Achieving Equity-Like Returns Without Stock Market Volatility

Very Long Term Real Returns after Inflation
Asset Class	50 yr. Return
Commodities	0%  but very low correlation with everything else and counter cyclical qualities
Property	1-2%  but somewhat uncorrelated with everything else and prone to periodic busts
Diversified equities	3-4%
UK government bonds	0-1%
Corporate bonds	1-2%

Managing an investment portfolio is particularly challenging when markets are volatile.  The figures in this table are estimates widely used by the pension industry but volatile markets can make short term returns very uncertain and make previously essential components of a good portfolio appear surprisingly risky as even blue chip companies and national governments face major challenges.

Almost all asset classes show returns that are related to the performance of the economy and the way that the financial markets react to those changes. Market sentiment is an important factor in short term returns and taking a very long term view is often not practical. For example a well diversified quoted equity portfolio will have shown fluctuations in the order of 20% over the past few years.

At the other extreme, investing in unquoted equities as a ‘business angel’ or through ‘corporate venturing’ is highly speculative and any returns often take 7 years or more to achieve.

The Business Loan Network (“BLN”) offers a new class of investment capable of providing a regular monthly fixed income, a degree of security and a return that should be at least two or three percent above inflation.  Since interest rates are usually fixed, the rate of return is not linked to market conditions or sentiment.

This is achieved by making secured business loans where there is a significant and growing funding gap in the £50k to £3m range, bypassing the clearing banks and their high costs and margins by directly linking the borrowers to lenders through an on-line auction for business loans the only factor that impacts on the return is the underlying cash flow of the business involved and its ability to repay the loan. BLN therefore assess this factor very carefully.

Because lenders get the interest rate they ask for (providing their bid is successful) and because we eliminate most of the margin charged by the banks, both Borrower and Lender can get a good deal.

Risk for the Lender is managed by spreading their funds across a number of deals and by BLN's use of traditional relationship bank mangers to ‘vet’ and structure each deal.  Because the loan is repayable at a fixed monthly rate, the income can be predicted with a degree of certainty.

Corporate treasurers, private wealth managers, self invested personal pensions, and experienced investors should consider exposure to a diversified portfolio of such business loans for a proportion of their overall portfolio.

Whilst the outlook for interest rates remains stable and low we expect that most loans will be at a fixed interest rate, providing both Borrower and Lender with a degree of certainty that will probably attract a slight premium.

BLN is not offering a new type of investment; it has found a way of significantly reducing the costs associated with a traditionally low risk market at a time when the dominant suppliers (the clearing banks) are cautious and expensive

The market for business loans has always been dominated by the clearing banks, using a mixture of retail deposits and money market transactions (the latter with its own recent liquidity problems) to lend to a wide portfolio of businesses at a margin on the interest rate that gives the bank an attractive profit margin.

The recent financial crisis has resulted in historically low interest rates on deposits and those who depend upon the interest they earn have very limited alternatives. At the same time the banks have been reluctant to lend to businesses and charged far more for their loans as they attempt to maintain their own capital ratios in proportion to their lending assets and rebuild their own balance sheets. As a result there are many very credit-worthy businesses that are finding it very difficult to obtain bank funding at sensible prices.

Clearly there are a few disadvantages in lending without banks, not least the fact that with a bank you can access your funds on demand whereas loans directly to companies are likely to be rather illiquid.  It is BLN’s intention to introduce a secondary market for existing loans as soon as possible to provide liquidity for lenders and the potential for Borrowers to reduce their borrowing by purchasing parts of it back themselves. 

The risks of depositing money in a bank are always likely to be extremely low so long as the Government guarantees those bank deposits.  This risk is balanced by the ability to earn (typically) 6% -12% interest on a BLN loan with regular monthly repayments and some security.  The range of deals available on BLN also provides investors with the capability to build and manage a diversified portfolio of loans, which collectively shield the investor from a single event of default and facilitate avoiding concentrating their portfolio on a particular sector such as leveraged property development.