London Capital and Finance

Jelli

Thanks eskbanker.

Malthusian

Jelli wrote: »

I'm just wondering, how would someone know that 8% is a big, unrealistic percentage? Is it possible to find out every savings/investment offer in the UK, then make a judgement on what's a suspect percentage? Would 3% indicate something unrealistic? Sorry if there's an obvious answer but I'm tired.

It isn't an unrealistic percentage.

Returns of 8% are more than plausible (though impossible to guarantee) when you take a calculated risk and a large proportion of London Capital & Finance bondholders thought they were taking a calculated risk, i.e. the risk that the underlying borrowers defaulted and there might be a delay in getting their money back while the security was enforced.

It is perfectly possible to generate returns of 8% per year (though not guaranteed) without running any meaningful risk of permanently losing money (beyond the irrelevant risk of financial apocalypse).

Other bondholders, it is true, didn't think about risk at all, no more than they do about the risk involved in their deposit accounts.

This was not too good to be true. That's why it took in £200m+.

Reaper

Jelli wrote: »

I'm just wondering, how would someone know that 8% is a big, unrealistic percentage? Is it possible to find out every savings/investment offer in the UK, then make a judgement on what's a suspect percentage? Would 3% indicate something unrealistic? Sorry if there's an obvious answer but I'm tired.

Anything more than a savings account means you have to start asking the question how they pay more and what level of risk is involved.

The rate to set alarm bells ringing depends on the market conditions such as the rate of inflation.

To give an example here is a company bond:
https://www.fixedincomeinvestor.co.uk/x/bondchart.html?id=3508&stash=F654DE28&groupid=3448
It's running yield is 6.23% at the time of writing.

Being a company bond your whole capital is a risk if the company goes bust, but since it is a large company (Aviva in this example) that risk is not particularly high.

So 8% would tell me the risk is higher than that, probably involving small companies without such a good track record and I would certainly want to know more before investing.

However the things to take away here is not the promised return was excessive, instead it is:
* They were unregulated. Quite simply don't invest in unregulated companies. They are suitable for hardly anyone (In this case I know they partly were which made it harder).
* Do read the risk warnings, don't just assume they are standard small print. Such as being suitable for sophisticated investors only.
* The return was fixed (I would expect high or fixed, not both)
* There was a lack of information about where the money was being invested. Compare that to something like a VCT or even a Unit Trust where they are keen to tell you what they are doing with the money. Without it you cannot assess the risk.
* Third party affiliates were involved with deceptive adverts. That suggests high commission payments (even if they had not turned out to be linked)
* A company without a track record prior to this offering (not in itself a reason not to invest, but it increases my wariness)
* Don't depend on non-financial review sites for reassurance. In particular the fact they have paid out to date means nothing.

AnotherJoe

Jelli wrote: »

I'm just wondering, how would someone know that 8% is a big, unrealistic percentage? Is it possible to find out every savings/investment offer in the UK, then make a judgement on what's a suspect percentage? Would 3% indicate something unrealistic? Sorry if there's an obvious answer but I'm tired.

If standard FCS backed savings are at 3% for 5 years whats going on when someone offers 8%? Why would they offer 8%? Ask yourself that question. Why not offer 4%, and take the extra 4% for themselves?

Its also unrealistic because it went along with the word "guaranteed". Those two phrases together are incompatible. 2x+ savings rate available elsewhere, with a guaramtee= too good to be true territory.

You could show you have a track record of 8% on investments with risk or you could guarantee around 3% for a standard savings bond. You cant have both.



These were also marketed as savings but were in fact investments, also they were not guaranteed in two respects, one, the marketing implied a level of FCS protection which didnt apply and second the guarantees were not backed by anyone with the capital/assets to stand behind that guarantee.

Supercalafragalistic

Malthusian wrote: »

It isn't an unrealistic percentage.

Returns of 8% are more than plausible (though impossible to guarantee) when you take a calculated risk and a large proportion of London Capital & Finance bondholders thought they were taking a calculated risk, i.e. the risk that the underlying borrowers defaulted and there might be a delay in getting their money back while the security was enforced.

It is perfectly possible to generate returns of 8% per year (though not guaranteed) without running any meaningful risk of permanently losing money (beyond the irrelevant risk of financial apocalypse).

