We have no idea what to make of Wisealpha - the Crowdcube success that raised £579k from 376 investors.
Its platform is FCA regulated. It reports full accounts as if it was some multinational - but turnover has gone from zero to just £9k for YE June 17. It makes enormous losses - to generate sales of £9k it spent just short of £500k.
Ok so maybe its one of those internet companies which collects followers to enhance value. Who needs revenues and profit if you have 250k followers on Twitter? Well no, it is not one of those - its following on Twitter is 900.
It was technically insolvent in June 17 but has raised £900k since.
What is it?
It's an assets under management thing
ReplyDeleteThey offer corporate loans secured against assets - usually property which pay up to 9% or so.
They get 1% of funds under management, and possibly also a small slice on selling before the loan is up.
The theory is that it costs about the same to run when there is 9m under management (1% of 9m is 90k) as 900m.
As long as interest rates stay about 3% for long term isas and none of the bonds they sold go under, I think they may do quite well.
Of course that is just my opinion and yes I do have shares in them.
Yes I get that. But it costs £500k to generate £90k? Come on.
ReplyDeleteI think a lot of that £500k was paid to the person who wrote the 120 page annual return out by hand (very neatly I must say)...
DeleteQuite impressed with this actually.
ReplyDeleteand I think they get free business space at level 39.
This actually of all the complete bollocks that gets funded on CC, looks pretty good.
So just in short, it appears that they buy the underlying bonds, syndicate them via loan notes to their investors and take a slice of the coupon payments.
very low overheads and very scalable via tech
relatively clever in my opinion
Hi Nick - good to see you are still out there. DM me as Id like to know how you are getting on. Do I take that WA buy a % of a corporate bond to sell onto their clients rather the whole bond? They seem relatively small amounts for such large companies. What is the downside - min or no risk with these companies.
ReplyDeleteIsn't the TO just £9,661 to June 2017? If I am looking at the right company https://beta.companieshouse.gov.uk/company/08967521/filing-history
ReplyDeleteI was surprised to see this type of company got EIS advance assurance according to the CC offer page - is this not an excluded trade under VCM3040? www.gov.uk/hmrc-internal-manuals/venture-capital-schemes-manual/vcm3040
Oops - sorry you are quite right and now corrected. First mistake of 2018! I thik what gets advanced assurance on a CC pitch has very little in common with what HMRC will actually allow if the company ever sells out - as we have mentioned a few times here HMRC work on self assessment and reserve the right to rescind the relief at any stage. Thanks for heads up.
DeleteQuite something to earn less than £10k with capital of £1.34m to hand!
ReplyDeleteI presume most of the capital was kept under a mattress somewhere until it was spent, if they only got £2,600 of interest for the year.
Hi Rob,
ReplyDeleteInvestors get high coupon payment - some of these are really attractive, though achilles heal potentially, is that investors are actually buying a loan note derived from a bond, so my worry would be the credit rating and financial sttability of the company issuing the loan notes. But company is fully FCA regulated, and part of incubator level 39, so looks interesting to me and should be really attractive to investors - both equity and debt.
Re the EIS, they'll be claiming (like Crowdcube do) that they are simply an electronic platform that puts buyers and sellers together, so they are a facilitator and as such still qualify. Most of the tech lot try to steer this course, like Uber (we are not a taxi company), facebook (we are not a media company). Absolves them of any responsibility, which I have come to believe is CC's take on this whole thing - we are just a facilitator, the public decided to fund these companies of their own volition - its not our fault if the public's is wrong - obviously they need to guard against false information, but from what I can see, there is no cognitive selection criteria - just get it on and let the market decide.
Rob, yes still out there fighting the good fight and waiting for our time to come....Will give you a shout in the AM
There seems to me to be some confusion on what an equity investment in Wisealpha is rather than investing in bonds through Wisealpha.
DeleteI am pretty sure that if you invest in Wisealpha you are not investing in the bonds/ loan notes that it buys but in the company, so the coupon payments (less 1%) and the risks on the credit quality of the bond issuers are taken by customers of Wisealpha buying the loan notes, not the CC investors. As an equity investor in Wisealpha what will make you a return is the scaling up of the platform and taking a 1% skim across the board. Presumably the funds are used to buy bonds in clips of £100-£300k and the capital is recycled as the loan notes backed by the bonds are sold over time and in much smaller denominations.
The risk I see is that the price as which the loan notes can be sold falls before the notes are all sold because of deterioration in the credit quality of the underlying issuer or a shift in the market as a whole (like if interest rates go up). If notes cannot be sold at an exact back-to-back value with what Wisealpha pays for the bonds then you take a hit (or a profit) or you hold the bonds, which means tying up capital. Depending on how quickly and at what price Wisealpha can distribute each bond, you could have a 1% annual fee on big portfolio with little risk, or you could be sat on a load of bonds worth less than you paid for them, ie as a CC investor you are underwriting each bond purchase and are then exposed to price volatility until the risk is fully distributed. To put that into context, Debenhams' bond price fell 3.5% in 1 day last week, meaning the bonds that Wisealpha is advertising with a yield of 5.2% currently yield >6%, so assuming investors have a clue, Wisealpha will not sell any more of those notes without raising the yield - which means making a loss equivalent to 3.5 years of the gross fees they will make from those notes.
