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Concentrated single-asset positions (Private business equity (Sale to 3rd…
Concentrated single-asset positions
Single asset
typically a position that has been held for a long period of time with low cost basis relative to market value
public stock
holding maybe requirement
or maintain effective voting control
private business
too early to sell
wish to control firm
commercial/investment real estate
might be part of business or wish to keep in family
Objectives in dealing with concentrated positions
Reduce the risk of wealth concentration
Generate liquidity in order to diversify and satisfy spending needs
optimize tax efficiency
Constraints
margin-lending rules
contractual restrictions & employer mandates
capital market limitation
Psychological consideration
emotional biases
cognitive biases
Goal-based planning
personal risk bucket
market risk bucket
aspiration risk bucket
Bucket 1 and 2 are primary capital to fund sufficient to provide for owner's lifetime spending needs
Bucket 3 - monetizing/sale to support primary capital
Asset location & wealth transfers
Locate the asset in a way that minimizes wealth transfer tax
estate tax freeze -> transfer future appreciation
100% equity to 100% voting preferred + non-voting common
Public traded shares
:red_flag:
Outright sale
triggers tax event
:red_flag:
Monetization strategies
loan against the value, re-invest fund elsewhere
riskless position and earn risk-free
1. Short sale against the box
= short an equal/partial number of shares (earn risk free rate),then invest into diversified portfolio
2. Total return swap
: return on index or fixed rate for the return on the position
3. Forward conversion with options
= synthetic short position,
4. Forward sale/single stock future contract
:red_flag:
Hedging the value
using derivatives
OTC risks
retain dividends + voting rights
1.Purchase puts
2. Cashless collars =
buy OTM put, sell OTM call
retain divs, + voting rights
3. Pre-paid variable forwards
= agreement to sell security at specific time in future with # of share varying the price at maturity
Private business equity
Sale to 3rd party (strategic/financial buyer)
Sale to insider -> management or key employees
Recapitalization (staged exit strategy) = 100% equity to debt, PE equity and minority equity share
Personal line of credit secured by company shares
IPO
Real estate
Mortgage finance
fixed rate mortgage where interest + principal repayment = NOI of property
monetize the LTV amount, invest in diversified portfolio
Charitable donation
earn income deduction or no tax trigger
Sale and lease back
sell and lease back to buyer