How Sandstorm Makes You A Private Equity Investor

Aug. 03, 2012 1:20 PM ETSTTYF, SAND13 Comments
Mike Scully profile picture
Mike Scully

The U.S. Government has established a series of rules and regulations to "protect" average investors from "risky" investments. One of the ways they protect us is by limiting certain investment opportunities to accredited (rich) investors. On an individual level, accredited investors are individuals who have at least one million dollars in liquid assets or have earned an income over $200,000 for the past two years. (Apparently, if you only make $199k per year, you are a brain-dead cow and can't be trusted with your own investment decisions.)

One type of investment that is unavailable to the average investor is the private placement. Private placements are simply deals made between a company looking to raise capital and a financing company or broker which provides capital. Typically, the broker will establish terms for the financing and then raise money from its accredited clients to invest in the deal.

The natural resource sector is one area that is particularly conducive to private placements. The up-front capital requirements are high and the payout, while potentially lucrative, is uncertain.

Take for example, a small oil exploration company that owns the rights to oil production on a tract of land. It has done the legwork to verify the oil reserves, acquire permitting, set up purchase and sales agreements, etc. Now it needs to raise capital to actually drill the well and begin producing oil. It could ask the bank for a loan, but banks are careful with their capital these days, and prefer safe income producing assets to risky, oil speculation. It could sell stock to raise money, but that would dilute existing shares and the stock price it could get from those shares may be less than desirable. A third option is raising money through a private placement.

Private brokers are willing to take more

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Mike Scully profile picture
I’m a product designer and mechanical engineer by profession. The design side of my job requires me to think about problems in imaginative ways and dream up creative solutions. The engineering side of my job requires an application of real world constraints and analytical problem solving to make those dreams a reality. Put the two together and you get a point of view you’ll rarely hear from mainstream economists. I have little formal education or training in economics. Or, as I prefer to think of it, I have no baggage. I’m more apt to look at the world empirically than to view it through the lens of an economic or political theory pushed upon me in school. Growing up, I had an innate interest in economics which was nurtured by my father who was an outstanding stock analyst. In 2007, as the housing bubble was reaching its peak, I began studying Austrian economics and the history of money to understand what was really going on with the economy. From an Austrian perspective, the crash of 2008 was just the prelude to the impending currency crisis we face. While the politicians and central bankers do everything they can to postpone the inevitable, they are only exacerbating the problems. In 2010, I started a blog, Liberty Insight, to inform people of the seldom heard Austrian perspective and to explain how free market solutions and sound money can provide the answers to our problems.

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