For small balance investors searching for “good” private investment opportunities…

But aren’t sure exactly what a “good” deal is, much less how to find one…

In my experience, the difference between a “good” deal and a “bad” one all comes down to how the deal is structured. 

If structured correctly, it’s possible to generate an attractive return on capital betting on “okay” companies with “okay” products.

But structured incorrectly, it’s possible to lose money in a great company with incredible products.

So how do you know which one is which? 

That’s the topic of today’s issue of Private Capital Insider.

-Jake Hoffberg

P.S. Interested in investing in an early stage, AI-powered oil and gas play? If so, Pytheas Energy is raising capital on the Equifund Crowd Funding Portal. 

Go here to review their offering page and learn more.

The Illusion of “Informed” Investment Decisions: Why (most) investors focus on all the wrong things in private market investments

After writing more than 1,000,000 words of investor education content over the past five years – and consuming several million more words in the form of books, articles, and videos…

What I’m about to reveal regarding the value of investor education material might come as a surprise.

Gathering more information – and by extension, the idea of being a more informed investor – doesn’t necessarily lead to better investment outcomes. 

Why? It all has to do with the paradoxical phenomenon in sales – known as The Dummy Curve Theory – where salespeople find it easier to sell when they know less about their product vs being fully informed. 

The idea behind this theory is that when you’re a newbie, because you don’t know what you’re doing, you keep things simple.

And if you’re a retail investor looking for ways to build generational wealth, you generally have to pick one of the following strategies.

1. Accept the Default (Passive Investing): Dollar cost average into a low-cost index fund, and simply buy and hold and let compounding do the rest.
   
   This style of investing – made famous by Jack Bogle at Vanguard – appears to be the lowest “effort to results” strategy available to retail investors.
   

2. Reject the Default (Active Investing): Take on higher risk for the chance of higher return.

For the vast majority of novice investors, the “default” strategy is the definition of keeping things simple; all you have to do is focus on increasing your savings rate and compounding it over time. 

But as you become a more informed investor, something weird happens – you start to fool yourself into believing that more information translates into better results. 

More specifically, you start to become more informed about higher risk strategies – for example, investing in private markets or actively trading stocks/options/crypto.

And as the saying goes… you know enough to be dangerous.

Also called the Dunning-Kruger effect, having more information may in fact make you feel more confident in your ability to outperform… 

But it doesn’t necessarily make you more competent at finding opportunities, underwriting and pricing risk, and proper position sizing. 

And if we believe that smart risk-taking involves positive asymmetric bets – which means the upside potential is greater than downside loss…

Overconfidence can often put you in situations where you are taking negative asymmetric bets – which is when the downside risk is higher than the potential reward.

In many ways, the worst possible thing that can happen is that you get “lucky” early on in a negative asymmetric bet and see positive results, which almost certainly causes you to “size up” your bets; because the math is “rigged” against you, you are guaranteed to lose the more you play.

Unfortunately, because self-directed investors tend to be intelligent people who are successful players in the Game of Business…

We tend to overestimate our skills and abilities in the Game of Money.

Even worse, if our experience in the Game of Business has led us to believe in a somewhat sports-oriented worldview of Capitalism – overcoming the competition through strategy, tactics, and good, old-fashioned hard work…

This need for “action” puts us in serious peril in the Game of Money.

And even though the idea that more data makes you more informed – and that being more informed leads to better outcomes – makes logical sense…

In my opinion, this narrative is more designed to sell data – and other “gadgets” and “toys” – for investors to play Fantasy Football: Investor Edition.

For example, here’s a recent headline from MarketWatch…  

According to the article,

Total retail trading by sector per day based on data from January 4, 2016 to May 13, 2024. PHOTO: NASDAQ DATA LINK

But hey, this is Private Capital Insider, not r/WallStreetBets.

And in private markets, what we’ve been taught to believe is that more due diligence leads to better investment outcomes. 

According to the 2007 study, "Returns of Angels in Groups," by Rob Wiltbank,

Seems like a slam dunk case that supports the “the more you know” paradigm of investing, right? 

