IPO Wealth/Mayfair Platinum - The scary end of the "rush" for yield

(Ed's Note: On 6 April 2020 ASIC commenced proceedings against Mayfair 101 and Mayfair Platinum for misleading or deceptive advertising.)

The brands IPO Wealth & Mayfair Platinum have become more prominent recently given their full-page advertising in the financial press and the recent high-profile purchase of Dunk Island. 

Some investors are clearly attracted to their “term deposit like” investment products yielding between 3.25-6.7% per annum with terms from 6 months to 5 years. In a November 11, Eureka Report podcast, Mayfair 101 CEO and founder James Mawhinney told host Alan Kohler that the group currently had almost $200m of external investors’ money.  At a more recent presentation to investors in capital cities in late November he indicated assets under management of $500m although this seems inconsistent with other information on current product sizes.

Their flagship IPO Wealth product has reportedly raised over $120m. Of the two newer products, M Core Fixed Income is said to have raised around $20m and M+ Fixed Income around $40m.

Under the Bonnet

But how do these products work? The flagship IPO Wealth Fund is an unregistered managed investment scheme and therefore for wholesale “sophisticated” investors only. The product commenced in March 2017. Vasco Investment Managers Limited is the Trustee of the Fund.

According to the IPO Wealth Fund 2019 financial report, at June 30, 2019 the Fund consisted of;

1. A cash operations account of $1,225,704, cash reserve account of $8,608,000 and a Capital Protection Reserve of $1,565,165 (see more below). i.e. total cash of $11,206,370 which is held with Macquarie - earning current cash rates of around 1% p.a. and falling. 
2. A loan to IPO Wealth Holdings Pty Ltd (trading as Mayfair 101 Holdings Ltd) of $86,080,000, a related party of the Investment Manager. The minimum term of each drawdown of the loan is 6 months with a return of 10% per annum calculated and accrued daily and payable monthly in arrears. 

IPO Wealth Fund investors have therefore lent the vast bulk of the money (approximately 90%) to the management group. In the “credit risk” section of the 2019 financial report it states that “The Investment Manager manages the exposure to credit risk on an ongoing basis.” Interesting, when the one loan making up 90% of the portfolio is to IPO Wealth Holdings Pty Ltd, a related party to the Investment Manager.

Mayfair 101 appear to present themselves as less of a fund manager and more a “non-bank alternative/investment bank”, providing higher returns on term investments and deploying capital to “gaps” left by the banks.  Indeed, it has heavily capitalised on current community dislike/distrust of the banks in its marketing pitch and talked about a “new banking world”.

The manager of the IPO Wealth Fund is entitled to a “performance fee” of the difference between the rates paid to investors and the 10% pa borrowing interest rate, less direct fund costs. At this stage this full performance fee is going towards a “Capital Protection Reserve” with the aim to build this reserve to 5% of the gross value of the fund when the fund is above $50million. At 8 July 2019 $1,779,466 was in the Capital Protection Reserve bank account representing 1.82% of the Gross Asset Value of the Fund. 

The financial report states that “the Capital Protection Reserve will be used to top up the Fund’s asset pool in the event of any capital losses”. Obviously, at 1.82% or even the targeted 5% of the Fund, this is not a significant buffer if the 90% loan to IPO Wealth Holdings were to default.

Clearly, the performance fee is not the main game for Mayfair 101. According to the 2019 financial report, “To date the borrower has utilised the Funds to pay for the business operating costs of the Borrower and related companies and to make a range of private equity investments”.

Revving up the Cost

How much could the business operating costs of the Mayfair 101 Group be? There is no real clarity, but they are likely to be currently running at an annual rate well into the mid to high single digit millions given that -

1. It has offices in prime locations in three major cities – London, Sydney and Melbourne. 
2. A recent presentation indicated the group had more than 40 full time staff plus an extensive paid global advisory committee. 
3. It has been doing 1-2 full page advertising in the mainstream financial press for much of the last year as well as a range of other extensive marketing/promotions (for example through the Switzer Group and it is also a sponsor of the Sydney based Shute Shield Rugby competition).
4. It has likely spent a lot of money on lawyers to ensure the disclosures in its glossy offering documents are adequate and within the law.  

