Let’s talk about the convertible loan note and preferential shares (series B) of Orange River Wealth.
If you have been proposed this option and want a second opinion, you can email me (advice@adamfayed.com) or contact me here.
We can sometimes offer discounts, and other benefits, if you want to invest in it, compared to many other providers, or introduce alternatives which might be better for your situation.
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Orange River Wealth Background
Orange River Wealth is a Mayfair, London-based boutique investment partnership.
The firm provides investment opportunities to high net worth individuals and sophisticated investors.
They use a range of investment vehicles, including fixed income and alternative investments.
Orange River Wealth through its special purpose vehicle Orange River Capital owns 49% of medicinal cannabis cultivation facility Greengrow located in El Passo Farm in South Africa. Orange River aims to amp the facility’s operations to increase production and acquisitions in the European cannabis market. The firm targets revenue of 26 million US dollars in three years.
Having said that, the company is offering a convertible loan note due 2025 and preferential shares in three series.
What is a convertible loan note?
A convertible loan note is a financial instrument that blends the characteristics of both a loan and an equity investment. Essentially, it is a type of debt security that can be converted into equity at a later point in time, typically during a future financing round or upon meeting specific conditions.
When an investor purchases a convertible loan note, they are essentially loaning funds to a company, with the option to convert that loan into equity at a later stage. This conversion usually happens at a discounted rate to the company’s valuation during the future financing round, which incentivizes the investor to convert the loan into equity.
A convertible loan notes isoften used by startups and early stage companies as a flexible and less dilutive method of raising funds, as it doesn’t require an immediate valuation of the company and doesn’t lead to the issuance of new shares at the time of investment.
What are the terms of Orange River Wealth’s convertible loan note offering?
The convertible loan note bears a yearly interest rate of 10.25% for investments that are denominated in euros, 10.75% for those in British pounds, and 11.25% for those in US dollars.
The coupon is paid out on a quarterly basis, specifically every April, July, October, and January every year through 2025.
This security can be converted into series B USD shares at 0.32 USD per share.
What are preferential shares?
Preferential shares, also known as preferred stock, are a type of equity security that typically carry preferential treatment in terms of dividends and liquidation preferences over common stock. Unlike common stock, which represents ownership in a company and typically comes with voting rights, preferential shares give investors priority in receiving dividends and liquidation proceeds.
In general, preferential shares have a fixed dividend rate or a formula to calculate dividend payments, which may be higher than the dividend paid on common stock. Additionally, in the event of a liquidation or sale of the company, preferential shareholders are typically entitled to receive their investment back before common shareholders.
Preferential shares are often used by companies that want to raise capital but don’t want to dilute the ownership and control of existing shareholders. They can also be attractive to investors who want the potential for higher returns than common stock but don’t want the same level of risk associated with investing in a company’s debt.
What are the terms of Orange River Wealth’s preferential B shares offering?
The preferential shares in Orange River Wealth unit Orange River Capital are being sold in a private placement at 0.25 USD per share. Interested investors are required to spend at least 25,000 USD to participate in the offering.
The investment pays a fixed annual dividend of 15% from the additional Greengrow cannabis facility’s first year of production. This dividend interest is paid out twice a year. There is an extra 5% bonus that’s tied to earnings from the second year of operation of the said facility.
Orange River Wealth expects to raise up to 8 million USD from investors’ subscription of preferential shares in this second funding round. The private placement is part of a larger offering that seeks to raise 24 million USD. Currently, the company’s series A shares placement has been fully subscribed and generated 6 million USD in proceeds.
Orange River Wealth intends to hold a series C private placement of preferential shares under the said larger deal. The company eyes 10 million USD for such offering.
Who are eligible to subscribe to the preferential shares B?
High Net Worth Individuals
Individual investors who possess an income of at least 100,000 pounds per year are considered high net worth individuals and are qualified to subscribe to join the private placement. The annual income excludes any amount obtained from pension accounts.
These individuals must also have net assets worth 250,000 pounds, minimum, excluding primary residence, insurance, or pension savings.
Sophisticated Investors
To be considered under this category, an individual must have been one of the following:
- a part of a network or consortium of business angels for the past six months
- have invested in more than one unlisted firm over the past two years
- currently work in the private equity industry or in the supply of financing for small and medium-sized businesses, or have done so within the past two years
Companies, Unincorporates Association, or Trust
The share capital or net assets must be 500,000 pounds if comprised of over 20 corporate members; 5 million otherwise. The net assets for unincorporated associations or partnerships must be at least 5 million pounds as well. For trusts, the cash and investments must total at least 10 million pounds.
How to subscribe to the private placement?
- Investor prospect hands over application forms with anti-money laundering (AML) paperwork, including photo ID and address
- Regulated Custodian does AML investigations
- Upon successful completion of AML checks and Know Your Customer (KYC) procedure, the investor applicant can wire the subscription funds to the custodian’s bank
- Once the money transfer is cleared, the client is issued a share certificate
- The new shareholder is paid the fixed dividend bi-annually to their designated bank account
What are the pros and cons of investing in Orange River Wealth convertible loan note and preferential shares B?
Pros
Developing economy
Cannabis is considered an emerging market because it is a relatively new and rapidly growing industry that is gaining acceptance and legalization in many countries around the world. In fact, cannabis is a lucrative cash crop, with a value that is more than 75 times greater than that of grapes and 150 times greater than that of sugar cane.
Investing in cannabis as an emerging market can potentially offer attractive opportunities for investors due to its solid upside potential.
Attractive valuation prospects
Orange River Capital is expected to be valued at more than 150 million USD after its buildout plans are completed. A convertible loan note can be an attractive investment option for investors who want to support the growth of a company but are not yet ready to invest in equity.
Advantageous export market site
South Africa is an attractive export market for cannabis due to a combination of factors, including its favorable climate for cannabis cultivation, its strategic location for export to other African countries, and the growing demand for cannabis products both domestically and internationally. Besides, production costs are cheap.
Inflation hedge
Since the preferential shares offer a fixed dividend rate, they can offer investors the potential for higher returns than traditional fixed-income investments, such as bonds. The fixed dividend payment provides a degree of protection against inflation. Additionally, in the event of a liquidation or sale of the company, preferential shareholders are entitled to receive their investment back before common shareholders, which can provide an added layer of protection for the investors.
Cons
Uncertainty of valuation
The conversion price of the loan note is often determined at the time of conversion, which can create uncertainty for investors about the valuation of the company at that time. This could lead to limited returns.
Interest rate risk
Preferential shares are often sensitive to changes in interest rates. If interest rates rise, the dividend rate on the shares may no longer be attractive compared to other fixed-income investments, which can cause the value of the shares to decline.
Credit risk
If Orange River Wealth experiences financial difficulties, there is a risk that it may not be able to meet its dividend obligations to the preferential shareholders, or that the shares may lose value or become worthless.
Liquidity risk
Preferential shares may not be as liquid as other investments, such as stocks, which can make it difficult to sell them in a timely manner, particularly in volatile market conditions.
Market risk
The value of preferential shares may be influenced by broader market conditions, such as changes in the economy, geopolitical events, or regulatory changes, which can cause the value of the shares to decline.
Inflation risk
While preferential shares can provide some protection against inflation, there is still a risk that the rate of inflation may outpace the dividend rate, which can erode the real value of the investment over time.
Bottom Line
It’s important for investors to carefully evaluate the risks and potential rewards associated with convertible loan note and preferential shares, and to diversify their investments to manage risk.
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Adam is an internationally recognised author on financial matters, with over 760.2 million answer views on Quora.com, a widely sold book on Amazon, and a contributor on Forbes.
