When discussing financial transactions and companies, oftentimes the word “leverage” comes up. Being leveraged can be either a good thing or a bad thing, however, depending on the topic at hand. So what exactly is leverage in the world of finance and how cautious should one be when leverage is used in investing?
“While leverage can be an excellent strategy for turning a profit, there is nevertheless a great deal of risk”, says Richard Cayne of Meyer International in Bangkok, Thailand. “While it may yield broader opportunities, your ultimate success in an investment depends on many other features”.
Leverage is basically debt
In a nutshell, leverage is actually a form of debt, but not just any type of debt. The term leverage generally means a debt encountered for the expansion of investments, the financing of assets or business expansion.
The term “highly leveraged” comes into play when this form of debt surpasses its equity. While it could be argued that this comes down to the advantage of semantics (investors tend to lose confidence when the word debt starts getting thrown around a potential opportunity), there are also positive elements involved in “leverage” that don’t apply to the word “debt”.
Let’s imagine a lever. A real, physical lever. It assists in the moving or lifting of objects that would be considerably more difficult to manipulate manually. By this same logic, we can begin to imagine what financial leverage consists of. It gives people or entities the ability to pursue transactions and investments that they would otherwise be unable to afford.
Leverage can pay huge or backfire spectacularly
The losses a company incurs can be greater than they can afford if a transaction fails as a result of relying too heavily on the borrowed capital used to fund the transaction in question. A fine example of this would be LBO’s, otherwise known as leveraged buyouts. When a buyer chooses to pursue an LBO, they generally borrow at least 90% of the purchasing price. That’s an incredibly high debt ratio, so with LBO’s comes a much greater level of risk.
Take the company Silver Lake, for example. They ultimately raised 85% in leverage when they decided to acquire Dell, the well-known computer company. However, the risk paid off after restructuring and cuts. What initially started as a $2.4 billion dollar investment in the year 2013 eventually grew into $6 billion dollars by 2019.
But on the flip side of this, you could also look at the energy company TXU, which was purchased by a cluster of private equity firms for a whopping $45 billion dollars. After seven years and a failure to yield returns, the company finally went bankrupt.
Pay attention to leverage
Being too highly leveraged should serve as a cautionary tale in the boom and bust world of LBO’s. Miscalculations and losses can be incurred by even the shrewdest of dealmakers.
The risks involved in leverage need to be understood when it comes to your investments and finances, which is precisely why it’s important to reach out to a trusted financial advisor like Richard Cayne of Meyer International if you’re considering leveraging as an option.
Richard Meyer Cayne
Richard Meyer Cayne of Asia Wealth Group Holdings, the Meyer Group, Meyer Asset Management and Meyer International Ltd has been involved in wealth management planning for decades. Originally born in Montreal Quebec, Canada, he later relocated to Tokyo, Japan for over 15 years and now resides in Bangkok, Thailand.
While he runs the Meyer Group and serves as the high credibility CEO of Asia Wealth Group Holdings Ltd, a London, UK Stock Exchange-listed Financial Holdings Company, as well as the Managing Director of the Meyer Group of Companies www.meyerjapan.com. and has additionally been the managing director of multiple organizations that specialize in helping high net worth individuals with succession planning .
Having worked with clients all over the globe with everything from portfolios to bonds to mutual funds to offshore investing to investing in retirement for your golden years, Richard Cayne of Meyer International can help you invest the right way and protect your cash.
Richard has been a financial advisor involved in wealth management planning solutions and asset management in Asia for over 25 years and while living in Tokyo, Japan, he assisted many high net-worth Japanese families create innovative international tax and wealth management planning solutions. The financial holding public company of which he is CEO can be seen at Asia Wealth Group Holdings Ltd or the stock exchange link:
https://www.aquis.eu/aquis- stock exchange/member?securityidaqse=AWLP Asia Wealth Group Holdings Ltd – Richard Cayne Thailand. Meyer Asset Management Ltd has been in the wealth management space since March 2000 and uses fundamental analysis along with modern portfolio theory.His image worldwide as a professional advisor has been sterling and he maintains a firm command and understanding of all things finance-related.