Which are the differences between Interim Equity and Full Equity?
Before we launched debt investments on CrowdLords, investors only had the option of investing via equity which meant that whilst we projected the end of term and the returns that would be paid, they are just that, projections, and as such are subject to change depending on how the project progresses.
We recognised that many of our investors were new to the idea of buying shares in SPVs and were put off by the idea that the exit date and the actual returns may be different to what they expected. So we developed a product we call Interim Equity – buying shares in the SPV for a fixed period and with a fixed return. We facilitate this by using "Preferred Redeemable Shares" as opposed to "Preferred Ordinary Shares".
This post is designed to help you understand the differences between full equity and interim equity and to help you choose which is right for you as you are appraising our investments.
Like the Preferred Ordinary Shares we issue in what we call "Full Equity investments" our Preferred Redeemable Shares:
- Are direct equity investments into the SPV owning the property.
- Carry full voting rights on a par with all other classes of share.
But unlike our Preferred Ordinary Shares they:
- Have a fixed exit date
- The returns paid are fixed no matter what the actual net profits are at the end of the project, assuming that the project has generated enough profit to cover the difference between the Redemption Price and the Issue Price.
- Have a higher priority order and are redeemed before any Ordinary Shares.
- Can often be redeemed before the debt is repaid as long as they are replaced with new equity either from the developers or other CrowdLords investors.
- All of the returns are paid as a capital gain when the shares are redeemed.
As a result of these differences, Interim Equity has, in our opinion, a lower risk profile than Full Equity and as such the potential returns are almost always lower than full equity offered in the same project. Thus they appeal to investors looking for lower risk / return investments either to balance their portfolio or because they feel more comfortable with the lower risk.
Please note that, even with Interim Equity, your returns are not guaranteed and your capital is at risk. Often, as with the current Interim Equity offered on the Darwin Street investment the Developer may enhance the terms covered in the Shareholders Agreement with a Put Option – a corporate guarantee to redeem the shares on the Redemption date and at the Redemption Price. In these cases, Interim Equity are more comparable to the Debt investments but with the distinction that returns are paid as a Capital Gain and no tax is retained by us on exit.
So to summarise:
The advantages of Interim Equity
- A fixed term.
- A fixed target return, irrespective of the profitability of the project.
- Considered to be lower risk than full equity in the same project.
- Shares are redeemed before any returns are paid to other shareholders.
- All returns are always paid as a capital gain.
- Often available at a lower entry point than Full Equity in the same project.
The disadvantages of Interim Equity
- The projected returns are lower than Full Equity in the same investment.
- There is no opportunity to earn a greater than projected return if the project is more profitable than expected.
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