London Capital & Finance: Administrator “optimistic” about recovering not a lot

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Smith & Williamson’s Finbarr O’Connell, one of the administrators appointed by London Capital & Finance to clean up their mess, has been speaking to the Evening Standard’s Jim Armitage in an article published yesterday.

O’Connell states that he is optimistic about making a “full recovery” of the £38m loaned to Independent Oil & Gas (an AIM-listed company) by London Oil & Gas (one of the companies in the LCF network linked to LCF itself).

O’Connell is less optimistic about the other £84 million loaned to London Oil & Gas, which went to another listed oil business, Atlantic Energy, and “numerous early stage businesses in artificial intelligence and energy”. O’Connell states “a number of the debts are going to be challenging to recover”.

Other investor money has been invested in a holiday park in Cornwall, development land in the Dominican Republic and development property in Cape Verde. O’Donnell says he is “optimistic” (his words) about recovering “some value” (Evening Standard’s) from Cape Verde.

Optimistic?

The repeated use of the word “optimistic” in the article risks giving investors a false impression of how likely significant recoveries are from the collapsed firm. The Evening Standard’s headline “Administrators warn on London Capital & Finance” cash sets a more appropriate tone.

Let us say O’Connell is right to be “optimistic” and the whole £38m is recovered from Independent Oil & Gas.

As O’Connell says, an as-yet-unknown multi-million pound sum will have to be deducted from that to pay Smith & Williamson’s fee.

After taking that into account, investors will be lucky if this £38m covers 15p in the pound of the £236m owed to LCF bondholders in itself.

For someone who invested say £100,000, £15,000 is not going to give them their retirement back. (The Evening Standard reveals that one 85-year-old man invested £400,000 in LCF.)

Of course we can hope that recoveries are made from other sources as well. However, LCF’s underlying loans are all inherently extremely high risk. We know this for a fact partly because of the inherent nature of the sectors they are invested in (oil and gas exploration, development property in small islands off the coast of Africa, unknown tech startups, etc etc) and partly because of the extremely high returns that LCF had to target in order to have any chance of returning interest and capital to investors after paying 20% commissions. From this it follows that many of these loans will be unrecoverable; the only question is how many.

Unless you want to believe that LCF’s directors have such an uncanny ability to spot winners in extremely high-risk sectors that they should be managing billions of pounds for hedge funds and venture capital firms, not a few hundred million raised from mis-sold pensioners.

If O’Connell’s chronic optimism is an attempt to get on investors’ good side, it carries a high risk of backfiring.

Smith & Williamson are due to publish their initial proposals to creditors by the end of March, which will contain a full list of LCF’s assets and an initial appraisal of their value.

The Evening Standard’s full article can be read here.

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