I still think it is quite a nice idea, but people need to be clear that the equity risk is all about the platform's ability to distribute quickly and not to get caught out by market shifts with a load of unsold bonds on its books. 1% fees will disappear very quickly with a couple of big write downs and the high yield market is pretty volatile when the wind changes.
As to the risk for anyone contemplating investing through Wisealpha rather than buying shares in the company; there are some household names in there but in today's market you don't get 8% returns on debt without substantial risk. High yield means non-investment grade, or in old parlance - junk bonds; min or no risk with these companies? I'm not so sure.
Not sure there is any confusion. Wisealpha buy the bonds then issue loan notes against them which users of WA buy (and possibly can sell). Thats the simple mechnics for the model. Of course investors via CC are buying shares in WA - not buying bonds. The fact that the company's revenue and success is tied into the skimming off the bonds to loan notes sales and it has to date no proven track record of this working in volume, lays the risk for failure of WA with the CC investors - as with any investment. What has been explained quite correctly above is that users of WA are NOT investing in the Bonds of say Virgin per se as they are in the chain on the next stage down - if WA default then the fact that Virgin are fine is going to mean nothing. Virgin has a low risk of default but that doesnt mean WA do.
DeleteI see plenty of confusion on here, on the CC site and even in how the management pitch the business. Maybe that's me but it is certainly partly because there is more than one WA company and more than one type of investor here and people need to be clear on who is doing what.
Delete"Investors get high coupon payment" - depends which investors you mean. Investors using the platform do but investors in WA get no coupon payment, they get a small share of the potential future value of a business that gets the 1% skim, nothing more or less. One investor above seems to think that WA provides corporate loans secured on property, which it clearly does not.
If a bond defaults then WA equity investors (in theory at least) are not exposed to any risk as the bonds have either been fully distributed to note-holders or have been transferred to another WA entity, WA Investment Ltd, which the CEO claims is completely separate and manages any long positions resulting from the price volatility mentioned above;
"It's important to note that WiseAlpha Technologies (the entity that you are investing in and which earns the service fees and sale fees) doesn't take any risk of holding the underlying bonds any way, - we have a separate vehicle for that" (answer from the CEO on underwriting risk)
What is odd in the pitch is that the CEO is at such pains to state that WA Technologies takes no risk on the bonds but also trumpets the returns the bonds are making, which to a CC investor is utterly irrelevant.
Personally I don't believe for one second in the segregation of the success of the technology platform and the underwriting risks; if WA Investment starts losing money, say if bond prices plummet and/or an issuer defaults then I seriously doubt they will persist with managing the WA platform that necessitates them taking on more and more underwriting risk to generate scale for WA Technologies.
Possible outcomes are the WA platform achieves sufficient scale to have a meaningful equity value before the trading/ underwriting sister company has a bad run (and at some point it will given the types of investments it is making) or the bad run comes too soon and the owners decide it's time to pack it in and the platform folds. There is a strong element of downside-only risk on the high yield bond market which I don't think anyone, including the CEO, has really recognised.
Disclosure: I'm an investor (albeit a very small amount) and have been since their first round on Seedrs (as an aside I wasn't best pleased when they switched to CrowdCube for their second round, being an avid reader of Rob's blog)
ReplyDeleteMy understanding is that they've structured things quite carefully to ensure no risk to capital funds (otherwise they would never have got FCA approval).
Essentially Wisealpha Limited buys senior secured bonds and covers those with 'wisealpha notes' on a 1:1 basis. Wisealpha Technology Limited (which is what Seedrs and CrowdCube investors have shares in) provides the platform to do this, and is paid a management fee. If the latter goes bust then the underlying funds are still OK, as the bonds are held on behalf of the former in an FCA regulated escrow account and there's no financial dependency between them. So provided there's no outright fraud I can't see a failure of the former affecting the latter. And the latter shouldn't go bust in theory as it's not geared - all wisealpha notes are covered by an equal value of senior secured bonds. As the value of the underlying bonds rises or falls the notes float accordingly. Obviously there's a risk if an underlying bond fails, but being senior secured Wisealpha Limited are in a better position than most of the other creditors in that scenario.
It's a clever idea and I invested because I see it having real potential in the long run, particularly for high net worth investors and other similar people who want a higher rate of return but can't afford to buy senior secured bonds directly themselves (as the minimum subscription amounts usually run to hundreds of thousands if not millions of pounds). One very promising area they were looking to move into was SIPP pensions - I'd certainly be very keen to have a senior secured bond from Virgin paying a 5.5% coupon in my pension. I also suspect that may also be a potential exit in a few years if someone like Hargreaves Lansdown comes along and buys up the platform.
I've met Rezaah a few times and I get good vibes about the business, it's certainly one of the few I've invested in where they actively encourage shareholders to come to the annual AGM and ask questions.