This article first appeared in Personal Wealth, The Edge Malaysia Weekly on June 17, 2019 - June 23, 2019
Malaysia’s peer-to-peer (P2P) financing and equity crowdfunding (ECF) space just got more exciting, with the introduction of eight new registered market operators last month. Investors will have plenty of options to choose from, given that the new operators will provide unique offerings.
For example, the three new ECF operators include the only Islamic ECF player in Malaysia, a renowned startup accelerator and venture capital firm, as well as a platform that wants to offer rewards alongside equity.
The five new P2P players cover an even wider spectrum. Two specialise in supply chain financing and invoice financing while others are engaged in asset financing, insurance premium financing and in micro-finance.
These new operators, registered with the Securities Commission Malaysia (SC), will join the first six P2P and seven ECF platform operators, who were granted licences in 2015 and 2016. Most of the first batch of P2P players provide working or growth capital to small and-medium-sized enterprises (SMEs) while two also offer invoice financing. The first batch of ECF platforms opened up investment opportunities in foreign and local startups for retail investors.
According to SC, as at end-March, P2P financing operators had raised RM294.48 million through 3,375 successful campaigns. The ECF platform operators have raised RM49.48 million through 53 successful campaigns since their inception. So far, both have provided alternative financing for nearly 900 Malaysian micro-SMEs.
Looking at an SC report from September 2017, there has been significant growth — P2P financing operators raised RM8.7 million through 44 successful campaigns while ECF platform operators raised RM23.18 million via 31 campaigns, with an 84% success rate.
Making the space vibrant
Many of the new ECF and P2P players are seeking to fill a gap in the market. Umar Munshi, founder of Ethis Ventures Sdn Bhd, saw a demand for a shariah-compliant ECF platform. Umar is already known in the Islamic finance space as a pioneer in shariah-compliant crowdfunding for property through his Indonesia-based platform EthisCrowd.
He was already getting inquiries from startups in the Islamic economy and investors who were looking for opportunities in this sphere, he says. “The Islamic economy is strong here and yet there is no such option here. It is the main reason why we decided to move here [from Singapore], because the demand for Islamic services is high.”
Many of the ECF and P2P operators will be able to tap a new investor group after receiving their licences from the SC.
One ECF operator is 1337 Ventures Sdn Bhd. Its founding partner and CEO Bikesh Lakhmichand says the firm already has a pipeline of startups that have gone through its accelerator programme and received investments from 1337 itself or other angel investors.
The same goes for P2P players such as Crowd Sense Sdn Bhd and Bay Smart Capital Ventures Sdn Bhd, which already have existing platforms that draw funds from institutional or high-net-worth investors.
“We are opening it up to retail investors because I think what is missing [in the startup space] is that most venture capital funds focus on late-stage startups, whereas early-stage startup funding is government-driven. But how do you provide funding to someone at a later stage if there is no deal flow in the beginning? That is why we have focused on creating the early-stage deal flow. Retail investors will play a role in this,” Lakhmichand says. “There is still a lot of room for ECF operators to grow. The current number of players ... is still considered small for such a market size and everyone has a different niche.”
On the other hand, there are operators who are targeting new segments or offering new services. Goh Boon Peng, CEO of MyStartr Sdn Bhd, wants to include rewards, such as credits to use the startup’s services, in the ECF platform to incentivise investors (see accompanying story on Page 8). This is because the ECF investment scene is still in its early days in Malaysia and there is no secondary market, so, investors are expected to hold onto their shares for many years.
“After the companies fundraise via my platform, I give my investors these reward components as a feel-good element, so they can see that there is progress in their investment. As a shareholder, the investor will use the services and hope the startup succeeds,” Goh says.
On the P2P front, microLEAP PLT will target only micro-enterprises, which is a space that is untapped by the P2P world. The founders, CEO Tunku Danny Nasaifuddin Mudzaffar and chief operating officer Matthew Noel Fernandez, found a demand for microfinance in that demographic.
“We did a survey with 250 correspondents, in which we went to the ground and met with food truck, kedai runcit and roadside stall owners to ask them about their appetite for P2P financing. We saw there was a need for it. A lot of them said they went to banks but, because they only wanted small amounts, the banks rejected their loan applications or could not help them. We want to help underserved or unbanked people get financing. We want to focus outside the Klang Valley as well, where we think financing is really needed,” Danny says.
