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Warnings about Wholesale Investments and Syndicated Property Trust

Thanks to FMA for this image

Thanks to FMA for this image

Since January 2023 our inboxes have had a solid stream of emails from the Financial Markets Authority (FMA) and from Business Desk warning about the risks of Wholesale Investment Offers and about Syndicated Property Trusts that are in trouble.

The information below has been gleaned from a Business Desk article.  Please read it and share the information with your friends and family so that the awareness of the risks and issues is increased.

In our business at Moneyworks we don't know any clients that we could certify to be Wholesale Investors.  The requirement to be a Wholesale Investor (which also applies to 'eligible investor' definitions are that:

  1. Disclosure is not required to 'eligible investors' that have a minimum investment over $750,000. 

  2. But more importantly - a wholesale investor is defined as a person 'having owned a portfolio of financial products or carried out at least one transaction valued at at least $1,000,000 in the prior two years.'

  3. Investors also need to certify in writing that they are aware of the merits of the transaction and understand the consequences of certifying themselves as such an eligible investor.

This category is one that is used in other countries and is designed to allow 'sophisticated investors' to make investors without the issuer of the investments providing all the disclosures that we are required to make, and that our recommended fund managers are required to make.

Unfortunately it is a loophole in the New Zealand legislation and there have been many offers made under the wholesale investing regime.  From time to time we have been asked to certify that someone is a wholesale investor, but we are unable to unless we know the client well, and know that their personal level of financial literacy is at a high level where they will understand the pro's and con's of such an investment on their own, without the disclosures that would come with a non-wholesale investment.

The loophole has been used extensively by property syndication investments.  We have written about these offers before, with warnings of the risks, and we are sad to see that history does repeat and the failures of these investments 20 years ago are occurring again, for the same reasons.  Property syndicates are where one or multiple properties are purchased, put into a vehicle and then investors buy a bit of that syndicate.

According to Business Desk a number of these offers (which are advertised aggressively in the Business Pages of mainstream newspapers and online, and then marketed aggressively in email follow ups - I signed up to track them and got sick of all the emails I was getting with new issues) are in trouble.

This was for-seeable as the interest rates offered were higher than the term deposit rates (which lured investors in), the offers where highly leveraged (lots of debt) and with the rising interest rates the economics of providing the returns no longer existed, putting pressure on the cashflow and finances of the offers.

Here is a summary from Business Desk:

Returns dry up
But the high yields being promised to wholesale investors by the likes of the Du Val Group and Williams Corporation weren’t performing as well as they claimed they would. 

In December, Christchurch-based Williams Corp – run by high-flying Matthew Horncastle and Blair Chappell – pushed out its redemption cycle on its $152m of investment funds across its three funds, from six-monthly to annually, citing a "tripling" in interest rates. 

Du Val’s investment arm, Du Val Capital Partners, followed suit, telling investors in its mortgage fund it would halt distributions and convert units – sold as income-generating securities guaranteeing 10% return payable quarterly – into equity ahead of a listing, possibly on either the Singapore or NZ stock exchanges.

It also halted payments on its $34m build-to-rent fund, announcing it would resume distributions in April but at a cut-rate of 2.25%, down from its promised 8% when it launched in mid-2021.

The FMA has issued warnings in October and since as follows: Warnings 

In October, it also took the step of warning nine property investment firms that had offered their unregulated products to non-expert investors.

Its list included Du Val, Williams Corp, Black Robin Equity, Wolfbrook Capital and Jasper NZ.

As a side note, one or two offers may work well, depending on how they are structured, but we have warned clients against investing in these offers for over 20 years, with the one question 'How will you get your money out'.  While the offers look sexy and attractive, so much can go wrong with these offers, and the only mechanisms for investors to get their money out are generally 1. A secondary market (which dries up when things get in trouble ) and 2. The investment winding up at some time in the future (usually at the offerors discretion).

Please consider seriously whether your financial knowledge is strong enough and whether you know enough about the in's and out's of the investment before engaging in a 'wholesale investment', regardless of how sexy the interest return touted may be.



 

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