How Do Alternative Investments Attain Such High Returns

By Avantis Wealth - August 01, 2021

There is a general misconception that an investment can only offer higher income and returns if it comes with higher risks. This is usually down to one of two things. The first is a lack of understanding around how the investment actually works. The second is the prevailing wisdom associated with equities that higher reward potential comes with higher risk – which often isn’t the case with alternative investments. In this short article we highlight eight incentives that businesses have for offering you a higher income in exchange for your finance.


alternative-investments

Number One: Competition

We live in an extremely competitive world, so if you are a new business or a smaller concern, it can be challenging to raise the finance you need through institutional channels. One fundamental way to attract investment in this contentious landscape is to offer excellent returns to attract private capital.

Number Two: Lack of bank finance

Traditionally, banks used to finance a high proportion of business needs, in particular, property finance. However, recently, it has been more challenging to raise funding through traditional banking institutions. They take time in their decision-making, offer less financing than required and often have the option to call in the loan at any time. In their place, a raft of other funding sources bypassing the banks has grown. Private debt is one of these sources of finance.

Number Three: Speed of lending

Many business projects, particularly property finance, require quick decisions to take advantage of very profitable projects and market availability. Our investors can provide capital much faster than traditional funding sources. Sometimes projects can be funded in a matter of weeks, providing solutions for competitive advantage.

Number Four: Flexibility of private lending

Banks and other major lenders are notoriously inflexible. With a flexible approach, providing that the investment passes our stringent due diligence, we can adapt to provide the right investment solution. So timescale, rates and the particular terms of the contract can be tailored to suit each specific project. Investment providers value this approach.

Number Five: Timescales

Bridging finance often focuses on 1-12 month timescales. Other lenders prefer 5-10 year lending deals. Generally the investment deals we take up offer investors short term propositions of 12-60 months, fitting neatly into a gap in the market, and also meeting our investment providers requirements.

Number Six: Blended finance

Often the investors provide a part of the entire financial structure; this is called the capital stack. The capital raised is often the critical 'last piece' of the jigsaw and is the project enabler. If the whole venture were to be funded by our investor's capital, the levels of return would cripple the project's viability and profitability, but it isn't.

Here's an example:

Suppose £1,000,000 is needed to fund a project. The capital stack could look like this:

Source
Amount
Rate
Bank finance
£300,000
5%
Institutional funding
£500,000
6%
Avantis Wealth Funding
£200,000
15%

The blended rate across the entire finance raised is just 7.5%, which on many projects delivers the necessary viability.

It doesn’t take a genius to realise that with increasing uncertainty over economic performance in the marketplace, combined with the relentless march of new tech initiatives, relying on the company to still be in a strong financial position in (say) five years, is not always a good bet.

Here’s a hierarchy of ‘value’ within assets provided as security for loans, starting with the safest and most reliable. Note that this is my personal view and you may choose to rearrange this list. Provided it gets you thinking about levels of risk and where you feel comfortable that’s great!

  1. Fixed charge - Land and buildings
  2. Fixed charge - Infrastructure assets backed by contractual public sector contracts
  3. Fixed charge - Plant and equipment
  4. Floating charge - Stock – finished goods
  5. Floating charge - Stock – work in progress
  6. Corporate guarantees – property development companies
  7. Corporate guarantees – manufacturing
  8. Corporate guarantees – tech businesses
  9. Corporate guarantees – service companies

At Avantis Wealth, our focus is on strong lending propositions backed, as much as possible, by property assets. We aim to give clients the best of both worlds!

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