Maybe. 

Except for two glaringly obvious problems: 

1. I have never seen the results of this study replicated, nor have I seen updated data from the original source.
   

2. The study makes no mention as to the exact methods used to undertake this due diligence; only that “angel investors may positively influence their rates of return by making wise decisions about due diligence, avoiding ventures in unfamiliar industries, follow-on investments, and productively participating in the ventures post-investment.”

Let’s address the first point by highlighting a recent article in the Wall Street Journal, “Flood of Fake Science Forces Multiple Journal Closures,”

If there’s one thing I’ve learned about marketing products and services – especially in finance and healthcare – it’s this: 

You can find “peer reviewed studies” that support basically any position you want to take. 

And this epidemic of “fake data” pushed by “fake news” is why I take all of these so-called “studies” with a grain of salt.

Why? Because the scientific method relies on replication of results from a disinterested third party. 

As we’ve discussed in other PCI issues, this is why it’s critically important to have a proprietary source of data, versus relying on the same third-party sources of data everyone else is using. 

And this brings us to what I believe is the most significant problem facing early stage investors today…

What ACTUALLY drives returns for small-balance checkwriters with non-controlling minority positions?

As a matter of professional curiosity – and a desire for networking opportunities and socializing – I recently joined a local angel investing group.

While there is a LOT I’ve enjoyed about the experience so far, one of the things I’m still skeptical about is the crowdsourced due diligence process. 

Basically, every week, a bunch of companies come and pitch the local chapter… and in a somewhat “Bachelor” style elimination process, some Issuers get to proceed to the next rounds based on member interest.

Then, members are asked to join a four-week due diligence team where the final product is a report that is sent out to everyone else. 

And when I attended an information session about how the due diligence process works, to no surprise, the “40 hours of due diligence” number was heavily promoted. 

But seeing as how I have some relevant experience in underwriting and due diligence working here at Equifund – not to mention, I’ve actually read the study and know what it says…

I asked the question most people don’t:

Said another way… how does being more informed create Alpha for me as a passive investor in a non-controlling, minority position?

While I didn’t get an answer to my question, here’s my personal opinion on the matter – it doesn’t.

Why? It all has to do with the five problems all small-balance checkwriters face in private markets. 

1. Access: Getting access to the “good deals” is already hard for professional investors with hundreds of millions of dollars under management. You – the average retail investor – have almost no chance of getting invited into the “club.”
   

2. Underwriting: Even if you did have access, you likely don’t have the time or resources required to perform any substantive due diligence. For that matter, you probably don’t have any clue how to price the risk either.
   

3. Check Size: Even if you did have access and could underwrite the deal, you likely don’t have enough money to negotiate terms.
   

4. Liquidity: Even if you could get your money in a deal on favorable terms, chances are you’re in REALLY early, and will be in the deal for a long time.
   

5. Fees: There is a real cost structure to investing in private markets – regardless of whether you try to “do it yourself” or hire a manager to invest for you.
   
   For example, in order to produce a 15% net-of-fee return, an investor in a fund with a standard two-percent management fee and 20% carried interest, the fund would need to produce a gross-of-fee return of 22-24%+ (depending on a variety of factors).

But for the final kicker? Even if you did manage to get your money into a “winning” company, that doesn’t mean that YOU are going to generate any significant Alpha – or a risk-adjusted return that exceeds your benchmark (which, for many retail investors, is dollar-cost-averaging into a low-cost index fund).

It is for exactly these reasons why it is my personal belief that the ONLY thing that makes a “good” deal “good” is the deal structure.

And if you’re like me – and you DO NOT want your investment returns to depend on materially participating in the venture (i.e., a lot of unpaid labor)...

Your best bet is to invest alongside a “Banker” (or Sponsor/Lead Investor) who is actively originating, underwriting, and structuring deals.

Otherwise, if you’re not investing alongside the Banker, it probably means you’re on the other side of the Banker’s trade as they look to get their (and their investors) money out of the deal.

