Considering that a three-percent return on common bonds is seen as high, there is no reason to doubt why individual investors are flooding to seven-percent return rates provided by mini-bonds. A rapidly growing number of well-established companies in the UK that are raising growth capital are looking to the public for sources of finance, and skipping the banks. Within a matter of a few weeks, companies have been able to borrow millions, at a rate much less than that offered by banks. However, due to the nature of the mini-bonds, many questions are starting to arise with this new ‘hot’ form of ‘easy’ financing. Is the high risk worth the high return? Is the individual investor protected enough?
A mini-bond is fairly similar to a retail bond, but the significant difference is that a mini-bond cannot be traded in a secondary market. In other words, the investor is forced to hold the bond for the entire duration period; locking in investor’s cash, thus removing any form of flexibility for the investor.
Another noteworthy detail about mini-bonds is the that this type of bond is not regulated by authorities. There is no detailed listing process put in place for companies issuing mini-bonds. Investors will not necessarily find any publication of a company’s risks and history. Also, companies are allowed to advertise directly to individual investors, via the press, and unlike retail-bond advertisements, companies are not obliged to disclose any risks involved. As The Week magazine put it, “buying the debt of a single company is thus always a high-risk approach—especially if you’re locked into the investment.”
If the issuer does fall into bankruptcy, the investor is not protected by the UK's Financial Services Compensation Scheme (FSCS). There have also been a few instances, where an investor has had to chase the issuing company for their annual interest. The current lack of regulation would make mini-bonds illegal in Germany and in Italy.
Though the high risk is recognized, mini-bonds are growing at a staggering rate. According to Capita, which administers many issues with bonds, research has shown that mini-bonds have jumped from £90m in 2012 to £1bn in 2013, and are expected to reach £8bn by the end of 2017.
As a result, it is no surprise that crowdfunding platforms are jumping on the opportunity. Platforms are looking to simplify the mini-bond industry, by removing the complexity of issuing the type of bond as well as encouraging a larger number of investors to capitalize on the gains of mini-bonds. The industry looks highly profitable, but is it growing too fast that this ‘mini-bubble’ is going to pop?
References:
Eley, J. (2013). The mini bubble in the UK bond market. ft.com
Evens, R. (2014). Retail bonds and mini-bonds: the risks and rewards. Telegraph.co.uk
James. (2014). Lend to established brands - mini-bonds are the new way to invest. Crowdcube.com
The Week. (2013). Pros and cons of mini-bonds: what the experts think. theweek.co.uk
Photo Credit: Davis Staedtler: https://bit.ly/p/o5rGbW
Another noteworthy detail about mini-bonds is the that this type of bond is not regulated by authorities. There is no detailed listing process put in place for companies issuing mini-bonds. Investors will not necessarily find any publication of a company’s risks and history. Also, companies are allowed to advertise directly to individual investors, via the press, and unlike retail-bond advertisements, companies are not obliged to disclose any risks involved. As The Week magazine put it, “buying the debt of a single company is thus always a high-risk approach—especially if you’re locked into the investment.”
If the issuer does fall into bankruptcy, the investor is not protected by the UK's Financial Services Compensation Scheme (FSCS). There have also been a few instances, where an investor has had to chase the issuing company for their annual interest. The current lack of regulation would make mini-bonds illegal in Germany and in Italy.
Though the high risk is recognized, mini-bonds are growing at a staggering rate. According to Capita, which administers many issues with bonds, research has shown that mini-bonds have jumped from £90m in 2012 to £1bn in 2013, and are expected to reach £8bn by the end of 2017.
As a result, it is no surprise that crowdfunding platforms are jumping on the opportunity. Platforms are looking to simplify the mini-bond industry, by removing the complexity of issuing the type of bond as well as encouraging a larger number of investors to capitalize on the gains of mini-bonds. The industry looks highly profitable, but is it growing too fast that this ‘mini-bubble’ is going to pop?
References:
Eley, J. (2013). The mini bubble in the UK bond market. ft.com
Evens, R. (2014). Retail bonds and mini-bonds: the risks and rewards. Telegraph.co.uk
James. (2014). Lend to established brands - mini-bonds are the new way to invest. Crowdcube.com
The Week. (2013). Pros and cons of mini-bonds: what the experts think. theweek.co.uk
Photo Credit: Davis Staedtler: https://bit.ly/p/o5rGbW
About the author - Jasmien Cels
Jasmien is currently studying a bachelors in Business Studies from Cass Business School in London while interning at Crowd Valley. Originally from Belgium, she grew up in Switzerland, Ethiopia, USA, and Japan.
She is very passionate about the start-ups, entrepreneurship, technology, and travelling; she aspires to one day become an entrepreneur.
Jasmien is currently studying a bachelors in Business Studies from Cass Business School in London while interning at Crowd Valley. Originally from Belgium, she grew up in Switzerland, Ethiopia, USA, and Japan.
She is very passionate about the start-ups, entrepreneurship, technology, and travelling; she aspires to one day become an entrepreneur.
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