How equity-backed loans can meet the liquidity ambitions of Asia’s borrowers

Equity-backed lending is emerging as a compelling funding mechanism in the current environment, and it is worth examining its merits versus other liquidity options – particularly given the rapid growth in the number of potential borrowers in Asia this kind of lending could benefit.

Asia’s ultra-high-net worth (UHNW) population – the second largest behind North America – grew 10.2% to 83,310 individuals in 2019.^[1] As economic conditions, and consequent risks and opportunities, shift rapidly, many of these individuals will be looking for new ways to put their assets to work.

Asia 10.2% (83,310)
North America 14.5% (105,080)

The premise is relatively simple: equity-backed loans allow investors, typically with concentrated holdings, to use their shares as collateral to unlock liquidity for other needs while still maintaining upside participation in the stock. At times their ambitions are business-oriented. The funds could be used to start a new venture, diversify investment or exercise options due to expire. Other projects are more personal – for example to address tax liabilities or to purchase “crown jewel” assets.

Through our two decades as a specialist in equities-backed lending, we have developed a unique approach that maximizes the potential of this model along two key dimensions – flexibility and efficiency.

Lending with agility

On a global basis, most of our loans average in the US$4 million range. Yet we can vary loan amounts considerably depending on borrower needs and market conditions. In markets such as Hong Kong with high liquidity and concentrations of wealth, the average loan size is many multiples larger. In Australia, the average loan size is just US$1 million, but transaction volume is high. In Europe, average deal sizes fall somewhere in the middle.

We are also able to structure liquidity solutions to the specific needs of each borrower by, for example, increasing or decreasing the tranche size, or adjusting the loan to value (LTV) ratio depending on their requirements.

Several borrowers have worked with us on repeat occasions due to this flexibility. For example, we have provided some borrowers a total of US$30 million in liquidity, but across six separate US$5 million tranches. Not surprisingly, we estimate up to 70% of our transactions are with repeat borrowers. Over the past five years, EquitiesFirst’s Asia offices have closed over $1 billion USD in loan transactions for UHNW individuals.

Value, delivered efficiently

The distinctive aspects of our business model also allow us to offer a quick and seamless experience to our borrowers. While we make sure that we conduct all necessary due diligence, we do not require extensive credit checks. The quality and value of the underlying asset – i.e. the equity the borrower supplies as collateral – mitigates the risk on our side of the transaction.

Interests are aligned during the term of the loan as the borrower’s equity is transferred to become a part of the EquitiesFirst portfolio and we become an investor in the stock alongside the owner. From then on, the borrower is simply required to pay a fixed interest rate – typically significantly lower than standard lending rates – on a quarterly basis; and at the end of the term, repay the loan. Once the principal is repaid, EquitiesFirst returns the same number of shares we received at initiation. This means the borrower retains all economic beneficial ownership, including value appreciation and dividend payments.

This level of efficiency is something that other capital providers, typically banks and other large financial institutions, are simply not in a position to offer. As equity-backed lending is typically a niche component of a large bank’s business at best, internal restrictions and a lack of focus limit their ability to act.

By contrast, as a dedicated equity-backed lender, we have worked for years to streamline and enhance our processes in a way that benefits the parties on both sides of each transaction. With a growing presence in Asia, we stand ready to bring these skills to bear as the region’s rising ranks of affluence seek new means to access the liquidity needed to achieve their goals.

[1] wealthx.com/report/covid-19-wealth-impact-the-world-ultra-wealth-report-2020/

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