Do investors in IPO Wealth adequately understand that the money they have lent via the IPO Wealth Fund and other products is contributing to such costs? Unlike conventional managed funds, investors don’t get to see what these costs represent as a proportion of the value of their investment, despite them potentially having a significant impact on the security and viability of their investment.

Most investors are focusing only on the fact that they are currently receiving their expected monthly interest income and have been able to redeem at maturity with no problems to date. 

But investment is about the future and that is where the challenges for these products lie.

The 2019 financial report states that loan interest income of $5,791,437 was paid by IPO Wealth Holdings Pty Ltd during the financial year. The figure is likely to be significantly higher for the current year given the growth in the size of the fund. Where is the money coming from to pay this, as well as the costs discussed above?

A look at the Investment Engine

One would hope that the money to pay the interest income is coming from the investments that Mayfair101 have made with the loan IPO Wealth investors have provided them.

In the Nov 26 Sydney Roadshow, it was stated Mayfair 101 currently have 30 assets of which 8 are controlled subsidiaries and 22 minority positions. 62% of the companies apparently have histories longer than 5 years.

One of the group’s Investor Relations Managers confirmed via a telephone call that the income supporting the IPO Wealth Fund interest is coming from a subset of 18 of these 30 investments and that actual returns to IPO Wealth Investors could be lower than the targeted returns if income from these investments was insufficient to cover interest payable.

What are the investments? Unfortunately, Mayfair101 doesn’t disclose a full portfolio listing or weightings. Transparency is something lacking in much of what the Mayfair 101 group do. One needs to trawl through the group’s presentations and media articles to get some sense of the investments made and held.

In the Eureka Report interview Mawhinney said that 90% plus of the investments are private. He has argued that this means lower risk because the investments are not subject to listed market pricing. 

Experienced investors know this type of thinking is at best misleading and at worst totally wrong. It is particularly a problem if there is a significant risk of a need to sell some or all those unlisted assets in the short to medium term to generate liquidity for investors.

The manager indicates that some investments have been made via convertible notes which may be providing some income. However, how reliable is income from convertible note structures where the underlying business has no profit and in some cases no revenue?

Companies mentioned in a recent presentation to the Switzer Income Conference include Australian Business Credit, Accloud, Paymate, Think Markets and Dunk Island. From articles in the media we are told that Mayfair 101 committed $42million to Accloud over 12 months in May 2019 and it paid $31.5million for Dunk Island. Additional purchases of properties on Mission Beach are said to be on an extended settlement basis.

Companies not mentioned in recent presentations but where an investment has been made by IPO Wealth/Mayfair 101 as reported in various media in recent years include Liven, Laundromap, Public Democracy, Bright Innovations, CHKDN, Alqami, MYNT Adbit, Okto Wealth, TPLC, Sportsfix and a Sri Lankan mining company.

As far as can be discerned from media articles, $10m was committed to Public Democracy in September 2018 and $10m to Liven in August 18. Accloud, CHKDN, AdBit, Liven, Alqami,/Mynt and Sportsfix investments were associated with blockchain technology or cryptocurrency offerings. Some of the earlier investments seem to be struggling although finding detailed information on their current status and progress is extremely difficult.

There are close ties with several of the companies. For example, IPO Wealth operates as a Corporate Authorised Representative of Quattro Capital Group which is associated with Australian Business Credit. Okto Wealth has the same 70 Pall Mall St James address as the Mayfair 101 London office and James Mawhinney is a director. Mawhinney is also a director of MYNT, Alquami and M12 Global (the UK offshoot).

