Flight to Simplicity Resolution

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Flight to Simplicity Resolution

  1. 1. Flight to Simplicity Resolution Chris Cook 23 July 2012
  2. 2. There are conventionally two types of ownership - Public or Private03/04/10 2
  3. 3. There are two conventional types of investment: Equity and Debt03/04/10 3
  4. 4. Equity: shares in a Joint Stock Limited Company 03/04/10 4
  5. 5. The 19th Century legal dinosaur...03/04/10 5
  6. 6. ...which makes the Private Sector Private03/04/10 6
  7. 7. Debt: typically credit created by banks secured eg by mortgages03/04/10 7
  8. 8. ...giving two conflicting claims over the same productive asset03/04/10 8
  9. 9. But there are new creatures out there03/04/10 9
  10. 10. Equity vehicles: Trusts, ETFs, ETCs, ETPs,REITs, Master Limited Partnerships (MLPs)03/04/10 10
  11. 11. Simple Corporate entities such as the UK Liability Partnership (LLP)03/04/10 11
  12. 12. UK Company Limited by Guarantee03/04/10 12
  13. 13. These enable Open Corporates03/04/10 13
  14. 14. Over 68,000 UK LLPs are now in pervasive use for purposes never intended...03/04/10 14
  15. 15. ...even in the Public Sector, where Glasgow has five municipal LLPs 03/04/10 15
  16. 16. Capital Partnership – direct investment in productive assets03/04/10 16
  17. 17. Embryonic Capital Partnership 2002 (> £1bn) Gross Revenues Capital Partnership LLP 10 UK Hotels % % Hilton Group Consortium LLP Capital User Capital Provider % % % Property Hotel Bank Developer Specialist
  18. 18. Generic Capital Partnership Users Payment Use Custodian Custodian % % Investors Managers
  19. 19. Productive assets are held by a Custodian Ownership Assets Assets Custodian Custodian
  20. 20. ...who safeguards the asset and accounts Ownership Assets Assets Custodian Custodian
  21. 21. Investors provide Financial Capital in money, or money’s worth… Custodian Custodian Financial Capital Investors
  22. 22. Managers provide Human Capital of time, expertise and experience.... Custodian Custodian Financial Human Capital Capital Investors Managers
  23. 23. Users pay for the use of Capital Users Payment Use Custodian Custodian % % Investors Managers
  24. 24. Result: Capital Partnership Users Payment Use Custodian Custodian % %Investors Managers
  25. 25. Capital Partnership reinvents Equity
  26. 26. Equity Shares - % age shares in flows of revenue or production03/04/10 26
  27. 27. Stock – units returnable in payment for use value eg rentals, Kilowatt Hours
  28. 28. Albion Trust - a charity providing affordable office space31/05/10 28
  29. 29. Due to demand for affordable space they bought the adjacent disused church...31/05/10 29
  30. 30. ...and planned a £4m development31/05/10 30
  31. 31. But if they borrow, rentals will be unaffordable 31/05/10 31
  32. 32. Solution? An Albion Partnership Tenants Tenants £ Custodian Custodian % % Investors Investors Managers31/05/10 32
  33. 33. Unitisation Users Users Rental Custodian Custodian Stock % Investors Investors Managers16/06/10 33
  34. 34. Stock - credit instruments returnable in payment for value received.16/06/10 34
  35. 35. Resolution – stock based upon use value of land 16/06/10 35
  36. 36. Stock – undated credits returnable in payment for occupation16/06/10 36
  37. 37. Custodian is appointed or incorporated Houses Custodian Custodian
  38. 38. Affordable rental is set Occupiers Rental Custodian
  39. 39. Proportional Share allocated to Manager Occupiers Rental Custodian % Manager
  40. 40. Balance available for unitisation and sale Occupiers Rental Custodian % % Investors Managers
  41. 41. Units of stock are sold to Investors at a discount to the rental value16/06/10 41
  42. 42. The discount determines the return16/06/10 42
  43. 43. The rate of return is literally the rate atwhich stock may be returned to the issuer 16/06/10 43
  44. 44. Debt: £300k pa will fund <£4m debt over 20 years at 5% compound interest16/06/10 44
  45. 45. Stock - £300k (initially) funds £5m @ 6%£10m at 3%; £20m @ 1.5% (index-linked)16/06/10 45
  46. 46. Investors lend Peer to Asset to the land – not to the owner16/06/10 46
  47. 47. Surprise! No compound interest + no principal repayment = drastic cut in funding costs 16/06/10 47
  48. 48. Occupiers - may invest simply by paying rent in advance16/06/10 48
  49. 49. Receive Sweat Equity Units if they maintain the property themselves 16/06/10 49
  50. 50. Investors – Units of stock are a secure and liquid new asset class 16/06/10 50
  51. 51. Secure – credit default risk in respect of capital becomes liquidity risk16/06/10 51
  52. 52. Secure - affordability of rental means income is by definition more certain to be paid 16/06/10 52
  53. 53. Liquid – units of stock are not fragmented by date, rate of return or even issuer 16/06/10 53
  54. 54. Liquid – even if Investors do not buy Units, Occupiers will buy and return to issuer 16/06/10 54
  55. 55. Intermediaries (eg Banks) – transform from a transaction model to service provision 16/06/10 55
  56. 56. ...and need Capital only for operating costs 16/06/10 56
  57. 57. Back to the Future? Stock pre-dates modern banking 16/06/10 57
  58. 58. Resolution - exchange of dated land-backed debt for undated land-based stock 16/06/10 58

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