Before I get into this post I'd like to make one thing clear...

Both Renate and myself have been on both sides of this situation. First, when we ran our first company, we offered friends/family the option to provide funding to us at an attractive interest rate (at the time 10%) and naturally we struggled to repay those funds but thankfully we did. Secondly, we also gave someone our money $1,500 USD to invest in Forex for us and provide quarterly returns. In this case, we weren't guaranteed a set amount but expectations were set and never met and in the end we never got back our principal only 1 quarterly payment. Both these situations have taught us humility and have shaped how we view this situation that has come to light.

Let me also say, we exercise compassion for the children, parents, teachers, the school and all related parties in this matter. In these situations, no one truly wins. 

Now to the lessons:

1. Consult a financial advisor before making any investment decision

Getting advice from someone who knows how to evaluate investments, assess risk and provide scenarios as to both positive and negative outcomes is critical for all investment decisions. Chances are, this way the first investment of this size for some of these parents. Having been promised such attractive returns, speaking with someone who could have given guidance on what type of returns are realistic to expect based on the type of business, their level of income, their future plans, etc., would allow them to make an informed decision. They might have ultimately decided to do the same thing but in an informed way.

2. Have a process to evaluate the risk in an investment

All investments come with some element of risk, this includes both public and private companies. Private companies however have even more risk than public ones as they have not yet proven their model is scalable or have not yet gone through a governance process that public companies are required to complete before listing. Private investments aren't regulated in the same way a public company listed on the Jamaica Stock Exchange is regulated. This means the responsbility for assessing risk lies on the investor. 

A simple checklist for investing in a private company could include:

• Are there Audited Financials for the last 2 years?
• What controls are in place to ensure the company achieves its stated goals?
• Is this the first time raising capital for the company, is there a track record for good management of cash?
• What are the plans of the company? Are they feasible?
• What is the best possible outcome?
• What is the worst possible outcome?
• Conduct Due Diligence on the company (debtors, credit history, etc)

These steps can help to filter an investment or answer questions that can lead to an informed decision.

3. Setting Realistic Expectations for Returns

Is it realistic to expect a private school to pay interest of 20% per quarter on the principal? 

For comparison let's look at some other investments and how they performed in 2024. We will compare stocks, bonds, dividend stocks, Unit Trusts, etc.

Best Performing Stock (2024) - Blue Power grew 79% for the year, but if you zoom out for the last 3 years it only grew 34%. Even in these cases you're encouraged to have modest expectations of growth for stocks when becoming a new investor.

Best Performing Dividend Stocks/Preference Shares/Bonds - these are grouped together because Preference Shares pay a set dividend and Bonds pay a set coupon (interest) rate for bondholders. The best performing dividend stocks paid between 6-10% at the top end with the average in the market being less than 3%. Preference Shares and Bonds on the upper end did 8-12% (per annum). These rates as you can see are far from 20% per quarter.

Best Performing Unit Trusts/Funds - The best Unit Trust for the year did 37.97%, however, most funds on average did below double digits, with some funds registering negative returns for the year.

One critical piece here is that for a company to pay 20% in interest to its investors then their margins would need to be enough to offset the expense to them. Without knowing Phoenix's financial position its hard to assess that but it certainly seems high considering the industry of education with which low margins and high costs come with the territory.

Your expectations for returns should therefore be based on the company's profitability and ability to sustain those outflows of cash. 

 4. Don't add more money to a bad investment

The article mentioned one parent who started with an initial amount and then added more money later on. When there is uncertainty with an investment its a good idea to recover your capital first before adding more to it. The fact that interest payments started didn't mean the investment was sound. 

Private investments present risks that public investments don't. There aren't usually audited financials or other measures of control/compliance. In the absence of this, when investing you should look to lower your risk by recovering or removing your capital as soon as possible. 

The shortcut we may take is that we focus on the potential for interest/gain. Our brain says, if I put in 1 million, I'll get 800,000 interest, so I just need to add more and I can increase my profits. The tendency is to focus on what we can gain instead of our risk of loss. 

I hope the complete story comes out over the next few months so we can properly assess and learn as much as we can about this situation. My concern is all those who look from the outside in and have a bad perception on IPOs or investing in general. I also hope all the parents and children who have been impacted are able to recover their capital and find a way to move forward hopefully with a clear plan of what good investment/investing looks like.

For more on my thoughts on this topic, check out this video: https://youtube.com/live/vZSn8L_sbzw