Supply chain and invoice financing a popular theme
Two of the new P2P players — Money Save Capital PLT and Bay Smart Capital Ventures Sdn Bhd — are engaged in supply chain and invoice financing. Both types of financing facilitate the early payment of a seller’s invoice via third parties, such as investors. Two older players who offer invoice financing are B2B Finpal Sdn Bhd and Modalku Ventures Sdn Bhd.
There is a need for supply chain or invoice financing across the region, the new players observe. Suppliers need cash upfront to provide their services to the buyer. But they might not be able to get bank loans because these institutions cannot offer small amounts of financing or certain small suppliers may not have a good credit standing. This is where third parties such as these P2P players, or factoring companies, come in.
“Factoring is a financing method that enables sellers to convert their accounts receivables to cash before the due date of the payment, effectively financing their working capital. In Singapore, the total factoring volume is approximately 15% of its GDP, according to statistics from the World Bank. In Malaysia, it was only 0.12% of GDP in 2015.
“If we use factoring as a benchmark and target P2P trade invoice investment notes to hit 1% of GDP, it is a RM13 billion opportunity for us in Malaysia,” says Vincent Soh, CEO and founder of Money Save Capital PLT.
The real challenge is in finding the needs and trends of suppliers in each individual industry, adds Ang Xing Xian, CEO and co-founder of Bay Smart Capital Ventures Sdn Bhd.
“I do not see a shortage of high-quality [invoice financing or supply chain financing] deals. This is a huge opportunity for investors. Supply chain financing is taking off globally. For instance, Softbank [Vision Fund] invested in British supply chain financing company Greensill Capital in May this year. The global market is starting to pay attention.”
Supply chain financing is initiated by a buyer who wants to offer financing to its suppliers so they can potentially enjoy early settlement discounts or extend their creditor days to pay suppliers. A third party operator, such as a platform or company, liaises directly with the buyer, owns the invoice and is also in charge of collecting payment. The money is then disbursed to investors.
Invoice financing, meanwhile, is initiated by the suppliers, who can seek financing for their invoices from investors. They are responsible for paying the investors once they receive payment of the invoices from their buyers.
The two methods of financing have their pros and cons. For instance, supply chain financing is limited to the businesses that sell products or services to one company (buyer), while invoice financing could serve a wider universe of businesses as it deals with the suppliers. But the former also provides additional protection because the invoices are confirmed by the buyer, who pays the amount owed directly to the financing platform instead of going through the supplier.
Personal Wealth spoke to all the new P2P operators to give readers an idea of what to expect. Most of the platforms aim to go live by the end of this year.
financing insurance premiums for smes
Paul Kuan, director of Crowd Sense Sdn Bhd, found a niche in the market over a decade ago when he established Premium Capital Partners Sdn Bhd, which specialises in insurance premium financing for businesses. Now, he is opening up this investing opportunity to retail investors.
Sometimes, companies that want to buy insurance — such as fire, theft and third-party insurance — might find they do not have enough cash to pay the annual renewable insurance premiums upfront. They might also face cash-flow issues if the premiums are high.
“If I have limited cash flow, insurance premium financing is an option I can use so I do not run the risk of exposing myself to any contingent liabilities. Even if I can afford to pay my premiums, I can get financing for cash flow and cash management purposes. I can spread out the premium payments over the course of the year,” says Kuan, who has been in the banking industry for decades.
Some companies load their premium costs onto bank loans but, typically, banks do not offer loans solely for financing insurance premiums, according to Kuan. This means some companies might go without insurance because they cannot afford it.
According to Bank Negara Malaysia’s Financial Stability and Payment Systems Report 2018, 54% of the 1,529 SMEs it surveyed have insurance or takaful products. The current take-up rate is low, but the potential future demand for insurance and takaful is significant.
Insurance premium financing is already a common option available in the US, Australia and Europe. Kuan estimates the local market to be worth RM800 million to RM2.5 billion. The company is already serving many large corporations in Malaysia.
With the P2P platform, Kuan hopes to provide this service to SMEs. The platform will be named CoFundr. The notes’ tenure will be up to 10 months (based on the company’s internal credit model) because insurance policies last for only 12 months. The expected returns could range from 6% to 12%, Kuan says, and investors will have the option to rollover the returns to invest in other notes. Kuan hopes to launch by the end of the year.
What is unique about insurance premium financing is that under the insurance policy’s terms and conditions, when a policy is cancelled — in the event of a default — the insurer has to refund the unearned premiums that were already paid.
