When or for whom does a securitization make sense?

Vincent Gessler, Founder & CEO, Gessler Capital GmbH, Zurich. http://www.gesslercapital.com

As Securitization Experts, we meet with various prospects almost daily. Some of our prospects' plans are still in their infancy, and other inquiries come from established companies that already have a clear idea of what they want to do with us. When or for whom does it make sense to talk to us?

Start-ups

The initial financing of a start-up can undoubtedly be provided through a securitization solution, but this is rarely realized. A start-up would have to convince asset managers and other qualified investors of the opportunity to invest in a relatively risky venture, which rarely fits their risk profile. The main reason for this is the fear of a total loss, which could put the decision-maker in trouble. Qualified or professional investors include family offices, UHNWI's, other financial institutions such as funds and investment companies.

However, family offices and investment companies might like a securitization solution because it would be a uniform and therefore simplified solution, especially if several investors are involved. Typically, if there is only one interested party, this party often wants the majority and thus control over the company. This problem could be avoided by launching an equity tracker, as the note reflects the share capital, but the voting rights remain with the company. In general, experience has shown that companies in this stage of their existence are financed through Family and Friends or Crowd Funding platforms.

In most cases, the start-ups have hardly any track record and are still making losses. The expected profits are usually based on assumptions, which do not meet the requirements of many qualified investors. After all, they invest the money of their clients, who, in turn, place their full trust in them through a management mandate. Besides, in this start-up phase, the amounts required are often too low for a securitization.

SMEs and other established companies

These companies have already proven themselves and have overcome the start-up phase, invariably giving them a much less risky risk profile. They can show qualified investors their initial successes and have demonstrated their sturdiness in stormy times. The sturdy nature gives them greater credibility with these potential investors.

However, because of their somewhat lower financing requirements, the big banks often reject such customers. It is then said that they would offer this securitization service, but only for amounts in the high double-digit millions. It is precisely for this clientele that we are closing a gap and help securitize both equity and debt while doing so without the so-called bank issuer risk. These SMEs and established companies, therefore, get a real chance to convince qualified investors, especially because all these forms of financing obtain a bankable ISIN and these projects, as well as the persons involved, have already gone through a proper due diligence process by a bank or equivalent regulated institute. Such a bankable format also offers an added value compared to a classic peer-to-peer contract, where each investor tries to negotiate better conditions and exercises due diligence. For investors looking for uncorrelated investments with above-average returns, such investments are highly attractive.

Only rarely are transactions of this size offered to the public, as they are usually presented to a smaller group of interested parties, also known from club deals, but here the transaction is provided in a securitized form with a bankable ISIN number and a highly regulated paying agent. Such private placement solutions are also not intended for the masses and, depending on the solution chosen, may only include a certain number of qualified investors. In this sense, we help you to actualize your desired format for all these investors.

A securitization can save you enormous legal costs and distance you from arduous negotiations. If the investor is seriously interested in participating in your project, he will accept this well-established format and your conditions. Of course, you could also offer a traditional form of financing in parallel. It would be interesting if you would suggest better conditions for the securitized version. After all, a special request is supposed to cost more and also causes you more effort.

Investment companies

Investment companies are mostly operating in the private equity and debt field and work in a parallel world to the securitization world. Existing and returning co-investors of such an investment company may choose peer-to-peer contracts over a securitization because they hope to obtain better conditions through individual negotiations.

However, the associated agreements have to be reviewed by lawyers of both parties and adjusted several times, which can be costly and completely inefficient for smaller transactions. For this reason, there is every reason to opt for a securitized version. The Investment Company defines the conditions at the beginning, e.g., by using a lead order and offering the same conditions to other qualified investors. These investors can then all purchase their shares through their home banks, thereby agreeing to the deposited term sheet of the product. The purchase, therefore, replaces the peer-to-peer contract.

A securitized form of a project also addresses an otherwise unreachable group of investors who would generally reject a peer-to-peer agreement. An asset manager, for example, would generally be interested in an uncorrelated investment, but unfortunately cannot book peer-to-peer contracts into his client mandates. Without an ISIN, this type of investor cannot be gained, even with the best return perspectives. With us, you can now address a previously unreachable group of clients. Perhaps you already have the right contacts for a securitized form in your network? Expand your target group and exploit your full potential of investors by talking to us and securitizing your projects.

Portfolio Managers & Contractual Investments

Sometimes, investors want to participate in multiple projects of an investment company or an investment strategy. For this need, we have a flexible portfolio solution called Actively Managed Certificate (AMC). Our clients can include and actively manage both bankable and non-bankable assets in such a format. A diversified portfolio eliminates the so-called cluster risk of an individual investment and can also appeal to, otherwise, rather conservative investors through the risk diversification. Besides, the investor remains permanently invested in the portfolio, even if the projects and profits it contains are realized.

Alternative forms of investment based on contractual agreements that distribute recurring or one-off gains can also be securitized. In this regard, we can securitize almost all contractual arrangements individually or as a portfolio. This also includes specialized forms of contracts such as trade finance transactions, leasing agreements, or royalties. Even here, it is very laborious to win investors for a peer-to-peer contract. We can mirror and also bundle these contracts, for example, individually or combined via a bankable format. This makes it accessible to a broader target group. By securitizing agreements, for example, we can avoid a form of financing at the level of the operating company. This bundling of contracts allows the investor to participate only in the underlying contracts or activities instead of being exposed to the company as a whole. In this case, a tracker certificate would reflect the contractual agreements, simplify the purchase and clearly distinguish the investment from the other activities of the company.

Conclusion

In principle, we recommend a minimum size of CHF 1 million for securitization via Guernsey and CHF 6 million via Luxembourg. By expanding your target group, you increase your chances of achieving your desired capital target. Instead of relying solely on peer-to-peer contracts, you should consider whether you have potential qualified investors in your network who might be interested in just such an investment form. Traditional thinking investors could also be won over to such a securitized format. A securitized form opens you up to entirely new possibilities and opportunities.

We would be happy to hear from you!