Financial leverage involves using borrowed funds to increase the potential return on an investment.
In the episode, it is explained how a company can take a pool of loans, worth $100 million, and use it as collateral to borrow an additional $50 million from a bank.
This leverage allows the company to amplify their returns, as they are now able to invest $150 million instead of just $100 million. However, this also means that they are now more exposed to risk.
When one of the loans in the pool goes bad, the company is at risk of losing not only the initial investment but also the borrowed funds.
In the example given, if the bank calls in their $50 million loan because of a default on one of the loans in the pool, the company is suddenly in a precarious position.
They may be forced to sell off assets quickly or take other drastic measures to repay the loan, putting their financial stability at risk.
In this episode of Tech Equity and Money Talk, Michael Episcope from Origin Investments discusses the rise of credit and debt funds in the private equity market.
He explains that these funds invest in a part of the capital structure that's more protected than equity, aiming to provide stable income through yield.
Listeners are advised to be cautious of inexperienced managers rushing to invest due to the pressure of closed-end funds.
Follow for more!
-
Listen to the full episode here:
-
YouTube:
https://youtu.be/0mNWbvETv5U
-
Audio Podcast:
https://www.techequityandmoneytalk.com/debt-and-credit-funds
