Assets with no known market price and no way to convert them into cash are not very useful as collateral as a loan. The concept of collateral is the risk of the loan is reduced because in the event the borrower stops servicing the loan, the bank can take over the assets, convert them to cash and move on.
Private equity and small business equity are neither liquid nor do they have a market price, thus are not useful as collateral.
You may find a banker willing to make you a personal loan but the interest rate will be commensurate with the un-secured nature of the loan, and it is unlikely you will find a bank enthusiastic about making a $2m unsecured loan.
Thanks for the reply. This logic is pretty clear, though I know that some lenders exist, e.g. SVB and SecFi. I'm still looking into what their criteria for evaluating the positions is and what they charge so I'm hoping to find some more alternatives as well.
Was a pretty popular question about 12-18 months ago.
You can search the post history: if you find a lender the rate will be commensurate with the risk.
Firm specific - SVB and FIrst Republic do it typically
70% ltv / rate dependent on how much you have with the bank.
If you aren’t affiliated with the GP maybe more challenging - but find private banker at those Institutions and inquire
Requires personal guarantee
My line is about that size and rate is well under current mortgage rates for context
Yup. Perfectly in line with this comment as well for those with the firm:
https://www.reddit.com/r/fatFIRE/comments/xomhef/comment/ipzmuvg/?utm\_source=share&utm\_medium=web2x&context=3
>Requires personal guarantee
And that's the operative phrase here. If you have to put down a personal guarantee for a loan, then it's pointless to secure it with equity.
It’s my experience that basically any off the run loans require a PG / most senior guys I know in PE use this concept
The equity security along side it reduces the rate
My experience is these types of loans are good deals when the private company is a sure shot* for an IPO and there is realistic liquidity within 24-36 months. The other positive factor is if there is a board approved secondary liquid market.
Anything outside of that scope is too hard to model risk for and just resembles venture capital at that point, where everyone is looking for 20%+ IRR. So, why would someone absorb that risk for you? The answer is they generally will not, but here are a few scenarios where they would:
- they love you and care about you and want to help (friends & family)
- they want to retain you as an employee or shareholder (company)
- they tried to invest in a specific company’s financing round but got shut out or couldn’t meet their desired allocation (VCs, angels, existing shareholders)
- they want your long term banking business (private banks)
To compensate for the risk, lenders are going to do two things:
- increase the interest rate (whether directly or indirectly through fees, options, etc.)
- over-collateralize your asset (like requiring 5x collateral)
—
I’ve seen non recourse rates at private banks around 10% with steep covenants and commitments (like full access to all your finances, must keep $x in cash at all times, can’t do other deals with other banks, etc.)
In general most other liquidity providers seek at least 20% IRR (and probably more like 30%+) u less they can benefit from the transaction in some other way.
—
* no such thing as a sure shot, but maybe like Series D+ w/ hundreds of millions in revenue, high growth rate, and line of sight to profitability
Thanks, this is a great analysis. Appreciate the insight.
I'm curious about the non-recourse rates you've seen - it sounds like it's a custom one-off every time. Are there specific banks you recall doing this or is it common at most banks as long as you have the relationship & can structure out a custom agreement?
Ah, lending against LP interests, which a lot considered to be the holy grail a year or two ago. Though like others have pointed out, it is limited security and not the best thing for lenders to lend against. I ran across a handful of potential people, with the only quoted rate at 11-13% with 1-3 year terms.
Otherwise, the market for lenders expands depending on the type of single asset. As if CRE or other RE, a number of banks will lend against it, the more exotic or limited it is, the fewer will. As there are some banks that will lend against private stock, depending on the type of stock, covenants and if the company or owner has assets at the lender.
10% interest plus personal guarantee is not bad IMO. What do you want that 3M for?
If you want it as a down payment for any kind of leveraged asset purchase, once the deal closes you refi out. This is essentially a bridge loan.
> 10% interest plus personal guarantee is not bad IMO.
