Why Do The Top 1% Leverage Their Assets?

How Do Elon Musk, Larry Ellison, Jim Walton, and Other Billionaires Multiply their Wealth Using Leverage? 

When the innovative Elon Musk, the richest man in the world, wants cash, he does not have to sell Tesla shares and pay high capital gains taxes on the sale. He can simply borrow money pledging a part of his shareholding as collateral to obtain lines of credit. The collateral serves as an evergreen credit facility, allowing Musk access to cash whenever he needs it. Musk has pledged more than one-third of his Tesla shares (excluding options) worth close to US$70 billion as of now.

Musk is not the only one using this strategy. The Forbes 400 list of richest Americans includes 32 billionaires who have pledged their public stock holdings as collateral for current or future lines of credit. Other mega pledgers include Oracle chairman Larry Ellison, Walmart heir Jim Walton, and the wealthiest person in private equity, Stephen Schwarzman. 

Among all NYSE and NASDAQ listed companies, as many as 560 CEOs, directors, and shareholders (with more than 5% shareholding) are utilizing leverage by pledging a part of their holdings. The total value of their pledged shareholdings is US$239 billion, translating into an average pledge size of US$427 million. 

Not surprisingly, within this larger group, the ones who do most of the pledging are those who have made it to the Forbes 400 list. And this is probably just the tip of the iceberg because this information only relates to owners of publicly listed shares. Many of the wealthiest Americans – including 232 billionaires listed in 2021 Forbes 400 – hold their wealth primarily in private companies. 

While there is no way to know exactly how common is leveraging assets to borrow among the ultra wealthy, it is “pretty high,” according to Jason Cain, chief wealth strategist at Boston Private. Talking about clients with net worth of more than US$500 million, Cain says that most of these ultra wealthy individuals are aware of the power of leverage and the arbitrage opportunity it provides.  

For centi-millionaires and billionaires, clearly the rewards of leveraging their assets appear to far outweigh the risks. According to Edward McCaffrey, a professor of tax law at USC Gould School of Law, leverage is a perfectly legal strategy for the ultra-wealthy to avoid paying taxes while fueling their wealth growth. Reports relating to leaked IRS data in recent years have shown that many of the richest people in the US paid nothing in federal income taxes.