Fixed income loan notes can be an appealing complimentary asset to portfolios. This is because investors get often get the same if not better returns per annum compared to the return of stock portfolios when averaged over five years or more, but without the stress of watching the markets daily and without the transaction and management fees charged by stock brokers.
Essentially you are lending capital to a business to grow their enterprise which is typically the domain of lenders like high street banks. The businesses benefit as they scale their companies faster than by purely using their own retained earnings due to increased liquidity via investors, and investors benefit as they enjoy a far higher rate of interest typically than bank savings accounts.
Some corporate loan note providers will offer to either pay interest and principal back each year, or interest only each year and the principal as a bullet repayment upon maturity of the loan note. There is reduced risk with interest and principal payments being made, but typically the interest rate is reduced – one to balance up when deciding your options.
Corporate loan notes customarily offer monthly, quarterly, biannual, yearly, or maturity payment frequencies of interest payments. The offerings are subject to negotiations which vary business to business but typically the higher the investment level, and the longer the loan note term, the higher the interest rates and frequency of interest payments offered by the businesses.
Are you looking at this as a growth investment or income? If it is growth, you may consider opting for maturity interest payments as you will get a higher yearly rate, if it is income, then you may opt for a lower per annum interest rate, but with a higher payment frequency – monthly or quarterly for instance.
Typically, businesses go to investors via loan notes if they do not wish to/cannot utilise bank financing. Make sure to ask the question why bank financing isn’t being utilised as it is typically easier to manage one bank lending relationship than investor relations for many individual investors.
Each business is different but a few common reasons are that either the business is profitable but of too small a scale for the banks; the directors do not wish to put up personal assets as security which is a common request from bank lenders; the terms offered by the bank are not favourable to the business and they prefer to go to investors instead.
Is the purpose of the investment to invest into a cash generative asset or to create a profitable entity? If you have a higher risk appetite, you may consider lending to businesses who are creating an asset that will be cash generative in the future (for instance lending to a business building a wind farm which will be operational in a few years).
Alternatively, a more conservative approach would be to only look for loan notes with lower overall returns, but greater security of interest payments due to the business already being cash generative month to month.
Invest in private equity
Investing in private businesses has historically been one of the most common ways to build generational wealth and every corporate behemoth we see dominating the stock market bulletin boards today all had humble beginnings.
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Invest in fixed income
This is essentially private debt. There are in general three types of debt investors can invest their capital in. Gilts: government bonds where you lend the government money.
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Important: The information on this website is for sophisticated/HNW investors only. It is not a personal recommendation to invest. If you’re unsure, please seek advice.