A model, pioneered by Chris Cook, that aligns the interests of financiers with users and managers of an asset. One might think of this as a vision for a Collaborative Capital Structure!
2. Questions
๏ฎ How do we finance the
development/acquisition of a productive
asset (one that generates cash flow)
withoutโฆ
๏จโฆ a few people (equity holders) controlling
the use of the asset?
๏จโฆ a few people (debt holders) having the right
to take possession of an asset?
3. What Is The Problem With Debt?
๏ฎ Has to be repaid on the basis of specified
terms or the asset can be repossessedโฆ
home foreclosures, for example
๏ฎ Increases due to compound interest
๏ฎ Serves to create/reinforce the class divide
๏ฎ Creates โdebt slavesโ
4. Why Do You Need Debt?
๏ฎ In the context of the creation/operation of
an asset (apartment buildingโฆ wind
turbineโฆ), you need resources
What you really need is money!... Soโฆ
5. Why Not Equity Financing?...
Whatโs the Problem?
๏ฎ Equity creates an ownership class that
has voting control over the asset which
leads toโฆ
6. Capital Structure and the Class
Divide
Debt
Holder
Equity Users
Ownership
and Control
No Yes No
Secured Yes No No
Return Fixed Variable N/A
Risk Low High N/A
7. Definitionsโฆ
Term Encoded Inโฆ Definition
Ownership and
Control
Legal structure of
corporationโฆ
Shareholders
Agreement
Have the ability to
decide use of
assetโฆ sell asset
etc
Security Mortgage
Documents
Have claim to
ownership of asset
if certain
conditions are
breached
8. What Do Investors Really Want
๏ฎ Risk Adjusted Returnโฆ which is a
complicated way of say โreturn potential
that is proportional to the risk they are
assumingโ
This leads to an important questionโฆ
9. What Does Risk Adjusted Return
Have To Do With Ownership,
Control and Security?
In Principle Nothing!
10. How Can We Provide Investors a Risk Adjusted
Return Without Providing Ownership, Control and
Security?
Allow Them To Purchase The
Future Cash Flows From the
Asset at a Discount to Par!
Hmmโฆ what does this mean?
11. Example: Apartment block that
generates $100,000/month in revenue
๏ฎ Investor purchases โnotesโ that enable him
to receive $100K month
๏ฎ He purchases them at discount to par; say
$80K
๏ฎ His โrate of returnโ is 100K โ 80K = 20K
๏ฎ He purchases them โdirectlyโ from the
โUserโโฆ in this case the renters
12. What Happens If Renters Stop
Paying?
๏ฎ The investor wonโt be able to redeem his
note at $100Kโฆ he will lose money
Note that the investor is assuming risk just
as in any transaction. If he had felt that the
apartment block was an especially risky
investment he could have offered only
$70K
13. What Are The Advantages Of This
Structure?
๏ฎ Eliminates the โclass divideโ between owners
and users of an asset
๏จ Those with financial capital do not have ownership
and control of asset
๏จ Aligns all stakeholdersโฆ investors, users and
managers of the assetโฆ since everyone has a vested
interest in the productivity of the asset
๏จ No banks
๏จ No interest
๏จ No โspecificโ ownersโฆ all stakeholders are โownersโ
๏จ Control of asset is shared by all stakeholders
14. Peer to Asset Financingโฆ a
collaborative capital structure!
Debt
Holder
Equity Peer To
Asset
Ownership No Yes Shared
Control No Yes Shared
Secured Yes No No
Return Fixed Variable Variable
Risk Low High Variable