Mayfair 101 highlights the degree of closeness they have with some of their investee companies even to the extent of overseeing their management accounts. It seems possible that some of the income underpinning the interest income back to the IPO Wealth Fund may be coming from Mayfair subsidiary businesses providing services to other companies within the Mayfair 101 group. Some of the interest to IPO Wealth investors may therefore be partly, if indirectly, derived from the loan IPO Wealth Fund provides to Mayfair 101.

Many of the minority investment positions mentioned appear to be loss making. Dunk Island is currently derelict and unlikely to be throwing off any genuine income in its present form. In any case, Dunk Island is not one of the investments indicated as providing income for the IPO Wealth Fund although it is relevant for other products.

What’s the Safety Rating?

A newer Mayfair Platinum product is M Core Fixed Income which offers “dollar for dollar” security over assets held by the Mayfair 101 Group of companies but again, how valuable is this security if the assets generate little income/profits, are hard to value and are highly illiquid?

Of course, even assets not generating current profits can be revalued up and this could help provide a buffer of security to these risks (ignoring liquidity for the moment). Mayfair 101 has spoken positively about the business prospects of businesses such as Indian focused Paymate, as well as the property upside of their Dunk Island and Mission Beach purchases.

To date any information on such revaluations or the returns from underlying holdings remains lacking.

Mayfair 101 is clearly hoping it can select investments well and generate returns (and realize those returns) in a way that more than cover the cost of interest, the high costs of running the business as well as meet redemptions/maturities as they occur. This likely requires some major winners in the short to medium term, especially if inflows were to slow or outflows rise. 

Clearly, while the business is raising new funds on a net basis such downside risks can largely be hidden.

In the 11 November Alan Kohler interview Mawhinney mentioned that one of the businesses is due to list on London’s Aim market within the month. Accloud has been flagged as an AIM listing for some time and this was also mentioned at the November 26 presentation. At the time of writing there does not seem to be any public information that indicates that Accloud (or any other Mayfair 101 company) has listed or will list on AIM in the near term. 

Mawhinney seems to be heavily involved in most of the investment decisions. Yet he does not seem to have a clear history of successful private equity investment prior to the commencement of Mayfair 101. The website talks about a 10 years history of Mayfair 101, but it seems clear it has only been seriously investing in any scale since IPO Wealth commenced in early 2017. There is little clarity on who else is heavily involved in investment due diligence and decisions but if they had a successful history of such investments, this would likely be extensively promoted. The actual input of the extensive advisory committee to investment decisions is unclear.

Performance in difficult conditions

A big concern with these offerings is the major liquidity mismatch between the terms offered investors and the current private, illiquid nature of almost all the investments of the group. A cash reserve equivalent of 10% is hardly sufficient to offset this concern. In the section on Redemption Arrangements in the IPO Wealth 2019 report it states, “as detailed in the Fund’s Constitution the Trustee is not under any obligation to buy back, purchase or redeem units from unitholders.”  It also states later under Liquidity Risk that “the Trustee also retains broad discretion to restrict distributions, withdrawals and redemptions.” It would not be surprising to see these powers exercised at some point.

The Switzer Income and Roadshow presentations emphasized the diversification in the portfolio - 11 Countries, 10 Sectors, 5 currencies, across debt, equity and property and across different business maturities but how diversified are they really? Six of those “industry sectors” are named as – asset management, cash alternatives, corporate bonds, fixed income, wealth management and fintech – all clearly financial related and hardly providing significant diversification, especially given their private equity/venture capital focus.

While investors are directed to the positive customer reviews of IPO Wealth/Mayfair Platinum on internet sites like TrustPilot, investors should be sceptical of the reviews on such sites. Typically, they are paid for by the product provider who can normally successfully argue the case that negative reviews can be removed because they are written by someone who “has not had a genuine buying or service experience”. Perhaps this works in non-financial services products but clearly someone with major concerns over a financial product is unlikely to invest and therefore will not be classed a “genuine buyer” but that does not invalidate their concerns. In addition, it is almost impossible to prevent fake or manipulated reviews appearing on such sites.

