When it comes time to liquidate your esoteric assets, interested buyers often emerge with tempting offers, promising to take the assets off your hands immediately with little effort required from you. 

But entities (typically insolvent estates or an operating company in distress) desiring to maximize the value received often run auctions instead of accepting those initial offers. An auction places all potential buyers into a market to maximize the asset value, and it includes five main steps.

Why Entities Monetize Esoteric Assets

Esoteric assets span a diverse spectrum, encompassing a variety of financial instruments and contractual obligations. These include: 

• Privately placed loans or debt instruments
• Legacy insurance assets and associated liabilities
• Unsettled insurance claims
• Uncollected legal judgments
• Illiquid shares in privately held companies
• Shares or economic interests in shares in pre-IPO companies
• Complex securities
• Accounts receivables

When do entities typically begin considering options to monetize certain esoteric assets that are illiquid, difficult to both value and market to potential buyers?

Often, organizations find themselves grappling with liquidity difficulties, seeking to alleviate cash flow constraints or unlock capital tied up in these assets. 

In other instances, companies may be compelled to liquidate assets due to external factors such as receivership or reorganization proceedings, where the interests of creditors necessitate asset liquidation. In both instances, market conditions are often an important factor.

Liquidation processes also often occur in cross-border situations. For example, the liquidating entity may be domiciled outside the U.S. and the underlying assets targeted for liquidation may be within the U.S. or jurisdictions outside the domicile of the liquidation proceeding.

A Five-Step Sale Process for Esoteric Assets

While esoteric assets present complexities in their valuation and transacting, a carefully planned and well-structured sale process will bridge the gap between sellers and buyers, maximizing the value of the assets.

Step 1: Perform a thorough and documented valuation of the assets.

A comprehensive and documented valuation of the assets earmarked for liquidation serves as the foundation for the subsequent bidding process. Whether it is machinery, insurance claims, or complex financial instruments, a third party can assist by providing an accurate assessment of asset worth.

Thorough due diligence and meticulous documentation will provide sellers with insights into the estimated value of their assets, allowing them to make informed decisions during the remainder of the liquidation proceedings.

Keep in mind that investigation, due diligence, and valuations are only tools and techniques to estimate an asset’s worth. In a liquidation proceeding, the “true” price can be considered whatever the market or auction process dictates.

Step 2: Identify and vet prospective buyers.

The initial phase of marketing an esoteric asset sale involves confidential calls to potential buyers aimed at generating interest without divulging specific seller details. In addition, potential buyers are sufficiently vetted to verify their financial capability and funding sources.

Finding a service provider to identify, communicate, and coordinate with potential buyers throughout the process can be key. The right sale partner will ensure that appropriate parties are brought to the bidding table, depending on the assets, industry, and meticulously documentation of the process to maintain transparency and trustworthiness.

This initial outreach lays the groundwork for establishing a robust bidder list, creating a competitive and transparent auction process.

Step 3: Create a confidential offering memorandum.

To facilitate informed decision-making among prospective buyers, your sale partner will create confidential offering memorandums. These documents succinctly summarize the terms of the transaction, providing background information and detailing the nature of the asset. 

By fostering transparency and clarity, the memorandums aim to instill confidence in potential buyers and set a foundation for a successful transaction.

Step 4: Structure auctions for maximum value. 

After buyers are identified, your sale partner will structure and manage a fair auction between the vetted potential buyers to maximize value. Ideally, the competitive bidding environment will stimulate interest among potential buyers and drive up the value of the assets. 

Step 5: Perform proper due diligence. 

When the sale of the esoteric asset is performed in liquidation proceedings, companies must demonstrate to court-appointed receivers or trustees that a thorough valuation and marketing process has been undertaken. 

The documentation of due diligence activities by the sale team serves as a testament to the integrity of their process, providing stakeholders with the assurance that the liquidation has been conducted with diligence and transparency.

Monetizing Your Esoteric Assets

There is no universal solution for monetizing esoteric assets, as each situation will require a tailored approach which addresses factors specific to any individual asset and liquidation proceeding. The right partner will manage this process for you, maximizing the value of your assets while easing the process from beginning to end. The right partner can often:

• Perform a comprehensive internal assessment and valuation of the assets to be liquidated
• Prepare timelines with milestone dates, including internal briefings to inform the seller of progress on a timely and routine basis
• In parallel with performing the valuation exercise, develop a listing of potential buyers based on past experience, knowledge of the industry, size of the transaction, and other relevant factors specific to any particular auction
• Facilitate the auction process through real-time communication with buyers and seller
• Prepare contemporaneous documentation of all activities to validate the integrity of the process and create buy-in from stakeholders (i.e., trustees, creditors, courts, etc.)

Ideally, to facilitate the sale of an esoteric asset, the right partner will provide a “soup-to-nuts” solution which allows the seller to convert an esoteric asset to cash in a timely manner which ensures the highest value in any given situation.