A Climate For Change
18 October 17
18 October 17
Debt Based Securities (“DBS”) are a relatively new asset class which may not be familiar yet to private investors. The term refers to securities (traditionally, a share or bond say, evidenced by a certificate) that represent a loan (debt) from the investor to the company that issues the security.
Such DBS investments have become far better known since HMRC ruled last year that they could now be included in Innovative Finance ISAs. Returns of up to 6% per annum, delivered tax free through an Innovative Finance ISA hold huge appeal in the current low interest rate environment.
But equally important, DBS offer a predictable income and a known, pre-determined maturity date (i.e. investors know in advance how much they will receive and exactly when they’ll receive it).
Many DBS also come with legal security against tangible assets. That is not to say that they carry zero risk as a result, but it does mean there are physical assets in place to provide recourse, and better protection for investors, if the manager is well placed to take any necessary action should the need arise.
However, as appealing as asset security can sound in relation to reducing investment risk, what is often missing is the all-important element of diversification. Having recourse to a physical asset is helpful in principle, but if something happens to the asset, your investment may suffer too. Conversely, if the risk is spread across a sufficiently diverse portfolio of underlying assets, investment risk in significantly reduced. (Harry Markowitz won the Nobel Prize in economics for his work on portfolio theory in the 1950s).
Many DBS offers are limited to financing a single project, with a single asset and/or counterparty. For example, a single property or single renewable energy asset – this obviously increases investment risk.
There are however, a number of DBS offerings that are backed by adequately diversified underlying portfolios of assets. For example, Triple Point’s Advancr Bonds are used to provide lease, loan and asset finance to a large spread of UK-based businesses. This means that if any of these businesses were to fail, investors would be unaffected. Currently each bond is backed by over 60,000 leases and loans, offering a level of diversification that is unique to the sector.
Triple Point are acknowledged experts in the specialist field of asset-based finance and have provided over half a billion pounds in funding to SMEs since 2004. The funding available can be short or long term, and is provided for a wide range of purposes. Advancr Bonds finance a wide range of ‘critical’ business needs, for example; credit card payment terminals, short term stock finance, mechanical equipment for garages, and UK telecoms companies to the tune of one million call minutes a day.
A recent report published by Intelligent Partnership stated that there is a “compelling reason for the inclusion of debt-based investments in a balanced portfolio” and their popularity is growing at a rapid rate, as awareness amongst financial advisers and investors continues to spread.
However, when evaluating DBS, it would be wise to ensure the underlying portfolio offers a level of diversification that can mitigate away specific project or sector risks.