City Scape

Bridging Finance as an investment asset class

Clara Capital investigates bridging finance funds as an alternative income strategy.

Following the sharp reduction in mortgage availability and traditional secured lending streams, the demand for short term loans has increased substantially over the past two years. Known as bridging finance, the aim is to ‘lend where the banks are not’.

A classic illustration is a typical auction purchase: the purchase is made and the deposit is paid, yet a bank is not able to lend the required funds within the 28 days needed to settle.

Bridging finance companies generally complete a deal within seven to ten days, enabling the borrower to complete the purchase and repay the loan as a result of refinancing or the sale of the property.

All very well, but the short-term nature of the bridge and the speed in which a decision is made makes them expensive loans. This is where the investment potential lies.

A number of funds have been established to offer investors a share of the interest gained on each loan. With target returns of up to 12% per annum, it is a concept certainly gaining traction.

High Returns

The Montello Income fund, offered by Montello Bridging Finance, has reported significant interest of late. Managing director, Christian Faes, said this is not surprising considering the ongoing problems in the lending market.

He said: "As time goes on people realise the high street lending market is not going to open up over night. We are a number of years into the crisis yet people are still taking many months to obtain loans. The longer that goes on, the more people look for ways to capitalise on it.”

For Faes, the ideal investor is someone sitting on cash, looking for a higher return than they are getting from their bank. The fund claims to provide investors with a fixed return of 8.5% per annum, payable quarterly in arrears.

Connaught Income Fund Series 2

Similarly, Connaught Asset Management offers the Connaught Income Fund Series 2 (Series 1 is now closed to new investment) alongside specialist partner and bridging finance provider, Tiuta. According to new funds director, James Allen, the vehicle is an ideal portfolio diversifier, with low correlation to traditional asset classes and offers a gross annual return of 7.5%.

UK Secured Finance Fund plc

The UK Secured Finance Fund plc, an Isle of Man OEIC, aims to deliver the respective target return for each share class through the creation of funding for short term commercial finance to the professional property community in the UK, where major banks may also participate in the loans provided by the Fund.

Loans to be used exclusively for property investment with typical borrowers being successful property investors and professionals with extensive net worth in addition to the projects being financed.

High level of security with a maximum loan to value of 70% supported by a current RICS valuation. Rigorous lending policy overseen by an Investment Adviser comprising of experienced bank and property professionals. The finance is aimed at the professional sector and does not expect to suffer any defaults. No Sub prime borrowers or owner occupied properties will be considered under any circumstances.

The available share classes are:-

Series One, 12% Targeted Return Share Class "Series One”

Series Two, 10% Targeted Return Share Class "Series Two”

Business Lending Secured Income Fund

The Business Lending Secured Income fund is designed to provide a 9.1% gross annual income fund by making short and medium term development loans to experienced property developers. They boast a top class management team with over 100 years experience in sector and a highly experienced compliance and regulatory board. The income return is distributed quarterly.

Bridgebank Firmus Flexible Income Fund

The Bridgebank Firmus Flexible Income Fund offers prospective investors the opportunity to invest indirectly into Bridging Loans, Short-term Loans, Short-term Commercial Mortgages and Short-term Second Charge Loans. Loans in the target sectors typically offer a premium rate of interest compared to long-term mortgage loan products.  The Fund aims to pay an attractive annual return of 7% over the London Inter-Bank Offered Rate ("LIBOR”) per annum.

We also understand that Bridgebank Capital is the specialist lending partner for the following funds:

Bluegate Secured Income Fund Series 1, which aims to pay investors a target return of 9% per annum.

Bluegate Secured Income Fund Series 2, which aims to pay investors a target return of 6% in year one, 7% in year two and 8% in year three onwards.

Sycamore V Property Development Fund

The Sycamore V Property Development Fund allows investors to invest indirectly into a range of projects within the UK comprising residential developments with planning permission already in place and land sites with an identified development potential.

PM Asset Management will create a portfolio of projects through the acquisition and development of a number of sites. All sites that are acquired by the Fund with planning permission in place, will be developed. Where sites are purchased without planning permission in place, planning permission will be sought for residential, commercial or leisure usage as appropriate. The site will then be sold or developed, with a view to sale after development, whichever, in the opinion of the Asset Manager, is in the best interests of the Fund.

The fund is a seven year closed ended fund with distributions in years 3, 5 and 7. The target return for the fund is 22.5% per annum.

Unregulated Collective Investment Schemes (UCIS)

All of the bridging finance funds mentioned in this article are structured as UCIS.

Every fund structured as a UCIS must have a firm authorised by the Financial Services Authority to act as its ‘operator’. This is because establishing, operating or winding up a collective investment scheme is a regulated activity and carrying out the activity without the proper permissions is a criminal offence.

The Financial Services and Markets Act 2000 makes it an offence to market an unregulated collective investment scheme to the public. Under FSA guidance, ‘marketing’ is given a very broad construction and it can mean any communication which might lead directly or indirectly to an investment. When looking at the meaning of ‘the public’ the following types of investor are excluded:

Investment Professionals; being:

    • Authorised persons
    • Exempt persons (not including Appointed Representatives but including professional firms)
    • Investors whose ordinary activity is investing in unregulated collective investment schemes
    • Governments, local authorities and international organisations
  • High Net Worth Companies and Unincorporated Associations
  • Sophisticated Investors with a certificate signed by an authorised firm (other than the scheme’s operator); and
  • Members of associations predominantly made up of exempt investors.

If the scheme invests wholly or predominantly in unlisted companies, authorised firms can promote it to High Net Worth Individuals and Sophisticated Investors who have self-certified. However, there is no such exception for unauthorised firms or for schemes that invest in other asset classes, such as real estate. Where the investor is certified, the promoter must ensure that the certificate is current and relevant before promoting the scheme to them. For Investment Professionals and High Net Worth Companies, the promotion can be made as long as it ‘may reasonably be regarded as being directed’ only at such investors and there are procedures in place to ensure that recipients not falling into these categories are prevented from investing.

There is an additional set of rules which have been created by the FSA allowing a scheme to be promoted to investors who have undergone an assessment by an authorised firm, including:

  • individuals for whom the scheme is assessed as "suitable” (usually by a financial adviser); and
  • individuals for whom an assessment of experience, expertise and knowledge is undertaken (usually by a financial adviser or the scheme’s operator) and the scheme deemed "appropriate”.

In these cases, the scheme can be promoted to a potential investor on the basis that they will not be allowed to invest unless they successfully complete the assessment (which may occur after the promotion has been made). In most cases, an FSA authorised firm can approve the scheme documents and summaries for distribution by an unauthorised person. In practice, this means that an unauthorised firm using an approved document can promote a scheme beyond certified investors, as long as the operator of the scheme (or another authorised firm, such as an IFA) will make assessments of potential investors and filter out any inappropriate applications).

Whichever exemption the investors fall into, the documents for the scheme must meet detailed requirements laid down by FSMA, the Treasury and the FSA. These include presenting a balance of risk and reward, carrying appropriate warnings, giving sufficient information, and always being clear, fair and not misleading. Summary documents can be used, but these also have to meet the rules and must be consistent with all of the other information given to investors.