Blog 8 - Ponzi Schemes
I learned about financial fraud this week and I mainly discuss Ponzi scheme in this blog. Ponzi scheme is the name of investment fraud in the financial field, the origin of pyramid scheme. Many illegal MLM groups use this trick to collect money. This trick was invented by a speculator named Charles Ponzi. I will discuss what I learned in the lecture in combination with the case in China.
Explosive growth was halted by a series of scandals. These included lender Ezubao’s $7.5bn Ponzi scheme, which claimed 1m victims two years ago. The ensuing government crackdown brought mass shutdowns. China’s total of online lenders has shrunk by a half from a decade ago.
Lufax, with over a fifth of the market, has managed to escape relatively unscathed. New users increased by a fifth and loans grew by almost a third last year amid the crackdown. It helps that Ping An owns 43 per cent. Loans are backed by the rock-solid balance sheet of China's largest insurer.
Opportunity (linked to this is Complexity)
Attitudes and Rationalisations (can linked to corporate culture)
When the business model's sustainability is questioned, growing market share makes little sense. There is little loyalty to any single platform among return-hungry individual lenders. Growth cannot continue for ever, implying revenue dependent on new lending fees is bound to slip.
At the beginning of January 2016, lufax completed US $1.216 billion of financing (including US $92m invested by round B investors and US $92m invested by round a investors in exercise of call options), with a valuation of US $18.5 billion. The valuation doubled in two years.
In order to avoid policy risks, lufax completed business restructuring in 2016 and successively incorporated into Chongqing financial assets exchange, Qianhai financial assets exchange and ping an inclusive. Its business covers wealth management, inter agency transactions and consumer finance, while P2P business transaction volume decreased, accounting for less than 10%.
On December 3rd 2019, a senior investor told reporters that this valuation is on the high side, especially in the current situation, "if lufax's business model is the official three horse drawn layout of consumer finance + wealth management + institutional business, even if it is fully achieved, it is the same as Ping An Bank, why can its valuation far exceed that of Ping An Bank?"
Investors have dodged a bullet. Lufax was planning a $60bn Hong Kong listing. Its $39bn private market valuation was mostly derived from the P2P business. If it comes to market at all now, a frothy fintech valuation would no longer be appropriate.
It is suggested to pay attention to the listed companies mainly engaged in P2P business. After all, in addition to the perfect governance structure, the listed companies also have transparent audit, law firm review and sufficient information disclosure.
According to regulatory requirements, transformation is an important direction. Only capable platforms have the opportunity to transform. Therefore, it is recommended to focus on P2P platforms with institutional capital cooperation, because it is very persuasive that P2P platforms are recognized by financial institutions at present.
https://www.ft.com/content/d6dee2ae-a76d-11e8-8ecf-a7ae1beff35b
Case in China
Lenders need scale. Peer-to-peer ventures have failed to achieve this individually and collectively. Lufax is the latest to throw in the towel. China’s second-largest online lender is shrinking its peer-to-peer business, while denying rumours of a complete exit. The move signals more withdrawals and consolidation are on the way across the industry.Explosive growth was halted by a series of scandals. These included lender Ezubao’s $7.5bn Ponzi scheme, which claimed 1m victims two years ago. The ensuing government crackdown brought mass shutdowns. China’s total of online lenders has shrunk by a half from a decade ago.
Lufax, with over a fifth of the market, has managed to escape relatively unscathed. New users increased by a fifth and loans grew by almost a third last year amid the crackdown. It helps that Ping An owns 43 per cent. Loans are backed by the rock-solid balance sheet of China's largest insurer.
Lecture theory & Reflection
Main areas for concern
Incentives and Pressures (Enticements)Opportunity (linked to this is Complexity)
Attitudes and Rationalisations (can linked to corporate culture)
Red flags
- High investment returns with little or no risk.
- Overly consistent returns.
- Unregistered investments.
- Unlicensed sellers.
- Secretive and/or complex strategies.
- Issues with paperwork.
- Difficulty receiving payments.
When the business model's sustainability is questioned, growing market share makes little sense. There is little loyalty to any single platform among return-hungry individual lenders. Growth cannot continue for ever, implying revenue dependent on new lending fees is bound to slip.
At the beginning of January 2016, lufax completed US $1.216 billion of financing (including US $92m invested by round B investors and US $92m invested by round a investors in exercise of call options), with a valuation of US $18.5 billion. The valuation doubled in two years.
In order to avoid policy risks, lufax completed business restructuring in 2016 and successively incorporated into Chongqing financial assets exchange, Qianhai financial assets exchange and ping an inclusive. Its business covers wealth management, inter agency transactions and consumer finance, while P2P business transaction volume decreased, accounting for less than 10%.
On December 3rd 2019, a senior investor told reporters that this valuation is on the high side, especially in the current situation, "if lufax's business model is the official three horse drawn layout of consumer finance + wealth management + institutional business, even if it is fully achieved, it is the same as Ping An Bank, why can its valuation far exceed that of Ping An Bank?"
Investors have dodged a bullet. Lufax was planning a $60bn Hong Kong listing. Its $39bn private market valuation was mostly derived from the P2P business. If it comes to market at all now, a frothy fintech valuation would no longer be appropriate.
Suggestions
Check the following:- Does P2P platform have a complete and independent risk control system? Do you have your own asset side?
- Has P2P platform completed Department inspection?
- Is the paid in registered capital completed?
- Is the network security center system docking completed?
It is suggested to pay attention to the listed companies mainly engaged in P2P business. After all, in addition to the perfect governance structure, the listed companies also have transparent audit, law firm review and sufficient information disclosure.
According to regulatory requirements, transformation is an important direction. Only capable platforms have the opportunity to transform. Therefore, it is recommended to focus on P2P platforms with institutional capital cooperation, because it is very persuasive that P2P platforms are recognized by financial institutions at present.
Further recommended readings:
https://www.ft.com/content/7a28aaa0-a9dc-11e9-984c-fac8325aaa04https://www.ft.com/content/d6dee2ae-a76d-11e8-8ecf-a7ae1beff35b
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