How secured lending can deliver returns through a pandemic
By Karen Sullivan
Business Relief investments are well known for their flexible, simple structure, offering access and control, and potential exemption from Inheritance Tax (IHT) if held for two years or more and at the time of death.
A less well-known aspect of investments in this area is the potential for steady predictable returns that are uncorrelated to other more mainstream investments, like listed pensions and ISAs. There are select trades that qualify for Business Relief and some can deliver returns over and above those achieved from the main markets.
Navigating investment challenges
If main market equities are volatile, investors looking for returns on their cash are also faced with historically low interest rates. So how else can investors find sensible risk-adjusted returns in this environment? Secured lending is one potential option as part of a diversified portfolio.
Thanks to our institutional and risk managed approach as demonstrated by Puma Heritage Ltd – a lending business in which clients can invest via the Puma Heritage Estate Planning Service – our secured lending has delivered consistent returns over the life of the investment, including through not one but two financial crises – the credit crunch and the Coronavirus pandemic – as well as no capital losses to date.
A shift in secured lending
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 retail bond saga surrounding several such platforms demonstrates the importance of appreciating not just how attractive an investment appears from the outside – the equivalent of the eye-watering returns being touted by these platforms – but how well-built it really is.
We have been lending since before the last financial crisis and in total has arranged over £800m in loans and construction projects. Whilst past performance isn’t necessarily indicative of future results, it’s 0% capital loss track record means that, to date, it has never lost a pound of capital on these loans. 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 currently has a weighted average loan-to-value of 62% across its portfolio. This provides a substantial 38% 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, lending to professional property developers and investors with loan sizes typically between £5m and £35m, Puma Heritage Ltd has consistently returned over 3% per annum, although it’s important to note that past performance isn’t necessarily indicative of future results.
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 [email protected]
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.
Source: Puma Heritage Ltd, 30 June 2021