More Than 50% of Wealthy People’s Net Worth is in Illiquid assets. What Is Monetization?
Illiquid Assets Definition
An asset that is difficult to sell because of its expense, lack of interested buyers, or some other reason. Examples of illiquid assets include real estate, stocks with low trading volume, or collectibles. Illiquid assets still have value and, in many cases, very high value, but are simply difficult to sell.
A survey of 1997 IRS filings found that 56.3% of assets held by filers with a net worth of between $600,000 and $1 million was illiquid. Of the $14.5 trillion in assets held last year by U.S. households that had an annual income of at least $100,000 and/or a net worth of at least $500,000, 49% was held in liquid investments. The rest, or $7.4 trillion, was held in illiquid assets, according to Spectrem Group, a Chicago research company.
Loosely defined as any asset that cannot easily be converted to cash, illiquid assets take many forms. Art, real estate, stock options and stakes in privately held businesses or limited partnerships are all considered illiquid. So is money held in 401(k)s and other retirement plans.
Role for advisers?
Investment advisers who help clients manage and monetize their illiquid assets are also likely to attract liquid assets. That’s because clients who come to an adviser with illiquid assets usually keep those assets with the adviser after they are liquefied. But that is also because the advisers are likely to win that client’s trust.
Why, then, do many advisers overlook illiquid assets? The answer is money. Unlike assets held in a brokerage account, a client’s Renoir or 401(k) assets generate zilch in fees or commissions for advisers.
Managing illiquid assets can also be a tremendous headache: downright complicated and confusing.
“Because financial advisers are not trained in the world of art, they tend to stay away from it,” he says. “They will ask the question, but they tend not to be diligent about finding out the true value of their client’s art holding.”
Too bad – they may be missing out. Experts say the market for illiquid wealth represents an untapped reserve of assets. Advisers who learn how to identify and manage such assets stand to make a killing.
A good portion of the illiquid wealth was created by the vastly increased use of stock options as compensation over the past decade. Today, about 14.1 million Americans hold stock options, up from 1 million a decade ago.
The value of those options is estimated to be about $522 billion, according to OptionWeath Inc., a Rockville, Md., maker of software that helps advisers manage stock options.
The value of options that were authorized, as a percentage of total U.S. household holdings of individual stocks, had risen to 17.4% by 1997, from 6.8% in 1989, according to a study by Sanford Bernstein Research. Translation: About one in every six dollars of household stock holdings was in the form of stock options in 1997.
So how do advisers go about getting their hands on illiquid assets? Perseverance. Identifying clients with illiquid assets isn’t easy. It requires that advisers dig deeply into a potential clients’ holdings and ask questions beyond the usual, “How much money is in your brokerage account?”
It also requires that they rethink their definition of the ideal client.
Monetization Definition – some assets don’t lend themselves to being “Monetized”
Real Estate is easy. Second Mortgages etc., can be arranged.
Precious metals are also not so difficult, once they are written into the register of a bonded warehouse, or linked to a securities account where a margin loan can be given.
The same goes for stock and bond portfolios.
But what about the more exotic forms of “collateral” that businesses often find themselves being offered?
I’m talking about things like:
- Shares of private companies
- Bank Instruments (Bank Guarantees, Bills of Exchange, Standby Letters of Credit)
- Insurance Policies
- Precious Gems
- In the ground assets like gold, copper, or iron ore mineral reserves
Here’s where it gets interesting!
Most professional money managers and investment advisers want to earn their fees without expending much effort or IP. My team and I have always taken a contrarian approach. Even a monkey can find and pick low hanging fruit. We’ve made a name out of taking on the “impossible” cases and turning them into amazing case studies.
Have you ever heard of the saying – “One Man’s Junk Is Another Man’s Treasure”?
It basically means for every seller there is a buyer, and often at a price that is above the seller’s expectations. All illiquid assets have a book or account value and a market value. Nine times out of ten, the owners of illiquid assets need to access cash for an unforeseen life event or simply because they have stumbled across or been introduced to an amazing business or market investment opportunity for which they need cash yesterday. If you need to sell an illiquid asset quickly, that usually ends up in tears. If you do find a buyer, one they realise that you as the seller are under time pressure, they shave even more off the bid they make, in the knowledge that you won’t find too many takers.
Using technology to find hidden buyers, next door or on the other side of the globe.
We take a different approach. Over the last 25 years we’ve built up an expansive network of tens of thousands of individuals and companies across the world. It allows us to use individual campaigns that are created and run for each specific asset owner that retains our services. When we don’t feel we have a wide or deep enough network, we use purpose built landing pages, and keywords, in other words SEO, to reach people that are conducting internet searches that show they might be interested in the kind of assets that our client wants to sell or monetize.
The real added value we bring however, is not in identifying one or more interested parties, it is being able to clearly see whether a complete sale, a sale and lease back, a sale and repurchase, a swap or a loan might be the best structure to deploy in each particular case.
The Solution – Asset Monetization Advisory
We offer a comprehensive solution to everyone who is interested in monetising their illiquid asset/s. It involves:
An audit of the asset in question – e.g. every fact that is needed to make an assessment as to whether we believe we have an potential party that might be interested at the right price
A report with recommendations about potential strategies that we could deploy once an interested party is identified
Where required – introductions to potential parties within our existing network, implementation of a local, regional, national or global search for potential parties, identification of the most efficient structure to be created for the transaction, taking the lead in negotiations etc.
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