Unlocking value through a smarter use of leverage

Investors do not need to sign up to onerous restrictions or unfavorable terms in order to borrow against their shares

Whether buying a house or a single stock, investors understand that leverage can be a powerful tool for their portfolio. Borrowing against shares, however, can be a daunting prospect. Loan agreements often come with strings attached that restrict how borrowers can use the proceeds or leave them locked into other products.

Margin calls can also be ruinous: if investors are unable to put up extra collateral immediately, they can face liquidation – often at the bottom of the market.

Margin calls have led to no end of lawsuits as investors look to recoup some of the losses from forced liquidations. Market shocks such as the 2008 financial crisis, 2016 Brexit referendum and, most recently, the 2020 Covid sell-off, are inevitably followed by years of litigation.

Courts have tended to side with banks or brokers, finding that leveraged investment contracts give lenders clear rights to liquidate positions. In 2013, the London High Court found in favour of Deutsche Bank in an US$8 billion case relating to the liquidation of investments by a Norwegian billionaire client during the 2008 crisis.[1]

Margin calls can also have a disastrous impact on company valuations, by adding to selling pressure in a weak market – especially if the underlying collateral is a thinly traded stock. And when margin calls affect positions that have grown to tens of billions of dollars, the knock-on effects from forced liquidations are exacerbated. The implosion of US hedge fund Archegos Capital Management after a succession of margin calls in March 2021 roiled markets and left its lenders nursing losses in the billions of dollars.[2]

Complete flexibility

At EquitiesFirst, we believe there is a better alternative for investors looking to borrow against their shares. Our financings are structured as sale and repurchase agreements, and we take a pragmatic approach to additional collateral requirements throughout the term of the agreement. Throughout our 20-year history, we have always returned the same number of shares to the borrower at the end of the term.

Our model is also free from the strings that are so often attached to margin lending. Private banks and prime brokers will typically allow clients to trade on the margin only when they purchase securities through their institution or keep a minimum balance in their account. In contrast, a deal with EquitiesFirst gives borrowers access to versatile funding at very attractive interest rates.

We are also cautious about how we manage our own risks. We approach every deal as an opportunity to add to our long-term public equities portfolio, and steer clear of the risky, highly leveraged strategies that have caused so much trouble for private banks and their clients in the past. We do not rely on external investors, and we do not engage in short-selling or permit lending assets to third parties.

Structuring deals in this way has helped us grow as a private company for almost 20 years, free from the burden of quarterly reports and pressure from external shareholders.

All forms of borrowing come with risks. In volatile markets, however, a well-structured equity-backed loan from an alternative liquidity provider can allow investors to ride out temporary disruptions without sacrificing their long-term belief in the stock.

[1] https://www.ft.com/content/a64a1535-f518-4465-b67f-44b19aa97ff3

[2] https://www.credit-suisse.com/about-us/en/reports-research/archegos-info-kit.html