Retail investors in the UK are largely left out of high-yield debt and alternative investments. A former NatWest trader wants to change that.
(Bloomberg) — Retail investors in the UK are largely left out of high-yield debt and alternative investments. A former NatWest trader wants to change that.
Daniel Harman says he was often frustrated that he couldn’t put his own money into the distressed debt and special situations investments he was pitching to clients. Like the time two years ago when EnQuest bonds were set to pay in cash or kind, depending on oil prices. Harman says he would have invested in the securities, but it was tough to do. Such opportunities are often reserved for investment funds and high net worth individuals, typically requiring a minimum of £100,000 ($124,000).
Some of his colleagues told him they felt the same way. So together with a software developer, Harman has created Darksquare Capital, a marketplace of such offerings for individual investors.
“We’ll list investments that we think are interesting,” Harman said in a video interview. “We’ll do some research on them, pull together a one or two pager thesis, and people are free to click on the investment, read our research, do their own research, learn more about it, and then decide whether or not they want to invest.”
The platform is likely to be the first of its kind for retail investors in the UK, focused on debt and alternative assets. Investors will be offered opportunities in the high yield, distressed debt and special situations space, renewables, real estate and forestry.
The platform won’t be for just anyone, targeting instead a relatively sophisticated individual investor. Regulated by the UK’s Financial Control Authority, Darksquare will run “know-your-client,” or KYC, checks before letting an investor participate.
With a minimum of £5,000, the participant will need to self-certify either as a sophisticated investor or a high net worth individual, filling a short questionnaire on the platform’s website. With criteria including some time spent in private equity or the financial services sector or having made private investments previously, the effort will be to keep out investors unaware of the risks involved.
“If we’re trying to buy a £500,000 clip of a bond, we’d need a hundred investors putting in £5,000 to hit that threshold. So we’re not targeting thousands of users for now,” said Harman. “We’re going to launch our beta later in April to about 150 users on our wait list and then scale it up in incrementally from there.”
Here’s how it’s going to work: For each investment, Darksquare will work with Odin, a firm that provides special purpose vehicles. A UK-based SPV will be created to own the asset and then will allocate equity in that SPV to its customers.
The firm raised £271,000 pounds from 19 angel investors and 190 investors on Seedrs, a crowd-funding platform for startups, according to the platform’s co-founder.
Direct Outreach
So far, potential users have been targeted via direct outreach by LinkedIn or email. The platform has about 500 users on its wait list, Harman said. The plan is to scale up incrementally through marketing via ads on Google, LinkedIn and Reddit. A web summit in Lisbon and Slash in Helsinki have also proved fertile grounds for the platform. Harman plans to also take it to the Master Investors show in London in mid-April.
For now, Darksquare is focusing on UK residents. Targeting European clients will require the setting up of a subsidiary in the European Union. Set to go live in a few weeks, the platform is looking at selected first liens like Maxeda DIY, Punch and David Lloyd, Harman said, adding that it’s seeking yields of 10% to 12%.
Darksquare charges a 1% upfront fee and a 1% annual management fee in payment in kind.
“We actually take 1% asset ownership every year for ourselves,” said Harman. “We feel that aligns our incentives with those of our customers, because the more money they make, the more money we make and we have an incentive to not list anything that just goes to zero.”
While the initial lock-up period is three to five years, the firm is also planning to launch a secondary market feature within about a year, where investors could buy into or sell out of previously funded opportunities, charging trading fees on that.
“The game plan is looking to do like £30 million in volumes on the 3,000 users. So average ticket size per year of £10,000 per active customer,” said Harman.
As to why the platform is called Darksquare, Harman said it reflects its dealings in illiquid investments that aren’t accessible to the public.
“It’s actually a chess strategy where you try to control the dark squares of the board,” he said. “And it kinda sounds hedge-fundy, institutional-investory as well.”
–With assistance from Chris Miller.
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