Private Placement Programs, also called “High Yield Investment Programs”, are private (non-public) investment programs which are based on the purchase or sale of bank financial instruments. In most cases MTNs are mainly used. These instruments are bought fresh-cut with a high discount on their base value to later be resold at a higher price in the secondary market. The difference between the sale price and the purchase price is the investor’s profit. These programs are offered to investors with high spending capacity and can only be executed by qualified traders with a license to carry out these kinds of transactions. A very special aspect of these programs is that usually the largest part of the returns is allocated to humanitarian causes as well as to the financing of larger business projects. So, any institution takes precedence on this type of operation.
Actually, PPPs are not well known publicly, and only a very small group of investors that own significant funds or Bank Instruments have access to them. Most programs can be joined by invitation only. These programs have been issued since for the past 60 years to finance Humanitarian projects and International Trade.
Risks for Investors
Private Placement Programs do pose risks for the investor! Indeed, one of the biggest risks is to have the funds blocked for one year or more. This happens when a transaction was not well prepared and organized. All rules given by financial institutions, the law and international money laundering regulations have to be complied with fully. The purchase and sale of MTNs is “risk-free” provided that the trader is guaranteed the exit to the instrument that was previously acquired (arbitrage trades). If Tradesmore Group selects, engages and contracts a trader, such an exit will be guaranteed by contracts and therefore the risks for the investor is minimized. Before the start of the program, the trader will prepare such a program by planning the future purchases and sales and determining beforehand the benefits that each of them will bring. In a second phase the program will be executed, which means nothing but carrying out the purchases and sales that were previously planned and negotiated with the cutting houses.
In any case, there are significant risks for an investor, as we will explain below.
The funds of an investor will not be turned over to the trader but will always remain in the investors account. To start a program, the funds will only need to be locked for a period of time. The one and only safe way is to lock the funds with a Swift MT-799 and Swift MT-760. The MT-760 is a Swift message used to block funds in favor of someone other than the owner, collateralizing the asset via this message, while allowing for loans and liens against it. Most private placements require the investor to send an MT-760 to the trader’s account, allowing the trader to use this swift as a collateral guarantee for their bank. This block will remain in place for the length of the program, which is a minimum of one year.
And here we have another risk for the investor. The fees for blocking a large amount of funds via an MT-760 can be more than some people expect. In most cases, a bank will charge 1-2% of the value being blocked for this service. For example, on a 100M bank instrument this can be 1-2M that the investor must pay, unless they have a very special relationship with their bank. The final conditions have to be negotiated in any case.
The POF (Proof of Funds) will be issued by the Bank where the investor has the resources deposited, demonstrating their quality and amount, but does not enable anyone to move them or dispose of them.
When all the required documents are submitted, including the due diligence and the bank documents, we proceed to verify the funds.
Once these preliminary procedures are successfully completed, within 48 to 72 hours the Program Manager will contact the investor or his representative for a formal presentation and also to agree on how to block the funds.
For the last step, the investor will receive and sign an LOI (pre-contract) which later will be delivered to the traders’ office.
When the trade starts, the profits are collected weekly at the bank or paymaster designated by the trader. From the time that the first profit is collected, this capital will be fully available to the client. The investor’s funds must be clear, clean and of course must have a non-criminal origin. For every asset, the location of the deposited resources should be clearly stated by the bank in question. If any doubts arise at the time of verification, the transaction will be automatically dismissed.
All programs are strictly confidential. The parties involved, including lawyers, brokers and traders, sign a non-disclosure agreement.
In conclusion, BEFORE blocking any funds, the whole deal structure of the PPP transaction must be organized, prepared and committed to in advance by all involved parties. The preparation and structuring of such a transaction takes 3-4 months.