Keutzal And Envestio Story

You probably already heard about Baltic platforms Keutzal and Envestio. If not, you can find plenty of information online as it’s currently the hottest topic in crowdlending discussions. Fake investment opportunities, involvement in money laundering schemes, mysterious owners, weak or no communication and initiated criminal proceedings by Estonian authorities resulting in trust issues all over the crowdlending sector in Europe. Classic signs of frauds weren’t spotted by the community and the house of cards collapsed at the moment where millions of euros of savings are probably long gone.

It all started with suspicions about one specific loan to a company called Alborg Petrol. The project economy didn’t make any sense and interest rate was simply too high. Moreover, investors found out that the company doesn’t have their own offices, was founded only a few days before the loan agreement and photos of the offices and representatives promoted on their website were stolen from the internet. As you can imagine, after this, it escalated quickly. Even though Keutzal tried to handle the situation by playing the party which was scammed in this one particular case, more and more dirt came into the light. The CEO left, new CEO showed his incompetence in each subsequent interview and investors started to feel the fraud.

After the panic started, Keutzal reacted like an incompetent scammer trying to base some legal arguments for upcoming “big reveal”. They changed their policy by including 2 important sentences:

Among other, the Portal Operator may terminate the operation of the Portal at its own discretion at any time.

The Portal Operator does not perform any due diligence of the Borrower or the Project.”

Exactly what you want to hear from the portal where you have your savings invested. That they can quit at any time and they are not doing anything at all to keep your money safe.

That was the beginning of the end. Shortly, Keutzal worked only in restricted mode where investors could still log in but nothing else could be done and in a few days, their web was shut completely. Envestio followed soon. I don’t want to go into more details since the stories of those 2 crowdlending sites were very well described all over the internet. Instead of talking about what happened, I’d like to talk what to do so it won’t happen to you (or at least the chances of happening are minimized) by stating what to analyze everything before investing in new crowdlending platform.

Project Team

In my reviews I always check the team behind the platform and so should you. From this step only, Keutzal would have been avoided by me even though it was a very promoted platform back in time because of high promised returns. Check by yourself HERE. Is this the person you would willingly give thousands of euros? I don’t mean it in a bad way, it’s not only his age I’m concerned about. It is also the lack of experience in general and especially in the CEO role since he literally went from fresh graduate to CEO.

In the top management of the platform, I’m always looking for years of experience in both leading the team and working in the relevant industry at least in higher management. If I don’t see those 2 conditions fulfilled, there is no way I’m depositing my money there. It might be a little over-prudent, but my risk appetite is static and it doesn’t change just because I can see some fast cash opportunity. I can live with some member of the top management not passing my personal requirements if there are other ones who I find suitable for their roles.

Competitive Advantage

Crowdlending sector is really hot nowadays. New companies without any added value emerge very often and it’s crucial to invest in those ones, which are prepared to survive in this tough environment. For me personally, if there is no competitive advantage of the platform, I don’t see the point in investing. By competitive advantage, I mostly mean position in the market, amount of investors, know how in the due diligence process, favorable history of defaults, extraordinary competent team or operating in unique market segment.

Unfortunately, both Keutzal and Envestio have been just some another crowdlending companies attracting new investors by high yield only. In tiny Baltic countries, competition in crowdlending is enormous. So, when some “business” is paying 20% interest to investors on these platforms, something is not right. Either they were unable to secure this loan for lower interest rate on other platforms because they didn’t pass the due diligence process there, they are not competent enough to deal with other platforms or simply, this business doesn’t really exist.

Risks Involved

Did you know that buyback guarantee provided by both Keutzal and Envestio worked in a way that the platforms at all times were willing to buy the remaining principal back from you for a few % discount? This was well known fact and specific “business model” which was adopted by other platforms as well. On 27 December 2019 blogger Georg from crowdlendingrocks.eu posted an interesting interview with Keutzal CEO.

Georg: 
I see that, for example, all of your real estate projects have buyback. However, if the project defaults and the buyback kicks in after two months, where will the money for the buyback initially come from? I mean, it could potentially take many months or even years to go through the proceedings in court and then sell the assets. 

Alberts: 
It is basically coming from our pockets. We have to involve our own money, of course. So all the buyback we are posting we can guarantee. 

Georg: 
Kuetzal is a company and you say that some money for the buyback could come from your personal account. So the money for the buyback is not actually on the company account? 

Alberts: 
No. If we don’t need them we don’t see a reason to do that. 

This interview was probably posted too late to take an early action and try to withdraw the money. But after this interview, I wouldn’t hesitate one second in being done with the platform for life. There are only 4 sentences written as a response, but they represent the best proof of incompetency, not understanding the business relationships and fraudulent behavior from Keutzal. It’s unbelievable that this is exactly how the platform worked for months.

My suspicion is that this buy back guarantee was probably the reason why Keutzal went bust to start with. They were probably buying back loans from investors with cash they raised from non-existent loans. There is no way they would do it from their own pockets. Basically, they started their little Ponzi scheme there. When the amount of investors was growing, they were able to buy back any loans with more and more fictitious loan opportunities with unrealistic interest rates to make investors invest. But every Ponzi scheme is about to fail in the long term and this wasn’t an exception.

