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Securities-backed lending is a flexible and fast way to borrow significant capital. However, the numerous opportunities securities-backed lending can offer are sometimes overlooked. Many people assume that these loans can be exclusively used to reinvest in securities, but this is far from the reality.
Securities-backed loans are utilised for a variety of purposes. Because of the speed with which it is possible to draw down capital, you can use this type of finance to:
Naturally, the capital raised from portfolio finance can be reinvested in securities, too.
Securities-backed lending used to be a relatively niche area of the finance market, with only one type of finance offered (i.e., only very liquid, listed securities on leading stock exchanges could be used as collateral as a loan). Lenders used to be few and far between, and package deals were the norm. Generally, if you held securities on smaller stock exchanges or you had illiquid securities you would struggle to borrow, even if the wealth tied up in these investments was very significant.
Today, niche lenders offer alternative options which reflect the more diverse portfolios held by borrowers. Pre-IPO loans are still a niche offering, but it is very possible to secure finance against equity in a company that will list in the short to medium term. It’s also possible to borrow against a single line of stock, which had been particularly sought-after by business owners, families and employees with substantial portfolios (equalling millions of pounds or the equivalent in another currency) linked to a single business. Lastly, unlisted stock loans have also become a possibility in recent years, which opens the door for the owners of privately held firms to release equity tied up in their business.
Ultimately, what you can borrow will depend on your securities, their value, your exit and what you want to use the finance for. A more ambitious deployment of funds will typically command a lower loan-to-value ratio (LTV) than a very low-risk scenario, for example.
Enness can regularly secure a higher LTV against securities, sometimes securing as much as 60-65%, which is exceptional in the space. With access to niche lenders and knowing exactly who will offer the most attractive package, Enness’ brokers will usually be able to negotiate a higher LTV than you would secure searching the market yourself
Portfolio finance can be purely transactional (i.e., you borrow capital from a lender and later pay back the loan). However, if you wish, it can be an opportunity to experience a more 'value-add' partnership with a lender who will help you achieve specific objectives during the loan term.
Lenders can, for example, assist with improving your stock’s liquidity by increasing trading activity if you have very illiquid securities. We’ve also seen cases where lenders have supported the dematerialisation of your shares if you are still using physical certificates. There have also been cases where lenders have supported the diversification of a portfolio (often relevant in single stock loans) to mitigate the potential risks of an individual or family having most of their wealth associated with a single company.
Securities-backed lending needs to be carefully structured. This is especially important if you have pre-IPO stock or your securities are linked to a company you own or work for. Lenders will want to take custody of the shares for the duration of the loan, and the deal will usually need to be structured so that you can retain your equitable rights, voting rights and you are happy with what the lender can do with the securities.
It’s always worth assessing all the angles and ensuring the deal is in your best interests. Often, a slightly lower loan-to-value with more advantageous terms is a better deal than simply borrowing the maximum possible. Enness will be able to help you negotiate these terms.