INTEREST rates are presently low on most investment products and the expected returns on short-term investments are decreasing every day. Investors are calling around more and more to find out what is new in the market and what they can invest in and still sleep well at nights.

The response to this pressure from investors, and in order to stay ahead of the game, has been for investment advisors and companies to constantly look for new and innovative ways to diversify their clients’ portfolios to mitigate many of the risks generated by changing and challenging international and local market conditions. That search for alternatives has become even greater with the implementation of a raised minimum for repurchase agreements increasing to US$10,000 by December 2015.

This has resulted in a variety of alternative investment products becoming more commonplace in the Jamaican market outside of the familiar world of bonds, stocks, and other prepackaged products. One such alternative investment is a promissory note.

Promissory notes have been around for many years and are common financial instruments in many countries, employed principally for short-time financing of companies.

A promissory note, also called a “pro note”, “p note” or simply “note”, is a type of fixed-income debt instrument similar to a bond, loan or even an IOU. It is a legal financial instrument in which one party known as the issuer or maker of the note makes a “promise” to repay its creditors, referred to as the noteholders, a determinate sum of money according to certain terms and conditions.

The key terms of a note usually include the principal amount, the interest rate if any, the date, the terms of repayment, and the maturity date. The note normally has a short tenor (maximum tenor of 24 months) and may pay interest periodically or at maturity. A promissory note must be signed by the borrower and lender to make it a legal document and is usually held by the payee.

Some notes are structured with a “put option” for the purchaser (i.e. the note holder). This means that the note holder may “sell” the note back to the issuer at specific dates and under specific terms. The terms and conditions outline the timing of payments and determine when and if you can sell the note.

Promissory notes, like other investments, are not risk-free, and are only as good as the companies or projects they are financing. You should research the company or project to determine whether it is viable. Bad management, competition, and unfavourable market conditions are some of the risks associated with promissory notes.

Notes should be registered with the government in the country in which they are sold and/or with the financial regulators. Registration is important because the process generally involves what is known as “due diligence”, meaning that financial professionals, usually including lawyers and accountants, have looked into the notes and companies behind the notes. While due diligence does not guarantee that you will be repaid, it means that you are much more likely to be given accurate information that will help you make an informed decision. If the note is not registered, the investor has to do his or her own analysis to assess whether the company is capable of servicing the debt.

There are some exceptions, however, as only accredited investors are able to invest directly in this alternative investment option. An accredited investor is an investor who is eligible to purchase securities that are not intended to be sold to the general public, which in the Jamaican context refers to securities registered with the FSC under the “exempt distribution” guidelines.

The definition of an accredited investor can be found on the FSC website. This restriction exists because many fund managers rely on private placement registration exemptions that restrict their investor base to sophisticated investors. These investments are growing in popularity, as institutional investors and individual investors are realising the benefits to be enjoyed.

The perks of investing in a promissory note include: their simplicity and straightforward nature, the competitive rate of return, potential flexibility to add to the investment or redeem the investment prior to maturity, and its use as an accepted form of collateral. Talk to your investment advisor today to see if a promissory note is right for your investment needs.

Lisa Minto Powell is Manager- Financial Planning at Sterling Asset Management. Sterling provides medium to long-term financial advice and investments in US and other world-market currencies to the corporate, individual and institutional investor. Feedback: If you wish to have Sterling address your investment questions in upcoming articles, e-mail us at: info@sterlingasset.net.jm. You may visit us on Facebook or follow us on Twitter and for more information please visit our website www.sterling.com.jm