In mid-April, London Stock Exchange Group announced that it would reduce the minimum investment amount on three of its own corporate bonds from £100,000 to £1,000 and remove the prohibition on retail investor participation.

The change – effective from 20th April and the result of a strongly favourable vote amongst these bonds’ investors (who were all institutional) – is designed to make them available to UK retail investors in addition to institutions, thereby cultivating a new investor base for LSEG’s debt which may increase the likelihood of their participation in any future retail inclusive issuance.

The move follows implementation of the Public Offers and Admissions to Trading Regulations (POATRs) on 19th January, the most recent element of the UK’s capital market reforms, replacing the old EU-derived UK Prospectus Regulation.

The new rules are designed to make it easier for companies to raise capital in the UK by reducing the administrative burden and expanding the investor base through the removal of barriers to retail inclusion. The centrepiece for debt issuers is a single, wholesale-based disclosure standard applying to both professional and retail investors.

Bonds meeting certain criteria will qualify as ‘plain vanilla listed bonds’ or PVLBs, receiving further regulatory alleviations. As well as being available to retail investors, LSEG’s three bonds also qualify as PVLBs.

According to James Leather, Director of Corium Treasury, the move is a significant milestone that will hopefully lead to others following suit.

“Being a UK citizen, I am supportive,” he says. “What is good for the UK capital markets is good for the UK. Retail investors have a better set of investment choices and those raising capital in the UK have a deeper investor base.”

The UK is an important bond market, he adds. “As well as offering access to pure sterling, a key feature is that bond issues can start at around £200m, over half that required in the US or Europe. This makes it an attractive option for those seeking to diversify away from other sources of finance. It makes sense for organisations to retain and nurture access to this now reformed market.”

Some question whether retail investors will participate. Holly Olson, US-based Corporate Treasurer at AFL, points out that retail investors represent a small percentage of the total investors participating in the bond market – and that this percentage is even lower outside of the US.

“If everyone held to the 50/50 or 60/40 equity/bond allocation you would think the number of retail bond investors would be on par with the standard portfolio allocation but it is not,” she says, adding that this could be due to bonds being more complex than equity and that retail investors tend to place their money in bond funds rather than directly into the bonds themselves.

“The reason you don’t see retail investors in bonds is because they have not had access to them – it’s as simple as that,” says Michael Smith, Head of Debt Capital Markets at Winterflood Securities. “The previous regulations deterred bond issuers from including retail investors, leaving only a handful of accessible corporate bonds. Retail intermediaries have consistently highlighted pent up demand from their clients, especially since the normalisation of interest rates.”

Olson though, is not convinced that retail investors will become a major factor in how and when companies decide to issue. “I believe companies will stick to their strategic optimal capital structure as the driving force behind whether they issue more bonds, commercial paper, equity or take on loans – not retail investors,” she says.

Smith takes a different view, suggesting that the decision about whether to include retail investors is totally aligned to strategic considerations.

“With respect to the sterling bond market, including retail investors expands the investor base – retail adds diversification and resilience,” he says. “We are also seeing some organisations positively considering the softer advantages of retail inclusion, such as the benefits of including employees and the communities in which they operate, in their bonds.”

Ultimately it seems that until a number of retail inclusive corporate bonds have been issued into the UK, it will be difficult to reach a conclusion as to the extent of participation by UK retail investors. However, the signs though are promising, not least from gilts, which are typically amongst the most traded securities by Winterflood on a daily basis.

Kyle Caldwell, Funds and Investment Education Editor at interactive investor describes the lower minimum investment amounts for corporate bonds as a game changer and says investing in such bonds has been a costly process for too long.

“As ever, diversification is key and while it is very early days, as the market matures, investors will have more bonds to choose from and then potentially be able to spread risk far and wide by owning a range of corporate bonds alongside other assets,” he says.