Private Fixed-Income Notes: The Controversial Asset Class Savvy Investors Can't Ignore
- paul58638
- Oct 17, 2024
- 4 min read
"If you learn what underpins the private fixed-income note you are considering and what intrinsic value these assets hold, especially when it's UK Property Assets then investors can start to understand the risks associated with the loan you are about to make and whether this offers a fair trade of for the reward." Paul Jeffreys Chartered MCSI
When it comes to diversifying your portfolio, private fixed-income notes issued by UK companies have sparked a heated debate. Critics argue they’re risky, opaque, and only for the ultra-wealthy. But here's the truth: when backed by UK property or similar assets, these notes present a compelling opportunity for those willing to think beyond traditional bonds or equities.
Why the Controversy?
It's easy to see why private fixed-income notes ruffle feathers. They’re often viewed as an unregulated corner of the market, where companies issue debt to raise capital and promise fixed returns. Detractors say, "If something goes wrong, investors could lose everything." But doesn’t the same apply to most investment vehicles, from equities to real estate?
The real issue here isn’t the structure of private notes but a lack of understanding. These notes are typically secured by tangible assets like UK property, offering a cushion that’s simply unavailable in most stock market investments. And in the context of a well-diversified portfolio, private fixed-income notes can provide something many crave: stability.
The Case for Private Fixed-Income Notes
1. Short-Term Commitments, High Returns
Unlike the long-term participation required in the stock market, where investors often need to wait years for returns, private fixed-income notes tend to be short-term, usually maturing in 1, 2, or 3 years. For those who prefer quicker outcomes, this structure is ideal. The returns can be higher than in the public sector ranging from 6-10% and at the top-end, an eye-watering 12-18% per annum. These aren’t pie-in-the-sky numbers; they reflect the returns that entrepreneurial companies, especially those in property development, can generate when they put capital to work swiftly.
Property developers can pay up to 2-3% per month to borrow from the public sector; such as bridging loans and the like from high street or private banks. It's easy to see why structuring an alternative approach to lending would make sense. The private sector represents an obvious lower-cost choice for the developer and as such, a win-win for both provider and investor.
2. Property Backing Equals Security
Contrary to the belief that private notes are just paper promises, many are backed by hard assets like UK property. This means that if things go south, there’s a safety net — a real, tangible asset that could be liquidated to recover some or all of your investment. Can the same be said for shares in a tech startup? This asset-backing provides a layer of comfort to investors who are understandably wary of unbacked securities.
3. A Hedge Against Market Volatility
With the stock market highs and the swaying to the whims of global politics, inflation, and interest rates, private notes offer something rare: predictability. You know upfront what your return will be and when you’ll receive it. For high-net-worth investors seeking to protect their wealth from the turbulence of traditional markets, this is a breath of fresh air.
The Godwin Scenario: Transparency Matters
It’s important to acknowledge that not all private fixed-income notes perform as advertised. The recent issues surrounding Godwin Investments, where some investors are facing uncertainty about repayments, highlight the potential risks. I want to be clear: I never recommended Godwin. We reviewed it at arm's length, and it was far too concentrated a proposition, which wouldn’t pass our stringent due diligence process.
We conduct both top-down and bottom-up research on our preferred providers of fixed income. This ensures that the notes we recommend are backed by a broad diversity of assets and tangible investments, providing greater security for our clients. The Godwin case serves as a reminder that due diligence and diversification are key when investing in private notes.
The Importance of Diversification
One critical aspect many investors overlook is the need for diversification. No more than 5-10% of your total wealth should be allocated to any single note provider. Concentrating too heavily on one issuer can expose you to significant risk, even if the note is backed by real assets. A diversified approach, spreading investments across multiple providers and different types of assets, greatly reduces this risk while still providing the benefits of private fixed-income notes.
What the Critics Miss
The naysayers point to liquidity issues: “What if you need to sell?” But let's be clear: liquidity is not synonymous with safety. Many of the world’s most successful investors prefer assets that aren’t immediately liquid because illiquidity often drives superior returns. Moreover, any well-managed investment strategy should account for liquidity needs without writing off entire asset classes based on this alone.
Some also criticize the lack of regulatory oversight. Yes, private fixed-income notes don’t fall under the strict purview of the FCA like publicly traded bonds. But is more regulation always better? If we learned anything from the 2008 financial crisis, it's that even "regulated" investments can fail catastrophically. Savvy investors know that due diligence trumps blind reliance on regulation.
A Vital Tool for the Sophisticated Investor
Private fixed-income notes aren’t for everyone, but for those looking to diversify their portfolios with something grounded in real assets, offering predictably high returns, and requiring a shorter time horizon, they’re an option worth considering. In a market flooded with volatility, inflation concerns, and low yields, these notes stand out as a stable, high-performing alternative.
While there are risks — including the potential for delays like those seen with Godwin — for well-informed, high-net-worth investors, the rewards often outweigh them. The short-term nature, high returns, and asset backing of these notes make them a serious contender for those seeking both income and security.
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