Capital without compromise

As climate change and social inequality dominate the headlines, corporate governance can seem like the forgotten corner of the Environmental, Social and Governance (ESG) world. In reality, though, governance is an integral part of what is rapidly becoming the dominant investment strategy of our times.

This historic shift of capital towards ESG will continue to drive shareholder expectations for corporate transparency, including in situations when major investors in a company use their shareholdings as collateral for financing. Boards and minority shareholders should have no reason for concern about such transactions, though. When EquitiesFirst provides liquidity to major shareholders, holding a portion of their stock as security, we aim to entirely align our interests with those of the company and all its owners. Explaining this requires that we clear up some misperceptions about equity-backed lending.

ESG momentum

First, though, we should consider the astonishing momentum behind ESG investing. In Europe, for example, PwC forecasts that ESG assets will account for up to 57% of total mutual fund assets by 2025, up from just over 15% at the end of last year. Most of the capital invested in these funds today goes to broad-based ESG strategies rather than to those based on its components, EY also found. That should mean governance has an equal priority to environmental and social factors for the managers of these funds. ^[1]

Growing shareholder activism around the world is also often driven by ESG factors. ESG is the focus of a quarter of the questions raised at companies’ general assemblies in Europe, for example, and of half the resolutions submitted by shareholders, according to research by Russell Reynolds Associates. ^[2]

Shareholder concerns

Among corporate governance considerations, directors’ share dealings have long been acknowledged to have a particular bearing on a company’s prospects – and therefore its share price – giving rise to the obligation to disclose any changes to directors’ holdings. For companies whose stock is closely held by a majority holder, purchases or disposals by these investors can impact on the share price.

However, major shareholders can still unlock the value in their shareholdings without foregoing their long-term positions in the underlying companies. In partnership with a lender like EquitiesFirst, they can raise flexible capital through a sale and repurchase transaction structured as a non-recourse loan. Over nearly 20 years in business, EquitiesFirst has helped hundreds of business leaders and entrepreneurs preserve their long-term legacies and controlling interests in listed companies.

Naturally enough, though, there can be concerns when a major shareholder assigns part of their holdings to another institution as collateral for a loan. Long-term stakeholders in the enterprise may fear that the lender will make use of the shares and voting rights to influence strategy or interfere with management. This type of activism can be highly disruptive and breed uncertainty around long-term planning and leadership.

How we operate

EquitiesFirst does not engage in any of these activities when we accept stock as collateral for a loan. Quite the opposite, in fact.

We are a financial investor whose objective is to maintain the asset in our portfolio until loan maturity (typically three years) and return it to its owner. The way we grow our business is through executing more tranches, growing our portfolio and being given more time with the asset. In this way, we can execute a patient and disciplined management approach to our portfolio positions and earn our economics over time.

We accept shares in companies that are well-run and sustainable. Our business model depends on orderly, rational and consistent trading in the shares we hold, which maintains their value as collateral. Although the borrower relinquishes a portion of their shareholding, they know that the shares will be returned to them when the loan is repaid and that they retain exposure to the stock’s performance and its dividends.

In most of our transactions, EquitiesFirst would never accept more than 20% of a company’s outstanding shares and we do not seek controlling interests in any companies. In order to minimise risk, we typically execute our transactions in a series of sequential tranches. Each tranche is entered into consensually by the borrower and lender. That protects us – and other shareholders – against a scenario in which the borrower would seek to inflate the stock price ahead of taking out the loan in order to maximise its value as collateral.

Interests aligned

All of this helps to avoid conflict between major investors borrowing against their holdings and the interests of the growing number of investors focused on corporate governance. Therefore, the interests of the borrower, lender, minority shareholders and other stakeholders can be substantially aligned.

Essentially, it is in everyone’s interests that the company is stable and performs well. That enables the borrower to repay the loan plus interest and regain the shares. That serves the interests of minority shareholders, boards and management teams – not to mention employees and wider communities.

