Market volatility. Low interest rates. High inflation. Geopolitical uncertainty. You could say it’s a sensible investor’s worst nightmare… and the majority of us would like to think we are exactly that type of investor. So much so that the Government decided to respond by giving investors some welcome respite, and more choice, in the form of the Innovative Finance ISA. Launched in April 2016, the IFISA allows investors to invest in unlisted corporate bonds, or put simply, debt. Private debt (or Direct Lending as it is known institutionally) has low correlation to mainstream markets and can potentially offer a good risk adjusted return, especially if the debt is secured against assets. At the same time, as this debt is typically issued by SMEs and smaller projects (like renewable energy) these debt finance opportunities often have a direct and positive impact on society by financing the UK economy.
The IFISA allows investors to receive tax free interest on bonds issued by UK companies. Interest in the IFISA is growing daily, fuelled by a perfect storm of investor behaviour, regulatory change, and the huge growth in Direct Lending as an investment option, which was the fastest-growing asset class globally in 2017.
Approximately £400 million is currently invested within this new tax wrapper according to TISA, the industry body. These figures are trending upwards every month as investors and financial advisers become increasingly aware and comfortable with the concept of investing in Direct Lending, and many are actively looking for an alternative to cash which is currently returning less than inflation. Goji’s platform powers a number of lending businesses who are offerings IFISAs so we have first hand experience. We see by far the largest portion of transfers in coming from cash ISAs which, as we’re all painfully aware, are offering very low rates of return.
What next for the IFISA?
As we look to the future, the real story is how the Innovative Finance ISA is moving far from its peer-to-peer roots and is now being used across the asset management industry to finance a range of assets. This is especially true of asset-backed opportunities that are now excluded from EIS and VCT products due to the new Risk-to-Capital conditions. Firms are issuing unlisted debt-based securities from existing or new FinanceCo’s instead.
Examples of the sectors being financed by the Innovative Finance ISA:
- Renewable energy
- Property and property development
- SME financing
Many asset managers who operate VCT, EIS, BPR, or manage alternative assets, may be unaware of how the Innovative Finance ISA could be used to leverage their investor and adviser brands, diversify their funding sources, and raise new funds.
Goji are an investment provider and platform, offering a ‘one stop shop’ to enable the asset management industry to seize the opportunity presented by IFISAs. We combine user-friendly investment technology with a comprehensive legal, regulatory and tax services package to get to market quickly with a robust, tried and tested solution. Find out more here.