WeWork impresario Adam Neumann, Chinese latte mogul Lu Zhengyao and, now, Markus Braun, the fallen star of German fintech -- all have exposed the perils of one of the biggest money maneuvers in the C-suite: borrowing money against stock in your own company.
Braun was forced to sell much of his stake in Wirecard AG to meet margin calls on a 150 million-euro ($170 million) loan he’d secured against about half of his ownership. When the company’s share price collapsed as an accounting scandal came to light last month, he ended up liquidating two-thirds of his holdings over two days to meet margin calls, pushing the stock even lower.
Neumann’s $500 million loan -- secured by WeWork shares -- proved similarly problematic for investor SoftBank Group Corp., which extended credit to Neumann as part of a 2019 rescue deal that was subsequently withdrawn. A soured margin loan to Lu, the founder of Luckin Coffee Inc., forced lenders to raise about $210 million selling Luckin shares that he had pledged as collateral. They still face a $300 million shortfall.
They are, of course, extreme examples. Few companies and executives will face scandals and struggles of such magnitude, and there’s plenty of safeguards to reduce the risk of margin calls. Loans are typically a fraction of the value of the pledge.
But while such lending is now part of the mainstream -- prominent executives and founders including Tesla Inc.’s Elon Musk, Masa Son of SoftBank and Oracle Corp.’s Larry Ellison have been relying on it -- the recent high-profile flame-outs highlight the risks that can come with it if the market turns.
What’s at stake is sobering: The combined value of the five largest share pledges disclosed in filings tracked by the Bloomberg Billionaires Index is about $60 billion.
“It certainly raises eyebrows,” said Brett Miller, head of data solutions for ISS ESG, the responsible investment arm of proxy adviser Institutional Shareholder Services. “Not that every case is problematic, but it is going to warrant even more scrutiny.”
ISS has identified 307 companies among the Russell 3000 Index with at least one executive or director pledging shares, Miller said. It’s particularly common at founder-led firms.
Pledging is big in Asia, where state-owned banks dominate financial markets and high-growth companies are more common. Tycoons in China and India often turn to lenders and other financial-services firms that offer cash in exchange for committed shares.
But concerns over the potential market repercussions have pushed both countries to curb the practice recently. India now requires stricter disclosures, and Chinese companies started issuing risk alerts when controlling shareholders pledge most of their stakes.