Our Head of Investor Relations and Corporate Development, Milena Naitoh, is back with her second Q&A to help prospective and existing investors understand capital deployments and top-ups on the Validus platform.
What is the minimum deposit size to start investing on the Validus platform?
Typically, investors adopt a “wait and see” attitude – they start with the minimum deposit size of $50,000 and then monitor their speed of capital deployment, opportunities available and assess this against their expectations, after which they decide whether or not to scale up their account.
Based on our records, the average individual investor (investing in the Validus platform) has a $250,000 portfolio. Assuming a well-diversified allocation across products and borrowers, we see the average investor fully deploying his funds over a 1-2 month period. As they start to see repayments and become familiar with the profiles of our borrowers and trends, we do see many investors opting to scale up gradually.
When do I consider scaling up or topping up my account balance on the Validus platform?
Here are several key factors to consider:
1. Speed – Specifically, we’re looking at the rate at which you have been deploying your funds. E.g., you may find yourself deploying an average of $10,000 – $20,000 on a weekly basis if you have a broad/flexible investment mandate, for which you’ve used auto-invest (or even manual investment) to deploy funds across a wide range of opportunities.
Good to know: In such a scenario, you may wish to consider topping up when your account reaches a balance of <$20,000 to ensure that in case something interesting arises, you will not miss out due to insufficient funds.
2. Timing of invoices from SMEs – SMEs tend to invoice near the end of the month under standard market practice. During this time, investors will often see a spike in live facilities for funding on the platform.
Good to know: As an investor, we highly recommend ensuring that your account is well-funded by week 3 of each month if you intend to leverage this opportunity for deployment so that you avoid missing out.
3. Your investment strategy – If your primary approach focuses on auto-invest, it is crucial to understand how it works thoroughly. Auto-invest places investors in a queue through “tokens,” representing increments of capital they have available to invest. From this queue, increments of capital are systematically and automatically allocated from each investor towards funding a loan until it is 100% funded. Once the loan is filled, it is deployed to the SME – this typically occurs within 24 hours, but sometimes as fast as minutes depending on the loan size and demand. Auto-invest operates on a FIFO policy (First in First Out) where the investor who deposited first will have an earlier place in the queue.
Good to know: If you want to be first in line to deploy funds at month-end under auto-invest, it would be ideal to fund your account in advance during the month, given the FIFO allocation.
4. Your investing personality – If you take a highly active investment approach with a frequent rebalancing of your portfolio, having even $10,000 of idle cash sitting in your account may not be a desirable option for you. As such, you would need to consider if you should top up the account beyond the initial minimum investment or top-up only when a particular loan piques your interest.
Good to know: The “fastest fingers first” policy is always vital to recall – if you do not have enough of an available balance in your account and do not deposit in time for your account to be credited before the loan is 100% funded, you risk missing out on the opportunity. This is why investors may often opt to keep a healthy margin, or buffer, available at all times in the account.
What are the parameters to calibrate when scaling up to balance risk mitigation with deployment?
1. Your product and borrower limit criteria – Many investors manage their risk by ensuring that their exposure to specific product types does not increase beyond a comfortable threshold, and they do the same when considering exposure to any single borrower.
Good to know: For invoice financing, the ultimate payment under a disclosed structure is coming from an end-buyer, in our case often a large MNC, so while you may see a single borrower name repeatedly, the payer in each request could be a different party, which is an in-built mitigant on concentration risk.
2. Scaling up your investments – Before scaling up, it may be helpful to consider your comfort level towards investing in particular products in percentage terms. By understanding your risk profile, you can keep calibrating your product-level allocation in proportion to any increases in portfolio size as you scale up your portfolio. E.g., if you have deposited $50,000 initially and determined that you were comfortable with up to 50% in Purchase Order Financing ($25,000) with a maximum of $5,000 per borrower, then when you scale up to $100,000, you may consider increasing these limits accordingly (maximum of $50,000 to Purchase Order Financing with a maximum of $10,000 per borrower)
Good to know: The logic behind this calibration is that risk remains affixed at your comfort level upon such calibration because when you think in % terms of portfolio size rather than a $ target, you retain the same parameters and limits while managing deployment speed relative to a greater cash balance, appropriately.
I’ve heard about ‘cash drag,’ and how do I manage it?
I’ll start first by defining what ‘cash drag’ is.’ We define “cash drag” as a common source of “performance drag” in an investor’s portfolio. In the context of investing through our platform, it refers to idle cash in the account which remains uninvested and does not put your money to work.
We recommend the following steps to manage cash drag in three ways:
- Calibrating your portfolio (ensure that deployment is proportionate to portfolio size, linking back to the earlier question)
- Understand your desired speed of deployment (e.g., the ideal time of the month to fund your account)
- Identify the cash management style that suits you (e.g., do you have enough time and capacity to adopt a wait-and-see approach, monitoring, and topping-up only when opportunities arise? Or is it simpler for you to keep a healthy available balance, focusing on a prudent way to ensure you’re prepared with little follow-up required?)
Good to know: Some investors would prefer to top up their account at selected times of the month where there is an abundance of facilities or deposit at the peak of financing demand nearer to invoice periods. It is difficult to avoid some degree of cash drag, but understanding what is comfortable and convenient for you to manage is essential.
As such, we’d highly recommend keeping your dedicated relationship manager (RM) apprised of your needs. Constant engagement helps both you and your RM understand the upcoming pipeline, performance thus far. They’re available to assist with information to help you decide how you would like to manage your portfolio on the platform.
For prospective investors, catch up with our previous Q&A, where Milena answers some of the most common questions about investing in SME lending and addresses how Validus manages risk and safeguards investors’ interest on the Validus platform.
If you have more questions, feel free to reach out to us at firstname.lastname@example.org. Existing investors may also schedule a 1-on-1 call to discuss your portfolio and have your questions answered by our IR team.