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Flight to Simplicity
Resolution
Chris Cook
23 July 2012
There are conventionally two types of ownership - Public or Private
03/04/10 2
There are two conventional types of investment: Equity and Debt
03/04/10 3
Equity: shares in a Joint Stock Limited Company
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The 19th Century legal dinosaur...
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...which makes the Private Sector Private
03/04/10 6
Debt: typically credit created by banks secured eg by mortgages
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...giving two conflicting claims over the same productive asset
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But there are new creatures out there
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Equity vehicles: Trusts, ETFs, ETCs, ETPs, REITs, Master Limited Partnerships (MLPs)
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Simple Corporate entities such as the UK Liability Partnership (LLP)
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UK Company Limited by Guarantee
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These enable Open Corporates
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Over 68,000 UK LLPs are now in pervasive use for purposes never intended...
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...even in the Public Sector, where Glasgow has five municipal LLPs
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Capital Partnership – direct investment in productive assets
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Embryonic Capital Partnership 2002 (> £1bn)
Capital Partnership LLP10 UK Hotels
Gross Revenues
Hilton GroupCapital User
Consortium LLP Capital Provider
BankProperty
DeveloperHotel
Specialist
% %
%%%
Generic Capital Partnership
CustodianCustodian
Investors
Payment
% %
Use
Managers
Users
Productive assets are held by a Custodian
AssetsAssets CustodianCustodianOwnership
...who safeguards the asset and accounts
AssetsAssets CustodianCustodianOwnership
Investors provide Financial Capital in money, or money’s worth…
CustodianCustodian
Investors
Financial Capital
Managers provide Human Capital of time, expertise and experience....
CustodianCustodian
Investors
HumanCapital
Financial Capital
Managers
Users pay for the use of Capital
CustodianCustodian
Investors
Payment
% %
Use
Managers
Users
Result: Capital Partnership
CustodianCustodian
Investors
Payment
% %
Use
Managers
Users
Capital Partnership reinvents Equity
Equity Shares - % age shares in flows of revenue or production
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Stock – units returnable in payment for use value eg rentals, Kilowatt Hours
Albion Trust - a charity providing
affordable office space
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Due to demand for affordable space they bought the adjacent disused church...
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...and planned a £4m development
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But if they borrow, rentals will be unaffordable
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Solution? An Albion Partnership
CustodianCustodian
InvestorsInvestors
TenantsTenants
Managers
% %
£
31/05/10 32
Unitisation
CustodianCustodian
InvestorsInvestors
UsersUsers
Managers
Stock %
Rental
16/06/10 33
Stock - credit instruments returnable in payment for value received.
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Resolution – stock based upon use value of land
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Stock – undated credits returnable in payment for occupation
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Custodian is appointed or incorporated
Houses CustodianCustodian
Affordable rental is set
Custodian
Occupiers
Rental
Proportional Share allocated to Manager
Custodian
Occupiers
Manager
%
Rental
Balance available for unitisation and sale
Custodian
Investors
Occupiers
Managers
% %
Rental
Units of stock are sold to Investors at a discount to the rental value
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The discount determines the return
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The rate of return is literally the rate at which stock may be returned to the issuer
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Debt: £300k pa will fund <£4m debt over 20 years at 5% compound interest
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Stock - £300k (initially) funds £5m @ 6% £10m at 3%; £20m @ 1.5% (index-linked)
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Investors lend 'Peer to Asset' to the land – not to the owner
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Surprise! No compound interest + no principal repayment = drastic cut in funding costs
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Occupiers - may invest simply by paying rent in advance
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Receive 'Sweat Equity' Units if they maintain the property themselves
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Investors – Units of stock are a secure and liquid new asset class
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Secure – credit default risk in respect of capital becomes liquidity risk
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Secure - affordability of rental means income is by definition more certain to be paid
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Liquid – units of stock are not fragmented by date, rate of return or even issuer
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Liquid – even if Investors do not buy Units, Occupiers will buy and return to issuer
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Intermediaries (eg Banks) – transform from a transaction model to service provision
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...and need Capital only for operating costs
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Back to the Future? Stock pre-dates modern banking
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Resolution - exchange of dated land-backed debt for undated land-based stock
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