Hi Hu Kun,
This scheme comes under various names — Private Equity / High Yield bond / co-investment partnership / Ponzi scheme:) I call it HighYieldPrivateEquity
1) Indeed the legal contract names a specific business entity paying “partners” (me) a fixed payout. I just feel the entity name isn’t as important as the real people behind it.
2) Default risk – yes they could run away with my money and declare the business entity bankrupt. Lehman did that to Singapore investors. A more well-known entity is perceived to be safer, but MAS won’t underwrite (guarantee) every financial institution it regulates. There’s still some default risk in some of these products. I look at their track record and their reputation. I feel a big name wouldn’t want to get their names in the news by cheating small investors.
My view on transparency:
- Most retail products are transparent, otherwise MAS wouldn’t give you license to sell to retail
- Many transparent and well-known investment products don’t stipulate payout amount or date (Mine spells out everything). This category include stocks, mutual funds, gold. They come with market risk, not credit risk.
- The best-known and safest products with “guaranteed returns” are offered by heavily regulated banks and insurers. They either pay very low return (CD) and/or require lengthy lock-in period (insurance)
- High-yield Corporate bonds are transparent and do offer guaranteed return. I find the return still too low, largely due to the transparency. In contrast, mine offers around 15% coupon rate, but what’s the default risk? Once you spend a few hours to understand the business, you can assess the risk. Before you do that, you have to assume default risk is very, very high.
- Suppose your brother approaches you to lend him $10k and promises to pay you back in a year (or 2) with 20% annual return. Based on your knowledge of his revenue, you could assess his default risk. Without that knowledge, you have to assume default risk is very, very high.
My experience investing in HYPE bonds:
- About 30 months ago I put $10k into a German real estate product offering fixed return of 24% over 2Y. Cashed out successfully.
- About 18 months ago I put $10k into a Brazil real estate product offering fixed return of 28% over 2Y. Received on 29 Sep 2017
So far, no default no delay. But doesn’t mean “never will”. When will I get hit by the first default event in my investment career? Could be 2018, 2019 … I embrace myself.
My rule of thumb – invest an amount that you can afford to lose.
The “amount you can afford to lose” depends on your nett monthly cash flow + your free cash pile after all liabilities. If you have S$200k cash (or cash equivalent), with no debt but with regular passive income to support your family, then you probably can afford to lose $2k to $10k? With the same $200k cash, some people can afford to lose $50k, if their monthly nett cash flow is very positive like positive $10k.