Page 6 - DIY Investor Magazine - May 2019

MINI BOND – MAX RISK?
Chief Investment Officer James Robson explains that RM Funds uses two separate, regulated structures, to deliver liquidity and disclosure in its investments in the alternatives space
The last article I penned for Focus on Funds concentrated my thoughts on some of the key risks surrounding investments within the alternatives space. The first two items on the ‘risk list’ were liquidity and disclosure:
Liquidity; ‘unless you are a pension fund or a significant institution why would you not want to be in a regulated or liquid structure’
Disclosure; ‘a lack of liquidity usually comes with a lack of disclosure... Investors need to know where exactly their investment is and what the ownership structure or security is, particularly when it comes to investments via platforms or mini bonds. Here the devil is in the detail.’
One month later and London Capital & Finance has collapsed resulting in expected significant losses for holders of their mini bonds.
In RM Secured Direct Lending’s annual report last month, I wrote: ‘The key risks for the alternative finance peer group lie in the more loosely regulated areas of the market where there has been a significant mispricing
of risk in recent years.’ If RM Funds can see these risks then why can the FCA not? What do we need to do as an industry to effect change?
Firstly, we can highlight the risks investors are taking in mini bond investments and what pitfalls to look out for – secondly, we can suggest other structures whereby investors can get access to other alternative income strategies which are regulated thus offering enhanced investor protections.
In my opinion what are the key risks for investors in mini bonds? Put simply the biggest risk is that the business fails and you lose your money. The key to avoiding
this is due diligence ‘DD’; what legal entity are you investing into?; What is the strength of the company’s balance sheet; where does your investment sits within its corporate structure; and re-examine any current and previous disclosures- are they adequate for you to really understand this investment?
RM offer two separate, regulated structures, with different strategies and return objectives investing within the Alternatives space; crucially these structures will allow investors to receive both the liquidity and disclosure unavailable in a typical mini bond.
Investors can then accurately decide whether they like the strategy or not – RM cannot guarantee returns but we can provide all the information required so potential investors can make an informed investment decision in conjunction with their financial adviser.
The first RM strategy is an Investment Trust (a closed ended structure) listed on the London Stock Exchange called RM Secured Direct Lending Plc ‘RMDL’, which invests in a portfolio of secured debt instruments.
‘RMDL AIMS TO GENERATE ATTRACTIVE AND REGULAR DIVIDENDS, TARGETING CIRCA 6.5%’
RMDL aims to generate attractive and regular dividends, targeting circa 6.5% through loans sourced or originated by the Investment Manager with a degree of inflation and interest rate protection through index-linked or Libor linked returns where appropriate.
Loans in which the Company invests are predominantly secured against assets such as real estate, plant and machinery and/or income streams such as account receivables.
As at 28th February RMDL had a diversified portfolio of 36 loans spread across a broad range of businesses giving a broad spread of risk for any investor.
Monthly factsheets outline the portfolio characteristics which are clearly labelled, a non-executive Board represents shareholders and a separate independent valuation agent assesses the companies’ loans independently of the Investment Manager.
There is limited leverage (maximum 20%) so a shareholder owns the proportion of the business represented through a shareholding.
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