Other bondholders, it is true, didn't think about risk at all, no more than they do about the risk involved in their deposit accounts.

This was not too good to be true. That's why it took in £200m+.

Malthusian, this seems to be a different view to those given on here earlier and v interesting.I dont suppose you happen to be an ifa or something akin do you? Up until this post I have sensed that the view towards the investors has been slightly on the ‘greedy, !!!!less twits’ side of the fence, and have almost felt as if it were there own fault.

AnotherJoe

Supercalafragalistic wrote: »

Malthusian, this seems to be a different view to those given on here earlier and v interesting.I dont suppose you happen to be an ifa or something akin do you? Up until this post I have sensed that the view towards the investors has been slightly on the ‘greedy, !!!!less twits’ side of the fence, and have almost felt as if it were there own fault.

Its easy to miss the bit malthusian wrote I've bolded here
It is perfectly possible to generate returns of 8% per year (though not guaranteed) without running any meaningful risk of permanently losing money


Its the "guaranteed" word in association with a rate much higher than on savings products that should have had "investors" running for the hills. Anyone than can guarantee 8% to pay out means they are making more than 8% (also guaranteed). No one can do that "guaranteed" unless of course the guarantee is worthless in which case they arent actually offering 8% or indeed offering anything at all.

masonic

The word permanently should also be emphasised.

jimjames

Jelli wrote: »

I'm just wondering, how would someone know that 8% is a big, unrealistic percentage? Is it possible to find out every savings/investment offer in the UK, then make a judgement on what's a suspect percentage? Would 3% indicate something unrealistic? Sorry if there's an obvious answer but I'm tired.

The previous replies have covered it well but there are 2 things to look for, FSCS protection and the word guaranteed.

If the product isn't FSCS protected and uses the words guaranteed/fixed/protected/asset backed then it is certainly not guaranteed in the way many people think. A guarantee does not mean you will always get your money back as LCF have proved. If a company goes bust any guarantee not backed by FSCS can be worthless.

In suspect many people invested in LCF because they wanted to avoid the risk associated with investing in the stock market. Ironically investing in stock market funds would have been far less risky and unfortunately it looks like the LCF bonds will be invested in high risk AIM shares when/if the debt/equity swaps take place too.

masonic

jimjames wrote: »

If the product isn't FSCS protected and uses the words guaranteed/fixed/protected/asset backed then it is certainly not guaranteed in the way many people think. A guarantee doesn't mean you will always definitely get your money back as LCF have proved. If you go bust any guarantee not backed by FSCS can be worthless.

It's worth also adding that mainstream investments have FSCS cover, such as investment funds. This does not cover investment risk though, and would only cover the fund house becoming insolvent, or the investment account provider committing fraud.

Investing through firms that can't even provide the above FSCS protection is not advisable if you consider yourself to be a consumer with average knowledge of financial matters.

Perhaps

masonic wrote: »

The APR is what the administrators have stated - viz the amount the borrowers would have to repay, taking into account all of the charges over the course of the loan.

No, the administrators say this:

Accordingly, in order for LCF to be able to repay the Bondholders, the Borrowers would need to make very substantial returns on the monies loaned from LCF to them. For instance, in the case of a: 1 year bond, we estimate that the associated Borrowers would need to repay LCF c.144% of the amount loaned to them, and thus requiring them to make a c.44% return in one year on the monies loaned to them.

The 44% APR figure is the administrators' calculation of what breakeven for the loan would be. It is not the contractual rate of the loan. This is important because the investor is only will only get the contractual rate, not this 44%, even if the borrower doesn't default.

In startups it's common to subsidise early operations from venture capital, with the hope that costs will fall as the business grows. For instance, if I'm building a competitor to Netflix and my costs are £1000 per subscriber per month, there's no way viewers are going to sign up for that price. But if the price is £10 per month, my VCs might be happy to lose £990/ps/pm in the short term to make it back once I've grown my market share.

In this case there doesn't seem to have been much VC money, but I wouldn't be surprised if the loan contracts were for rates lower than breakeven, given the large payment to Surge. Maybe they were hoping to make it up in volume later on.

At the end of the day, assuming no other complications with the corporate structure (and there seem to be many), these loan contracts are the collateral bondholders have on their money, and we don't know what they are. We can't assume their borrowers are on the hook for 44%, even if everything else were to work out.