As all seasoned investors know, it is essential to use diversification to bring down the overall risk of the portfolio. This is particularly true when investing for growth. A well-diversified portfolio in a range of smaller companies that tick all the boxes will still have failures. Successful portfolios typically will make returns from less than 20% of the portfolio, with these companies achieving stellar growth and providing a healthy overall return to the investor.
So what about the other companies in the portfolio, those that have neither succeeded nor failed? Investors will mentally tuck these away in a “bottom draw”; they have become long term investments that you hope will make a return eventually. This could typically account for up to half of the companies in a growth portfolio.
CSS Partners believes they might have found the answer – convertible loan notes in listed companies. A product that combines the potential upside of equity, with the priority and income of debt.
A convertible loan note is structured as debt on typically a two year fixed term. This means the company is obliged to repay the amount invested on a set date. The loan notes will also pay income whilst held by investors. The convertible aspect of the investment means that the investor also has the option of convertible loan notes at a fixed price during the fixed term.
So in many ways, on the face of it, this limits the investment to two years (no more need for the bottom draw) whilst also allowing the investor to achieve the capital growth they are seeking if the company is successful. However, you are still investing in smaller companies with all the associated hurdles and risks involved.
We hope the risk will be somewhat mitigated by a combination of the loan note structure and also additional criteria the companies must satisfy overall:
- Be listed on a recognised investment exchange with a proven trading history so we have access to research reports from a number of different analysts
- Have a strong asset base
- Appear to be trading at a significant discount to either asset value , future asset value or when compared to direct competitors
- Have a clear two year growth plan that offers substantial upside to investors over the short term
- Have an experienced management team with a proven track record of raising capital from the markets
- Be revenue generating so that the loan notes can be repaid from future cash flow as an alternative to raising funds.
Whilst the above criteria help mitigate risks for investors, the underlying companies must still be considered high risk. For this reason, when possible convertible loan notes promoted by CSS Partners will also hold a guarantee against assets of the listed companies.
Without risk, there is no upside. Convertible loan notes have long been a preferred investment structure for institutions investing in growth companies; CSS Partners now wants to open this market for private investors.
CSS Partners has raised over £175m for entrepreneurial companies since 2001. To learn more about how we enable private investors seeking higher capital growth to invest with confidence in smaller companies click HERE.
Investments offered by CSS Partners are not appropriate for all investors. Our free client service aims to be of benefit to high net worth and sophisticated investors looking to achieve higher returns.
Important NoteThe information in this website is provided by CSS Partners LLP. This website has been approved for the purposes of section 21 of the Financial Services and Markets Act by Charles Street Securities Europe LLP (CSSE), which is authorised and regulated by the Financial Conduct Authority. CSS Partners is an appointed representative of CSSE.