We have listened carefully to our clients investment needs and what it is they want to achieve

How to build income and wealth for retirement 3d: Getting the best from different investment classes through unquoted bonds and loan notes


A diversified and well constructed portfolio is critical to income flow at retirement. And, having a good understanding of each principal investment class is important to achieving this. In this part of the blog series on building income and wealth for retirement, we examine unquoted bonds and gilts.

Unquoted bonds and loan notes

There are more than a million more limited companies registered with Companies House in 2017 than there were in 2012. According to Companies House, there were 3,896,755 companies on the total register at March 2017, and the upward trend does not appear to show any signs of slowing. While some of these companies will be under the ownership of listed groups, the number of unquoted companies continues to rise in the UK.

Some of the UK's largest businesses are not listed, and individual investors have been keen to participate in their success, as they look to diversify their investment portfolios away from traditional asset classes such as property and quoted shares. Household names such as Iceland, Dyson and Bet365 are all privately owned, yet are some of the UK's most successful businesses.

With the rise of the 'business angel' and access through crowdfunding and peer-to-peer channels, there are more opportunities than ever before for individual investors to invest in unquoted companies.

An increasingly popular form of investment in an unquoted company is through a loan note or corporate bond. A loan note is essentially lending to a company usually at a fixed rate for a term. The company will pay interest to the holder of the loan note either at the end of the term or periodically - eg, every six months.

The loan note may be secured on the assets of the company (eg, a property or fixed plant and machinery), which theoretically makes the investment less risky, or it may be unsecured. A loan note holder is expected to receive their interest payment before profits are paid to the shareholders. When the term ends, the company will repay the par value of the loan note.

Over the years Avantis has listened carefully to our clients investment needs and what it is they want to achieve. Unquoted bonds and loan notes have matched these requirements very well.

As a result of this we have developed a five-tier investment model reflecting our clients desire for fixed returns and which incorporates this class of investment.

The Avantis investment model is structured to include:

  1. Fixed income only investment
  2. Rewarding returns (typically 7%-15% pa)
  3. A short to mid investment term with a defined exit strategy, typically between 12 to 36 months
  4. Security in place
  5. Hands off: no involvement required

Some questions we get asked about the model follow:

What difference does a return of 7% to 15% make to my portfolio?


Investing in unquoted bonds and loan notes provide a route to achieve 7%-15% pa returns from capital that already exists.

If we said (for the sake of argument) a 12% pa return can be achieve and this is compared to 2% pa on traditional savings, the difference is far more lucrative with the latter over a period of time. For example: on every £100,000 of investment you would receive £12,000 a year instead of £2,000 a year! That’s an additional £10,000 annually (less attributable tax) as disposable income.

What kind of companies issue bonds and loan notes that fit this investment strategy?



Smaller companies are not large enough to afford listing fees and the issue of prospectus. They may not qualify for listing or have the luxury of time to make a proposed project happen.

Many of the companies are involved in property development. Others in lending to SME’s. An increasing number may have a ‘green’ project.

Why will they offer such high returns, typically 7%-15% pa?


It’s our job to negotiate the highest possible returns, commensurate with the investment being able to service the interest. Some common reasons include:

  • They can afford and need to in order to achieve project funding quickly
  • The market for fundraising is competitive and a successful raise requires this level of return.
  • Traditional funding sources either can’t or won’t provide the funding. This doesn’t mean the project is riskier, sometimes banks (for example) decide they have enough lending in a sector and bank managers are told to decline any further funding requests.
  • This is a small part of ‘enabling’ finance that means a larger project can move forward.
  • Funding often comes from multiple sources, resulting in a blended finance cost of which the returns offered to private investors are usually the highest but the overall finance cost is acceptable.
  • The funding enables a profitable one-off project to be undertaken, separate from the mainstream activity of the business.

Why don’t they borrow from the bank?


  • The timescales are too long with banks often taking too long to assess and approve a funding request.
  • Banks often include onerous supervision and controls which can in itself put the project at risk.
  • A company might have hit its borrowing requirement, then be offered a very profitable project but it sits outside the banks lending rules.
  • The security submitted is strong but doesn’t fit the bank criteria.
  • The bank is not lending at all to the sector.

How can they afford to repay capital?


Capital is paid through various exit strategies and are dependant on the purpose of the investment:

  • Rolling over finance into new loans.
  • Selling part or all of the project to a third party.
  • Selling part or all of the project to an investment house like a pension fund or a housing association.
  • Renting a commercial space and then selling the capital interest as above.
  • Repaying through working capital surpluses of the business.
  • Refinancing through traditional sources like mortgage companies and banks.

You say that investments are predominantly 12 to 36 months. How can they be this short?



  • We believe risk increases rapidly once investments extend beyond 36 months. So we rarely take on projects that are longer than this time.
  • Our investors like short0term investments which provide maximum flexibility for their portfolio.
  • In our experience, there are many investment opportunities which can be successfully completed within 12-36 months.

Other articles in this series


How to build income and wealth for retirement: 1. Identify the obstacles

How to build income and wealth for retirement: 2. How to create more retirement income

How to build income and wealth for retirement 3a: Getting the best from different investment classes -Through Shares

How to build income and wealth for retirement 3b: Getting the best from different investment classes -Through quoted Bonds and Gilts

How to build income and wealth for retirement 3c: Getting the best from different investment classes - Through day trading

How to build income and wealth for retirement 3d: Getting the best from different investment classes - Through unquoted bonds and loan notes

How to build income and wealth for retirement 3e: Getting the best from different investment classes - Through savings and cash

How to build income and wealth for retirement 4a: Ways to boost your retirement income - By investing in property

How to build income and wealth for retirement 4b: Ways to boost your retirement income - By starting a business

How to build income and wealth for retirement 4c: Ways to boost your retirement income - By reducing costs and outgoings

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