Much like buying shares in an unquoted company versus buying shares in a FTSE 100 business, mini-bonds are considered far more risky than investing in a fixed income fund.
As mini-bonds are not traded on the stock market they are subject to significantly less regulation.
If the issuer goes under or faces financial difficulty there is no guarantee you will get your investment back.
And mini-bonds do not have to provide investors with financial statements in the same way an issuer of a corporate bond does.
So being sure of the financial health of the company you are lending money to is far trickier.
If clients change their mind and wants their money back before maturity, there is no way to do so – they have to stick it out.
And unlike cash bonds, issued by banks and building societies, an investment in a mini-bond is not protected by the Financial Services Compensation Scheme.
So if the company does go under, investors have little chance of recompense.
Earlier this month, property company Harewood Associates warned investors in its house-building mini-bond that it may not be able to repay the loan, and prior to that in January this year London Capital & Finance saw the regulator freeze mini-bond investors’ assets.
Last year, Square Pie, a restaurant group that began as a stall in London’s Spitalfields Market, went into administration, leaving more than 300 investors in its mini-bond high and dry.
And they are not the only ones – the list of failures is long.
The Financial Conduct Authority has launched an investigation into the LCF failure – addressing allegations that the mini-bonds were marketed as able to be held in an Isa and that they were regulated, where in fact only the company was, not the product. The investigation has since spawned a wider review of the sector conducted by the Treasury, looking into whether the current regulatory regime for mini-bonds is appropriate.
For investors trapped in the LCF mini-bonds, there may be good news. While the investments are not covered by the FSCS as standard, there may be grounds for a claim due if the company was found to have been giving misleading advice. There are 11,700 people with assets trapped in the mini-bonds, with a total invested of £237m.
Investors affected are being encouraged to fill out a questionnaire posted on the FSCS website to help determine whether there are grounds for compensation.
Should my clients invest?
As with all investing, it is a case of risk appetite.
Fixed income investing is designed to reduce risk in a portfolio and add ballast to volatile equity markets – mini-bonds definitely do not deliver on that front.