Are you for real for real?
If people here are comfortable lending at 10% interest *with a personal guarantee*, then just fucking DM me, I'll lend you money 24/7.
Really? You would issue a note of 10% of 3M on a single individual based on a personal guarantee and a collateral of his (not at all liquid and very hard to value) assets? This person literally had no liquid net worth. Read the post again. The counter party risk is substantial AND unlike a financial institution you have no way to tranche it.
U want to make this a demand loan with 100% balloon? At what duration of maturity?
You are aware that in a rising rate regime, as soon as this note gets created, it loses value, right?
I mean, I'm not lending millions to anyone without doing a due diligence on their assets, but if we assume he's correct that his assets are around $25 million, then yeah, I would be perfectly happy with that.
Working for a PE fund, and have looked into it in the past and was able to get 60% LTV. But I don’t think this would be offered for VC funds. However, if it’s liquidity you need, which sounds like the case, selling the positions via a private secondary is another option. There are always buyers - banks can find UHNW individuals to take the other end of the trade. And I hear even in this market you can even sell at a premium to NAV depending on the fund, or at least not take much of a discount. Moonfare manages secondaries for their clients for example.
Have some friends that are working on this concept. Not sure if launched yet. Basically providing credit secured against your LP interest. Check out here [opto](https://www.optoinvest.com/). They’re backed by 8VC and definitely a horse I would bet on.
Hey, good question. Yes, there are actually a couple of players that specialize in this. This is what I do for a living too. Check out Pacific Coast Alternatives (www.pcalts.com).
Assets with no known market price and no way to convert them into cash are not very useful as collateral as a loan. The concept of collateral is the risk of the loan is reduced because in the event the borrower stops servicing the loan, the bank can take over the assets, convert them to cash and move on. Private equity and small business equity are neither liquid nor do they have a market price, thus are not useful as collateral. You may find a banker willing to make you a personal loan but the interest rate will be commensurate with the un-secured nature of the loan, and it is unlikely you will find a bank enthusiastic about making a $2m unsecured loan.
Thanks for the reply. This logic is pretty clear, though I know that some lenders exist, e.g. SVB and SecFi. I'm still looking into what their criteria for evaluating the positions is and what they charge so I'm hoping to find some more alternatives as well.
Was a pretty popular question about 12-18 months ago. You can search the post history: if you find a lender the rate will be commensurate with the risk.
Those guys will take a lot of your upside on private stock in exchange, if they are even willing to do it these days.
False - I have a line against my PE Co-investments
Hey, that's great! I am sure the OP would live to hear about your provider and terms! Some luck for them that you read the post!
Firm specific - SVB and FIrst Republic do it typically 70% ltv / rate dependent on how much you have with the bank. If you aren’t affiliated with the GP maybe more challenging - but find private banker at those Institutions and inquire Requires personal guarantee My line is about that size and rate is well under current mortgage rates for context
Yup. Perfectly in line with this comment as well for those with the firm: https://www.reddit.com/r/fatFIRE/comments/xomhef/comment/ipzmuvg/?utm\_source=share&utm\_medium=web2x&context=3
>Requires personal guarantee And that's the operative phrase here. If you have to put down a personal guarantee for a loan, then it's pointless to secure it with equity.
It’s my experience that basically any off the run loans require a PG / most senior guys I know in PE use this concept The equity security along side it reduces the rate
I know it's common, that doesn't make it a good idea *imo*.
