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What is an Investment Guarantee?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 06 September 2016
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    2003-2016
    Conjecture Corporation
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An investment guarantee is a special provision that is designed to protect investors from incurring losses as the result of an investment opportunity that carries a high degree of risk. A guarantee of this type is not available with every type of investment, but is relatively common when it comes to real estate and construction projects. The purpose of the investment guarantee is to protect the interests of the investor in the event that circumstances or events should arise that could not be foreseen, and are considered outside the scope of typical and known risk factors. Protection of this nature is sometimes extended through insurance coverage associated with foreign investments, especially if the investment involves operations within a nation that is currently undergoing significant political turmoil.

The degree of protection offered as part of an investment guarantee will vary, depending on the nature of the investment and the conditions found in the host country. Real estate investments may be covered based on the anticipated appreciation of the worth of the properties involved, and the intended use for those properties. The guarantee often provides compensation in the event that some type of natural disaster prevents the real estate from being developed according to the plans of the investor, or if unforeseen factors emerge that negatively impact the value of the land itself.

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The investment guarantee also provides some degree of protection for a business that chooses to open a manufacturing facility in a nation where political conditions are currently stable, but could change within the next few years. In this scenario, the business would most likely be able to obtain coverage that guaranteed recovery of both the original investment in the facility and at least a portion of the anticipated returns associated with the effort. In situations where political conditions are already somewhat unstable, the coverage may cover the initial investment, but not allow any type of compensation for the loss of returns.

Obtaining an investment guarantee is often a costly venture. This is especially true when the guarantor has reason to believe that the degree of risk involved is above what he or she considers acceptable. In exchange for assuming the risk, the guarantor will often require high premiums, even if the scope of the coverage is limited to the original investment. Companies usually do not take on this expense unless the investment is significant and the chances of something endangering that investment are higher than the investor is willing to assume. While expensive, the guarantee can easily pay for itself if the value of the investment is undermined, or the opportunity for earning a return is destroyed.

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