Chris Tell's  Instablog

Brokers, placement agents, middle men, promoters, consultants, financial intermediaries…call them whatever you wish. They have existed in the financial space since man invented a way to exchange one thing of value for another.

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Some do a fine job, provide a valuable service and deserve every penny they earn. In my experience however, and that of Mark and many of our friends who invest in private equity, these people, the deserved ones that is, are a very small fraction of those inhabiting this space. I've met hundreds of middle men and can count on one hand those I trust and value.

In the private equity space they are abundant. MAN are they abundant. In fact, I think we currently have a bubble in middle men. Doubt me? Hop onto LinkedIn and you'll find every Tom, Dick and Sheryl hard at work putting Nigerian scam artists to shame. To be fair, they may represent real deals which in-and-of-themselves are not shams, but beware the costs. Many "represent" millions in capital, yet like those "trusty" Nigerians, who also represent gobs of dough, somehow they just need that little itty-bit of additional capital from you and I to "pull it over the line."

I bring this up because of an amusing interaction I had recently with one such individual. I'd like to think that shining a light on some of these creatures lurking under slimy rocks may help other investors recognize these clowns when they see them. It may also serve as one of the red flags I previously spoke about for investors seeking an entrance into private equity deals.

Firstly, you'll likely have already come across some of them; they're quite possibly the guys "endorsing" you for your skills on LinkedIn. WTF..?

I'm confused, some guy I've never met and don't know from Adam, just endorsed me for "Strategic financial planning" skills. As confusing as this is, what really gets me is why I've not been endorsed for my great pancake making skills. My kids reckon I'm the best there is, and they actually know me and have witnessed said incredible pancake making abilities. The guy on LinkedIn…not so much!

Now these guys are nothing like brokers at all, but rather more akin to back alley abortionists peddling their wares, complete with the rusty, blood-stained "tools" from the last botched job. They litter the world of private equity like plastic bags on a Maputo high street, and frankly annoy the sh*t out of Mark and I.

A story to illustrate absurdity…

Onto my tale. I was recently put in touch with a gentleman of the type I described above, it turned into the stuff of high comedy.

Now, the underlying business was actually OK, which was why I gave the time of day to him to further explain the deal terms. However, the structure of the deal was such that the "promoter" got a fat chunk of the cash out of the gate, travel expenses (which were obscene), and sundry other expenses, which I showed to Mr. back alley boy, that amounted to fully 60% of the investors capital! I kid you not! Even more amazing to me is that this clown had in fact already found an investor of sufficiently low intellect to invest in the deal, taking out the majority of the offering. A 7-figure sum. I pity the sod. Something about "fools and their money" comes to mind.

This particular investor now requires a 150% return in order to simply break even. This, on an investment which is high risk to begin with, and where it's entirely possible to lose 100% of his money. Of course the promoter was doing his damndest to make the deal sound like a low risk, HUGE upside, fit for widows and orphans opportunity. He tried to weasel his way out of the facts when I presented them to him, but I was having none of it. In frustration he simply walked away saying I didn't understand the deal. Oh, I understood…and that of course was the problem.

This was one of the more extreme cases I've seen of friction costs, but I will say that it's pretty common for your investment dollar to be "attritioned" or "frictioned" to the tune of 15% or more on many deals I've reviewed. On a $100,000 placement you're looking at losing $15,000 right out of the gate if you don't pay attention.

You will almost NEVER be shown these details, but will need to closely examine the deal to find them out. Small print etc. folks. Look for font size 8 and read diligently.

As an investor it's crucial to understand the cost of capital for any business you are looking at getting involved in. Additionally, ferreting out the true cost of capital for a business, and whether you are getting hosed or not, is important in order to understand the true state of accounts in the company.

Some points:

• Find out how much capital hits the balance sheet. Unless its a "friends and family" round you'll likely have placement fees somewhere. No problem, but analyze them and make sure that they make sense.
• Always ask whether they have their own capital on the line, how much, and ask for proof and full disclosure of compensation to those involved in the transaction. Let me tell you there is a vast, Grand Canyon wide difference between having your own cash on the line and that of a client, friend, associate, or whatever you want to call "the other guy"… you know, the one who is actually putting up the capital.

Kyle Bass mentions the, "give a shit factor", and it is remarkably high when putting your own cash on the line. I should know, I've been "dumb enough" my entire adult life to be the guy putting his own capital to work and only getting paid when I'm right, and taking it on the chin when I've screwed up. It has frustrated me many times to have watched middle men walk away with larger sums than I…even after they never put a single dime on the line. No need to follow my path though, you can always become a mini-Bankster yourself.

Good luck out there, watch ceaselessly for this nonsense and make sure you ask the question first and foremost if any fees are being paid and to whom. Full disclosure should be given. So, next time some back alley abortionist lies to you, do us all a favour and punch them in the face.

