Administrators Duff and Phelps have released their initial report into collapsed property minibond scheme Blackmore.
Of £46 million raised from investors, director Patrick McCreesh has estimated in a Statement of Affairs that less than £5 million is likely to be realised to pay them back.
Investors’ money was moved to a series of Special Purpose Vehicles which then invested in property developments. These SPVs borrowed more money from other sources, such as short-term bridging finance providers, whose loans would have been on very high interest rates.
In March 2019 Blackmore stated that “Our business model is entirely on track and current return on capital employed averages 54 per cent”. How it went so quickly from being “entirely on track” and generating 54% ROCE, to being unable to pay interest six months later and collapsing with (at least) 90% losses is unclear.
The £5 million that McCreesh estimates can be realised from Blackmore is less than the £9.2 million that would have been paid to their marketers Surge in commission. Surge ran Blackmore’s back office and marketing efforts, the same job they carried out for London Capital and Finance. (Blackmore’s December 2017 accounts suggested that Surge were paid 20% commission on virtually all the funds raised by Blackmore.)
Overseas efforts fail
In the aftermath of the collapse of London Capital and Finance, the FCA “made enquiries directly of the Company in relation to its business operations” in March 2019.
Blackmore subsequently lost its “Section 21 signoff” – the approval of its financial promotions by an FCA regulated firm that allowed its bonds to be marketed within the UK. In April 2019 it closed to all new investment from the UK, and, in an attempt to source funds from overseas, opened an office in Dubai, with further offices planned for Tokyo and Hong Kong.
To be clear, there was nothing to legally stop Blackmore from finding another FCA-regulated firm to sign off its promotions and continue sourcing investment from within the UK – provided its bonds were promoted only to high-net-worth and sophisticated investors (as they always should have been).
The inescapable conclusion is that Blackmore’s decision to stop taking money from all UK investors was to keep the FCA off their backs. Meanwhile the FCA crossed its fingers and hoped that overseas investors would somehow invest enough in Blackmore to avoid another scandal involving tens of millions of losses to UK investors.
I’m not seeing another reason to refuse to market to UK investors, even when it is perfectly legal and compliant to do so, while still taking money from overseas investors.
How did that go? The administrator’s report notes that “further minibonds totalling £2,331,340” were issued to overseas investors – so about 5% of the amount that had been raised before Blackmore closed to UK investment.
There is no indication that Blackmore had had any contact from the FCA prior to March 2019, despite the FCA being well aware that Blackmore Bonds were being systematically missold to retail investors since at least March 2017.
“Capital guarantee” schemes
The administrators note that Blackmore’s bonds were supposed to be covered by insurance policies in the event of default, from Ion Insurance Group S.A. for Series 1 bonds and Northern Surety Company, SRL for subsequent bonds.
Whether any funds will be recovered from these policies is described as “uncertain”. There is a long history of unregulated investments being marketed as being covered by insurance, which for one reason or another doesn’t pay out.