To recap, always try to understand all the risks you are facing with. The weird unsustainable model is indeed one of them. I personally write down the worst scenario that could happen and what is the platform doing to mitigate my risk from such scenario. By this, I’m able to identify the weaknesses and strengths of each platform.

Financial Results

Did you try to find latest annual report and auditor’s report of Keutzal or Envestio to check their results? I did and found nothing. It’s a shame that this is not that surprising in the industry. Lot of crowdlending platforms simply don’t share their results with their investors. For me, as an auditor, financial statements aren’t only about the profit or loss though. I completely understand that all such platforms are basically start-ups so I don’t expect the profitability yet (kudos to exceptions such as Mintos or CrowdEstate). Anyway, I’d like to go through the major shareholders, financing and any other information which would help me to understand the company’s business in detail. If I’m unable to do it, it’s a huge weakness.

I’m also very curious how did the companies accounted for the buyback guarantees provided by the management of the company rather that the company itself in their books. Just kidding, they most definitely didn’t do it at all 🙂 But this probably answers the question whether their results were audited. Again, most definitely not because no auditor in their right sense would sign the report (I hope so…). Unfortunately, not surprising again as it’s general practice in the industry to not invest in transparency.

Promoted Returns

The higher the return, higher the risk involved. If someone tells you anything else, he’s lying. It is true for stocks, it is true for bonds, it is true for traditional loans and it is also true for crowdlending. Business loans for 20%+ in Europe in the current times is the equivalent of either highest risk junk bonds or scam. I already mentioned that if legitimate business in the EU is not able to borrow for less than that, believe me, the business is in serious trouble anyway.

The point is to not fall for the platform just because the interest rate is high. And if you see the “independent review” which is 7 lines long and saying that the platform is great because the website is user-friendly, projects are interesting and the interest rate is high, find some other review immediately. Investigate other aspects as well, do your own due diligence and most importantly, consider such loans as alternative risky investments with a high chance of default from the beginning.

Spot Fraudulent Loans

This is maybe the hardest thing to do. But if you have at any point of time the feeling that something is not right, run away. Sell everything you can and withdraw your money as soon as possible. If you’re not totally paranoid, you might be onto something. And if the platform gives you any doubts about its projects, it’s not a good platform anyway.

Loan agreement – It should be in platform’s best interest to provide you with the contract between the platform and the borrower. It’s not a common practice in the sector to publicly put the contract on the website though. If you ask for it, however, I don’t see any reason why the platform should not provide it, even especially if you already invested in the project. If they’re not willing to do it, I advise you to run away.

Existence of business – Check the website of the business you’re considering to invest in. Check public registries for the proof of their existence, history and annual reports if available. Cross check evidence obtained from public sources to facts about the business stated in the platform’s opportunity profile. Additionally, check any photos posted under opportunity overview and search for any inconsistencies or maybe ask the question in fellow investor’s groups e.g. on Facebook. There might be a high chance someone lives close so he can check whether proclaimed construction of the building actually exists. In case of any discrepancies, run away.

Related parties’ issues – Verify the major shareholders of borrower and platform and their ultimate owners. In case you identify any related party relationship between the borrower and platform which is not directly disclosed on the website, I advise you to confront the platform and wait for them to state this information on the website. In case of unsatisfying resolution of this confrontation, run away.

Project financials assessment – Principal of EUR 500,000 with interest of 20% p.a. Loan provided for one year and it will be paid out at the end of the period after the sale of the apartments for market price EUR 600,000. You probably know what’s wrong here. Such inconsistencies might be really just an honest mistake of the data input. Or they might signalize the fraud. Those are the only 2 options here. If you invest through a platform which provide you with the cash flow projections always check whether taxes, interest and principal repayments are included and whether all assumptions used are reasonable. If you find any discrepancies, that means that the platform’s due diligence sucks and don’t place any reliance on it any more in the future. And consider running away.

Regulation

In the Baltics, where most of the platforms come from, crowdlending isn’t regulated by any authority. Other European countries have similar approach with some exceptions. This will most definitely change in the future. Until then, you can at least look for some exceptions (FCA license granted for Flender) or some voluntary regulations (membership in the European Crowdfunding Network or voluntary external audit – Unfortunately membership in ECN didn’t help in Keutzal and Envestio cases).

Summary

I’m honestly very sorry for people who will lose money invested in Keutzal or Envestio. I also believe, that there might be some other platforms quitting in the same manner in near future. The only thing each of us can do now is to decide responsibly where to put our money and to be aware of the risks. Don’t put your faith in the platform based on questionable reviews and false promises. And hopefully other scams won’t affect you.

Moreover, keep in mind that crowdlending business is the segment of the market, which traditional banks consider to be very speculative. All the businesses financed through crowdlending were either assessed as too risky by banks or they were able to secure very favourable conditions in the crowdlending sector (less collateral, less reporting scrutiny, no audit required). In real estate project, businesses might use crowdlending sites as an additional source of money on top of bank loans because the bank wouldn’t lend the loan-to-value ratio to exceed some amount. You’re usually getting a higher return than a bank but with higher risk as well as the bank would be the first institution to get their money back in case of bankruptcy. In 95% cases, you’re making the money bank cannot make because of its internal policies. That is both beauty of the crowdlending but also its damnation.