Vala Secured Lending plc offers IFISA bonds and unregulated bonds paying interest as follows:
- 4.62% for a one year term
- 6.25% per year for a three year term
- 7.9% per year for a five year term
Funds raised are to be used to invest in small and medium enterprises (SMEs).
At time of writing Vala’s website has been offline for some days or weeks. As far as we’re aware however the company is still trading. This review has been based on Vala’s last available brochure as at November 2019.
Who are Vala?
Vala Lending plc was incorporated in July 2019. Vala is 92% owned by founder Jasper Smith via the holding company Vala Capital Ltd (the other 8% being owned by Vala Capital director James Faulkner).
Jasper Smith is described as an entrepreneur who has invested in a succession of ventures including Static2358, Electra Entertainment, Optimistic Entertainment Plc, PlayJam, PlayStack and Arksen.
The holding company Vala Capital also runs a UK Challenger Fund (launched in 2017 and now closed to new investment) and a Vala EIS Portfolio. Little detail about the track record of the UK Challenger Fund is publicly available and the EIS Portfolio, like Vala Secured Bonds plc, launched only this year.
Vala’s brochure is upfront about the fact that Vala Secured Bonds plc intends to invest investors’ money in projects which Vala Capital has previously invested in. Under the risk warnings this is correctly identified as a potential conflict of interest; Vala states “we have in place procedures and policies to identify, manage and mitigate any conflicts of interest that arise”.
How safe is the investment?
Vala’s brochure and website makes clear that the investment is capital-at-risk and not covered by the Financial Services Compensation Scheme.
Its brochure also claims several times that its bonds are a “low volatility” investment and, more specifically, offer “lower levels of volatility than investments in the stock market”.
“Volatility” is conventionally used as a synonym for “risk” in the investment industry (specifically investment risk). Higher-risk investments generally go up and down in value to a greater extent than lower-risk ones.
This only holds if you are comparing two investments traded on liquid markets, which allow their volatility to be compared.
Vala bonds are not traded on any liquid stockmarket.
The fact that Vala bonds are not traded on a stockmarket does not make them low risk – entirely the opposite. The fact that Vala bonds do not go up and down on a daily basis is not an advantage; it means they are subject to greater liquidity risk than a bond traded on the stockmarket issued by a national government or large company.
The fact that Vala uses the term “low volatility” rather than “low risk” does not make the implication any less misleading. Especially when they are described as offering “higher interest than can be found on the high street, with lower levels of volatility than investments in the stock market”.
Comparing the interest rate offered by an unregulated bond with a risk of 100% loss with the interest offered by FSCS-protected high street deposit accounts is also misleading.
Asset-backed lending
Vala’s bonds are described as secured bonds as they offer “security over the assets of the bond issuer, Vala Secured Bonds Plc”.
Secured lending is not risk-free as there is a risk that if the underlying borrower defaults, the security cannot be sold for enough to cover the loan – a point Vala itself makes in its brochure.
Investors in asset-backed loans have been known to lose 100% of their money when it turned out that there were not enough assets left to pay investors after paying the insolvency administrator (who always stands first in the queue).
We are not in any sense implying that the same will happen to investors in Vala, only illustrating the risk that is inherent in any loan note even when it is a secured loan.
If investors plan to rely on this security, it is essential that they hire professional due diligence specialists (working for themselves, not Vala) to confirm that in the event of a default, the assets of Vala would be valuable and liquid enough to compensate all investors. Investors should not simply rely on what Vala tells them about their assets.
Should I invest in Vala?
This blog does not give financial advice. The following are statements of publicly available facts or widely accepted investment principles, not a personalised recommendation. Investors should consult a regulated independent financial adviser if they are in any doubt.
As with any individual loan note to an unlisted startup company, this investment is only suitable for sophisticated and/or high net worth investors who have a substantial existing portfolio and are prepared to risk 100% loss of their money.
As an individual, illiquid security with a risk of total and permanent loss, Vala’s loan notes are much higher risk than a mainstream diversified stockmarket fund, despite its claim to offer “lower volatility than the stockmarket”.
Before investing investors should ask themselves:
- How would I feel if the investment defaulted and I lost 100% of my money?
- Do I have a sufficiently large portfolio that the loss of 100% of my investment would not damage me financially?
- Have I conducted due diligence to ensure the asset-backed security can be relied on?
If you are looking for a “low volatility” investment, you should not invest in corporate loans with a risk of 100% loss.
I absolutely agree with what Brev says in the article about “low risk” and “low volatility” claims in an illiquid market.
But please remember that the so called “liquid markets” may be highly manipulated: this is true in financial markets for example. Illiquid markets may or may not be that manipulated.
To correctly evaluate risk, you must know the degree of manipulation in the market you work in, and how you can cope with it.
My personal feeling is that small, illiquid markets can often be less manipulated than high liquid, mainstream markets.
But that depends on the amounts at stake, and it is much easier to manipulate a small illiquid market than a big, liquid one.
My point is that to fully evaluate an investment risk, you have to go beyond the “book teachings” which are very important, but just a part of the whole picture.