“If you paid RM10,000 for a 12-month policy and six months down the line, the policy is cancelled due to a default, the policy still has six months of premiums left. This amount will go back to the investor through us. The risk is now predicated on single A or double A-rated entities (insurers),” Kuan says.
The investment risk is minimised by the due diligence performed by the insurer offering the policy. The focus on the recovery process and short-term notes protects investors, he adds. “We think there is an appetite for this kind of investment. If you are risk-averse and you still want higher returns, this is perfect for you.”
Micro-finance for SMEs
As the only P2P financing operator focusing solely on micro-finance, microLEAP PLT adds the element of impact investing to the P2P scene. It provides financing to micro-enterprises from the B40 and lower M40 group.
The demand for micro-finance among small enterprises was determined by a survey done by Tunku Danny Nasaifuddin Mudzaffar and Matthew Noel Fernandez, who has worked in the banking industry. Another co-founder and partner is Norsharizal Mashahrin, the former CEO of the country’s largest micro-finance institution, Amanah Ikhtiar Malaysia (AIM).
“We have a compelling story to tell, which is very different from the other operators. It is very personal. We want their personality to shine through the investment notes, so we encourage issuers to include their photos and tell their story. We also have a Q&A that tells investors what the issuer wants to do with the money,” Danny says.
microLEAP offers financing ranging from RM1,000 to RM50,000. Small enterprises typically have problems getting funding from banks because they are only looking for small amounts.
“Their alternative financing source is their friends and family members or, even worse, loan sharks. So, we want to help those who cannot get traditional funding,” he says.
To provide investors with security, microLEAP provides micro-insurance in the form of personal accident protection to the issuers.
“In the event that the business owner or key person has an accidental disability or death, our insurance partner will pay out an amount to the P2P investors. We also provide basic debt management and accounting training to all our issuers. The insurance and training are done at no extra cost to the investor,” Danny says.
SMEs who want to become issuers must be in business for at least six months and make a profit. The tenure of the notes is from 6 to 36 months.
The platform will offer conventional and Islamic investment notes. The minimum investment value is RM50 and expected returns range from 6% to 18%. Issuers’ risk assessment is measured by their credit score and psychometric testing. Danny hopes to launch microLEAP within the next two months.
He plans to use the Grameen Group model for his platform. Grameen Bank, founded by Bangladeshi social entrepreneur Muhammad Yunus, is the pioneer of providing micro-loans to the poor.
“We will individually credit score five enterprises that will borrow individually. But during repayment, they will come in as a group. If one enterprise defaults, then the whole group will default. This peer support ensures the whole group will make their monthly repayments. Using this model, Grameen bank boasts a 98% repayment rate. This is something we want to incorporate during phase two,” Danny says.
Funding asset purchases
Capshere Services Sdn Bhd focuses on asset finance. The operator will offer financing on its P2P platform to companies that want to purchase assets while securing the asset as collateral.
“For example, if a manufacturing company wants to purchase a forklift, our platform will help it to raise funds, subject to the quality of the collateral and creditworthiness of the issuer,” says director David Chew Kah Seng. Chew and his founding team have a background in technology, corporate and investment banking, management consulting and other sectors.
Members of the team have worked in the UK and the US and were exposed to innovations in the financial sector abroad. “In addition, most of the team also have roots in the SME segment through family businesses in the medical and automotive sectors, for instance. We are well aware of the challenges when it comes to financing, be it for growth or working capital management,” Chew says.
The team hopes to improve market efficiency and issuer pricing by innovating their internal processes. “We also streamline note origination by implementing automated data capture from physical documents to process applications faster,” he says.
The general minimum investment amount is RM50. Chew says the company has identified and engaged with several issuers in specific target sectors, which he is unable to disclose yet, across various supply chains. The tenure of the notes will depend on the needs of the market.
“The expected rate of return would be subject to market expectations, collateral quality and issuer credit risk. While we are unable to disclose hard numbers at this juncture, we expect returns to be between those of conventional SME financing and unsecured P2P instruments,” Chew says.
In the event of a default, the operators will recover the funds by liquidating the collateral and claim the outstanding amount through legal means. Chew plans to launch the platform, called Capshere, by the first quarter next year.
Investing in supply chain finance
Bay Smart Capital Ventures Sdn Bhd is a P2P operator that will offer supply chain financing. The company has been operating in this segment since 2017, serving suppliers of blue-chip listed companies and subsidiaries of foreign multinational companies in Malaysia by connecting them with institutional investors.
