Part of debt financing’s future is equity

Lending against listed securities is one of many speciality private debt strategies jostling for attention and poised for growth.

The role of apples in shaping Newton’s law of gravity is well known; their significance in the emergence of a specialist type of debt financing far less recognised. It was back in 1997 that US entrepreneur Alexander Christy Junior was struggling to come up with a way to provide finance for an apple farm in Michigan which, on the face of it, had no suitable assets to lend against. But the apple farm’s owners possessed publicly traded shares – and it was these that ended up acting as security for the loan.

Christy Junior went on to found Equities First, which has been lending against equity for the last couple of decades. But although the firm has found a receptive audience for its product, deploying around $2.6 billion of capital and expanding into 12 offices around the world, it’s a market that has remained small, with only a handful of players emerging. Within the private debt universe, it occupies only a small corner.

There are reasons why you might expect this to change. For one thing, it has proved itself to be a largely non-cyclical play. The universe of public shares to take security against is almost unlimited. It’s also largely unrecognised, as Equities First’s CEO in Asia, Gordon Crosbie-Walsh, told us: “Companies which have given away security already and don’t think they have any more to give away, often have unutilised equity which can be used for financing on a non-recourse basis.”

The market also appears to offer a space to be occupied by newcomers, offering higher loan-to-value ratios than the banks are willing to do at the larger end, while being regulated (unlike the largely unregulated financiers operating at the smaller end of the market). Further growth is expected to hinge on awareness – which is actually higher in Asia-Pacific, where banks have provided this type of finance for some time, than in other parts of the world.

In the October 2021 issue of Private Debt Investor, we will be taking an in-depth look at numerous different areas of speciality finance, of which lending against equity is one. With many investors having built out their mainstream private debt allocations, there is an increasing willingness to consider more marginal strategies to achieve diversification and possibly higher returns. Find out from our coverage how the face of private debt may be changing.

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