DBS

48 institutional intermediaries and investors to engage. We are living in a historically low interest rate environment, and people are expecting that trend to continue and may even continue for another decade, but regardless of that, people are looking for an attractive yield at fixed rates without taking on an inappropriate relationship to risk. When speaking to the advisers we work with, they tell us that the reason they like Advancr Bonds is the high level of diversification underlying the security and how that impacts the risk profile. Advancr Bonds are secured against 10s of thousands of loans and leases, rather than exposed to a single project. So, I’d say an attractive yield is the number one benefit and if you can marry that up with an experienced provider, then I think it becomes a very interesting proposition. For us, as an investment product, debt based securities are really transferable and long term. But, although they’re not traded on an exchange, the are traded through a bulletin board and they still give you the ability to exit or cash in your investment if you need the money. Secondly, you are investing into projects and asset classes which are not widely available to the general public. They have traditionally been distributed to institutions who have benefitted from them and debt securities are a way for the broader public to get access to those types of investments that they couldn’t otherwise. And the small minimum investment levels, from £5 (which compares favourably with the £1,000 in the ORB retail bond market) makes them appropriate for the broad spectrum of the population who are able to invest an amount that is relevant to them. Then, the third piece is in terms of risk within the crowdfunding world, where debt based securities are lower risk than equity; as a creditor you have more protections than as a shareholder. And in some ways, we are investing in similar opportunities to those covered by peer- to-peer platforms. But in general, the debt based securities investments will be bigger projects and bigger investments, with the average debt security investment at somewhere between £2-4 million. Consequently, you’re investing in a much bigger entity and we will see more mature businesses coming to the debt security world. Finally, debt security is likely to invest in infrastructure, and infrastructure is one of the most important things which pension funds invest into because they have long-term liabilities i.e. long term financial goals. Individual investors can have similarly long term financial goals, but there is a shortage of investment of long-term returns, whether that’s income or growth. And debt securities are a way of achieving that. I think investors and advisers want high quality borrowers delivering returns well in excess of cash rates. Our investors are seeking relatively higher returns and are happy with a 4-5 year hold period. Other offerings target lower returns with more liquidity. The asset class is relatively new for most investors and advisers, so they prefer routes that offer transparent and regular reporting with a reliable sponsor, who can deliver reporting and deal with any problems. I think it’s really important that debt based securities are simple and transparent as historically, these are investors who are more used to investing through a fund. The fees are higher when investing through a fund, where you are paying a professional investment manager to pick the projects for you, to negotiate the rate, to make the investment and then oversee that investment all the way through to exit. Funds also diversify for investors, whereas in individual debt based securities, there is a concentration risk. Therefore, our shared responsibility with advisers is to make sure investors understand they shouldn’t put all their eggs in one basket and they should invest in a number of bonds over the year to spread the risk. These really need to be simple investments, so people can understand them. Both advisers and their clients should understand where their money’s going, how it’s being used, and how it’s going to get paid back, but equally the offer document should give them a clear view on what could go wrong, as well as what could go right. That way they can really assess the risk, and also assess whether the rate of return they’re getting, makes it a risk worth taking. In my view, it is much easier to assess debt based securities than peer-to- peer loans – because of the amount of information provided, and the fact that our Crowd Bonds always have an independent research report available. With P2P loans you are really relying on the platform to assess and price the risk and in many cases the investor or adviser doesn’t even get to pick their loans. I don’t know how comfortable I would be advising clients to lend through a platform unless I had a really clear understanding of what credit checks have been done, what lies behind a ‘risk rating’ and the rate the borrower is paying, as that is often a better indication of the risk of the investment than the rate offered to lenders. The bottom line is just how good is the risk adjusted return, and when I have met with advisers, they are usually of the view that these are good rates of interest given the LTVs “There is a clear and obvious advantage that debt based securities in the form of bonds have over a P2P investment offering. The structuring required to enable the issuance of bonds creates an opportunity for the platform and the borrower to incorporate critical safeguards, governance and accountability.” — Rohin Modasia, Property Crowd