DBS

20 “The measure [IFISA] will increase the choice available to ISA investors, encourage the growth of crowdfunding and may improve competition in the banking sector by diversifying the available sources of finance.” - Conservative Government undertaken on the DBS for which it raises funds before allowing businesses to raise funds on their platform. This means that the platform does not hold any debt on its balance sheets, so the ultimate responsibility for the repayment of the capital or interest of the DBS which it hosts, lies with that DBS issuer. The platform makes its money by taking fees for arranging, promoting and administering the issue. The platform therefore does not have a stake in the DBS insofar as the money that has been loaned does not belong to it and it has no claim on the repayments and any interest due on the capital, aside from the fees it has agreed with the issuer and the investors for its services. Nevertheless, since it has a continuing relationship with the investors, who are its clients, during the lifetime of the DBS, it does have a responsibility to its clients. Some platforms such as Downing Crowd also make their annual monitoring fees contingent on the investors getting their capital back and interest paid in full, which goes some way to aligning themselves with their members and investors. Platforms operating in the investment-based crowdfunding space are required to verify that the retail investor is aware of the risks associated with their activity. Authorised debt securities platforms, with a much more tangible connection to their investors than self-promoted DBS, are much more likely to undertake several stages of in depth due diligence on the DBS they offer. So, the FCA has rightly identified that due diligence standards vary from firm to firm and not all firms explain their due diligence processes on their websites 18 . Consequently, advisers and investors should be aware of this and the general quality of investment offerings available on sites offering DBS investments. Another, less common model is that of the ‘pure balance sheet lenders’. The funds they raise are taken onto their own balance sheets. They then lend them out to third parties. This means that there have been two lending events – one where the company has issued DBS to investors and one where the issuer then lends those funds to a third party. Consequently, the issuer is responsible to its investors for repayment of the funds it has borrowed from them. For this reason, the issuer has a strong incentive to ensure that whatever it does with the money it has borrowed, the loan will provide secure returns. If this is not the case, the issuer is still responsible for repaying the funds and interest to its investors and it will lose money. In short, the issuer takes on some of the risk. This is much like a bank, where the bank is the issuer and the investors are its depositors. The Triple Point Advancr platform offers fixed-term secured debentures in the form of bonds issued by its group company, Triple Point Advancr Leasing PLC (TPAL). TPAL then has responsibility for paying interest and repaying capital. They can diversify and choose which companies to invest debenture receipts into. The Goji platform also offers crowdfunded bonds issued by its group company – Goji Nominees Limited (GNL) which invests in selected P2P loans across various UK platforms, sectors and risk ratings. Investors may be familiar with this concept as it is similar to covered bonds which are on-balance sheet instruments. TYPICAL TERMS Whilst there is no restriction on the length of these securities, there are both short and long term crowdfunded bonds and debentures, but generally there are few offerings in between. Longer terms tend to be up to 20 or 30 years, whereas the short term instruments usually have a maturity from 1 to 3 years. The longer terms tend to be associated with projects which have lengthy, stable cash flows, possibly backed by government subsidies, or infrastructure projects. Alternatively, they may be less mature projects and further away from refinance options. Infrastructure is an important sector for pension funds which have long term financial goals, as do many individual investors, who often find it difficult to access investments which offer long term growth opportunities in particular. Importantly, DBS can offer this. In a market with record low interest rates, the shorter terms may represent lower risks as the investor is less likely to be stuck in a product that is illiquid with capital at risk, when savings rates may come up and change the equation for risk adjusted returns. Crowdfunded bonds with a term under three years are also available, and have less liquidity risk as they tie in the investor for less time and require less of a crystal ball to determine the risks over the investment period. As a result, this type of shorter return could equate to a lower risk rating. Data suggests that the most common investment period is 3–7 years. A few more years provide for additional interest payments and therefore a greater overall return, and a more manageable timeline for the issuing firm to pay out interest and make sufficient earnings to repay investors’ capital. The reality of the issuer’s growth/income strategy should inform the term of the debt based securities that it issues, and this is something advisers should also take into account. Loan notes tend to be for shorter periods of perhaps one, or two years. This is because they may be used as a type of bridging finance