Where loans meet equity

EquitiesFirst is involved in a niche area of finance that provides companies with loans in exchange for security over shares. Private Debt Investor spoke with the firm’s chief executive officer in Asia

It was a different type of seed finance. Back in 1997, American entrepreneur Alexander Christy Jr was faced with a dilemma – how to provide finance for a family-owned apple farm in Michigan that had no assets. Or at least it thought it had no assets. Christy had become aware of a specialist finance provider able to lend against equity and that made him realise he could provide the farm with finance backed by 800,000 shares of publicly traded stock.

That experience was formative as Christy went on to found EquitiesFirst, a lender against equity, a few years later. Although Christy is based in the US and the firm sees itself as a single-family office backed by Christy’s capital, it has expanded into 12 offices around the world – nine of them in Asia-Pacific, where demand for the product has been highest to date. Over the past couple of decades, the firm has deployed around $2.6 billion of capital globally.

Gordon Crosbie-Walsh, chief executive officer, Asia, at EquitiesFirst, says the product’s roots lie in the banking world and around 80 percent of investment professionals within the business have investment banking or private banking backgrounds. He explains the rationale of the product: “In the debt stack you typically have a lot of mortgage and asset-backed finance and mezzanine, and we often times can come in at the top of the stack. Shareholders, which have issued securities already and don’t think they have any more to deploy, often have unutilised equity which can be used for financing on a non-recourse basis.”

He says the product is typically provided by both banks and small, unregulated specialist financiers. EquitiesFirst sits inbetween, providing loans at interest rates of between 3-4 percent and loan-to-value ratios typically between 60-70 percent – a higher ratio than would typically be offered by the banks.

Lack of awareness

Crosbie-Walsh says one of the biggest challenges for this type of financing is lack of awareness. “It’s very new in Europe, especially in mainland Europe, and a lot of education is needed,” he says. Even in Asia-Pacific, where the product is well known in parts of the region, it is nowhere near as well established as asset-based finance, which involves lending to the likes of receivables, inventory and equipment.

Awareness doesn’t have to grow that much to have a big impact on growth for firms like EquitiesFirst. Crosbie-Walsh says business increased 300 percent at the firm on a year-on-year basis in both loan transactions and capital deployed and says he is expecting similar growth over the next year.

One focus for the firm within Asia-Pacific has been corporate governance, teaming up with Nasdaq Governance Solutions to produce co-branded white papers on the topic. “In our experience, the better the company, and the more in tune it is with corporate governance, the better it is for us,” says Crosbie-Walsh. “If the company does not meet a high corporate governance threshold, then the terms and dynamics of a deal sometimes become more challenging for us.”