I think I educated today. Let me share the comments and my responses. It may help some young people going into finance. I write as an ex-banker (a really good one) and founder/chairman of a US-based investment banking institution which invests $$millions across the globe yearly.
QUESTION on if billionaires care when their assets drop in value: “I sometimes wonder if billionaires care about these ratings. Once you make a few billion dollars, what is it that one billionaire can do that you can’t? “
My RESPONSE: Does ranking matter? I respond YES, the higher you’re ranked, the easier banks see you as a good risk for loans. Consider this brief which I will write if I am asked to raise money for Dangote:
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“This client is Africa’s richest man and the most dominant businessman in sub-Saharan Africa. For more than 20 years, Forbes, Bloomberg, Fortune, etc have recognized the excellence he has demonstrated in his enterprises. He plans to venture into Sun-Direct Electricity, tapping the inner layers of the sun to power every part of Africa. This has never been done before and it offers a massive opportunity to fix the energy poverty problem in Africa.
Our client is looking for $50billion. Four banks have already committed $35billion and we’re working to close the balance of $15billion. As Africa’s richest man with a durable position on all the major wealth rankings, we model that his risk is well mitigated.
More so, he owns 85% of Dangote Cement and a chunk of other entities within Dangote Group which pay an excess of $1 billion in dividend yearly, meaning that his capacity to service this debt is well contained. Kindly review the attached investment brief and let me read you in three days.
Ndubuisi, Tekedia Capital”
1/2 (I will share a sample of an investment brief later. We have one in Tekedia Startup Masterclass as a sample though) Source
2/2 . QUESTION: “…There are probably very rich people that only farm. I am assuming banks won’t lend them money to launch a satcom business.”
MY RESPONSE: “There are probably very rich people that only farm. I am assuming banks won’t lend them money to launch a satcom business.” If you are rich and need money from a bank, most times, they do not care what you plan to do with that money provided they are sure you will pay back. Due diligence happens extensively for the poor folks.
What do they look to be sure you can pay back? Easy. If you run a farm business (Farm Ltd) and generate $500m in profit and the business is valued at $3B, and want to go into satcom business and need $500m, you will get your funds.
Why? I will ask for 50% of the farm business equity as a collateral and power of attorney for 50-80% all dividends to be paid for the debts. Magically, there is no risk to giving you $500 million since I have secured the bottom. If the shares of Farm Ltd begin to drop, by the time it drops from $3b to $1b, I will sell to get my money back.
Very rich people do not need to write head-cracking business plans as WE THE PEOPLE do; you actually beg them to borrow because they have limited risks since there are assets which mitigate the risk.
Comment on Feed
Comment 1: But individual person is not the same as a corporate person that is assessed for borrowing purposes. Billionaires use trusts and holding companies to hold shares of companies. Dangote’s resume may get huge loans but in reality it is his companies claims against society that the banks will fund. It will be easier to list the entity that is borrowing.
My Response: Of course, in context, it is Dangote company that borrows. Not sure Dangote as a person needs to borrow money. Borrow for what? Milk or indomie. We’re discussing his company. Yet, if you own 85% of a company, banks will see you as being the company.
Comment 2: I suppose this speaks more to credible counter parties and the reliability of their cash flows backed by assets accumulated overtime from retained earnings. The challenge is that earnings expectations are usually missed and could lead to downgrade of borrowing capacity.
My Response: VERY RICH PEOPLE, not just rich people, meet those yardsticks of “reliability of their cash flows backed by assets accumulated overtime from retained earnings”. The portfolio is designed in such a way that if one side struggles, what is causing the struggles will help the other side.
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