In order to make trust units appealing to investors, combinations of other securities are often deposited into the trust (e.g., stocks, bonds, treasury securities, forward contracts, options, etc.) in order to modify the payoff pattern of the trust units and provide investors with income combined with potential price appreciation or other investment characteristics. Assets are deposited in the trust and managed by a trustee on behalf of the beneficiary investors. When trusts are terminated, the assets or cash proceeds from the sale of such assets are distributed to investors, net of transaction costs and fees. Trusts may also be used in certain structured transactions for investors seeking to monetize large equity holdings (Chapter 13 further discusses monetization strategies).
This chapter provided insight into how a long-established legal structure, a grantor trust, can be used in creative new ways to provide new means for issuers and investors to achieve their financial goals. Trusts offer the ability to mix actual cash instruments and securities for reissue as smaller units of investment. One of the drawbacks of using trust structures is the expense involved in creating them. Since trustees must be hired by the trust, and such trustees must engage in a certain amount of oversight activity, a level of expense is incurred by trusts, compared to the relatively few ongoing expenses regarding warrant, option, and note offerings. Regardless, trust structures, beyond their use in equity-based unit investment trusts and real estate trusts, among others, are useful to financial engineers.
Chapter 12 deals with OTC private placements, which is a type of offering that can be used for structured products as an intermediate step between publicly offered warrants and structured notes, for example, and larger private transactions among institutions. OTC private placements, although not typically offered to retail investors, can be structured and issued in units of investment that are attractive to individual and institutional clients, usually in the tens of thousands to hundreds of thousands of dollars. They are also attractive because of the speed with which they can be brought to market.
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