- Chris

"Money talks and bullsh*t walks" - Sam Zell

Some anecdotal evidence first… I recently corresponded with a friend in Europe who consults to a number of hedge funds managing predominantly European and British money. He mentioned that across the board his clients are increasingly concerned about equities and are seeking to hold more cash. I asked him if there was a fear of being "Cyprus'd".

"No" was his answer. Stunning as that sounds to me…the vast majority of people, my friend's wealthy clients included, which I might add would be termed "smart money", simply think "it wont happen here". Are you shitting me? The banks are mostly insolvent, the governments are bankrupt and the Banksters have already shown their cards in Cyprus! They've GIVEN us the playbook! What will it take for people to wake up?

I asked what his clients were holding in terms of cash. "Euro mostly, USD and of course Yen" was his reply. I wrote a long time ago about the triplets Ugly, Uglier, and Ugliest mentioning how those with large sums of capital to allocate have little choice when seeking liquid markets within which to do so. What I never considered then was the vaporizing of bank accounts regardless of the currency being held. This will forever be referred to as being "Cyprus'd".

Holding currency in the banking system itself increasingly looks like a bass-ackward idea, and makes a mockery of the term "safe deposit". Our friend Simon Black of Sovereignman wrote an excellent article on the state of western banks here which you should read.

One of our readers (thanks Riana) sent me the clip below of Jeffrey Sachs, a Columbia University professor, providing a very candid view of the financial system in the US.

I strongly urge you to watch this clip! It is in my opinion a MUST VIEW. The short version is, "Massive, massive illegality" condoned by the legal system, government and big business. If you thought you were safe investing in the US stock market you have been taken for a ride. I think the American people VASTLY underestimate the extent of fraud, theft, and subjugation that is taking place under their very noses, and worse yet, feel powerless to stop it!

There is a reason Mark and I invest in private equity in markets which, humorously enough, are considered by the mass media as "too risky".

I think it's indicative of a problem when, half-jokingly, the vernacular increasingly being used in the popular media includes: being "Corzined" and "Cyprus'd". The former meaning having your money stolen from or via the equities market, and the latter being theft directly via the banking system.

What options does that leave us? Ah, the bond market…aye carumba, don't get me started.

Sorry folks, but when Mark and I, together with our exclusive CPAN subscribers, invest in private companies in places like Mongolia, Myanmar, Nepal, or Cambodia we have a LOT more control and understanding of what we're getting into. Risky? Look, it makes investing in the US and European financial systems look positively like Russian roulette in comparison!

Most stock markets, the US included - venerable, decaying, fecal matter that they are - are now rallying on the energy created by Bernanke's credit and paper printing. The true value of all that paper will be revealed when it's simply used for composting at some point. Please don't ask me WHEN that will be, as this train has stayed on the tracks longer than most, including myself, have thought possible…

Funny money - crazy printing - is what is vaulting stock markets globally. They are running on fumes folks. The current financial system will ONLY run out of fumes when the masses can finally differentiate between liquidity and solvency, and at that point the currency and bond markets get toasted!

Remember, a rising equity market doesn't always mean increasing economic prosperity. Look at Argentina. Its equity market is the best-performing in the world as of late. For those that don't know why, in a nutshell the crazy b%&$h that runs the place is single handedly turning it into a banana republic. The currency has been devalued by market forces to such an extent that the "blue" (underground) market rate for USD is more than 2x the "official" government rate. The rise in the equities market, as spectacular as it has been, has not even kept up with inflation, which the Argentine government says is still in single digits, but is running at double digits monthly now! These clowns (I'll throw ALL global "central planners" in there) are clinically insane.

From Japan, to Europe and across the Atlantic back in the States, to what Mark now regrettably refers to as "prison", economic push-up bras are in vogue. Why is Mark referring to the States as "prison"? Lemme see… the recent IRS fiasco, Benghazi scandal, Bloomberg scandal, gun control, militarization of the police force, 300+ national surveillance drones, the world's largest data collection center…the list goes on, and on, and on. For those that still insist that "if you don't like it leave", Mark asked me to remind our readers that he already has.

Make no mistake, push-up bras are still push-up bras, and when the lights go dim and the bra, with much anticipation, comes off, the "truth" will reveal itself. Market conditions will be seen for what they are.

Right now market participants are confusing liquidity with solvency, and the solvency issue is becoming increasingly stretched. When reality starts hitting home, and the inevitable market correction comes, the push-up bra will come back with a new and improved version (QE whatever… where are we at now? I lost count somewhere…). We'll be getting the mother of all QE, much like Kuroda is trying right now in Japan. It's also a lot like Rudolf Havenstein, the president of the Reichsbank in Weimar Germany once managed.

We'll be told that the entire world will choke and die unless these corrupt, unbelievably wealthy "masters of the universe" keep the game going. Herr Von Bernankenstein will man the keyboard with his two chubby fingers on CTRL and P. The only question is how much abuse can a currency take before it implodes? Again, we don't know!

This really is a Viagra economy. The "old man" is limp, much like what was hidden under the previously mentioned push-up bra. Anyone with any sense knows it, and will keep accumulating gold and "real" assets. It is one of the most obvious trades I can think of for now. Short term, the chart looks like it wants to go to $1,300 or even $1,200, but in the long run those tiny corrections are irrelevant.

