Income: A Review of Corporate Bonds and Alternative Income

In 2016 UK interest rates had fallen below the rate of inflation. This led to unprecedented demand for higher rates of income from investors who typically didn’t invest in alternative or unregulated vehicles.

As a result there was an unprecedented number of new corporate bonds, mini-bonds, loan notes and debentures suddenly being structured and promoted, which were successfully finding funding from this new surge of demand.

This significant rise in demand and activity prompted multiple current members of UKIA senior management to conduct a thorough updated review of the alternative income market together.

This review took approximately 18 months and included close ongoing consulting services to bond and income specialists in the City - most notably with one bond specialist company based in Monument in the Square Mile - which included reviewing, screening and monitoring a large number of income products for FSMA compliance, transparency, investor value and ultimately performance.

The consulting included ongoing recommendations and implementation of improved on-boarding assessments, in-depth risk analysis and in one case overseeing the complete rollout of an FCA-regulated structure in one bond company in an attempt to provide as much transparency and investor protection as possible.

During the review a large proportion of these income vehicles defaulted on income payments and failed, and the “asset-backing’ that had been claimed would cover investors in the event of default also failed despite the initial offer documents complying with FSMA and FPO protocols. The reasons for this were ultimately identified as being down to two main factors.

Firstly: The entire structure of a corporate bond puts immense pressure on a venture to generate significant regular income almost immediately and enough revenue to not only meet income payments but also the ultimate repayment of capital to investors.

Promoting these bonds required large commission payments to promoters and agents, significantly reducing the amount of capital available to fund the venture in the first place, and many of these business ventures failed to perform well enough to meet these obligations.

Secondly: Despite transparency relating to the business activities to be undertaken, the risk mitigations such as the appointment of Trustees to take the necessary steps if a bond fails but had been “asset-backed” were impossible to analyse and validate, as these contracts and roles were complex and weren’t transparent.

The ultimate conclusion was that while there were occasional examples of successful ventures, the risk profile of these structures was extremely high, transparency was extremely low, and there was little investor value even in a successful bond issue.

This was felt because if investors fund a high risk business venture the reward in private equity is a share in the profits and success of the venture, whereas in a high risk bond or income vehicle the risks are taken on by the investor but the rewards are limited to the promised rate of income.

UKIA management decided it was a very unattractive sector to participate in. Most bond promoters and agents in the space only exist for a short time, until the bonds they promote begin to fail. The company in Monument ceased trading within a couple of years of entering the market.

Some bond issuing companies appeared to be successful and issued a large number of bonds and achieved a large market presence and early reputation, such as The High Street Group, which seemed to be an exception to the rule at face value.

Their entire portfolio of bonds ultimately failed. We’ve summarised our analysis of this group in this article.

Outside of the normal structure of corporate bonds, some companies became initially successful on the face of it at promoting alternative income through alternative vehicles such as StoreFirst, who offered high income returns to investors based on the purchase of storage units, for a fixed return based on the rental income of these units.

StoreFirst also ended up collapsing very publicly despite trading for some time and attractive a very high number of investors by promoting to investors without conforming to FSMA or FPO standards because their investments were not recognised as official investment vehicles in law due to their structure. We’ve also summarised this example in this article.

Our conclusion is that private equity suffers far less pressure to generate and pay high income to investors, offers a much fairer share of profits to investor for undertaking risk and is more transparent.

The focus on private equity instead of income was considered to be a far more attractive sector to trade in, both for the long-term outlook for a broker and the potential returns and fair risk management and mitigations for investors.

Alternative Investment Risks: Lessons from The High Street Group and StoreFirst Collapses

Summary

The spectacular failures of The High Street Group (HSG) and StoreFirst serve as stark reminders of the inherent risks in alternative investment markets, particularly those targeting income-seeking investors with promises of attractive fixed returns.

Both collapses demonstrate how alternative investments can expose investors to significant capital loss despite marketing materials emphasising stability and regular income.

The High Street Group: Corporate Bond Collapse

The High Street Group positioned itself as a significant player in the corporate bond market, attracting investors with the promise of steady returns through debt instruments. However, the company's collapse highlighted several critical risks inherent in alternative corporate bond investments:

• Lack of Transparency: Unlike publicly traded bonds, HSG's instruments lacked the rigorous disclosure requirements and regulatory oversight of traditional markets

• Concentration Risk: Investors were exposed to a single entity's financial health without the diversification benefits of established bond indices

• Liquidity Constraints: When problems emerged, investors found themselves unable to exit positions, unlike conventional bond markets where secondary trading provides liquidity

• Due Diligence Gaps: The complexity of the underlying business model made it difficult for retail investors to properly assess the true risk profile

StoreFirst: The Storage Unit Investment Mirage

StoreFirst marketed itself as offering "fixed income returns" through investments in storage units, appealing to investors seeking alternatives to low-yielding traditional savings. The collapse revealed fundamental flaws in this alternative investment model:

• Asset Valuation Uncertainty: Storage units lack the established valuation methodologies of traditional real estate, making it difficult to assess true underlying value

• Operational Risk: The business model depended heavily on occupancy rates and operational efficiency, factors that proved more volatile than marketed

• Regulatory Gaps: The storage investment sector operates with less regulatory protection than traditional property investment vehicles like REITs

• Income Sustainability: The "fixed" returns were dependent on new investor capital rather than genuine operational cash flows, creating a structure vulnerable to collapse

Key Risk Factors in Alternative Income Investments

Both cases illustrate common warning signs that income-focused investors should recognise:

• Returns Too Good to Be True: Both offered yields significantly above market rates without commensurate risk disclosure

• Complex Structures: Unnecessarily complicated investment vehicles often obscure underlying risks

• Limited Track Records: Alternative investments frequently lack the historical performance data available for traditional assets

• Regulatory Arbitrage: Many operate in less regulated spaces, reducing investor protections

• Liquidity Illusions: Promised liquidity often evaporates precisely when investors need it most

Market Implications and Investor Protection

These collapses highlight a broader pattern in alternative investments where marketing focuses on income generation while downplaying capital preservation risks. The failures demonstrate that:

• Alternative investments often concentrate rather than diversify risk

• Regulatory protections are typically weaker than in traditional markets

• Due diligence requirements exceed most retail investors' capabilities

• The income focus can mask underlying capital destruction

Conclusion

The High Street Group and StoreFirst collapses serve as cautionary tales for income-seeking investors. While traditional investments may offer lower headline yields, they typically provide greater transparency, liquidity, and regulatory protection.

For investors prioritising income generation, established dividend-paying equities, government bonds, and regulated investment trusts offer more reliable alternatives with clearer risk profiles.

The alternative investment sector's promise of enhanced returns often comes with disproportionate risks that are inadequately disclosed or understood. These cases underscore the importance of thorough due diligence and the value of regulatory oversight in income investing.