Monday, 13 July 2009

Taking out the leverage

The FT has an article today on re-equitisation. The basic idea is that some assets can be structured in such a way as to generate a bond-like series of cashflows, but rather than tranching them into a true bond plus a residual, it can make sense to treat the whole investment as an equity. The key advantage is flexibility: you don't have to worry about bond defaults if things go badly, giving you more freedom to wait out problems.

The private equity industry has known this for a long time. By structuring an investment as unlisted equity, they have been able to take advantage of good opportunities with uncertain payback horizons. The example the FT cites is a real estate investment, an area which has not historically been favoured by private equity, but these are new times. (Another area where equity like financing is preferred is of course sharia-compliant finance, but that is another story.)

Reequitisation, then, is a logical trend. After the recent turmoil, many investors would be happy with boring, safe investments that beat cash. If zero or low leverage equity investments in cash cow assets provide that, then for a while at least, investors will be buying them with alacrity.

Update. There is an article with a similar theme, albeit dressed up in rather grandiose language, in the FT.

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