The Foresight Group has launched a bond offering a trio of fixed-term deals paying up to 4.83 per cent interest to bankroll the so called ‘smart meter revolution’.
In an era where saving rates are as low as 0.05 per cent, the private equity firm is hoping to tempt those with at least £10,000 to invest with the option to fix their investment horizon for up to three years in return for up to 4.83 per cent interest.
It also pays more than 4 per cent for the one-year option, which could tempt rate-starved savers.
But could this investment vehicle be for you? We take a look at the details and explore some of the key considerations.
The bond loans money to companies that own and operate smart meters for energy suppliers
What is on offer?
Investors will have a choice to invest over one, two or three-year fixed terms for rates of interest between 4.07 per cent and 4.83 per cent each year.
What’s more, with the two and three-year options, investors have the choice as to whether to take the interest payment annually or at maturity when a superior rate would apply – assuming all goes well.
The annual payment options offer interest rates of 4.44 per cent and 4.59 per cent on two-year and three-year fixed terms respectively. But if interest is paid at maturity, the bond offers investors a bumper rate of 4.55 per cent on a two-year fixed term, and 4.83 per cent for the three-year equivalent.
The one-year deal comes with a one-off interest payment of 4.07 per cent at maturity.
The minimum investment threshold is £10,000 in increments of £1,000.
Remember, retail bonds like this are not covered by the Financial Services Compensation Scheme safety net, which covers investors in regulated products up to £50,000 in the case of an investment company going bust.
The bond is available directly through Foresight or via an intermediary until 13 October 2017.
A tax-efficient Isa wrapper is not available for the product.
What does it invest in?
The funds amassed by the bond will be used as loans to companies that own, operate and rent installed smart meters to UK energy supplies.
These devices display a household’s energy consumption in pounds and pence and sends this information to the energy supplier so that the customer receives accurate bills rather than estimates.
Every home in Britain will be offered a smart meter from their supplier by 2020.
The bond is secured against the portfolio of smart meters financed by the loan.
Foresight has a five-year track record of funding smart meter installation in the UK, investing £74million into more than 160,000 smart meters across the UK.
The firm also launched Foresight Metering, a smart energy metering company, in early 2016.
How does it compare?
It is difficult to find another investment vehicle that invests solely in smart meters. There are ETFs and other investments that indirectly invest in smart meters by investing in utility companies.
This is Money verdict
The potential of earning more than 4 per cent in interest over a one-year fixed term will undoubtedly turn the heads of many investors.
However, there are some pitfalls to watch out for here. The roll-out of smart meters began in 2009 but the initiative has had several teething problems that could have a significant financial cost to beneficiaries of the bond – and thus undermine their ability to repay loans.
One of the biggest is an IT blunder, which has rendered millions of smart meters redundant and in need of replacing.
In addition, firms that operate in the space are set to lose out on business after the government made smart meter adoption optional, having previously pledged to install meters in all homes.
There are a host of other key considerations to factor in, such as interest rate risk. Our guide on bonds explores these in greater detail.
Ben Yearsley, director of Shore Financial Planning, says: ‘The first thing to consider is that this isn’t a substitute for cash, it offers a higher rate therefore there is increased risk. With these types of bond, the key in my view is whether the underlying asset the bond is secured against is worth enough to underpin the bond and subsequently whether the rate of interest being offered is enough.
‘With a bond linked to a pub, I can make an educated guess, with this one it’s harder.
‘Foresight is probably the leading investor in smart meters and therefore has a great insight into the sector. My feel on this bond though is that I would go for the one-year and maybe the two-year, but the three-year bond seems too long for the return offered.’
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