The dramatic recent failure drives home a timeless lesson.
The rise and very public fall of property developer Du Val offers salutary lessons for would-be investors across New Zealand – but while the Du Val disaster is new, the lessons are not. Brent King, managing director of General Capital, says short memory spans mean it is only a matter of time before a new generation of investors are targeted.
One should always remember the tale of the Emperor’s New Clothes, he advises. You should not be swayed by ostentatious displays of wealth, and always know who your money is going to before signing on the dotted line.
In King’s opinion, “The warning signs surrounding Du Val were clear years ago. The failure wasn’t a surprise, and investors could have avoided exposure by following the absolute basics: doing their due diligence, and fully investigating what – and who – they were putting their money into.”
The Du Val Group implosion is dominating property news with a web of 62 entities placed in interim receivership in August this year, before the Government took the unusual step of statutory management in September. Receivers PwC are responsible for winding up the group, with the firm’s most recent report indicating debts of $237.6 million, the majority of which is owed to banks and other secured creditors.
Some $41 million is owed to 150 investors in Du Val’s various property development schemes. Describing investors as ‘last in line’, receiver John Fisk of PwC said some might not get any of their money back.
As a seasoned financier, King is horrified by the situation. “There’s a massive shortfall, and the last thing any investor wants to see is their capital wiped out. There are clear lessons that must be taken out of this catastrophe, though I can say with some conviction that it isn’t the last time something like this will happen.”
Receivers have reported several concerns regarding Du Val, including issues noted by PwC such as accounting irregularities, lack of audited accounts, and the complex structure of related party transactions.
But King says the first area of concern is the history of Du Val’s co-founder Kenyon Clarke. “While nobody has a perfect track record of successful investments, a bankruptcy which left investors out of pocket to the tune of tens of millions of dollars is a big warning sign.”
King is referring to the 2009 failure of a network of companies owned by Du Val founder Kenyon Clarke. That incident left creditors out of pocket to the tune of $50 million.
Courting potential investors with flashy social media displays is a common tactic, often drawing in less cautious individuals, King observes. He advises that these images should be separated from the solid facts that must underpin investment decisions. “Look carefully at what the business does, how it generates its returns, and how sustainable that income stream is. The prospectus should contain this information, with no need for helicopter rides and personal stays at high-end boutique venues.”
When high returns are promised, it always, always, always comes with higher risk, he adds. “It’s a simple principle: if earning high returns – like [Du Val’s] promised 10% per annum – were that easy, everyone would be doing it.”
He adds that due diligence must extend to related parties, including auditors, legal, and finance advisers. “You need to see the workings of how income is generated and where any profits are made,” says King.
Sales methods are worth examining, too. King notes that Du Val’s marketing approach may have attracted less-experienced investors, despite its claim of targeting wholesale investors, which would exempt it from certain FMA protections for retail investors. Early on, a senior executive at General Capital joined Du Val’s mailing list out of curiosity and observed tactics that concerned King, with a focus on high yields and enticing opportunities, but limited mention of associated risks.
He says the problem is bigger than Du Val and remains, particularly in frothy markets awash with easy capital, as people are simply not following the fundamentals. “Always ask yourself: who is behind the ‘investment’? What do you know of their history? Do they have independent directors with a sound reputation and proven track records? What is the actual ability of these directors, or are they merely family members? And while the promise of returns is seductive, know the associated risks.”
And if the accounts aren’t audited? “Don’t trust it. Don’t even think of it,” advises King.
As an industry veteran who has seen multiple boom and bust cycles including disasters like Hanover, South Canterbury, Lombard and others, King says that while people don’t forget entirely, their memories are not sufficiently long enough.
“Every 10 to 15 years we see major failures like Du Val. With the passage of time, the names are forgotten, the mistakes are forgotten, and the necessity for due diligence and sound financial advice are forgotten. Then newly retired people who have downsized or received a pension are in the market and a new generation of opportunists emerge to take advantage. It really is a story as old as the Emperor’s New Clothes, and it almost never has a happy ending for investors.”
For more information: generalfinance.co.nz/service/deposit-rates/