[1] www.pwc.lu/en/sustainable-finance/docs/pwc-esg-report-the-growth-opportunity-of-the-century.pdf

[2] www.russellreynolds.com/en/Insights/thought-leadership/Documents/2020-Global-and-Regional-Corporate-Governance-Trends.pdf

Disclaimer

Past performance does not guarantee future returns, and individual returns are not guaranteed or warranted.

This Document is intended solely for accredited investors, sophisticated investors, professional investors, or otherwise qualified investors, as may be required by law or otherwise, and it is not intended for, and should not be used by, persons who do not meet the relevant requirements. The content provided herein is for informational purposes only and is general in nature and not targeted to any specific objective or financial need. The views and opinions expressed in this Document have been prepared by third parties and do not necessarily reflect the views and opinions of EquitiesFirst. EquitiesFirst has not independently examined or verified the information provided herein, and no representation is made that it is accurate or complete. Opinions and information herein are subject to change without notice. The content provided does not constitute an offer to sell (or solicitation of an offer to purchase) any securities, investments, or any financial products (“Offer”). Any such Offer shall only be made through a relevant offering or other documentation which sets forth its material terms and conditions. Nothing contained in this Document shall constitute a recommendation, solicitation, invitation, inducement, promotion, or offer for the purchase or sale of any investment product by Equities First Holdings, LLC or its subsidiaries (collectively, “EquitiesFirst”), nor shall this Document be construed in any way as investment, legal, or tax advice, or as a recommendation, reference, or endorsement by EquitiesFirst. You should seek independent financial advice prior to making an investment decision about a financial product.

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The information contained in this Document is intended to be general in nature and is not personal financial product advice. Any advice contained in the Document is general advice only and has been prepared without considering your objectives, financial situation or needs. Before acting on any information, you should consider the appropriateness of the information provided and the nature of the relevant financial product having regard to your objectives, financial situation and needs. You should seek independent financial advice and read the relevant disclosure statements or other offer documents prior to making an investment decision about a financial product.

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The information contained in this document is intended to be general in nature, and, to the extent that it is perceived as advice, any advice contained in this document is general advice only and has been prepared without considering your objectives, financial situation, suitability of the financial products or your needs.

The material contained in this document is for information purposes only and should not be construed as financial advice, including an offer or solicitation or recommendation to buy or sell financial products. The information contained in this document is intended to be general in nature and any advice contained in this document is general advice only and has been prepared without considering your objectives, financial situation, suitability of the financial products or your needs. Before acting on any information, you should consider the appropriateness of the information provided and the nature of the relevant financial product having regard to your objectives, financial situation and needs. If you do not understand the contents of this document, you should consult an authorised financial adviser.

This document relates to a financial product which is not subject to any form of regulation or approval by the DFSA. The DFSA has no responsibility for reviewing or verifying any documents in connection with this financial product. Accordingly, the DFSA has not approved this document or any other associated documents nor taken any steps to verify the information set out in this document, and has no responsibility for it.

Hong Kong: Equities First Holdings Hong Kong Limited is licensed under the Money Lenders Ordinance (Money Lender’s Licence No. 1659/2024) and to carry on the business of dealing in securities (Type 1 licence) under the Securities and Futures Ordinance (“SFO”) (CE No. BFJ407). This Document has not been reviewed by the Hong Kong Securities and Futures Commission. It is not intended as an offer to sell securities or a solicitation to buy any product managed or provided by Equities First Holdings Hong Kong Limited and is only intended for persons who qualify as Professional Investors under the SFO. This document is not directed to individuals or organizations for whom such offers or invitations would be unlawful or prohibited.

Korea: The foregoing is intended solely for sophisticated investors, professional investors or otherwise qualified investors who have sufficient knowledge and experience in entering into securities financing transactions. It is not intended for, and should not be used by, persons who do not meet those criteria.

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