What you need to know about mini-bonds

They promise huge returns but regulation is patchy and unwary investors can easily be misled. James Connington reports

The collapse of Providence Bonds earlier this month is not the first time a mini-bond has gone south and is unlikely be the last. The often-controversial investments can promise big returns, sometimes approaching 10pc. While investors are told to steer clear when something looks “too good to be true”, such offers can prove tempting when interest rates are near zero. Here we put minibonds under the microscope and examine the potential problems investors need to look out for. only to the information memorandum, not the website, and that it had no ongoing role.

The role of security trustee is also obscure. Essentially, as security over assets cannot be individually held by every bondholder, a middleman is required. So the security trustee is the party that benefits from the security on investors’ behalf in the event of default. But, according to one senior expert in the field, the duties of security trustees vary, with the trustee’s obligations entirely dependent on the wording of the minibond documents concerned.

An FCA spokesman said firms were required to be authorised if they undertook regulated activities but that there were “specific exclusions for trustees”. He added: “Security trustees are not generally required to be authorised for the purposes of acting in this capacity.”

The document approver and security trustee for both Providence Bonds and Secured Energy Bonds, which failed last year (see box), is Independent Portfolio Managers. The firm has ignored repeated requests for comment from Telegraph Money. deliver the promised returns, but, as with any investment that pays above the odds, caution is advised.

For instance, mini-bond provider Basset & Gold claims that its investment approach “affords a level of protection which rivals any bank or building society”. However, bank accounts are covered by the Financial Services Compensation Scheme, which guarantees up to £75,000. No minibonds have FSCS cover.

A Basset & Gold spokesman said: “It is a statement of our belief. We make absolutely sure that we put in place high levels of security and guarantees that are in our opinion as good as, if not better than, the security put place when banks invest.”

For the average investor, working out how the protection offered by a mini-bond compares with other investment options, or whether it is adequate, is a tall order.

An advertisement for the Empire Property Holdings mini-bond, whose investors have been told that their first three interest payments will be delayed, includes a graphic proclaiming that the bond offers “guaranteed returns” that head into double digits. The advert appeared on the website of Marbellabased Templar Settlement Services and an Empire spokesman said that although it had no control over thirdparty advertisements it would contact Templar regarding the wording used in its advert.

Individuals in senior positions who are associated with past frauds, scandals or failures should be another warning sign to investors that a bond issuer may be suspect. The Companies House database is now free to access. It can be used to look up company filings and find out which other firms directors have been associated with. A Google News search is also a good idea.

For instance, at Providence Group, the parent company of Providence Bonds, Stephen Dewsnip, the global head of distribution, appears in news reports and Spanish court documents related to a property

Could Secured Energy Bonds investors receive some of their money back after all? Investors in some potential Grant Thornton failed mini-bonds assets, including is assessing issued by Secured 14million shares whether to Energy Bonds in BlueNRGY sell Secure have been offered Group, the Energy Bonds’ some hope of successor to SEB’s shareholdings in recovering at parent, which these subsidiaries least a portion of is attempting to or to place them their money in list its shares on in liquidation to the latest progress the Nasdaq stock effect a sale of the report from the exchange in New assets. administrator, York. One factor Grant Thornton. The report said: certain to limit

According to “Any potential the amount the report, the value of the returned to “green” energy shares is likely investors is the firm, which to be dependent extensive fees collapsed last upon the approval involved in the year, still has of BlueNRGY’s administration of relisting application.”

Two subsidiaries, SEB Mercury and SEB Venus, also own solar panels installed at six school and farm sites. Minor repairs on the installations are taking place to “secure the best possible sale price for the units”. a failed company.

Grant Thornton’s fee is disclosed to be a fixed £55,000 for statutory matters, in addition to 15pc of all gross assets recovered. It had also incurred time costs to July 16 of £386,000, along with nearly £100,000 in legal fees.

The amount outstanding to bondholders is £7.5m. investment scheme that turned sour. No wrongdoing on Mr Dewsnip’s part has been proved.

Telegraph Money spoke to a former employee of Providence Investment Management, another failed part of the Providence Group. The group’s former chief executive, Antonio Buzaneli, has had his global assets frozen by the US regulator, and the Miami-based Providence Financial, part of the same group, has been accused of securities fraud. An initial report from Deloitte, the UK administrator, claimed that the money invested in Providence Bonds was largely not spent on its intended purpose, and was instead lent to other Providence Group companies, and other companies in Brazil controlled by Mr Buzaneli.

The former employee painted a picture of closed-door meetings, strong egos and a disregard for keeping costs down. Providence spent money sponsoring events, bringing in big-name speakers such as former England footballer Gareth Southgate. Staff, many of whom had invested in the firm, were apparently kept in the dark about how it was run.

The individual said the compliance team at Providence Investment Management had walked out in May. The firm’s auditor, PwC, resigned after its first audit.