Looking for an AI-powered oil and gas play?

If so, you might be interested in checking out Pytheas Energy – an upstream oil and gas producer that is currently raising capital on the Equifund Crowdfunding Platform. 

[Disclaimer: By law, Equifund cannot make any buy/sell recommendations, provide individualized investment advice, or otherwise “endorse” any specific investment opportunity – especially ones listed on the Equifund Crowdfunding Platform due to the obvious conflicts of interest. Please do not make any investment decisions based solely on the information published in this article.]

For investors looking to take limited downside risk with potentially unlimited upside return…

Chances are, you’ve heard about the holy grail of investing – asymmetric bets. 

Philosophically speaking, it’s pretty obvious why you’d want to invest ONLY in opportunities where the potential reward is greater than the potential risk…

But what’s not obvious is how to determine what the actual risk and reward potential is, or the statistical probability of either outcome happening.

And even less obvious… how do you think about pricing in the risk and uncertainty of any trade you’re about to make – especially as a small balance check writer who has to be mindful about position sizing?

Here’s a potential counter intuitive answer: It’s managing your risk through concentrating your positions over time (i.e. cutting your losers early and doubling down on winners) instead of diversifying (i.e. selling your winners to rebalance into losers).

And when it comes to investing in early stage companies, this means keeping capital in reserves to invest in follow on rounds.

That’s the topic of today’s issue of Private Capital Insider.

-Jake Hoffberg

P.S. Interested in investing in an early stage, AI-powered oil and gas play? If so, Pytheas Energy is raising capital on the Equifund Crowd Funding Portal. 

Go here to review their offering page and learn more.

Risk Stacks: A brief primer on understanding risk (and how that impacts price)

Last week, we talked about the types of private market deals I like to invest in as a small checkwriter.

And just in case you don’t have time to read the entire article, here’s the gist of it…

If your entry price determines 80% of your long term stock returns, proper underwriting (i.e. pricing in risk) and position sizing are the key risk management tools.

But as we’ve discussed in previous issues, most people don’t really understand what risk actually is…

Or for that matter, how to think about managing that risk through a function of both price and check size.

That’s why the concepts of Alpha, Beta, and Theta are crucial in this context, each serving a distinct role in the assessment and pricing of risk.

• Alpha (𝛼) represents the excess return on an investment relative to the return of a benchmark index (for example, the S&P 500)... when adjusted for risk.
  
  Alpha is often seen as a reflection of the unique value added or subtracted by the management of a portfolio.
  

• Beta (𝛽) measures the volatility of an investment compared the benchmark index.
  
  A Beta greater than 1 indicates that the investment is more volatile than the benchmark, while a beta less than 1 indicates that the investment is less volatile.
  

• Theta (Θ) represents the rate of decline in the value of an option due to the passage of time, assuming all other variables remain constant. This is often referred to as the "time decay" of options.
  
  Theta is particularly important in the pricing of options because it affects the premium of the options as they approach their expiration date (we are going to come back to this concept in just a moment)

While we are often inundated with the promise of alluring potential rewards that come with the high risk involved in early stage investing…

Very rarely do I hear management teams candidly address the multiple risks involved with any investment in the category they are in…

Nor do I hear an explanation about how those risks are being priced into the current financing.

For these reasons, when we are going through underwriting, one of my big questions is some version of…

How does management generate Alpha through managing the known risks and dealing with unknown uncertainty?

For this, we have to take a look at what we call the “Risk Stack” – the accumulation or layering of multiple risks that, when combined, significantly increase the likelihood of a negative outcome or failure.

In risk management disciplines, this is sometimes referred to as the Swiss Cheese Model of Accident Causation – although many layers of defense lie between hazards and accidents, there are flaws in each layer that, if aligned, can allow the accident to occur.

In this diagram, three hazard vectors are stopped by the defenses, but one passes through where the "holes" are lined up. Source: Wikipedia

And to use our Game of Business vs Game of Money framework, we have to assess both the business risk and financial risk within the investment opportunity.

