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Advantages of offering a financial instrument versus a direct investment

The following article illustrates the advantages of securitization versus direct investment and briefly explains the various aspects of each. Both solutions have their raison d'être and can be offered to investors individually or in parallel. Depending on the form, different investor groups can be targeted more specifically.


The direct investment


In this case, the investors provide funding, becoming shareholders in the case of a share participation, or alternatively via contracts, e.g., via a participatory loan with or without additional collateral. In the contractual field, classic debentures or hybrid forms of payment can be formulated. In addition to assessing the planned investment, the investors themselves must perform due diligence as to whether they can trust the company and the people involved. It can be a difficult task for one individual to thoroughly investigate both levels. Not only the story and purpose of the investment has to be right; the question of whether the persons involved have potential conflicts of interest must be addressed too.


The securitization as a possible alternative


In essence, a securitization can reflect either a direct investment or a contractual relationship. The big difference lies in the handling of the investment and the associated processes and rights, as well as the involvement of a paying agent or suchlike. The paying agent, with its banking or broker license, must meet the highest legal requirements. In Switzerland, this activity would be regulated by FINMA. For a financial institution, a clean check of the persons involved is mandatory in the securitization process. The issuer's administrator must also comply with this due diligence obligation. Thus, no financial instrument is launched unless all parties involved have been thoroughly screened. Even though these checks do not make the paying agent or administrator liable, an investor in this type of financial instrument may be assured that these background checks are at least part of the product launch—although this does not automatically imply that the investment will be profitable.