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

private business

commercial/investment real estate

Objectives in dealing with concentrated positions

  1. Reduce the risk of wealth concentration
  2. Generate liquidity in order to diversify and satisfy spending needs
  3. optimize tax efficiency

holding maybe requirement
or maintain effective voting control

too early to sell
wish to control firm

might be part of business or wish to keep in family

Constraints

margin-lending rules

contractual restrictions & employer mandates

capital market limitation

Psychological consideration

emotional biases

cognitive biases

Goal-based planning

  1. personal risk bucket
  2. market risk bucket
  3. 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

🚩Outright sale

  • triggers tax event

🚩Monetization strategies

  • loan against the value, re-invest fund elsewhere
  • riskless position and earn risk-free

🚩Hedging the value

  • using derivatives
  • OTC risks
  • retain dividends + voting rights

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

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

  1. Sale to 3rd party (strategic/financial buyer)
  1. Sale to insider -> management or key employees
  1. Recapitalization (staged exit strategy) = 100% equity to debt, PE equity and minority equity share
  1. Personal line of credit secured by company shares
  1. 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