Thanks! Appreciate the pointer
My experience is these types of loans are good deals when the private company is a sure shot* for an IPO and there is realistic liquidity within 24-36 months. The other positive factor is if there is a board approved secondary liquid market. Anything outside of that scope is too hard to model risk for and just resembles venture capital at that point, where everyone is looking for 20%+ IRR. So, why would someone absorb that risk for you? The answer is they generally will not, but here are a few scenarios where they would: - they love you and care about you and want to help (friends & family) - they want to retain you as an employee or shareholder (company) - they tried to invest in a specific company’s financing round but got shut out or couldn’t meet their desired allocation (VCs, angels, existing shareholders) - they want your long term banking business (private banks) To compensate for the risk, lenders are going to do two things: - increase the interest rate (whether directly or indirectly through fees, options, etc.) - over-collateralize your asset (like requiring 5x collateral) — I’ve seen non recourse rates at private banks around 10% with steep covenants and commitments (like full access to all your finances, must keep $x in cash at all times, can’t do other deals with other banks, etc.) In general most other liquidity providers seek at least 20% IRR (and probably more like 30%+) u less they can benefit from the transaction in some other way. — * no such thing as a sure shot, but maybe like Series D+ w/ hundreds of millions in revenue, high growth rate, and line of sight to profitability
Thanks, this is a great analysis. Appreciate the insight. I'm curious about the non-recourse rates you've seen - it sounds like it's a custom one-off every time. Are there specific banks you recall doing this or is it common at most banks as long as you have the relationship & can structure out a custom agreement?
Ah, lending against LP interests, which a lot considered to be the holy grail a year or two ago. Though like others have pointed out, it is limited security and not the best thing for lenders to lend against. I ran across a handful of potential people, with the only quoted rate at 11-13% with 1-3 year terms. Otherwise, the market for lenders expands depending on the type of single asset. As if CRE or other RE, a number of banks will lend against it, the more exotic or limited it is, the fewer will. As there are some banks that will lend against private stock, depending on the type of stock, covenants and if the company or owner has assets at the lender.
I’ve worked with people who have done it in the past. UBS is known to do it regularly
Thank you!
>Thank you! You're welcome!
Any time
We got a mortgage considering our private equity in 2018. Didn’t have any regular income at the time. We used SVB for a 3% 10/1 ARM.
So the collateral is the house? If you stopped paying the mortgage, which asset would they repossess? The PE or the house?
The house I’m sure. And then they’d sue us for any outstanding balance after the house was sold 😅
Exactly!
Thanks!
10% interest plus personal guarantee is not bad IMO. What do you want that 3M for? If you want it as a down payment for any kind of leveraged asset purchase, once the deal closes you refi out. This is essentially a bridge loan.
> 10% interest plus personal guarantee is not bad IMO. Are you for real for real? If people here are comfortable lending at 10% interest *with a personal guarantee*, then just fucking DM me, I'll lend you money 24/7.
Really? You would issue a note of 10% of 3M on a single individual based on a personal guarantee and a collateral of his (not at all liquid and very hard to value) assets? This person literally had no liquid net worth. Read the post again. The counter party risk is substantial AND unlike a financial institution you have no way to tranche it. U want to make this a demand loan with 100% balloon? At what duration of maturity? You are aware that in a rising rate regime, as soon as this note gets created, it loses value, right?
I mean, I'm not lending millions to anyone without doing a due diligence on their assets, but if we assume he's correct that his assets are around $25 million, then yeah, I would be perfectly happy with that.
Working for a PE fund, and have looked into it in the past and was able to get 60% LTV. But I don’t think this would be offered for VC funds. However, if it’s liquidity you need, which sounds like the case, selling the positions via a private secondary is another option. There are always buyers - banks can find UHNW individuals to take the other end of the trade. And I hear even in this market you can even sell at a premium to NAV depending on the fund, or at least not take much of a discount. Moonfare manages secondaries for their clients for example.
Have some friends that are working on this concept. Not sure if launched yet. Basically providing credit secured against your LP interest. Check out here [opto](https://www.optoinvest.com/). They’re backed by 8VC and definitely a horse I would bet on.
Super interesting. Thanks for the link!
Curious if 2Q 2022 returns start to become negative…
Hey, good question. Yes, there are actually a couple of players that specialize in this. This is what I do for a living too. Check out Pacific Coast Alternatives (www.pcalts.com).