The idea for setting up the company came from CEO Ang Xing Xian, whose father used a middle man and, later, factoring services, to sell his fish to supermarkets. Businesses or suppliers in need of funding sell their invoices to factoring companies at a discount. The factoring companies then provide cash in advance to the business and take over the responsibility of collecting the payment from the buyer.
“The main reason these middlemen continue to exist is because buyers and suppliers need financing and banks cannot service them,” Ang says.
He studied at Oxford University and gained experience working in the private equity industry. He also had a stint in MarketInvoice, one of the largest invoice trading platforms in Europe.
“These middlemen, or factoring companies, use a very different set of criteria to decide if they want to provide financing. Instead of looking only at the supplier’s financial performance, they look at the company’s reputation and who they are supplying to. We have a lot of internal models now to prove that this data is accurate. Our idea was to build an infrastructure that allows lenders, like the banks, to use alternative ways to provide financing to small businesses,” says Ang.
His friends — Edwin Tan, Dion Tan and Darrel Ang — who have backgrounds in investment banking and consulting — joined him as executive directors. They found a niche in providing financing for suppliers of blue-chip companies. Investors do not have to worry as much about blue-chip companies defaulting in the short term and failing to pay their suppliers.
“Instead of merely providing financing to the supplier, I am buying over that invoice, which allows me to collect money directly from the buyer (blue-chip company). This is the basis of what we are doing,” Ang says. The team has spent the past few years on the difficult task of building up the structure and system for supply chain financing. According to Ang, the group has financed about RM80 million worth of invoices across 1,400 transactions so far. The deals are spread across various industries and no defaults have been recorded yet.
Now, the company wants to open up this opportunity to retail investors via its P2P platform called CapitalBay, which is expected to be launched in the third quarter of this year.
“We looked at the deals and they were really good. If I were a general investor, I would be taking a low risk and earning 9% and 14% on average,” Ang says.
Investors will be investing alongside banks in similar deals, he says, which provides a layer of security as the banks have already done due diligence on CapitalBay. The notes offered on the platform will be short, typically one to three months, to minimise the risk if there were to be any change in economic conditions.
Investing in insured trade invoices
There is a huge opportunity for investors in invoice financing, observes Vincent Soh, CEO of MoneySave Capital PLT. The company plans to offer a P2P platform for invoice financing called MoneySave. “Investors can expect returns of 7% to 14% per annum in MoneySave’s platform.”
Soh has 25 years of experience in various industries, working for companies such as Fuji Xerox, KPMG and Hong Leong Bank. He was also an SC-licensed fund manager and an institutional client portfolio manager for Eastspring Investments Bhd and Kenanga Investors Bhd for more than a decade.
MoneySave’s business model is also supported by Magnisave Group Sdn Bhd, a financial advisory company licensed by Bank Negara Malaysia and a Capital Market Services Licence holder in financial planning by the SC. Soh and his team established the company in 2017, and it currently advises more than 50 of the largest corporate clients (mostly listed on Bursa Malaysia) in areas of liquidity, risk management and trade credit insurance.
“For starters, we plan to work with over 50 of our large clients’ supply chain communities, as each of these companies easily have 100 to 500 accounts payables (buyers) and accounts receivables (suppliers or contractors) at any one time. This translates into a pool of 5,000 to 25,000 SMEs that are linked to the existing clientele that we currently serve,” Soh says.
The SME suppliers (issuers) will trade their invoices on the platform. Some of the invoices will be insured, in which case investors could be provided with an indemnity of up to 90% due to bad debts or default by the issuer’s buyers.
“For instance, a noodle manufacturer (issuer) who supplies to grocery stores (buyer) can now purchase trade credit insurance against bankruptcy or protracted payment by its buyer locally or globally. The manufacturer can then offer the invoice that is trade credit insured on the platform at a lower investment return to investors as the investor’s risk is mitigated,” Soh says.
“But if the issuer defaults or fails to pay, the investors, assisted by the platform, must go through a recovery process to get the balance back. MoneySave is also exploring other possibilities of risk mitigation to lower the investment risks.”
Not all the notes on MoneySave will be trade credit insured, as it depends on the issuer’s credit risk and the buyer’s risk profile. If the issuer has a strong credit rating and its buyer has a strong profile and reputation as a good paymaster, then the investment note may not need to be insured.
“It is a safe investment option for retail and institutional investors. It is also a less costly and faster funding option for SMEs,” he says. Soh targets to launch MoneySave by December.
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