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.
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:
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:
Why don’t they borrow from the bank?
How can they afford to repay capital?
Capital is paid through various exit strategies and are dependant on the purpose of the investment:
You say that investments are predominantly 12 to 36 months. How can they be this short?
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