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Any time there are economic headwinds, liquidity becomes a competitive advantage, especially in the context of the many investment opportunities that typically arise as share valuations fall, businesses are revalued, and companies consolidate.
The current economic environment doesn't automatically mean that securities-backed lending is hard to access. Lenders are assessing loans carefully and want to work with quality borrowers, so if you hold illiquid stocks or have a poor credit history, this will naturally act as a barrier to borrowing. However, if you are in a good financial position with a portfolio of strong securities, lenders remain keen to do business and will offer Lombard loans and portfolio finance secured against various types of security, including pre-IPO stock, stock in private companies, and certain types of funds. Borrowing against your securities to raise capital can allow you to hold your investments long-term while they appreciate through economic cycles.
Here, we lay out some of the main advantages of securities-backed loans:
Lenders usually offer Lombard loans as a credit line that you can use any time during the loan period. The advantage of this is that you can use this credit line whenever you like - sometimes, it will be beneficial to pre-arrange a credit line and have it waiting for you when you need it. Portfolio lending isn't only confined to Lombard loans secured against liquid, A-grade stocks on leading stock exchanges. As investment products have diversified and become simultaneously more sophisticated and mainstream, you can now use various securities as collateral for a loan, including:
General and limited partners of investment funds, including mutual funds, hedge funds, venture capital and private equity funds can access securities-backed lending. Here, lenders will usually secure the loan against the carried interest generated by the fund. Loans are available with LTV running at around 50% of the carried interest amount - this can amount to loans of several million pounds. If you are a general or limited partner, lenders will assess your suitability for a loan based on the type and quality of the fund’s investments.
We can expect that markets will be volatile in the coming months. This means that you or your investment manager will be carefully planning a long-term strategy that accounts for this, which may include going long on investments through a trough and potentially investing in more stocks while valuations are low. Rather than selling securities to raise the liquidity you need to do this, borrowing against your securities will allow you to maintain your current investment strategy and raise capital.
In periods of economic volatility, the need to complete securities-backed loans quickly is compounded because lenders must complete loans quickly to ensure that the valuations haven't changed between making an offer and loan completion. As a borrower, this will work in your favour, and securities-backed lending remains one of the fastest ways to raise liquidity. Lenders can underwrite loans quickly - you can draw down capital in as little as 1-2 weeks, and you can access this finance regardless of your country of residence or citizenship, provided you meet compliance and AML requirements.
Selling securities to create liquidity will usually trigger capital gains tax. However, lending against your securities will usually not trigger a fiscal event because you pledge these securities to your lender in return for a loan, rather than selling them. This is often fiscally advantageous.
If you want to borrow a significant amount against your securities (£1 million plus), you will often tend to be the type of quality borrower lenders like to work with. The value of your portfolio will often push you into HNWI territory, and usually, you will have a solid credit history. Additionally, your wider background or track record (either in business or investing, depending on the type of securities the loan is secured against) can serve to give lenders comfort in the loan and can support your case for borrowing.
Rising interest rates have hit the headlines recently as central banks raise base rates. As well as being faster to arrange than a mortgage, securities-backed lending rates can be more competitive than what you’d see for a mortgage.
We were approached by a Limited Partner (LP) of a venture capital firm focused on European technology and internet startup companies. We raised £4 million for the LP (50% LTV) – a HNWI – with a charge against their carried interest being the security for the loan. The LP used this to create additional liquidity for investments. The loan had a term of 4 years, and the interest rate was 2.5% over the BoE base rate.
The client, a president and co-founder of a Silicon Valley-based technology company, wanted to diversify their investments and revenue streams, given their wealth was linked to shares in a single business. The founder's company is listed on the New York Stock Exchange after it began trading publicly in 2021 and has a market cap of about $3 billion. The single stock loan was for £8,156,000 (25% LTV) and for a term of ten years with a fixed interest rate of 5.175%.
Our client wanted to buy an investment property in the US with a reduced purchase price. To do this, they wanted to use their stock in a single listed company as security for the loan. A single stock loan of $10 million to support this. Our client wanted to keep the LTV low to mitigate any margin risk, so the deal was agreed with 30% LTV, securing a rate of 4.90%.
Enness arranges high-value securities backed lending, and we have a track record delivering these transactions. We are one of the only firms to operate in this part of the market, and we can work with unusual and complex transactions and borrowers.
Enness does not give advise on to securities products or investments in securities based products. Securites backed lending is unregulated.