Recent scrutiny of the private-company Business Relief market has reopened some long-standing questions. For illiquid holdings valued by the manager, what underpins confidence in the headline number? How do investors actually exit? And how diversified is a BR allocation really, once you look past the provider names?
The value of unquoted assets rests on judgement rather than observable market prices, and a manager’s carrying value can differ, sometimes materially, from audited net asset value, and further still from the sum a client could realise. It’s a useful prompt to look more closely at concentration risk, and at what genuine diversification requires beyond a different logo on the factsheet.
The convergence problem
The BR market has matured quickly, and adviser flows have tended to concentrate around a smaller number of established names, where size and longevity read as reassurance, which is understandable. But diversifying across providers only reduces risk if the underlying exposures are genuinely different, and a fair number of established strategies converge on the same narrow set of assets: renewable energy generation, secured property development, or SME lending. Spread a client’s allocation across three or four “different” providers built on these same foundations, and on closer inspection they may be holding much the same risk several times over.
Three tests for genuine diversification
Real diversification comes from exposure that behaves differently when conditions change. Three things are worth checking against.
1. Correlation with the rest of the allocation. Does the strategy sit in broadly the same territory as a client’s other BR holdings, or does it operate in a sector less correlated with the areas estate planning funds have traditionally favoured? The value of a genuinely different exposure is that it’s unlikely to come under the same pressures, at the same time, as everything else in the bucket.
2. Liquidity, and the shape of the underlying book. BR investments are illiquid by nature, and withdrawals are usually met through a matched-bargain service, matching investors leaving with new subscriptions coming in. That mechanism depends on continued inflows.
A strategy built on a rolling book of short- to medium-term loans, such as the Calculus ITS, which lends against film and TV production finance, has an additional, structural source of liquidity: as loans repay, capital returns to the fund on a continual basis, and that returning capital can fund share buy-backs or a capital reduction. Liquidity comes from the natural turnover of the book itself, rather than resting solely on finding a new investor to take an exiting one’s place.
3. Valuation, and how closely it tracks reality. This is easily overlooked, but it matters a great deal. Where the underlying assets are equity in private companies, the manager sets the valuation, and sometimes earns fees calculated on that same figure. It’s worth noting that “asset-backed” is not the same as “valuation-transparent”: a loan secured against a solar farm or a plot of land still depends on someone’s judgement of what that underlying asset is worth today. Genuine valuation certainty requires something more specific, income that’s fixed by contract rather than assessed by anyone.
That’s the distinction a loan book offers. A loan doesn’t need a subjective growth story to justify its value: it’s worth what’s owed, adjusted down only where there’s a real impairment concern, and it’s usually secured. Beneath the Calculus ITS, the amounts owed, the interest due, and the repayment dates are all contractual and known, so the carrying value stays closely anchored to what the underlying company actually owes, not to an assessed opinion of what it might be worth. That narrows the self-valuation judgement considerably, even though the investment remains unquoted and still carries capital risk.
What this points toward
Taken together, these three tests point toward a specific kind of strategy: one operating in a sector less correlated with the areas estate planning funds have traditionally targeted, lending on a secured basis against contracted, receivable income, with a rolling short- to medium-term book that both returns capital as loans mature and keeps valuation closely tied to what’s actually owed. A provider label alone can’t tell you whether a BR allocation is genuinely diversified, the underlying exposure, the liquidity mechanism, and the valuation basis can.