The risks associated with Go & Grow
Since its official release in June 2018, Go & Grow has proven to be incredibly popular within the European investor community. As a result, a significant number of investors have joined Bondora over the past 10 months, and the amount invested in the platform has grown in line with this.
We’re receiving a growing number of investments month-by-month.
What are the risks?
While it’s great to be able to say we’ve delivered on our promises to investors so far (and despite the scenarios below being unlikely), it’s important for us to make sure you’re aware of the risks.
1) The net return falls below 6.75%
A headline benefit of Go & Grow is the high-yielding return of 6.75%. Compared to the net return rates achieved since Bondora’s inception, the rate of 6.75% provides a substantial buffer. Today, the Go & Grow portfolio mirrors that of the overall composition of the loans originated at Bondora – in other words, across all risk ratings and countries. These loans have been originated using our latest generation of credit analytics, a proprietary model which has been developed for over a decade.
Therefore, the actual Internal Rate of Return (IRR) of the Go & Grow portfolio significantly outperforms the headline rate of 6.75% - the returns generated over this amount are held back as reserves and reinvested to mitigate the risk further. Bondora has no claim on these reserves. Overall, this gives us statistical confidence that the rate of 6.75% is deliverable for the foreseeable future.
However, a risk which may affect our ability to deliver on the rate of 6.75% is the amount of deposits we receive from investors. For example, if more money is added to Go & Grow accounts by investors than we can originate in loans – this results in a percentage of the portfolio remaining in cash (i.e., not earning a return). In this scenario, we may decide to add a limit to the amount new investors can deposit. In an extreme case, we could decide to stop accepting new investors altogether and form a waiting list – similar to Zopa in the United Kingdom.
Before deciding to make super-fast liquidity a benefit for Go & Grow investors, we analyzed close to a decade of cash flow data on Bondora investor transactions to determine the inflows, outflows and how the portfolio cash flows moved overall. This is so investors can rely on being able to withdraw money from their Go & Grow account at short notice.
In addition to this, we analyzed cash flow data from a number of banks and investment funds – specifically, their redemption and withdrawal cash flows, during the global financial crisis of 2007-08. This, combined with our own data, gave us the conclusion of the amount of continuous cash buffers that need to be in place to provide quick liquidity to investors.
The investor will receive their full withdrawal once there’s enough money available in the Go & Grow portfolio, generated via further returns or deposits
The investor will receive partial withdrawal once there’s enough balance available – paid out each banking day until the full withdrawal has been fulfilled.
It’s important for us to reiterate that the events described above are unlikely, but we want all Go & Grow investors to be aware of them and the action plans in place in case they occur.