The problem though is that the demand for high yielding bonds from less than investment grade issuers isn’t going to go away. There are two aspects to the problem. The first is that many growth businesses still find it difficult to get bank funding for loans between £1m and £20m. Anything above that level and the PE outfits start to listen. Anything below that level and the p2p platforms kick in. Crucially this demand for debt capital isn’t limited just to private businesses. Many AIM listed businesses are also in need of capital. An example of this is Defenx, a cyber security business listed on AIM which has just put a bond on UK Bond Network. It’s a micro-cap business in an exciting area but it’s also obviously too risky for mainstream lenders.
UK Bonds Network is trying to play in this £1 to £20m space but my guess is that its capacity is fairly limited. I suspect the same is true for many other P2P lenders. No matter how much they say they want to lend to £1m plus businesses, they probably couldn’t cope with a flood of demand.
What’s desperately needed is an alternative version of the ORB – the London Stock Exchange’s retail bonds platform. This was set up a few years ago to streamline secondary market trading (and IPOs) for retail orientated bonds. You can find out more here.
It was and is an excellent idea and LendInvest has made use of this structure to raise money. But it is also a big disappointment as well. New issues – bar Lendinvest – have virtually dried up as borrowers shy away from the regulatory hurdles and associated cost. Some brokers such as Peel Hunt and Investec do their best to back the market but there’s no getting away from the fact that most potential borrowers steer clear. One problem is that regulatory cost. An issue can cost anything between £100,000 and £1m once legal costs are included. Talk to most participants and they’ll suggest that issuing a retail bond doesn’t really make sense unless you are looking to raise £50m or more (or £20m for charities where a more streamlined issuance process exists).
Imagine though if there was an Alternative ORB for smaller businesses – listed or not. Arguably UK Bond Network is trying to be that platform (using auctions). But being honest, it isn’t. I like the platform but it isn’t anything remotely like ORB, not least in scale. What’s needed is one of the big exchanges to come up with a streamlined process whereby businesses looking to raise between £1m and £20m could issue a bond, possibly based on the model used in Germany. Costs could be kept to an absolute minimum – say a minimum of £50,000 and a maximum of 1.5 per cent of the capital raised. The main range of funding would be between £3m and £15m with the first cohort of borrowers AIM listed businesses. Crucially a matched bargain secondary market could also operate for those who want to sell their bonds after issuance. There are smaller micro cap exchanges such as ISDX/NEX that cater for equity issues amongst small and micro caps – why aren’t they tapping the debt markets?
What’s needed is for a proper, licensed exchange operator to sit down in a room with a bunch of p2p platforms and the regulators. The deal is to keep regulatory requirements to an absolute minimum, especially around listing documents and legal paperwork. P2P platforms and loan originators could in effect become like brokers such as Peel Hunt and Investec. They source the lenders and run their own due diligence process – they also sponsor the bond issuers on to the exchange. The exchange takes a cut from issuance and from operating the secondary market. Maybe the government – via the British Business Bank – could also be encouraged to help out and the big banks might even be willing to offer the bond syndication route for clients who don’t quite tick all their credit scoring boxes. Crucially investors would get a proper external platform where they could invest in proper bonds, issued by proper growth businesses. Obviously this platform would be risky and many businesses might default, but we’d also have in place a proper marketplace where the risk adjusted yield could be benchmarked over time. And perhaps most importantly UK PLC would have a brave new experiment in funding smaller growth businesses in the crucial £1m to £20m gap. Time to get to work?