Want to cut out the middleman? Platform lets you invest in the loans of big blue-chip companies for up to an 8% return - for as little as £100
An online platform is pledging to democratise secured corporate loans by giving armchair investors the chance to buy into the debt of mainstream companies for as little as £100.
WiseAlpha lets investors tap into loans issued by some of Britain's biggest firms, such as telecoms giant Virgin Media.
Previously, those wanting to take a stake in these loans would have to invest in £1million 'blocks' meaning that realistically they were the preserve of pension funds, banks, and extremely wealthy individuals.
Investing for the masses? WiseAlpha customers can lend to the likes of Virgin Media, advertised here by Usain Bolt (l) and David Tennant (r)
But now 'ordinary' investors can cherry-pick the individual companies they want to back.
However, investors should bear in mind that they are not investing directly into the secured senior loans issued by the company.
Instead wiseAlpha issues its own participation notes, which it says are 'designed to reflect the key terms of a specific loan-based investment or other investment issued by established companies in the United Kingdom and mainland Europe'.
WiseAlpha itself purchases the large secured loan issued by the company and issues the note, which allows investors to invest on a much smaller scale.
The senior secured loans that wiseAlpha invests in are different to retail bonds traded on the London Stock Exchange's Orb market, or mini-bonds issued by companies.
A stock market for loans?
The wiseAlpha platform describes itself as 'a bit like the stock market but for loans' and offers a return of between 5 and 8 per cent, depending on which underlying companies the user chooses to invest in.
For example, as the table below shows, a loan to haulage company Eddie Stobart maturing in five years is paying a coupon of Libor plus 7.7 per cent.
Current opportunities: Here's a look at some of the current loans you can invest in and the rates they'll pay you on top of Libor
WiseAlpha argues that lending directly to large blue-chip companies to earn income is a better way to invest than trying to get income from their dividends.
This is because the loans tend to offer higher income yields than dividends, and are typically less liquid than stocks - although you could still lose money.The platform also argues that secured loans are less volatile than high-yield bonds or equities
Many investors already buy into the debt of big companies through corporate bond funds. However, some of these funds have a minimum investment of £1,000 and can invest in any combination of companies that they choose, provided they meet the fund's stated objective.
One upside of this is that you have a fund manager using their expertise to select the companies for you.
These funds will also have a much wider spread of investments, which will diversify and thus hopefully lower your risk.
But the average yield on a corporate bond fund in today's investing environment is about 3 or 4 per cent - which is significantly lower than the 5 to 8 per cent income on offer with wiseAlpha.
How it works
WiseAlpha investors can currently pick from four companies - Virgin Media, the RAC, United Biscuits and Eddie Stobart.
Soon, Vue Entertainment, New Look and Enterprise Inns will join their ranks.
More loans on the way: Investors can access opportunities in some of the UK's biggest hotel, cinema and retail companies
The platform charges its members an annual 1 per cent service fee based on how much they invest, which is deducted from the interest they are paid back.
WiseAlpha makes interest payments as the borrowers make payments on their loans, which is usually every three or six months.
Your corresponding payment, after the 1 per cent wiseAlpha service fee has been deducted, is automatically credited to your account.
And if you want to sell on your investment to another user, wiseAlpha will charge a 0.25 per cent sale fee based on the amount, which is deducted from the proceeds.
First in line: If a company goes bust, secured creditors are among the most likely to get paid back
What are the risks?
The returns on offer at wiseAlpha are similar to those offered by peer-to-peer lending, where investors lend to a pool of individuals and small businesses.
Like peer-to-peer lending, these investments are not covered by the Financial Services Compensation Scheme, the UK's statutory compensation scheme, which covers other more mainstream types of lending from banks and building societies. (Although recently, the FSCS has ruled that investors may be compensated if they receive unsuitable advice around peer-to-peer lending.)
WiseAlpha is regulated by the Financial Conduct Authority, which means it has met the regulator's expectations. And client assets are kept in a separate pool to the company's finances - so if wiseAlpha went bust, investors' money would be protected.
Having said that, it is important to bear in mind that investors could still lose money if something went wrong with the underlying company that issued the loan, for example Virgin Media.
A more likely risk is that you may not be able to exit your investment when you want to.
If you do want to sell up, wiseAlpha will attempt to match you with another buyer. But as the platform is in its early stages, that could prove difficult - wiseAlpha says its customers should in theory be prepared to stay invested until the loans reach maturity.
If all customers wanted to sell their loans at once - which could happen if wiseAlpha ever went bust - the platform would attempt to re-sell the large underlying secured loans on the banking market.
One way in which secured loans differ from their unsecured counterparts is that they tied to the underlying company's assets, so if the firm goes under, the people holding these investments will be among the first to get paid back.
For example, if Virgin Media to go bust and the senior creditors were paid back 90 per cent of what they lent to the company, then wiseAlpha would receive 90 per cent of the total amount invested in the loan in recovery proceeds
WiseAlpha would then distribute that £900,000 back to Noteholders on a pro rata basis - so if someone had invested £1,000 then they would receive £900 back in their account.
This means there would be no difference in terms of timing or the level of recovery whether you were a large pension fund investing directly in the secured loans, or whether you were an individual investing through wiseAlpha.
The platform recently turned to equity crowdfunding site CrowdCube to raise money from investors in exchange for just under 10 per cent of its equity.
As a sweetener, equity investors who pledged £1,000 or more during the pitch will never have to pay the 1 per cent service fee when they go to use the platform.
The pitch - which closed on 24 May - was 170 per cent over-funded and managed to raise a total of £594,000. The company says it will be using the money for marketing to grow the number of people investing in secured corporate loans in the UK and Europe
WiseAlpha was founded by Rezaah Ahmad, who started off in global investment banking, helping to structure and execute multi-billion debt financing and advisory transactions for Deutsche Bank.
He says: 'We believe that lending to some of the largest and most established companies in Britain is an attractive proposition for the discerning investor looking at diversifying their portfolio and doing something more interesting with their savings.
'Our investors value the peace of mind that comes with lending to large and often long-established brand name companies versus lending via other marketplace lenders offering loan investments in small businesses or others offering more opaque and risky types of loans.'
An investment rebel?
One wiseAlpha customer, who wished to remain anonymous, has been investing via the platform for about six months. She said it was the 'rebel' aspect of the platform that appealed to her.
She considers herself a novice investor and has put in £500 in secured loans across two businesses - Virgin Media and United Biscuits - and is in line for an interest rate of more than 7.5 per cent.
She says: 'I wanted to start making serious investments and someone recommended wiseAlpha to me. The thing that appealed to me is that I understood the nature of the business and I knew the names involved, which made me feel like I was taking less risk.
'When you're looking to invest as a novice, you are intimidated and while you could be drawn to higher levels of return, I know the likes of Virgin Media and that made me feel a little bit safer.'
She adds: 'Before, these loans were closed off, and I quite like the rebel side of that - that they are now open to everybody and that the loans they are offering have not been previously available.
'It doesn't seem fair that you have to go through a stockbroker - I don't want to do that, and I wouldn't have the money for it.'