Loan notes are a financial instrument which detail when a loan must be repaid by the borrower and what interest is payable to the lender.
Loan notes are often used as a way of investing in a company or property transaction. They can be secured against assets or unsecured.
Loans belong to the debt asset class. The risk and return profile is lower than that of an equity investment as debt investors sit 'ahead' of equity investors when investment is being returned.
Loan notes can be attractive ways of raising capital for companies as they do not dilute ownership. Investors are attracted by the opportunity to target an income yield (through interest payments) as well as the return of their capital at a fixed date.
At Connection Capital we structure many of our UK private equity transactions using loan notes to reduce the risk of return.