Peer-to-peer and marketplace lending have thrown open opportunities for retail investors – from investing in SME and consumer debt to property, in addition to invoice financing options for high net worths.
However, there’s one remaining major asset class retail investors have not been able to access – secured corporate loans and bonds (the wholesale variety, not the every day retail corporate bond). Because of the minimum block sizes required to invest, these have remained the preserve of banks and funds. But this is changing, thanks to online platform WiseAlpha.
Describing itself as a “compelling alternative to low-yielding savings accounts, the stock market and P2P lending marketplaces”, the firm enables retail investors to buy a small chunk of the debt of big companies for as little as £100. Current offers range from Virgin Media and Vue Cinemas to New Look and Enterprise Inns.
Yields on current listings are between 6 and 8 per cent. For instance, a bond on offer to Study Group International is paying a coupon of Libor plus 8.9 per cent, maturing in September 2018.
Investors view a firm’s financial statements and presentations on the platform – many of them have a track record that goes back decades. Investors may often have used the firm’s product or service, too. This, says founder and chief executive Rezaah Ahmad, makes it unique in the alternative finance world.
I caught up with him to learn more about WiseAlpha.
How did you come to the idea of WiseAlpha?
Having started my career in banking, structuring and investing in corporate loans and bonds, it always amazed me how old-fashioned the corporate debt markets were in comparison to the equity market. I’d also been observing the amazing progress of fintech, and in particular some of the crowdfunding and P2P players, and just thought, “this is a multi-trillion asset class now currently unavailable to retail investors and it should be. Let’s build a platform to provide access in the most economic way”.
Despite having the relationships to build WiseAlpha, global investment banks are not the easiest beasts to deal with, so we’ve spent a few months building demand on the investor side. Now, we’re operating efficiently and have a good selection of investments on the site – and this will increase over the coming weeks.
If you’re a WiseAlpha investor, you’re not investing direct into the senior debt issued by the companies – you issue participation notes and pre-fund the loans yourself with capital from large investors. Why did you decide to do that?
The large minimum block sizes of these investments meant we needed to create a neat solution to allow retail investors the opportunity to invest in specific loans or bonds. Our participation notes are that solution.
Over the last month we’ve been moving towards an immediate execution model. Working with larger investors to pre-purchase means we don’t have to build investor commitments using a crowdfunding-style green bar mechanism to get demand. We just want to deliver a better experience for investors which, we believe, means being able to buy immediately – not wait to find out whether investments are filled.
Obviously it’s harder for startups that have their own balance sheet risk, but every firm has a view on how it wants to manage itself. Some will just want to connect individuals to borrowers and not take on their own risk. But ultimately, we want to be able to provide the liquidity and execution of larger markets, and that means always improving efficiency – which is also why we’re focusing on our secondary market.
Why are secondary markets important in this sector?
For three reasons: one, it means that investors know there’s potential to get liquidity should they need to get cash out of their investment. Two, it’s something the regulator likes to see because existence is still at a minimum in the sector. And three, if you’re looking to establish a real marketplace with continued transactions and breadth of users, a secondary market is vital. We’re still early-stage, but it’s very important to our development.
The equity crowdfunding side of the alternative finance industry has struggled with secondary markets. Must that be the case?
Private equity and VC investment are, by their nature, illiquid assets. But at some point, these fundraising companies are going to start to show a track record which can be valued. It’s always going to be desirable to investors to have the option to realise their investments.
There is a challenge in equity crowdfunding because of the rules around holding EIS investments – for which many deals qualify – for a minimum of three years before realising the tax benefits. But the industry is still in development stage and it’s simply a case of enough time passing. It’ll look a lot more interesting in the next few years.
Can investors hope to see WiseAlpha offering the Innovative Finance Isa?
We’d love to have an Isa product. We are currently in discussions with the Treasury and Financial Conduct Authority (FCA). Because we’re fairly new, we need a bit more time to develop before we can seek all the necessary approvals, but we’re certainly trying to do so before April of next year. I for one think our asset class is a lot more stable than some mainstream equity options, and therefore much more suitable for an Isa. It’s just a case of going through the right steps.