimbursement of the investors every month. Thus, we are every month in front of our clients, who are today a few thousands of people.
However, as soon as you made a good selection, kept on focusing on quality instead of volume and delivers significant returns, people become retained and this is what creates a buzz. It takes some time, but once it is in place as it is today, we have more supply than demand, which means we have more investors than borrowers. The challenge today is therefore to increase the number of investment opportunities. For that purpose, we try to make digital acquisitions in order to keep our fixed costs as low as possible in order to generate a strong profitability, which is not easy due to the very low margins.
To get back to the geographical markets, you are present in Belgium and in France and you allow citizens of other European countries (Netherlands, Luxembourg and Switzerland) to invest. Are you planning on developing your activity in other countries?
There are two ways to expand: from the borrower and from the investor point of views. To acquire an investor does not require to reinforce our fixed costs structure, that is to open an office in each of those countries. We can acquire them via Google AdWords for instance. We are already working that way and we are even going to accelerate this process. As far as the borrowers are concerned, the acquisition cost is high since we need people on the field who source and meet those borrowers.
Today, we estimate in the medium and long term that the Belgian and French markets are pools of SMEs that represent lots of opportunities for us that we could offer to a larger number of lenders.