HOW FUNDING WORKS
It is very important to understand how funding against assets/collateral actually works.
- Asset/collateral documentation and client documentation is brought forward for review, organization, and consideration.
- If asset is of interest to private equity a call between the client and private equity.
- If asset/collateral continues to be of interest...private equity issues a non-disclosure agreement (NDA) to client to allow more open discussion between client and private equity.
- Client brings forth legal counsel to negotiate with private equity.
- Private equity issues commitment documents as per procedures.
- Contract is signed.
- Private equiy liens the asset collateral.
- Private equity releases cash equivalent of LTV (1:1) into escrow.
- Immediately from escrow clients upfront usage fee is paid to client as well as any commissions and/or corporate credit guarantor fees.
- Balance of escrow amount is spread across multiple asset managers in order to spread out risk.
LIENING/LEVERAGING THE ASSET/COLLATERAL
The first thing that must be understood is that the credit from the asset has be be able to transfer to the private equity in such a way that the world's financial systems respect and honor. Please understand that just because an asset has significant value does not always mean leveraging the value of the asset is a simple task.
The equity firm does a joint venture (JV) with the client in such a way that the client retains 100% ownership and the equity firm gets to leverage the value of the title for the duration of the contract.
How an asset would be liened would be similar to how a bank or mortgage company would lien an asset for the duration of a contract. These details will be orchestrated, negotiated, and agreed between the attorneys/legal counsel of both parties. Various factors including the asset type, custodial conditions, and local market conditions have to be taken into account.
LESSON A:
A playful example would be while cash is considered king... $20 Billion on pallets being stored in a wet cave in Somolia will have the respect of the world's financial systems. Consider that verifying the existence of the cash would not be easy, the secuity of the cash would not be predictable nor would the predictabiliy of the safe keeping conditions
LESSON B:
If you want to fund against a bag/jar of dirt from your backyard that has had a cash value underwriting certificate issued against it for $20 Billion...this might be as simple as having a bank take custody of the certificate and transfering the credit to the private via SWIFT. It is important to understand the underwriting certificate is a financial instrument and SWIFT messaging which includes full banking reponsibility is a bank instrument itself which the private equity can leverage rather than the jar of dirt itself.
The two lesson examples above are very important to mentally grasp and understand when trying to bring forth non cash or cash equivalent assets such as artwork, inground and above ground assets, etc.
The private equity has found that they can leveratge real estate depending on location using just a municipal valuation and then liening the real estate in favor of the private equity. Not every location work work with a municipal valuation but many locations in the United States will work using a municipal valuation. While a municipal valuation may not be high as a market valuation created by a credible third party... using a municipal valuation can save the real estate owner considerable time and expense.
LTV
The LTV assgned to the asset is formulated from a variety of factors including the description of the asset, the location of the asset, the custodial conditions of the title of the asset, market conditions, and other risk factors. Without submission of full details of an asset it is impossible to be quoted/offered a LTV for owner/client consideration.
General LTV information: CLICK HERE
General profit information: CLICK HERE
Broker notes: CLICK HERE
Disclaimer: CLICK HERE
