A small group of UK consumer companies has taken matters into their own hands. Growing, privately held, faced with a difficult credit environment, armed with a base of loyal customers and led mostly by passionate founder-CEOs, these companies have gone straight to the public to raise capital. They’ve done it in the form of debt, issuing what they are calling minibonds or–in the case of green power company ecotricity–ecobonds.
The pioneer, in 2009, was King of Shaves. Since then ecotricity, chocolate purveyor Hotel Chocolat, retail partnership John Lewis and, this week, foreign exchange specialist Caxton FX have followed. Amounts raised have ranged from £600,000 in the case of King of Shaves, to £50 million in the case of John Lewis. Caxton FX is targeting £4 million.
In recent years there has been growing demand from UK retail investors for easier access to corporate bond issues. In response, in early 2010 the London Stock Exchange (LSE) launched the Orderbook for Retail Bonds (ORB), an electronic trading platform designed to improve information flow on the bond market and to encourage issuers to structure bonds in denominations attractive to retail holders–£100 to £1,000 rather than the typical £10,000 to £50,000.
The minibonds pick up on this trend, add a dose of Kickstarter and allow smaller companies to meet their capital needs. At a time when interest rates on basic savings accounts in the UK hover around 3.0%, investors have received promises of annual cash and in-kind returns of 6.0% – 7.5%, in exchange for committing minimums of £1,000-£2,000 for three to five years. In the case of John Lewis, the offer to participate in the offering was made only to partnership members and employees, and ecotricity customers were given the opportunity to participate at higher levels than non-customers.
As with any investment, there are risks. Each of these companies is long-established–the youngest is Caxton FX, founded in 2002, reportedly generating in excess of £400 million in revenues today. Nonetheless, as they are private and the issues are unregulated, information disclosed varies widely and there are no associated reporting requirements. Further, since none of these bonds is traded on the ORB, there is no market for them. An investor is committed for the life of the issue and cannot benefit from UK tax breaks normally associated with bonds held for the longer term–the privately-issued bonds cannot be deposited into the associated accounts where those benefits accrue.
Over the summer, to address some of these issues, Conservative MP and former Goldman Sachs banker Sam Gyimah put forth a proposal for a bond exchange for small and medium sized companies. An interesting idea–for the US as well–it has received support from the LSE–it would be a logical partner to the ORB–as well as from Stephen Welton, who is CEO of the Business Growth Fund, a cross-bank investment fund targeting small and medium sized companies.
The emergence of minibonds is an unsurprising outgrowth of the financial crisis–they represent company-led innovation, tap into consumer and employee desire for a greater sense of meaning and connection to the products they use and places they work, and they address the financial needs of both growing companies and retail investors. The surprise? That there haven’t been more companies issuing minibonds to date, that they haven’t cropped up yet in the US and that there haven’t been more financial innovations like them.
You can review John Lewis’ documentation for its offering here. ecotricty’s renegade CEO, Dale Vince, keeps a cleverly-titled blog–Zero Carbonista. You can read his post about the company’s offering here. ecotricity is reportedly planning a second, larger ecobond offering for later this year or early next. Information on the Caxton FX bonds is available here.
Next up? Crowdsourced equity. BrewDog, a Scottish brewery and pub group that ran an online IPO in 2009, is currently raising £2.2 million via a direct offering that they’re subversively referring to as Equity for Punks. You can download the prospectus here and watch the offering video below.
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