On March 7, Connaught, which is not regulated by the FSA, decided to suspend income fund series one while it commissioned a review into the true value of the fund and to determine its future.
Connaught has now contacted investors to inform them the fund was unable to pay their scheduled quarterly interest payments after bridging lender Tiuta, which is backed in part by the fund, told the asset manager it would be late paying its own interest payments.
The asset manager says the review of the fund will be completed “very shortly”.
Connaught says it has a charge on every property in the fund and additional guarantee and debenture agreements.
Connaught has also decided to temporarily suspend another fund it runs, the income fund series two, to “avoid any speculation and uncertainty”. It says it expects the fund to resume normal dealing by May 14.
The fund series one has approximately £120m of assets while the series two has approximately £18m, both of which are unregulated collective investment schemes.
Connaught chairman Mike Davies was the compliance officer of Tiuta, which pulled out of regulated mortgage business in May last year, between August 2008 and July 2010, according to his LinkedIn profile.
In December, Connaught said the two funds are responsible for funding around £130m of short-term lending. There are no exact figures on the size of the short-term lending market but estimates range from £800m to £1bn.
Davies says the asset manager is taking steps during the suspension of the fund to ensure this does not happen again with income fund series two.
He says: “Connaught Asset Management (Guernsey) Ltd and the Investment Manager are using this period to set up an additional process for provisioning up-front for future investor distribution payments and for quarterly independent reporting on the continuing robustness of the fund models to ensure that going forward there is no doubt regarding the Fund’s ability to secure both the income and capital for investors.”
In June last year, the FSA issued a warning to people who invested in two funds because it believes the way they have been advertised could be misleading.
The literature described the funds as “very low risk” and “low risk”, making comparisons between investing in them and placing money in a high street or building society bank account. Connaught has since changed its literature.
Tiuta declined to comment.