Haley Schaffer was working with a client whose stock in one of the large artificial intelligence hyperscalers ballooned in value from $1 million to about $10 million in the past five- to seven years.
Instead of selling about $3 million in shares of this company to buy a home in the pricey San Francisco Bay Area -- and triggering a large taxable capital gain -- Schaffer, co-founder of the independent San Francisco advisory firm Waypoint West, took out a pledged-asset line for that amount for this client, backed by the value of the stock.
"He'll be paying $120,000 of interest on those assets every year, but he's dodging [roughly] $1 million in capital-gains taxes that he would have paid out of pocket," Schaffer said in an interview.
Taking out loans and letting investments continue to grow is a strategy that has long existed but has steadily gained traction among the wealthy, particularly as soaring stock values have supported the costs of borrowing at todays' rate levels.
The Lending Solutions Group at Merrill -- the wealth management arm of Bank of America -- had record loan balances of $171 billion at the end of the second quarter, up 11% from a year earlier, a total that includes securities-based lending (loans backed by public stockholdings), custom lending, and mortgages. The group helps to sell or originate loans, and educate and train advisors on loans offered by Bank of America.
Custom loans -- offered to clients with at least $5 million in liquidity and a net worth of more than $30 million -- can be backed by an array of assets, including commercial real estate, hedge funds, fine art, yachts, and public securities, Kurt Niemeyer, head of Merrill's lending group said in an interview. Merrill's custom loan balances rose 21% in the second quarter.
The wealthiest clients also may have the option of taking out unsecured loans from Bank of America, Niemeyer says. Unsecured loans aren't backed by collateral, but instead include financial covenants that require a client to hold on to a certain amount of liquidity, or generate a certain amount of cash, or other requirements, he says.
This strategy is reserved for the firm's best clients so that "when the loans mature, their financial position looks roughly the same if not better than when you gave them a loan," Niemeyer adds.
Many of Schaffer's clients, who are typically ultrawealthy founders, executives and creators across tech, media, and entertainment, require creative solutions for access to cash.
"There's a lot of wealth being generated in less liquid assets so we get these questions all the time about borrowing," Schaffer says. Although this strategy -- which critics sometimes dub "buy, borrow, die" -- has long existed, wealth is being generated differently today, largely through private holdings instead of public securities.
"There's this almost new level of complexity," she says. "It's gone from just getting leverage on your public securities, which has mostly been like a traditional custodian or private bank gives you a loan, to now you have all of these different specialty lenders coming in."
To address these needs, Waypoint West has developed a network of vetted specialty lenders. Anecdotally, securing one of these loans has "an "single-digit" acceptance rate, especially against an illiquid asset, "so it requires us to have a ton of people in our back pocket who specialize in different types of loans," Schaffer says.
Specialty lenders can include private-credit funds, boutique private banks, structured secondary firms, specialty finance shops, and venture-debt providers, she says. The latter are firms that function as a general partnership that raises funds from outside investors to issue loans to individuals against their venture-capital positions. But these are loans only made only if backed by late-stage private companies with household names, "like OpenAI or Anthropic, where they can see that path toward an IPO," Schaffer says.
Unlike a traditional bank, some of these lenders will underwrite a loan for an individual against their private company's equity. A specialty lender may require over-collateralizing the loan as much as three times the value of the company, and an equity kicker -- an arrangement that provides equity upside through a payment-in-kind interest, warrants, or equity participation, she says.
"We see [lenders] getting more comfortable around underwriting these loans by, focusing on cash interest or payments in kind, and making sure that they're getting paid back in cash over time," Schaffer says.
The borrower, however, also has to keep in mind that providers of these more complex strategies will demand higher rates, reflecting the bespoke nature of these transactions and the risk.
As an example, at Charles Schwab, the annual variable percentage rate on a $3 million loan via a standard pledged-asset line backed by public shares is about 6%. By contrast, a similar loan taken out against a private company could carry a rate of at least 8.5% or more, plus an equity kicker.
But for company founders whose shares are illiquid and hard to value, there's little choice. "It isn't a cost comparison between two available options," Schaffer says. "It's often a structured lender or nothing."
Bank of America, similar to other traditional banks, doesn't lend to individuals against their privately held companies. Instead, the bank would consider whether it could make a loan to the business itself.
"If all their wealth is tied up in an income-producing business, generally speaking, the loan would be made to the business," Niemeyer says. "If they've got wealth outside the business and we can use that as support to making them a loan that they then use to make an investment in their company, that's certainly something that we can do."
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