Peer To Asset Financing

On the Creation of a Collaborative Capital Structure

Questions

How do we finance the development/acquisition of a productive asset (one that generates cash flow) without…… a few people (equity holders) controlling

the use of the asset?… a few people (debt holders) having the

right to take possession of an asset?

What Is The Problem With Debt?

Has to be repaid on the basis of specified terms 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 of an asset (apartment building… wind turbine…), you need resources

What you really need is money!... So…

Why Not Equity Financing?... What’s the Problem?

Equity creates an ownership class that has voting control over the asset which leads to…

Capital Structure and the Class Divide

Debt Holder

Equity Users

Ownership and Control

No Yes No

Secured Yes No No

Return Fixed Variable N/A

Risk Low High N/A

Definitions…Term Encoded In… Definition

Ownership and Control

Legal structure of corporation… Shareholders Agreement

Have the ability to decide use of asset… sell asset etc

Security Mortgage Documents

Have claim to ownership of asset if certain conditions are breached

What Do Investors Really Want

Risk Adjusted Return… which is a complicated way of say ‘return potential that is proportional to the risk they are assuming’

This leads to an important question…

What Does Risk Adjusted Return Have To Do With Ownership,

Control and Security?

In Principle Nothing!

How Can We Provide Investors a Risk Adjusted Return Without Providing Ownership, Control and Security?

Allow Them To Purchase The Future Cash Flows From the Asset at a Discount to Par!

Hmm… what does this mean?

Example: Apartment block that generates $100,000/month in revenue

Investor purchases ‘notes’ that enable him to 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 Stop Paying? The investor won’t be able to redeem his

note at $100K… he will lose money

Note that the investor is assuming risk just as in any transaction. If he had felt that the apartment block was an especially risky investment he could have offered only $70K

What Are The Advantages Of This Structure? Eliminates the ‘class divide’ between owners

and users of an asset Those with financial capital do not have ownership

and control of asset Aligns all stakeholders… investors, users and

managers of the asset… since everyone has a vested interest 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… a collaborative capital structure!

Debt Holder

Equity Peer To Asset

Ownership No Yes Shared

Control No Yes Shared

Secured Yes No No

Return Fixed Variable Variable

Risk Low High Variable