The Benefits of the Collateral Transfer Provider

When a private equity firm or other types of funding institutions make an investment into companies on an international platform, several laws come into play. If an equity company made an investment (or indeed a loan) into a company outside of their own jurisdiction (i.e. they physically lent funds in a different country), they may need Government permissions, licenses and other forms of financial authority registrations in that jurisdiction in order to make such investment or lending commitment.

The Benefits of the Collateral Transfer Provider
What are the benefits of the Provider investing in this way?

When a private equity firm or other types of funding institutions make an investment into companies on an international platform, several laws come into play. If an equity company made an investment (or indeed a loan) into a company outside of their own jurisdiction (i.e. they physically lent funds in a different country), they may need Government permissions, licenses and other forms of financial authority registrations in that jurisdiction in order to make such investment or lending commitment.

In addition and in the event of a default, they would be expected to enter that offshore jurisdiction to recover their losses. Several different laws may therefore apply. If the equity firm did not have representation in that country or had no specific location knowledge, they would find it difficult and therefore of higher risk.

In order to keep things simple, the equity firm will set-aside the funds in their own jurisdiction and retain them at their own bank. Requesting their bank to issue a collateral medium often in the form of a Letter of Guarantee (Bank Guarantee) to the borrower or recipient, using their funds as the underlying security or asset. Therefore, they use the Banks international network whereby the bank will have representation in that jurisdiction (a correspondent bank for example).

The receiving bank of the Letter of Guarantee can then extend the borrower or recipient the credit or loans required under the laws of their own jurisdiction.
By employing these techniques, the equity firm would mitigate risk as the recipient bank would also take responsibility for the recovery of losses. This means that the equity firm would not need to enter that jurisdiction to recover losses. This makes the financial model of Collateral Transfer very appealing to equity firms and lenders alike.