The difficulties facing Names (individuals who used their wealth to finance Lloyd's insurance market) in the 1990s and early 2000s were well documented at the time. Their losses arose from asbestos claims and disasters such as the Piper Alpha Oil platform fire.
Before those losses, which financially wiped out some Names, being a Name was seen as a guaranteed way of receiving an annual income with little risk.
Many Irish investors have invested in property syndicates, many of them overseas, in the hopes of making substantial gains with similarly little risk. In some respects the parallels of such syndicates with the Lloyd's Names are very strong: investors, in some cases, risking their entire wealth in return for a moderate income or capital gain.
The advantages of investing through a syndicate are obvious: access to experts, acquisition costs spread over a larger base, acquisition of premium properties and diversification of risk.
If the syndicate is well advised, the only obvious disadvantages are the illiquidity of the investment - investors are obliged to stay the full term - and the exchange rate risk on the equity investment (sterling has depreciated 10 per cent against the euro over the last year).
There are many types of syndicates, from the "informal" arrangements organised by a small group of friends, to the large syndicates organised by professional promoters.
Having had practical experience of dealing with property syndicates that have run into financial difficulty, it is clear that such investments do carry some risk.
The syndicates most at risk are those that did not purchase buildings with sitting blue-chip tenants on long leases. Some syndicates have purchased buildings with tenants with poor covenants who have subsequently gone into an insolvency procedure, or have purchased poor quality buildings in poor locations.
While many syndicates utilise non-recourse lending (ie, the financial institution providing the first mortgage does not have recourse to the investors), some syndicates have established lower levels of non-recourse debt to obtain a better loan rate.
In common with many people who purchase investment property overseas, the investors do not inspect the building before their investment, even though their exposure may be in the millions.
Promoters of such syndicates give such strong "health" warnings in their promotional material that it is very difficult to sue them successfully for negligence. In many cases, the promoters receive significant fees with no risk attaching to the promoter.
In some cases, the promoter earns an additional "success" fee if the property is sold for a substantial gain.
If a particular investment goes wrong, the promoters defend themselves by saying that any investor should invest on a portfolio basis and should not put all their eggs into the one basket. They then point to other successful syndicates that they launched.
On the law of averages, a promoter is likely to have at least some successful syndicates and professional investors acknowledge this factor.
A typical syndicate requires investors to sign a multitude of documents. While the promotional literature suggests that the investors should take independent advice, very few of them do. Indeed, many investors merely sign without reading the underlying documentation.
One risk area that investors sometimes underestimate is the area of "joint and several guarantees" - ie, all investors agree to contribute to any deficiency. If one particular guarantor is unable to contribute their share, other investors are obliged to make it up.
Another risk area is if there is a "cash call" made on the investors to pay any arrears to the lending institution to prevent a receiver being appointed. If the investor meets the cash call, s/he may be throwing good money after bad and if s/he doesn't make the cash call, the investment may be heavily diluted.
Another risk area is the granting of powers of attorney to the promoters. Unless the power is carefully drafted, the investor may find that s/he has been signed up to more than bargained for. It may be possible for an investor to sue if the power of attorney is abused. However, if the promoter (which is usually a limited company) has few assets, there may be little benefit in suing.
Obviously, the biggest risk area facing investors is an irreversible collapse in property prices. British commercial property has dropped 15 per cent since June 2007 and the current financing crisis is causing many headaches.
A recent UBS report predicts a 30 per cent decline in commercial property values here. The fall in property values is creating a classic pincer movement: banks are putting their customers under pressure to sell; at the same time, they are restraining their own lending, thereby reducing demand and prices.
While many property syndicates should do well, some will hit the rocks. Provided the original lending was non-recourse, the investors should avoid the fate of many Lloyd's Names in the 1990s.
Jim Stafford is managing partner of Friel Stafford Corporate Recovery. www.liquidation.ie
