For someone with billions of dollars worth in stocks and investments, how hard would it be to liquidate these assets, how much of it would they be able to convert to cash, and could there be any negative outcomes as a result?
In: Economics
Depends what it is. If they are US treasury notes/bonds it would be no problem at all. Over half a trillion dollars in US treasury notes/bonds are traded every day.
If it’s stock in a company what would happen (I’ve participated in these transactions) is the broker would look for a block placement, like an insurance company or endowment, who is willing to buy a big chunk for a small discount (say 10%). This keeps the price from collapsing (which would destroy the value of the investment), gives the seller cash and gives the buyer an immediate built-in return.
If it’s a secret stockpile of Action Comics #1, well my friend you aren’t getting your billions.
Are you referring to Richard Branson? hahaha
It depends on the speed at which you do it. Liquidate, implies speed.
The price of stocks is determined not by the average perception of its price but by the last transaction. If one decides to sell a significant portion of one individual stock, this will overwhelm the sell side of the market and the price will drop.
If the portfolio is very diversified it could less of an impact but you’re talking billions so it’s not likely to go unnoticed.
So one could liquidate his portfolio but is very likely to get just a fraction of its paper value on day zero. How much that fraction is depends a lot on how the liquidation happens. The more time the better, the most diversified the better. And luck.
Used to work in finance as a low-level sales/broker. But to clarify, the laws and regulations I worked in may not be different from the US, so use my answer for reference only.
tl;dr Not very hard if your credit line is good enough.
No, major investors do not just buy / sell massive amounts of stocks on the market when they want to. Instead, they enter into contracts called “Accumulators” / “Decumulators”. These are contracts that agrees to sell X amount of stocks at a fixed price (usually slightly lower/higher than market price) over 12 months.
For example, I want to sell 12 million shares of AmaZen Company at the market rate at $100. However, AmaZen is not a super-duper active stock, and only 4 million shares get traded daily. If I try to dump 12 million shares, it will take 3 days to sell it all, and the stock price is definitely going to be well below $100 by the time I’m done, and I’ll be lucky to make even 1 billion out of it.
Instead, I go to a bank and ask for a “Decumulator” contract. The bank will negotiate a price for me and I can sell 12 million shares of AmaZen at $97. I sign the contract and get $1.164billion upfront, and every month, I have to give the bank 1 million shares of AmaZen.
The decumulator has a few pros and cons:
1. It protects my bottom line. Having to sell all my shares at once will no doubt plummet the stock price *in the future at the end of my sales* to well below market price. $97 is a small loss, but I stand to lose more if I do it on the market.
2. It protects the market price. The stocks I liquidate does not get registered to the daily queue, so the price does not plummet. If I own more than 12 million shares of AmaZen, it means the share price(and asset value) of the rest of the shares I own will not be negatively affected by my sales.!
3. I get the money upfront, but I get to hold on to my shares over the 12 month period. It means any decision making, shareholder meeting, dividend, etc. I still have the privilege of the rights the shares grant me until I slowly give them away.
4. Risk exposure to hedging. If I believe the stock price will plummet over the next year, I can go into a Decumulator contract, get a billion dollars upfront, and every month I buy it cheaper and cheaper on the market, and sell it to the bank for the fixed cost and gain a hefty profit from it with nothing to start with.
5. I don’t have to sign the contract during market hours. I have much more freedom in terms of time of when to execute the trade.
The cons:
1. You need to be rich.
2. You need to be very rich.
3. You need the bank to grant you enough credit to enter into such contract, i.e. you need to be very rich.
4. I pay the money upfront. For the opposite contract of an Accumulator.
5. Risk exposure to hedging. If I hedge selling 12 million shares to the bank without owning any shares in a vaccum, I’ll be mighty fucked if the share price went up during the 12 month period. It means I’ll have to buy the more expensive price and hand it right over to the bank, losing a lot of money per share.
*Edit: italics marks the amendments*
Most rich people with assets in investments take out loans against their assets at a low interest rate.
I.e. I have $1B in assets and need $100M to buy an island, take out a loan for $100M with stocks as collateral.
Meanwhile, if the market is increasing at say 5%, you take out the loan at 3%, you are still netting 2%. Even in a worst case scenario where these two number are the same is a wash.
This may get buried since this post has been up for half a day, but I’ll give you a real world example I worked on.
The company I was at I was working a deal with them to do business together, as part of the deal we were receiving equity that would be about 15% of the company. The company was publicly traded.
We didn’t want to hold the equity, we were just going to sell it off on the market. However the stock didn’t trade that much, and if we just tried to dump the shares quick, the stock price would plummet. Even a substantial increase in daily trades was going to have a pretty negative impact per our models.
The plan became essentially we would have to slowly bleed our shares out over the course of about a year to have any realistic expectation of selling them and doing so without causing the price to get destroyed with millions of open sales orders on a stock that doesn’t trade much.
very easily.
you either unload all and tank the market
or you either sell periodically to not tank the market.
A step down from the super billionaires who own stocks of the company’s they own (i.e. bezos, buffet, gatesy, cuckerburg) are millionaires and UHNWIs.
They generally don’t own the stocks outright but through hedge funds or private equity funds. They have their money managed by professionals/researchers. More of the ultra rich have their money managed in this way, or atleast have part of their money with these funds as part of a diversification.
These funds have contract structures that only allow their clients to withdraw a certain amount at a time.
For example, if the fund manages 10B in assets, they might only allow a client to cash out the lesser of 10% or 10M per quarter. This ensures that when disaster strikes or markets collapse, they can’t just take all their money, screwing the hedge fund by forcing them to sell products that hadn’t reached maturity or get out of deals that they has spent millions developing, like stadiums or skyscrapers.
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