Alternative investments and crowdfunding explained

Alternative investments are increasingly attracting the attention of investors especially in turbulent markets; but should you be considering them? And which alternative investments offer the best opportunities for UK residents and expats?

A growing number of people around the world are now considering alternative investments for cash they have available on deposit or instead of keeping their money in their pensions. In recent months, we have heard about people investing in anything ranging from bamboo plants in Africa to property in Brazil. Others are investing in equity share crowdfunding campaigns and wine stocks.

For some, these investments may seem like new opportunities. However, despite only recently being heavily promoted, many of them have been around for some time. In actual fact, a major contributory factor to their rise in popularity has been the increase in their availability to a wider audience.

What’s more, many are readily available as direct cash investments and some would even allow both pension funds and other capital to be invested.

Pension reforms in the UK also means that individuals now have significantly more freedom when deciding what to do with their pension funds during retirement, but alternative can still be difficult to include within a pension depending on the provider. Low interest rates around the world (which still show no signs of increasing) have made traditional deposit-based savings unappealing, and have increased the appeal of alternative investment options.

As with any investment, the same investment rules apply: no investment will guarantee a return on capital and you should always read the small print and understand your risk profile before making any decisions.

In this article, we look at why alternative investments can be a great opportunity but please remember that any information provided is a guide only and should not be considered advice. If you’d like more information or advice about any investment opportunity, you should speak to an independent financial adviser – you can request a free consultation with one of our advisers by entering your details on the form.

Alternative investments: what are the options?

Alternative investments can take a number of forms including, and certainly not limited to:

• Investment in companies as a mini-bond or in exchange for equity (including equity crowdfunding
• Purchasing luxury items which are expected to appreciate in value
• Property crowdfunding
• Ethical Investments

Investment in companies as a mini-bond or in exchange for equity

Traditionally, borrowing has been the most popular way of raising capital. However, since the global financial meltdown, raising capital through bank loans has become more difficult which has meant many companies (including start-ups and established firms) have been searching for alternative ways to raise capital.

In search of this capital, companies are willing to consider a number of options including offering mini-bonds, a stake in their company and even offering active equity positions in the organisation, allowing you to offer expertise as well as money.

Mini-bonds

Mini-bonds offer investors a steady, fixed rate of income by lending money to existing businesses. Rates of interest can vary, although can be as high as 8%.

For example, if you invest £10,000 in a mini-bond at 6% per annum over a four year term, you will earn £600 per year (£2,400 over the term) as well as receiving your initial £10,000 back at the end of the term.

One of the highest profile cases, Chilango (a chain of Mexican restaurants in London) turned to its existing and growing set of customers to raise capital to fund new outlets.

They set up a campaign on Crowdcube to offer mini-bonds (aptly named the Burrito Bond) starting at £500. The aim was to raise £1m to open two new outlets. In exchange they offered an 8% interest rate per annum.

After hitting their target, Chilango went on to raise £2m from 709 investors.

While this is a high profile case, it is just one of many examples of mini-bonds available to invest in.

Mini-bond investments are typically unsecured, non-convertible and non-transferable so it is important you research the company before you make any decisions.

There have been some more unusual investments with their own success and failures such as:

• Airport car park spaces
• Bamboo
• Alpaca farms

Equity crowdfunding

Traditionally this was achieved through the stock market or venture capitalists. In recent times the introduction of equity crowdfunding websites have made investing in exchange for equity more accessible, but there are still options of going direct to companies.

Equity crowdfunding enables people to invest in organisations, typically start-ups and early stage businesses, for a share in the company and the potential for a significant return.

Before considering equity crowdfunding, it is important to remember that most start-ups fail. Therefore a prudent approach is to consider a portfolio of investments to minimise the risk and avoid having too many eggs in one basket.

Typically within a three to seven year period, a start-up will either succeed or fail.

An investor will typically see a return on their investment either through dividend payments, sale of the company for a lump sum, or flotation on the stock market leading to the public sale of shares.

Depending on the investment and your country of residence, you may receive tax reliefs. If you are a UK tax resident, you may receive between 30% and 75% tax relief on your investment. If you are an expat or non-UK resident, there may also be significant tax savings to be made, but be sure to request advice from an independent adviser who can help you avoid unnecessary penalties.

Purchasing luxury items

When the pension reforms were announced in 2014, one of the big fears was that people reaching retirement would blow their pension pots on flash cars or yachts.

While this was a flippant and over-quoted comment, the truth is that some luxury items can provide potential investors with a decent rate of return.

Classic cars are one such option, however it is not the only option available. Other luxury investments which you may wish to consider include:

• Wine
• Stamps
• Art
• Furniture
• Watches
• Antiques

Investors typically hold the item for a number of years before taking to auction or selling privately at an appreciated value. This form of investment is typically open to market trends and you would also need to consider storage of your item to protect its condition and value.

Property crowdfunding

Property crowdfunding is seeing an increase in popularity in 2015 as UK rental incomes continue to rise. The premise follows the standard crowdfunding principle. You invest a sum of money along with other crowdfunders. The money raised is then used to purchase a property which is subsequently rented in the private rental market.

The rental income is then divided amongst the investors.

The property is sold at the end of a pre-agreed term and the money generated from the sale is then also divided amongst the investors and the crowdfunding platform.

This means that, unlike mini-bonds, not only will you receive payments on a regular basis, your initial investment is also likely to appreciate in value.

How to find the right alternative investment and invest tax efficiently

While some companies are using crowdfunding and others are listed on the stock exchange, it still represents a tiny proportion of the companies worldwide who are seeking investment from outside parties.

Most economies are made up of small to medium sized companies, each offering a unique opportunity for investors. The key element is finding them.

There are independent experts who can assist with locating the right company and also ensuring that their businesses match the risk profile of the investor.

Finally, the expert should also be able to discuss your options with you in terms of how to invest. For example, if you have money in a pension which you were considering taking lump sums from, it may be possible to use the pension itself, thereby avoiding any unnecessary tax payments and maximising your investment in the process.

Pension freedoms and alternative investments

Many people feel they have to take funds out of their pensions to invest in alternative investment schemes. In doing so they incur tax on their withdrawals and therefore the investment begins from a negative position.

In certain circumstances you may be able to invest in an alternative investment using your pension, which can minimise all manner of taxes, including capital gains tax, but this is dependent on the pension provider and the alternative investment chosen.

Request free and independent advice

To understand which alternative investments match your risk profile, will offer you the best returns, and allow you to invest tax efficiently, you should always seek advice from an independent financial adviser.

If you have considered using funds from a pension, the sale of property or an inheritance, enter your details using the form and we will arrange for an independent financial adviser to offer you a free consultation to discuss your options in full.