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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.

Fundamental benefits for investors

For an investor, the certainty provided by a background check on the parties involved can impart additional confidence in the investment, even though it cannot hurt to do some additional verification oneself. However, the risk of the underlying project and the possible failure of management remain. As an investor of a financial instrument, you have the assurance that you as well as all your co-investors will be treated identically. It is therefore not possible that only certain investors of the same note will receive a payout. It is also practical for the investors to handle the subscription and sale through their house bank, and they are also repaid through this channel. Thus, there are no contracts that must be reviewed by a costly lawyer. The terms are the same for all investors and can be seen in the product description, which conforms to market standards. By purchasing such a note, all investors agree to these terms.

From the point of view of the capital seeker

Using a note as a means of participation does not necessarily mean that the full profit has to be distributed to the investors. The project developer or advisor can have a success premium embedded, which takes effect in the case of predefined scenarios. Furthermore, hybrid payoffs are also possible, which makes it more attractive for the capital seeker compared to an effective sale of company shares, e.g., an annual coupon plus a profit share upon exit instead of 100% of the performance. And with an effective participation of the note in the shares, an adjustment of the payoff is possible. In addition, no voting rights are transferred to the investors, but can still be controlled by the client. In the case of a synthetic variation, which only involves contracts, profit sharing can also be promised without a necessary change of ownership, and thus a tax-effective realization of the existing shares can be avoided. In this case, the existing shares are usually additionally deposited as collateral, or alternatively, an underlying asset (such as the land in a real estate project) could be used.

The investor groups

Securitization in the non-bankable sector is usually available to professional investors only, as is the case in Luxembourg, but we also offer less common retail solutions. For direct investments and so-called peer-to-peer contracts, there is no retail investor protection and no minimum size for investments. Thus, depending on the chosen financial instrument, access to these smaller investors may be denied. These solutions are generally recommended for asset managers, pension funds, and other large investors who may not want to enter into contracts. In principle, a note is suitable for amounts from EUR 5–10 million, and for funds the amounts should be ideally larger, like EUR 30 million on bankable or EUR 50–60 million on non-bankable underlyings. However, through our vast access and strong relationships with different cooperation partners, we can also handle smaller requests with varying requirements. A business with sufficient margin can benefit from raising capital through a financial instrument and extended investor access, and it is possible to raise the necessary funds for realization more easily this way. Both direct investments and financial instruments have their advantages and objectives. If you are seeking larger amounts and generally wish to access professional and institutional investors, you may consider a solution with a bankable ISIN over a pure contractual offering only.

Through our broad expertise and our wide range of cooperation partners, we can assist you at every step of the way, from finding the right solution to getting your case well prepared to final realization, all without any surcharges on the solution providers’ offering. Please do not hesitate to reach out and make your appointment with us.


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