Investment Risks
As with any investment decision, there are always associated risks
Risks
This summary is designed to help investors understand the principal risks associated with investments through ZEPS. It is important that
investors fully understand these risks and we encourage you to consider them carefully before making any investment decisions.
If you would like more information or detail about any of the risks, please contact your financial advisor.
Risk to Capital
The value of an investment through ZEPS may go down as well as up and investors may not get back the amount they originally invested. Investors should not consider investing unless they are able to bear the associated financial risks involved in investing through ZEPS. Investors should not consider investing unless they already have a diversified portfolio.
Business Relief
Each Direct Lending Company will seek to conduct its business so as to ensure, so far as possible, that it is always regarded by HMRC as constituting the trade of money-lending so that investors may obtain Business Relief in respect of their investments which are made through ZEPS, and to this end, whilst not determinative of the issue, all loans will be made on commercial terms comparable to the terms offered by other money-lenders, including banks. As the precise distinction between the activities of a money-lender and investment business are unclear and as interpretations of the law by HMRC can vary according to the particular facts of each case there can be no guarantee that HMRC will always regard investments in a Direct Lending Company as qualifying or continuing to qualify for Business Relief. Therefore, as a general policy, Zenzic Capital and the boards of the Direct Lending Companies will always give priority to making commercial decisions based upon sound business reasons around the need to maximise the security and value of a portfolio of loans rather than seeking to make or churn loans with the primary objective of ensuring that Business Relief may be available for Investors.
Nor can any assurance be given that even if HMRC were to treat the activities of a Direct Lending Company as constituting a trading business that HMRC will grant Business Relief on the full amount of each investment in a Direct Lending Company. For example, if HMRC were to regard cash held by a Direct Lending Company as being in excess of its needs for working capital and liquidity requirements, Business Relief otherwise available may be restricted proportionately to so much of an Investor’s interest in the business as is not regarded as in excess of such needs.
Performance
Investors in ZEPS should be aware that there is no guarantee that the investments will achieve their return expectations or targets. Prospective investors should be aware that past performance is not a guide to future performance and that any statements made in relation to expected performance are projections rather than guarantees. If Real Estate Companies which receive loans from the Direct Lending Companies fail to pay interest repayments or pay back the loan to the Direct Lending Companies, the value of shares in the Direct Lending Companies would be materially affected.
A strong pipeline of new lending opportunities for the Direct lending Companies is an important part of generating enough revenue to cover their general overheads and other costs and to generate the anticipated returns. The Direct Lending Companies will be reliant on Zenzic Capital to ensure a strong pipeline.
Business Risk
The performance of the Direct Lending Companies in which the ZEPS DFM arranges investments is dependent upon a number of factors which include the quality of their customer bases and their respective revenue streams, the strength of management and controls, and the value of any assets held as security. Both specific and general circumstances can adversely affect customers’ abilities or willingness to meet their obligations. Businesses may also be affected by competition, interest rates, inflation, employment rates, COVID, Brexit, and other macroeconomic factors over which the ZEPS DFM has no control. There is therefore a possibility that one or more of the holdings into which investments are arranged may under perform and cause a loss of value for investors.
Diversification
Investments may be arranged into a single Direct Lending Company. This limited diversification could increase the risk for investors. It should be noted that while investors may only receive shares issued by one Direct Lending Company, that investment may be secured against a diversified portfolio of three or more real estate projects (although this cannot be guaranteed).
Investment period and liquidity
It is important that investors understand they may not be able to liquidate investments early. Investors can request an early repayment of capital but the ZEPS DFM may not be able to meet such a request. Investors should bear this in mind when deciding the amount they are happy to invest. Partial repayments of capital may also not be possible or permitted. The underlying assets of the Direct Lending Companies are also highly illiquid, which may mean that it could take a substantial amount of time for investments to be liquidated.
Reliance on Zenzic Capital and the ZEPS DFM
Zenzic Capital and the ZEPS DFM are each dependent on certain key individuals and on their business and financial skills. The success of ZEPS will primarily depend upon the ongoing ability of Zenzic Capital to identify, source, select, finance, and monitor appropriate investments.
Dealing with SMEs
Small to medium enterprises (“SMEs”) are on average more risky counterparties than larger companies as they may be less prepared for the economic factors (such as interest rate changes, inflation, impact of COVID, effects of Brexit, political and regulatory changes, economic uncertainties etc.) and company-specific risks which they face.
Economic Risk
The Real Estate Companies to which Direct Lending Companies make loans are subject to UK-based economic risk. If there are adverse changes in the market or in the macro-economy, this could cause the Direct Lending Companies to generate less income than expected which could in turn impact their ability to make payments to investors. This may also impact the recoverability of loans made to the Real Estate Companies and the ability of Direct Lending Companies to return investors’ capital.
Credit underwriting
Details of the Real Estate Companies to which loans are made may not be disclosed on a named or detailed basis to investors because of confidentiality and other restrictions. To this extent, investors may not, therefore, have an opportunity to evaluate for themselves such Real Estate Companies and, therefore, investors will be dependent upon the judgement and ability of the Direct Lending Companies and Zenzic Capital in deciding which businesses to deal with.
Financial Services Compensation Scheme ("FSCS")
Two types of FSCS protection are relevant to investors: deposits and investments.
Deposit protection applies when money belonging to investors is held in the client account. This occurs initially when investor money is transferred to the ZEPS Administrator to make an investment and when interest repayments or dividends and repayments of capital are being held on behalf of investors. While the money is in a client account (which is likely to be a short period) it is protected by the FSCS deposit protection which is currently £85,000 per person per eligible claim. This client account is operated by Woodside Corporate Services Limited, the initial custodian appointed by the ZEPS DFM under the direction of the ZEPS DFM and is held with the Royal Bank of Scotland.
Investors may also be entitled to investment protection in cases where loss is incurred by factors such as investments in ZEPS being mis-sold or misrepresented. The FSCS investment protection is currently up to £85,000 per person per eligible claim.
The shares issued by Direct Lending Companies are not protected by the FSCS. Accordingly, neither the FSCS nor anyone else will pay an investor compensation upon the failure of a Direct Lending Company. If a Direct Lending Company goes out of business or becomes insolvent, you may lose all or part of your investment. Individuals approaching retirement and considering options under the new pension freedoms should recognise that an investment in the shares of a Direct Lending Company is a much higher-risk alternative to buying an annuity. Individuals in retirement, who may have significant sums in savings and may be concerned about low interest rates and are tempted to invest may be taking an inappropriate level of risk with their money. It should be noted that an investment in ZEPS should be made in the context of wider portfolio of investments with sufficient assets in readily realisable investments to cover any anticipated liabilities. If you remain in doubt whether an investment is appropriate for you, you should contact your IFA.