Peer To AssetFinancingOn the Creation of aCollaborative CapitalStructure
Questions How do we finance thedevelopment/acquisition of a productiveasset (one that generates cash flow)without…… a few people (equity holders) controllingthe use of the asset?… a few people (debt holders) having the rightto take possession of an asset?
What Is The Problem With Debt? Has to be repaid on the basis of specifiedterms or the asset can be repossessed…home foreclosures, for example Increases due to compound interest Serves to create/reinforce the class divide Creates ‘debt slaves’
Why Do You Need Debt? In the context of the creation/operation ofan asset (apartment building… windturbine…), you need resourcesWhat you really need is money!... So…
Why Not Equity Financing?...What’s the Problem? Equity creates an ownership class thathas voting control over the asset whichleads to…
Capital Structure and the ClassDivideDebtHolderEquity UsersOwnershipand ControlNo Yes NoSecured Yes No NoReturn Fixed Variable N/ARisk Low High N/A
Definitions…Term Encoded In… DefinitionOwnership andControlLegal structure ofcorporation…ShareholdersAgreementHave the ability todecide use ofasset… sell assetetcSecurity MortgageDocumentsHave claim toownership of assetif certainconditions arebreached
What Do Investors Really Want Risk Adjusted Return… which is acomplicated way of say ‘return potentialthat is proportional to the risk they areassuming’This leads to an important question…
What Does Risk Adjusted ReturnHave To Do With Ownership,Control and Security?In Principle Nothing!
How Can We Provide Investors a Risk AdjustedReturn Without Providing Ownership, Control andSecurity?Allow Them To Purchase TheFuture Cash Flows From theAsset at a Discount to Par!Hmm… what does this mean?
Example: Apartment block thatgenerates $100,000/month in revenue Investor purchases ‘notes’ that enable himto receive $100K month He purchases them at discount to par; say$80K His ‘rate of return’ is 100K – 80K = 20K He purchases them ‘directly’ from the‘User’… in this case the renters
What Happens If Renters StopPaying? The investor won’t be able to redeem hisnote at $100K… he will lose moneyNote that the investor is assuming risk justas in any transaction. If he had felt that theapartment block was an especially riskyinvestment he could have offered only$70K
What Are The Advantages Of ThisStructure? Eliminates the ‘class divide’ between ownersand users of an asset Those with financial capital do not have ownershipand control of asset Aligns all stakeholders… investors, users andmanagers of the asset… since everyone has a vestedinterest in the productivity of the asset No banks No interest No ‘specific’ owners… all stakeholders are ‘owners’ Control of asset is shared by all stakeholders
Peer to Asset Financing… acollaborative capital structure!DebtHolderEquity Peer ToAssetOwnership No Yes SharedControl No Yes SharedSecured Yes No NoReturn Fixed Variable VariableRisk Low High Variable