Which Road Ahead?

Despite presenting as fixed interest alternatives, these product arrangements arguably have significant speculative elements, for both investors in IPO Wealth/other Mayfair Platinum products as well as the management/owners of Mayfair 101. Yet these are very asymmetrical speculations. The maximum investors can earn is their target rate of 3.25-6.7% p.a. yet if the private equity investments/corporate transactions pay off and Mayfair 101 is successful then it gets the upside beyond this (after extensive business operating costs that also benefit the company management/staff along the way). 

If the private equity investments and corporate transactions turn out poorly then the loan to IPO Wealth Holdings could be at risk and investors could lose income and a significant part of their capital. 

The Trustee of the IPO Wealth Fund says at the date of the 2019 financial report (31 July 2019) it would “appoint an audit firm to audit the value of the portfolio of investments held by the borrower”. It is unclear who this auditor is or when this report is due, but it would be interesting to look over the shoulder of such a valuation process and the ultimate outcomes, particularly how such valuations incorporate liquidity issues.

Beware unskilled drivers

The rush for yield in an extremely low interest rate environment is clearly creating all sorts of distortions and excessive risk taking by investors across the investment spectrum.  IPO Wealth/Mayfair Platinum is one of the more obvious examples. 

That doesn’t mean such risk taking is certain to end badly for investors. The Mayfair 101 group might have one or more major private equity or corporate transaction winners that provide enough buffer to enable them to keep paying interest income and to repay the loan capital to investors as required. Time will tell.

For the sake of the investors, many who seem to be unsophisticated and risk averse (despite being classed as “wholesale/sophisticated” investors), I hope this is the case. In one of the Mayfair Platinum brochures there is a quote from a client, Janet, giving her positive take on investing with the group. 

“My husband of 50 years had just passed away and I had just sold a house we built together. All of a sudden I was alone and had no idea what to do….” 

Does that sound like a sophisticated investor?

Questions to Ponder

If, on the other hand, things turn out badly for such investors, there will be a lot of important questions being asked. Indeed, many of these questions are relevant today irrespective of the outcomes for these products.

1. What is the regulator’s role in assessing and monitoring the structure and benefits/risks of such “wholesale” investments?
2. Does the current definition of wholesale/sophisticated investor based on a simple dollar amount invested ($500k), net worth ($2.5m) or income ($250k over last two years) make any real sense today, especially in an environment where the sale of a house or small business can easily result in million dollar amounts looking for a home by non-sophisticated investors? 
3. How much responsibility and resources should the Trustee/Responsible Entity apply in its scrutiny of the investment vehicle? The Vasco website says it is Trustee or Responsible Entity for 60 funds. (From the IPO Wealth Fund Vasco received trustee and administration fees of $176,797 for the 2019 financial year).
4. What role do the mainstream financial media have in pursuing basic scrutiny and discretion in deciding whether to accept lucrative advertising dollars from investment product promoters?
5. What level of scrutiny should newsletter writers/high profile finance promoters need to undertake on investment products they are being paid to promote (and how prominently should such arrangements be disclosed)?  
6. How have banks become so disliked and untrusted by the general community that this anti-bank sentiment has become a powerful marketing meme easily exploited as a mechanism to encourage some people to take excessively risky investment decisions? 
7. How reliable are, and what regulatory scrutiny applies to, customer review internet sites which are paid for by the product promoter, particularly for financial services, where negative reviews can be easily removed and where fake or manipulated reviews can appear?   
8. What responsibility should central banks bear for creating the very low/negative real interest rate environment where this type of excessive yield/risk seeking behaviour flourishes with potentially disastrous consequences for investors?
9. While it is clear Rugby in this country has had a range of financial and non-financial issues recently, is the local Sydney Shute Shield Competition wise to be accepting sponsorship from such an untested and risky product provider?