Rich people have always used their equity portfolios to tap into cheap loans and avoid large tax bills. It has also been used in complicated corporate finance deals, so portfolio-based lending is nothing new, but the pandemic's market rally and low interest rates turbocharged borrowing among the world’s wealthy over the past few years. But such credit facilities are no longer just a privilege of the rich and famous. EasyEquities, the country’s largest retail investing platform, recently launched securities-based lending to select clients ahead of a broader roll-out.
It is limiting this to “portfolios which are diverse and liquid”, said Almero Oosthuizen, head of product at EasyEquities. This means “users who have over the years exhibited good investment behaviours” – including regular deposits and diversification – “are the ones we have invited”. The qualifying criteria for these margin loans are likely to change over time.
The new product, named EasyCredit, allows investors to secure loans of up to R300 000 against qualifying investments. The interest on these loans is required to be paid monthly, and the entire amount is repayable at the end of the 12-month term. On its inaugural day, EasyEquities said it received more than 100 expressions of interest from users eligible for loans exceeding R5 million.
The platform aims to analyse conversion rates and user adoption by the end of the month, with findings to be shared during Purple Group’s results presentation in November.
Purple is the parent company and majority shareholder of EasyEquities, holding around 70% of the stock. Sanlam is another significant shareholder.
EasyEquities was also the first adopter of fractional share investing in South Africa and is still the only provider of the option in the country. It allows you to invest in a portion of a share, while still getting the benefits of being a shareholder. Even though a share's price might be, say R1 000, they enable a first-timer to invest in and own just R100 of that share, for example.
With this launch, the platform will effectively be democratising securities-based or equity-backed lending, which until now has only been available through private banking-type services from the likes of Investec, FNB/RMB, Standard Bank, Absa and Nedbank.
Moneyweb, however, reported that this pool of potential customers is limited, and that usage of this type of product is in the tens of thousands of South Africans. At the end of February, EasyEquities had over 830 000 active clients, and it is believed this number has surpassed 1 million since then.
Oosthuizen said that over nine years, EasyEquities has seen that over 50% of all withdrawals are to fund so-called “emergency” events – and that the funds typically return to the platform within 12 months. Often, these clients had to sell in market conditions that weren’t ideal and alternative forms of credit were either inaccessible or cumbersome.
The group says its research showed that the appetite for securities-based lending, broadly, is “extremely high”. This was the core motivation for launching the product.
So the company is trying hard to make our financial markets more inclusive. Securities-based lending specifically could provide ready access to capital that can be used for almost any purpose, from buying property to investing in a business. Other benefits for borrowers include lower interest rates, greater repayment flexibility and the fact that they don’t have to sell their listed securities. The only restrictions to this kind of lending are other securities-based transactions like buying shares.
FNB business, which offers the facility to commercial enterprises, said this form of lending provided flexibility and geared potential entrepreneurs and sole proprietors towards creating or sustaining wealth without disrupting their personal long-term investment goals. Their loans are customised around repayment, amount, time frame and collateral structures.
If you don’t know by now that the key pillar to any wealth creation or preservation strategy is diversification, then you probably live under a rock, but for the rest of us living above ground, securities-based lending could further increase the value of our shares portfolio, which is unrelated to a main line of business, or large asset purchases. It also allows the power of gearing but also diversifies your returns away from your main line of income. Another benefit is the gearing of securities yet to be acquired with the loan proceeds for both local and offshore investments.
If utilised correctly the power of gearing provides higher returns on any share portfolio than if you were to not use the power of gearing. Like any share or debt facility, it does not come without risk, but Oosthuizen said EasyEquities conducts an affordability test (as part of it being a registered credit provider). Also certain securities qualify, which only includes the top 100 companies on the JSE, as well as a selected few exchange-traded funds. On approval, investors pledge a portion of their portfolio as collateral, meaning EasyCredit loans are therefore secured. Unlike the big banks, at present, the product is not available to companies or registered legal entities.