The State of Play in the BPR Market

We would like to share some insights into BPR products based on our recent research results. In our register, there are 34 open BPR investment products in the market as of March 2016.

Looking at the market composition by investment sector, the general enterprise sector, which consists a variety of companies across different sectors, contributes to 47% of all investment products. The second largest segment (20%) is investments in the financial services sector. Lending to low risk and oftentimes asset-backed companies falls under this category.

It comes at no surprise that the majority of BPR products have capital preservation as their main investment objective, given the generous 100% inheritance tax relief that investors can get after owning the underlying business or asset for 2 years. We found only one active product which invests in high risk seed/early stage companies, while 53% of investments are made to support later stage companies and “asset rich” projects. About a quarter of all investment offers are portfolios consisting of companies listed on the alternative investment market (AIM). These findings reflect the prominence of the capital preservation investment objective. However, we do see 30% of BPR products are targeting high returns and/or income generation.

Out of 1029 companies that are currently listed on the alternative investment market, about half of them are BPR qualifying investments. AIM based products are in average 5 times more diversified than other private company investment opportunities in terms of the number of portfolio companies. Diversification, the only free lunch for investors, can help to improve the liquidity of a portfolio as well as controlling risk. We expect investors to find greater liquidity when investing in AIM products considering the market’s large trading volume (an average of 502 million AIM shares traded daily from launch to date). In contrast, the trading volume of small and medium businesses that are not listed on AIM is thinner.

When it comes to charges and fees, advisers should expect a wide dispersion among BPR products. For example, the initial charge ranges from 0% to as high as 5.5%, with an average of 3.34%. Although the ongoing fee (1.34%) is significantly less than the initial fee, it could sum up to a large amount several years after initial subscription as managers charge it annually regardless of their performance. Most products, including all AIM opportunities, do not charge a performance fee. Fees accumulate and can potentially wipe out some or all of the risk premium investors deserve, so advisers should pay extra attention to products’ different fee structures.

We will launch our in-depth report on BPR investment later this year to provide advisers with all the up-to-date information that you would need to make more informed decisions for your clients.

Thanks
Ryan