A precedent setting new investment model, or simply just a hope and a dream?
It’s more than just urban legend that some of the worlds most successful millionaires got where they are today by taking a risk with an out of the box investment opportunity. They’re the type of “take a leap” situations that can see you either making it over to where the grass is, in fact, greener, or nose diving into directly into shallow waters. Great money managers who have found success are like the rock stars of the financial world, some cashing in on wild strategies and innovative ways to maximise their investments, others picking securities on pure instinct… Where you won’t see much difference between these golden kids is in their ability to beat the market.
So, you’re thinking of trying this approach? What about a brand-new bond, expected to launch in the first quarter of 2020 looking to boost the rapidly dwindling black rhino population by 10% globally? The $50m, five-year bond is the first financial instrument for species conservation, a ground-breaking concept to be sure, but is it a wise to invest in a highly endangered African megafauna that is also highly valued in traditional Chinese medicine? When exactly is an investment opportunity just too wild to take a bite out of?
Lets first examine exactly what this Rhino Investment Bond (RIB) actually is
“The Rhino Impact Bond is the world’s first financial instrument for species conservation, transferring the risk of funding conservation from donors to impact investors by linking conservation performance to financial performance,” according to Conservation Capital, the company arranging the bond offer. The $50 million bond is based on the concept of investors receiving financial returns only on the successful and measurable completion of the objectives – so it’s effectively an “outcome payments” model. The outcome offering the returns? Investors will be paid back their capital if the population of African black rhinos increases in five years. The yield on the bond will be subject to the growth of the rhino population. Dependent on evaluations on whether the RIB target has been achieved, the relative performance of the bond determines whether the investors receive a return.
Hailed as a “precedent-setting model” for future projects, especially as the list of endangered species continues to grow, the real risk for an unconventional bond like this is expecting traditional investors to pay upfront without any precedent for a return. The bond opens up a more than a few unanswered questions for those considering investment. What is this funding hedging against? Is one side of the trade betting on rhino extinction and just who is the counterparty? Rhino’s certainly are unique assets and with their numbers dropping by the day a bond like this will give investors a chance to “recycle” their capital, but aside from the questions being raised, another hurdle for backers of this bond is the tough job of persuading potential investors to take the upfront risk and agree to a five year deferred liability.
Some high-profile backers have already expressed keen interest in the bond. The British government is among potential donors, and it is also receiving assistance from Credit Suisse Group AG and DLA Piper LLP, and although the this bond is the first of its kind, other “impact bonds” have been used to finance a varied array of outcomes, including girls education in rural India to sustainable marine and fisheries projects in the Seychelles.
All in all, as a company with its roots firmly planted in South Africa, CM Trading is all for an innovative approach to conserving one of our greatest resources. But, as with all investments, certain levels of ‘due diligence’ i.e. research and investigation, into exactly what the premise of the bond is and whether it’s a viable and smart investment choice, remains the onus of the potential investor. Whether you’re investing in a tried and tested cash cow or want to open your portfolio up to these single horned “cows”, you certainly should never take anything regarding your finances at face value. No matter how incredible the imagined outcome can be.
OPINION PIECE FROM CM TRADING
CONTRIBUTOR: DANIEL KIBEL, FOUNDER AND DIRECTOR CM TRADING