DBS

8 The global financial crisis demonstrated the illusory benefits of diversification across asset classes when correlations between them are, in reality, high. Drops in portfolio values dramatically underlined that genuine diversification is not achieved by simply choosing asset classes with different names. This has left a challenging legacy of advisers searching for both yield and assets that don’t just follow the movements of stock exchanges and customary indices. One of the benefits of debt based securities is that they offer exposure to a range of underlying activities across a broad spectrum of companies with differing age, valuation and risk profiles. Consequently, if shares, property, cash and term deposits struggle to reduce portfolio risk, generate income or drive performance, debt based securities can provide viable options. INVESTORS’ DESIRE FOR MORE ENGAGEMENT WITH THEIR INVESTMENTS a return 3 . And the democratisation of finance is giving individuals much greater direct access to entities looking for funding. There is certainly a feel-good factor and a connection to greater ethical standards, which has been driven by the growth in fintech platforms that link private investors to investment opportunities, without the traditional financial intermediaries. An October 2016 survey also revealed that many people are keen that their investment funds are directed to projects and companies that have meaningful goals, that mean something to them, outside of simply making money. However, they often struggle to find these sorts of options. Of course, with a bank, an account holder has no choice about how their deposited funds are used, but online platforms, such as those which offer debt based securities, have opened up previously inaccessible asset classes, giving small investors a choice as to who they allow to use their funds. The transparency of the underlying assets in debt based securities can really draw in investors who are interested in the issuer’s purpose or brand. ADVISERS’ AWARENESS AND UNDERSTANDING In 2012 Capita Registrars estimated the size of the UK unlisted bond industry at just under £90 million 4 , just over a third of the value of the peer to peer (P2P) lending market in that year. The peer to peer lending market has experienced incredible growth in that period – surpassing an annual figure of £3 billion in 2016 and forecast to hit £5 billion per year by 2018 5 . However, while debt based securities share many of the benefits which have driven P2P lending, of the approximately 100 active UK debt crowdfunding platforms, only around a fifth currently offer DBS, most of which raise between £1 million and £5 million per issue. The Great British Money Survey of April 2016 found that almost 70% of those questioned agreed or strongly agreed that they like to know what their money is being invested in to get “The appeal of unlisted bonds is a high fixed income, a capital return at the end of the bond’s life, discounts and loyalty offerings for bondholders, and options to convert the bonds into payouts in goods.” – Adrian Lowcock, Head of Investing, AXA Wealth SAY THEY WOULD LIKE THEIR MONEY TO SUPPORT COMPANIES WHICH ARE BOTH PROFITABLE AND MAKE A POSITIVE CONTRIBUTION TO SOCIETY AND THE ENVIRONMENT. HAVE NEVER BEEN OFFERED THE OPTION OF INVESTING IN SOCIALLY RESPONSIBLE INVESTMENT (SRI) FUNDS. 62% 51% SOURCE: TRIODOS BANK That said, we have started to see some investment providers such as Triple Point, Goji and Downing offering direct crowdfunded, unlisted bond investments. This growing trend has undoubtedly raised awareness of this new asset class. Nevertheless, the market is currently still small in relative terms, even though it has been developing rapidly (with an average growth rate of 171% (in continental Europe) in the three years to 2014 6 ), so perhaps it’s no wonder that many advisers’ awareness of it is limited. This lack of familiarity with debt based securities, and the funding models of the issuers, means that many advisers confuse them with online equity crowdfunding or peer to peer lending, or think of them as high risk unregulated investments that don’t fit the requirements of their clients. MISCONCEPTIONS Advisers who have not researched debt based securities tend to think they are: More like P2P than equity but with larger raises Harder to understand and require more due diligence than P2P Lacking diversification Very high risk However, these assumptions are generally no more than misconceptions. What’s more, since the RDR, advisers need to be aware of all of the possible investment options that could be suitable for each of their clients, and be in a position to recommend them when merited. This report aims to put them in a much better position to do so, by addressing these misperceptions. The Institute of Directors has called unlisted bonds the “bouncing baby of the bond markets” 7 – which we could interpret as healthy and growing and there are some compelling opportunities.