We clearly need a hedge, and therefore Capitalist Exploits is proud to announce the launch of an ETF that will provide it!

The composition of the ETF is as follows:

• 25% precious metals
• 25% guns and ammunition
• 25% a sustainable place in the sun, far from the madness, with a massive veggie garden, fresh spring water, cows where my milk is assured not to have aspartame in it. (Oh yes, the FDA is now thinking about including artificial sweeteners in the definition of "milk"… you can't make this shit up!)
• 25% antibiotics, medication and bio-hazard suits

Ticker symbol: SHTF

The fund managers reserve the right to include tin foil hats in the portfolio as required.

Why now you ask? How about this…

No further commentary necessary.

- Chris

"We have a system which is out of control, that's politically out of control, regulatorily out of control, out of legal bounds, out of responsibility, and we've invented a system where you get to take home billions of dollars in personal compensation, your shareholders pay hundreds of millions of dollars in fines, you shelter your money in the Cayman islands in agreement with the IRS and nobody seems to control it at all." - Dr. Jeffrey Sachs

In a bull market one of the most profitable businesses to be in is that of financing. This is largely due to the leverage available, not only financial leverage, but equally important are the leverage of skills and technology. Financial services, banking, insurance, brokerage, investment and merchant banking all fit the bill.

These aren't the only businesses that benefit in this environment however. With that in mind lets take a look at agriculture, a favourite of Mark and I. "Ag" is a market which enjoys growing demand, supply shortfalls, is severely under-capitalized…and this says nothing of the inflation which central bankers are adroitly baking in the oven. Unfortunately, in the western world agricultural land values are prohibitively expensive, and certainly not attractive on a pure yield basis.

I've spoken before about streaming companies, and in fact one of our trade alerts suggested writing Sandstorm Gold (SAND) puts. I estimated that doing so would get us a 30% return overall, if things went as I predicted. Streaming is well-known in the mining world. Companies like Franco Nevada, Silver Wheaton and Royal Gold have made a LOT of money for their shareholders over the years. It is a truly unique set of circumstances we find ourselves in with respect to the resource markets today, but I want to talk about agricultural streaming in this post.

Agricultural Streaming?

Yes! Agriculture is in a bull market. Much like the better known metals streaming companies who provide financing for producing mines in return for a "stream" of the metal over specified time frames, agricultural streaming follows the same essential business model.

As mentioned above, one problem with agriculture that Mark and I have encountered has been the unbelievably high cost of agricultural land in the western world. Farmland in the Midwest US is now topping $20,000 per acre, which is certainly not bargain territory. Yields are simply terrible. Eliminating this problem is possible, and the model is being effectively proved by a reader of ours with whom Mark and I have been communicating for some time now. Brad Farquhar is the co-founder of Input Capital, the world's first agricultural streaming company.

Focused on canola streaming in Saskatchewan, Brad and his co-founder Doug Emsley have built an enviable business! With IRRs in the 20-40% range, and operating cash flow margins exceeding 50% the business model is completely scalable, provides leverage to the commodity, and allows Input Capital to bear no direct operational risks. Their model offers diversification simply not possible by owning a farm itself.

Brad raised money for the business in a seed round last year at $1, and unfortunately for us and for our CPAN members this was at a time when the service was only just being born. We did not participate. Just for reference, that's the type of early stage private equity deal that we live for in CPAN.

Input Capital is now doing a pre-IPO raise at a multiple to the seed round, and will then list via a reverse take over (RTO) on the TSX. In conjunction with the RTO, Input Capital is also carrying out a $100 million private placement. This is a sale of Subscription Receipts, which will be converted to shares in the company when this RTO process is concluded. The offering is targeted at institutional and accredited investors ONLY.

The syndicate for the offering is composed of: GMP Securities, CIBC World Markets, National Bank Financial, Cormark Securities, and AltaCorp Capital. Mark and I both have a relationship with Sprott, and in fact our brokers there reached out to us on this just this week. Our guess is most Canadian brokers will be familiar with the deal.

While it isn't the early stage seed round we typically look for, we do believe the upside from here is likely substantial… assuming Brad and Doug continue to run it as they have up to this point. As we've said, we absolutely love the sector and we believe they have what it takes to make their investors a lot of money during this bull market.

We don't have any skin in the game at this point, but we may participate. You can get in contact with Brad or Doug directly by visiting Input Capital's website. We are told that the placement closes near month's end.

- Chris

Disclaimer: We didn't get paid to mention Input Capital…we just like what they're doing and may participate in the offering ourselves. We will make no attempt to tell you or anyone else when or if we participate. Do your own due diligence, this is NOT a recommendation or a solicitation on behalf of Input Capital or ourselves. The fact is we like the ag streaming space so much that we're personally in the process of setting up an entity dedicated to streaming grains and high-value crops in frontier markets. CPAN members have already been introduced to what we're up to.