{"id":1460,"date":"2021-07-23T14:42:17","date_gmt":"2021-07-23T18:42:17","guid":{"rendered":"https:\/\/www.nepc.com\/private-wealth\/?post_type=newsroom&p=1460"},"modified":"2022-01-26T15:02:05","modified_gmt":"2022-01-26T20:02:05","slug":"bloomberg-banks-are-giving-the-ultra-rich-cheap-loans","status":"publish","type":"newsroom","link":"https:\/\/www.nepc.com\/private-wealth\/newsroom\/bloomberg-banks-are-giving-the-ultra-rich-cheap-loans\/","title":{"rendered":"Bloomberg: Banks Are Giving the Ultra-Rich Cheap Loans to Fund Their Lifestyle"},"content":{"rendered":"
[vc_row][vc_column width=”1\/1″][vc_column_text uncode_shortcode_id=”911659″]Dan Gimbel was featured in a recent Bloomberg article. View the article on Bloomberg’s site here<\/a>.<\/p>\n

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Billionaire hedge fund manager\u00a0Alan Howard<\/a>\u00a0paid $59 million for a Manhattan townhouse in March. Just two months later he obtained a $30 million mortgage from Citigroup Inc.<\/p>\n

Denis Sverdlov<\/a>, worth $6.1 billion thanks to his shares in electric-vehicle maker Arrival, recently\u00a0pledged<\/a>\u00a0part of that stake for a line of credit from the same bank. For\u00a0Edgar<\/a>\u00a0and Clarissa Bronfman the loan\u00a0collateral<\/a>\u00a0is paintings by Damien Hirst and Diego Rivera, among others. Philippe Laffont, meanwhile, pledged stakes in a dozen funds at his Coatue Management for a\u00a0credit line<\/a>\u00a0at JPMorgan Chase & Co.<\/p>\n

In the realm of personal finance, debt is largely viewed as a necessary evil, one that should be kept to a minimum. But with interest rates at record lows and many assets appreciating in value, it\u2019s one of the most important pieces of the billionaire toolkit — and one of the hottest parts of private banking.<\/p>\n

Thanks to the Bronfmans, Howards and Sverdlovs of the world, the biggest U.S. investment banks reported a sizable jump in the value of loans they\u2019ve extended to their richest clients, driven mainly by demand for asset-backed debt.<\/p>\n

Morgan Stanley\u2019s tailored and securities-based lending portfolio approached $76 billion last quarter, a 43% increase from a year earlier.\u00a0Bank of America Corp.<\/a>\u00a0reported a $67 billion balance of such loans, up more than 20% year-over-year, while loans at Citigroup\u2019s private bank — including but not limited to securities-backed loans — rose 17%. Appetite for such credit was the primary driver of the 21% bump in average loans at JPMorgan\u2019s asset- and wealth-management division. And at UBS Group AG, U.S. securities-based lending rose by $4 billion.<\/p>\n

Borrowing Binge<\/strong><\/h4>\n

\u201cIt\u2019s a real business winner for the banks,\u201d said Robert Weeber, chief executive officer of wealth-management firm Tiedemann Constantia, adding his clients have recently been offered the opportunity to borrow against real estate, security portfolios and even single-stock holdings.<\/p>\n

Spokespeople for Howard, Arrival and Laffont declined to comment, while the Bronfmans didn\u2019t respond to a request for comment.<\/p>\n

Rock-bottom interest rates have fueled the biggest borrowing binge on record and even billionaires with enough cash to fill a swimming pool are loathe to sit it out.<\/p>\n

And for good reason. With assets both public and private at historically lofty valuations, shareholders are hesitant to cash out and miss higher heights. Appian Corp. co-founder\u00a0Matthew Calkins<\/a>\u00a0has pledged a\u00a0chunk<\/a>\u00a0of his roughly $3.5 billion stake in the software company — whose shares have risen about 145% in the past year — for a loan.<\/p>\n

\u201cFamilies with wealth of $100 million or more can borrow at less than 1%,\u201d said Dan Gimbel, principal at NEPC Private Wealth. \u201cFor their lifestyle, there may be things they want to purchase — a car or a boat or even a small business — and they may turn to that line of credit for those types of things rather than take money from the portfolio as they want that to be fully invested.\u201d<\/p>\n

Yachts<\/a>\u00a0and private jets have been especially popular buys in the past year, according to wealth managers, one of whom described it as borrowing to buy social distance.<\/p>\n

\u2018Significant Benefit\u2019<\/strong><\/h4>\n

Loans also allow the ultra-wealthy to avoid the hit of capital gains taxes at a time when valuations are high and rates are poised to increase, perhaps even almost\u00a0double<\/a>. Postponing tax is a \u201csignificant benefit\u201d for portfolios concentrated and diversified alike, according to Michael Farrell, managing director for SEI Private Wealth Management.<\/p>\n

Critics say such loans are just one more wedge in America\u2019s ever-widening wealth gap. \u201cAsset-backed loans are one of the principal tools that the ultra-wealthy are using to game their tax obligations down to zero,\u201d said Chuck Collins, director of the Program on Inequality and the Common Good at the Institute for Policy Studies.<\/p>\n

While using public equities as collateral is the most common tactic for banks loaning to the merely affluent, clients further up the wealth scale usually have a bevy of possessions they can feasibly pledge against, such as mansions, planes and even more esoteric collectibles, like watches and classic cars.<\/p>\n

One big advantage for the wealthy borrowing now is the possibility that rates will ultimately rise and they can lock in low borrowing costs for decades. Some private banks offer mortgages on homes for as long as 20 years with fixed interest rates as low as 1% for the period.<\/p>\n

The wealthy can also hedge against higher borrowing costs for a fraction of their pledged assets\u2019 value, according to Ali Jamal, the founder of multifamily office Azura.<\/p>\n

\u201cWith ultra-high-net worth clients, you\u2019re often thinking about the next generation,\u201d said Jamal, a former\u00a0Julius Baer Group Ltd.<\/a>\u00a0managing director. \u201cIf you have a son or a daughter and you know they want to live one day in Milan, St. Moritz or Paris, you can now secure a future home for them and the bank is fixing your interest rate for as long as two decades.\u201d<\/p>\n

Risks Involved<\/strong><\/h4>\n