Capital - and Asset-based Financing
only two ways of raising Money : Debt and Equity. Right? Wrong.
There are only two forms of tenure: Freehold and Leasehold, Right?
Out of the
primeval Capital swamp there is emerging a new animal - the "Capital
Partnership" - based upon a curious hybrid of a commercial
company and a partnership, known as a Limited Liability Partnership
(LLP). The LLP is already beginning to make its mark in the commercial
world - examples include a recent initiative by the AIM listed
company Numerica and a new property portfolio investment scheme
by the well known businessman Tom Hunter - but has implications
for financing enterprises of all types, in particular those in
the field of public investment.
early 1990s, professional partnerships such as Arthur Andersen
became concerned that their individual partners' acceptance of
liability for their firm's actions put them individually at risk
of bankruptcy. Long before Enron, the City persuaded Jersey's
Parliament to draw up an Act creating the LLP -and the British
Government, fearing an exodus of professional partnerships to
Jersey, passed the Limited Liability Partnership Act in April
2001. For the first time anywhere in the world, it became possible
to form a corporate body -an entity with a legal existence independent
of its individual members - which had both collective limited
liability and the mutual, co-operative characteristics of partnerships.
now over 7,000 LLPs around the country. In part, the growth is
because they're so easy to create: two designated members must
complete an application downloaded from the Companies House website,
and pay £95. There is no Memorandum of Incorporation, no
Articles of Association and no Shareholder Agreement. In fact
there isn't even any requirement for any written agreement at
all - although only the most trusting dispense with them - since
simple "default" provisions based upon partnership law
The LLP has
two key attributes: firstly it is an "Open" Corporate
body (NOT legally a partnership as one would expect from the name)
in which any stakeholder, whether or not they are Investors may
become Members, thereby aligning their interestswith other members.
Secondly, the LLP makes it possible for those who invest Money
in an enterprise or in Capital assets such as Land to be members
of a "Capital Partnership" alongside the users of the
Capital or Capital Asset thereby replacing the usual adversarial
contracts between those who finance an enterprise or asset and
those who utilise it.
all these stakeholders are brought inside the partnership, so
their interests are aligned; it's quite a change from traditional
structures, which pit stakeholders in competition against each
other. The LLP delivers an ideal combination of the collective
and the individual; it's flexible and easy to establish while
its partnership characteristics are robust enough to make it attractive
to the private sector.
how an LLP operates, it's best to consider a theoretical example.
Let's say that Bloggside Regeneration holds a brownfield site,
while Bloggshire Islamic Community Arts (BICA) needs a workshop
in which to train local people to produce patterned Islamic tiles
for the growing UK market. BICA becomes the first 'occupier member'
and Bloggside Regeneration becomes the 'capital member' of the
new Bloggside Community LLP, with BICA paying Bloggside Regeneration
a peppercorn land rent.
A new workshop,
costing £100,000, is acquired using money from a Community
Development Finance Institution (CDFI), which becomes the LLP's
second capital member. The CDFI then receives two per cent of
BICAs total revenue: as a 'capital rental' paid for the
use of finance, equivalent to those paid for the occupation of
land, this payment does not count as interest, making an LLP an
acceptable financial structure for strict Muslims. Hence, rather
than a contract whereby a debtor organisation pays interest to
a creditor, or an investor buys part-ownership of a company in
the form of shares, both financier and beneficiary join a partnership
whose revenues are then shared. In time, BICA may acquire ownership
of the capital asset by making payments over and above the required
capital rental. The rental payments will then decline with the
This is not
merely a concept: the Hilton Group entered into a revenue sharing
"Capital Partnership" in late 2002 in respect of a portfolio
of hotels and raised £350m for a period of 27 years on exactly
this basis. It will be seen that a hugely potent application for
LLPs is their ability to draw in investment for public projects,
offering an alternative to private finance initiatives. By drawing
the users and stakeholders of a service into its ownership, LLPs
could build community links and ensure that the aims of a service's
financiers are aligned with those of its providers and users.
example best demonstrates how an LLP could do the work of a PFI:
drawing private cash into a public project, with the promise of
repayment from the public purse over many years. Let's say that
Bloggshire Local Education Authority (LEA) funds ten schools held
by five different boroughs, which require a £20 million
refurbishment. The boroughs transfer the schools' land to an LLP
named Bloggshire Land Partnership (BLP) and the school buildings
to another named Bloggshire Schools Partnership (BSP), becoming
capital members of both. BLP then becomes a capital member of
the new Bloggshire Education LLP, while BSP becomes an occupier
member and agrees to pay BLP a peppercorn rent for use of the
land. BSP, which will carry out the refurbishment, then negotiates
an agreement by which Bloggshire LEA pays BSP £800,000 annually,
linked to inflation. BSP is divided into ten million 'partnership
interests' -or shares -each valued at two pounds, and these are
offered for sale to Bloggshire residents. Buyers become capital
members: priority buying rights could be given to parents, government
"baby bond" money could be used to purchase interests
on behalf of pupils, and institutions such as the teachers' and
Bloggshire LEA employees' superannuation schemes could also invest.
It is open to Bloggshire LEA to repay the Capital simply by buying
back "shares" in the market õ which it would do over
the expected life of the building: equally, any investor will
find it very straightforward to sell to another interested in
a secure "index-linked" investment of this type.The
rate of 'rent' paid for use of the capital could be set perhaps
4 per cent above inflation. This would be unaffected by Bank of
England interest rate decisions; it's not lending, but taking
a proportionate share of gross revenues. With risk spread among
the partners, it would be less risky than shares, more profitable
than gilts, and more accountable and transparent.
consequence of this model is of a new form of tenure õ ie a right
to occupy the property INDEFINITELY for as long as one pays the
"rental". Once within a "Community Land Partnership"
there is no need ever to sell the land again although the "owner"/
financier may change, and the occupier/capital user may change.
it then: the "Public Sector Borrowing Requirement" is
is necessary is to find investors prepared to share in the revenues
generated by productive assets such as schools, hospitals and
railways on the basis that they receive an agreed inflation linked
rental in respect of the Capital used.
As John A
Wheeler said: "Behind it all is surely an idea so simple,
so beautiful, that when we grasp it õ - in a decade, a century
or a millennium" - we will all say to each other, how could
it have been otherwise? How could we have been so stupid for so
That is the
measure of the "Open" form of Capital currently emerging
- simply a proportional "share" of revenues for a period