IPO Wealth: More Questions Than Answers

By Tim McGowen | More Articles by Tim McGowen

As the owner of some financial websites and former hedge fund manager I recently came across IPO Wealth. I was looking at them as a potential advertiser across our websites as I had seen them being particularly active for a relatively small fund manager, both on radio and with the likes of Switzer and Pro Active Investors. Their financial product is unlike any I have ever seen in the thirty years or so I have been in the markets. So I decided to do some due diligence and investigate their financial product offering.

In the videos and media I had seen on IPO Wealth they promote themselves as an alternative to term deposits. They encourage potential investors to look for better returns than what are currently offered by the big four banks. They promote their customer service and actively use social media to have their customers review their service and product. For investors, IPO Wealth offers a set rate of interest ranging from 3.25-6.45% per annum, according to the timeframe selected. This is where any comparison with the concept of a term deposits starts and ends.

Their marketing argument across the market is fairly standard. They appeal to bank customers and wholesale investors in particular who are locked into low interest rate paying term deposits. Throw in some rhetoric about the lack of trust with the banks, poor customer service and the Royal Commission, and it will resonate with most income seeking investors. But what makes this product really interesting is not IPO Wealth’s above average interest rates offered for their term deposit, it’s where the cash is invested.

Once invested the “term deposits” are loaned to a related party (Mayfair101) who invests the funds in a range of unlisted private companies. In the portfolio page on the Mayfair101 website (https://www.mayfair101.com/portfolio), you can see the types of investments they make, with a particular focus on emerging sectors and emerging markets. These are potentially early stage high-risk companies. In even more recent press, investments in property, fintech and payment related companies have been highlighted.

What is of particular interest is that these types of companies are lent money by Mayfair via a convertible note structure, as stated in their investment strategy outline, at interest rates of between 10-15% to established and early stage companies. Typically these convertible note structures can have conditions that include discounted equity positions in the underlying company on the expiry of the note. Ignoring the potential equity position exposure for the moment, the 10-15% rates of interest obviously aren’t entirely passed onto the investors who have made the loan and wear the risk. Further the investment mandate of the investment manager Mayfair101 states:

‘Mayfair 101 operates an investment banking-style model by providing finance solutions to companies in growth markets with a focus on socially responsible investments that provide income, capital growth and liquidity.’

I’ve highlighted ‘capital growth’ as this terminology isn’t usually associated with cash enhanced style term deposit. The fund by nature is a debt fund but can take equity positions in the companies it loans money to. Now this is where it gets particularly interesting, as the question is whether the investor gets rewarded for this capital growth. What if the investment portfolio doubles in value and successful exits have been made on all the private unlisted investments? Well the offer document outlines what happens:

“….the Unit price can be less than $1.00 if the Fund’s assets decrease in value, but cannot exceed $1.00. The value of your investment is not guaranteed.”.

So does this mean an investor gets all the downside but none of the upside? If you bought the units at $1 and the portfolio doubles in size shouldn’t the unit price be $2? Apparently not. So who receives the capital growth? It’s difficult to speculate but IPO Wealth operates on a performance fee basis only, an interesting business model for a financial product promoting cash enhanced returns. The quantum of the performance fee is not articulated in the offer document. But the statement below from the offer document outlines the impact of the performance fee on the unit holders:

“The Withdrawal Price may be less than $1.00 but will never be more than $1.00, given the structure of the performance fee payable to the Investment Manager.”

It is therefore clear that the performance fee is equal to ALL of the capital growth upside of the entire investment portfolio less fees and expenses. And to receive those performance fees the manager needs to deliver capital growth. So the manager receives any upside through a potential combination of capital growth from the portfolio and the difference between the 10-15% interest loaned via the convertible note and the cash enhanced returns offered to investors. In IPO Wealth’s defense, some of these accrued performance fees are held as a ‘Capital Protection Reserve’ in the event of any capital losses. But the ‘Capital Protection Reserve’ has defined percentage limits according to the fund size and would provide little protection if the portfolio fell substantially in value.

How the unit price is determined isn’t entirely clear, as the offer document doesn’t state how often these unlisted companies are valued. But the unit price is where the risk remains. Liquidity is a major risk; a risk not often associated with cash enhanced term deposits. As stated:

‘….the Trustee also retains broad discretion to restrict distributions, withdrawals, and redemptions.’

So while the unit price may never trade above $1.00 (because of the performance fee structure) according to the offer document it could certainly trade below. From a risk perspective it will be the equity-like positions that will have the biggest impact on any portfolio valuation and therefore the unit price. So the question remains as to how and when the portfolio is valued. In the annual report it appears the units have remained at a value of $1.00 since 2017. This isn’t surprising, as the fund has a relatively short track record and perhaps predominantly debt like positions. But the debt portfolio could also impact the unit price over time, especially if a portfolio company cannot service the loan.

So what happens if the portfolio was revalued and the units were revalued at $0.80, a 20% loss for unitholders? Would any new investor then be able to get the capital growth upside to the $1.00 unit price, should the portfolio revalued higher given the performance only comes into play above that level?

In summary, IPO Wealth has a very unique business model and resembles more closely a private equity group. They entice investors with cash enhanced term deposits then lend this money out at a higher rate and collect the difference, in turn receiving all of the upside from an unlisted private equity portfolio and NONE OF THE DOWNSIDE. None of which is illegal of course. But IPO Wealth’s alignment of interest with investors has to be questioned. Ultimately an investor should ask themselves whether they are being rewarded for the risk they are taking, because where their investment dollars ends up ultimately is with an unlisted emerging company. And that’s a very different risk profile than a liquid term deposit.

Tim McGowen

About Tim McGowen

Tim McGowen is the co-founder of informedinvestor.com.au. He was previously the founder of Fortitude Capital the Hedge fund of the Year in 2008 & 2009. More recently he was a global Portfolio Manager for PM Capital.

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