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How secured lending can deliver returns through a pandemic

By David Kaye, CEO of Puma Investments

In September 2020, Tesla stock plunged 34% in one week, marking a reversal of fortune for one of this year’s hottest stocks which, just one week prior, had reached a record high. Notwithstanding its sudden decline, Tesla has now reported Q3 as being its “best quarter in history” following another dramatic recovery.  Whilst this may be an extreme example of volatility in main market equities, there are numerous examples of wild swings in shares as a result of the pandemic.  

If main market equities are volatile, investors looking for returns on their cash are also faced with historically low interest rates with the Bank of England cutting the rate to 0.1% on 19 March 2020, just a week after being cut from 0.75% to 0.25%.

So, where else can investors look for sensible risk-adjusted returns in this environment? Secured lending is one potential option as part of a diversified portfolio.  

Mainstream banks continue to retrench 

Mainstream banks have found it increasingly difficult to service the needs of professional property investors and developers. Not only are their processes cumbersome, the capital they are required to set aside for such financings is expensive. This has opened up the opportunity for lending platforms to provide highly experienced borrowers with bespoke funding solutions at attractive returns.  

Not all lending platforms are the same

The range of available lending platforms, however, necessitates careful consideration. The recent retail bond saga surrounding several such platforms demonstrates the importance of appreciating not just how nice a car looks on the outside – the equivalent of the eye-watering returns being touted by these platforms – but how well-built its engine is.

The Puma Property Finance division of Puma Investments has been lending since before the last financial crisis and in total has arranged over £700m in loans and construction projects. I am proud to say that we have a 0% capital loss track record, meaning we have never lost a pound of capital on these loans. Whilst past performance clearly is no guarantee of future performance, our commitment to sensible lending, both in times of calm and distress, is fundamental to our approach.  

What constitutes “sensible” lending today?

A key factor in sensible lending is an “equity cushion”. Loans are written at a loan-to-value, which means the borrower takes the first loss before the lender’s capital is at risk. For instance, Puma Heritage Ltd, a lending business in which our clients can invest, currently has a weighted average loan-to-value of 60% across its portfolio. This provides a substantial 40% cushion before our investors’ capital is at risk and the loans have first charge security, taking priority above all other creditors.

However, there is much more to lending than maintaining a conservative loan-to-value. A highly developed and rigorous underwriting and execution approach is required, backed by an experienced in-house group of underwriters, legal, finance and risk teams working together with third-party professionals. In particular, each of our loans must go through detailed scenario testing where we look at the impact of three specific variables: (a) the end value of the asset dropping substantially; (b) the costs of the project increasing substantially; and (c) the time taken to repay the loan overrunning by a material margin. We look at these scenarios both individually and cumulatively to assess any risk to capital should all three of these circumstances occur in the same loan.  

Importantly, we also expend significant time performing due diligence on the people involved in the transaction, not only to check their experience but also to ensure interests are aligned. This might be in the form of their cash contribution to the funding of the transaction but also in the form of additional credit support through guarantees.  

Tax tail should not wag the dog

By following this disciplined approach, Puma Heritage Ltd has been participating in first charge loans for over seven years without any capital losses.  By focussing on loans to professional property developers and investors with loan sizes typically between £5m and £35m, Puma Heritage Ltd has consistently returned over 3% per annum.  

In addition, an investment in Puma Heritage Ltd is intended to benefit from Inheritance Tax relief after a two-year holding period assuming the shares are also held at death. However, as ever, the tax tail should never wag the dog. Given the volatility of equities and the ultra-low interest rate environment, I believe that even leaving aside the potential Inheritance Tax benefits, we are offering investors a sensible risk-adjusted return, secured against property, in this uncertain world.  

 

Puma Heritage Ltd can be accessed through an advised-only investment in the Puma Heritage Estate Planning Service, which is managed by Puma Investments. To find out more, contact the team on 020 7408 4070 or advisersupport@pumainvestments.co.uk 

 

This communication is a financial promotion issued by Puma Investments in accordance with section 21 of the Financial Services and Markets Act 2000 (“FSMA”). Puma Investments is a trading name of Puma Investments Management Limited which is authorised and regulated by the FCA (FRN 590919). This article is for professional advisers only, and it is not to be relied upon by retail investors. Personal opinions expressed by the author may change and should not be seen as advice or a recommendation. An investor can only apply to subscribe for shares in the Puma Heritage Estate Planning Service through a financial adviser who has assessed that a subscription is suitable for them.  An investment may not be suitable for all investors given the key risks which are summarised as follows: past performance is not a guarantee of future performance; investor capital may be at risk; tax reliefs are not guaranteed; the investment should be viewed as long-term and potentially illiquid; the Financial Ombudsman Service/the Financial Services Compensation Scheme are not available, and investors have no direct right of action against Puma Investments.

 

Sources:

 - https://finance.yahoo.com/quote/TSLA/history/

 - https://www.irishtimes.com/business/personal-finance/stocktake-tesla-profitable-but-still-expensive-1.4389234

 - Puma Heritage Ltd, 30 September 2020