Permuto Capital Management Team
In perhaps one of the very first cases of blockchain solving a real-world problem, and a bit of financial alchemy through the creation of additional value through the transformation of a standard financial asset, Permuto Capital created the next big thing for stock investors.
Permuto Capital is launching a product to decouple the dividend and capital components of common stock and by appealing to different groups of investors, the total value of the two elements can be greater than the value of the underlying stock. Permuto has filed a registration statement with the SEC and, upon approval, plans to launch with Microsoft (MSFT) as its first capital.
The separation of the economic components of financial instruments is not in itself a new idea. In the 1980s, the government authorized coupon stripping of U.S. Treasury securities (notes and bonds), a process in which the interest and principal components are divided into separate securities and are called “STRIPS” (registered interest separate trading). and the principal of the securities). The components are aimed at different investor segments and the product thus improves the efficiency of the entire market.
Dividends and capital appreciation
Similar in concept to Treasury stripping, the Permuto product splits a share of Microsoft common stock into two: a “dividend certificate” and a “certificate of appreciation.” The owner of the dividend certificate will be entitled to the dividends paid by Microsoft on the common stock, and the certificate of appreciation will be entitled to everything else.
Permuto’s “secret sauce” that makes its product viable when previous incarnations were considered too cumbersome and expensive for widespread distribution is twofold: the benefits of blockchain technology coupled with the use of single-stock voting trusts to hold the shares and issue the certificates. The Voting Trust structure provides a regulatory compliant structure and blockchain reduces costs.
The idea is that investors who own Microsoft common stock can deposit the shares with a designated custodian and, in return, the investor receives one of each of two certificates. Once the certificates are created, they will trade independently and, therefore, the investor who deposited the shares will be able to sell one or both of the certificates, and other investors will be able to buy certificates without having owned the certificates. underlying shares. An investor who owns both types of certificates can return them to the trust and receive one share of common stock.
For an investor who wishes to use traditional platforms, Permuto seeks to have both types of certificates listed on a nationally recognized exchange, and the investor can choose to have the Depository Trust Company (DTC) hold their certificates.
Blockchain Chia
Alternatively, investors can choose to hold their certificates on the Chia blockchain under the name Chia Asset Tokens (CAT). One of the advantages of CATs is that they will be able to be traded on decentralized markets 24 hours a day, every day, and will not be subject to exchange trading interruptions.
The main advantage of blockchain technology is cost reduction. Besides reducing trading fees on decentralized markets compared to traditional exchanges, blockchain provides a cost-effective mechanism for distributing dividend payments.
Permuto charges for processing dividend payments and a nominal fee is charged for creating or redeeming certificates. When dividend certificates are held at DTC, Permuto pays the investor 80% of the dividend and retains 20% for processing fees. Better yet, since costs are significantly lower on the Chia blockchain, an investor holding CAT will receive 90% of dividend payments. This difference implies that the dividend certificate should trade at a higher price as a CAT than on traditional markets.
Example of valuation calculation
If the assumptions are simplified, a quick assessment can be calculated. Using a Microsoft stock price of $429 and an annual dividend of $3.32, and assuming the dividend increases at 5% per year, of which 90% is returned to the investor, the investor in the dividend certificate will receive $198.50 over thirty years. This is not the price the investor will pay today, however, because the money has a greater value today than if it were received in the future. Assuming silver is worth 8% less per year, this dividend certificate will be worth $45.46. A dividend certificate of this value earns an annual yield of 6.6%. The certificate of appreciation should therefore have a value of $429 – $45.46 = $383.23.
This simple calculation shows how an investor can value the two elements of common stock. The advantage for investors is that they can allocate their investment capital directly based on their investment preferences and receive a series of dividend payments or no dividend payments and only the capital appreciation of the shares.
According to Trent Martensen, co-CEO of Permuto Capital, “The ability to choose and manipulate risk exposure by assuming a given return requirement is a goal for all investors, and dividing common stock into dividends and appreciation capital, we provide investors with tools to refine their adjustments. their wallets.
In graduate schools of finance in the late 1980s and early 1990s, discussions of financial engineering and risk structuring often included dividends and how a given dividend stream might not be good. valued for a given ordinary share. Only now are the tools available to offer standardized products to investors, and Permuto certificates could be the answer to these questions of yesteryear.