Generally speaking, here are the main Game of Business risk flashpoints with respect to the typical early stage company:

• Technology Risk: Does the technology work as claimed?
  

• Patent Risk: Does the team have the ability to acquire and defend patents in an effort to drive enterprise value?
  

• Regulatory Risk: Does the company need to achieve some sort of regulatory approval (or permitting) to execute the business plan?
  

• Commercial Risk: Is there sufficient demand in the marketplace to successfully commercialize the technology?
  

• Supply Chain Risk: Will management be able to maintain profit margins and product quality as it scales supply to meet demand?
  

In my experience, the vast majority of investors are very focused on the Game of Business risk factors; whenever I’m in a room where investors are asking management teams questions, it’s almost always product (or operations) focused.

This makes sense when you think about it…

Most individual investors are far more likely to have some sort of operational (or product) experience than they are a corporate finance or capital markets background.

But remember: Good products don’t necessarily make good companies, and good companies don't necessarily make good investments.

However, there are plenty of situations where investors can make above market returns betting on “okay” companies with “okay” products.

For these reasons, instead of getting overly caught up in the details of “is this product better than what’s already out there” or “is the market as big as they’ve forecasted?”...

I find it’s far more useful to ask the question “so how do I make money in this deal?”

Why? Because in the majority of early stage investments, there are only two things that determine your financial returns: Your entry price and your exit price.

Simply put, you are looking to make short- to medium-term trade… not a medium- to long-term investment.

And even though the Game of Business Risk Stack is something we need to pay attention to when it comes to execution risk…

The Game of Money has its own risk stack called the Capital Stack – which organizes the different types of financing into a hierarchy based on the order of repayment priority and financial risk.

• Senior Debt: This is the most secure form of investment in the capital stack. It has the highest priority in terms of repayment and generally carries the lowest risk.
  
  Senior debt holders are usually the first to be repaid in the event of a sale, refinancing, or liquidation of the property.

• Mezzanine Debt: Positioned between senior debt and equity, mezzanine debt is subordinated to senior debt. It is riskier than senior debt and therefore typically offers higher returns.
  
  Mezzanine lenders may also receive warrants or options to convert debt into equity, increasing potential returns if the project performs well.
  

• Preferred Equity: This component of the capital stack offers features of both debt and equity.
  
  Preferred equity holders have a priority over common equity holders in terms of profit distribution and capital return, but they are subordinate to all debt holders.
  

• Common Equity: At the top of the capital stack, common equity holders assume the highest level of risk. They are the last to be paid in any capital distribution scenario, such as from operational cash flows or upon liquidation of assets. 

Said another way, your biggest risk as an early stage investor – especially if you own common stock – is every other round of capital that comes in.

More specifically, how the rights and privileges those shareholders receive – relative to yours – impact your ability to sell your shares at a future date.

Because they take on significant risks, investors expect to get “VIP” head-of-line privileges to be paid upon a liquidation event such as an acquisition. Common stockholders wait in line and collect proceeds only after all of the preferred investors take their share. Source: Fundable Startups

And once we have a composite understanding of the Risk Stack and Capital Stack – as well as how management can “de-risk” the investment opportunity over time by achieving certain milestones…

Then, and only then, can we have a real discussion around how to properly price the risk vs reward potential…

And how much we’re willing to wager on this current investment opportunity.

With a mature company with an observable track record of results, it’s relatively easy to produce a reasonable forecast of future returns – the next 12 months probably looks pretty similar to the previous 12 months (with some growth factored in). 

But what about young companies with a limited track record and incredible – albeit speculative – future potential value?

Valuing early stage companies with milestone driven valuations and multi-stage call option pricing

Before we begin, we have to remember that valuation is not the same thing as price.

• Valuation is an attempt to quantify the true intrinsic value of an asset using objective measures and predictions of future performance.
   

• Price is what the market will bear, influenced by psychological factors (i.e., risk and reward), market dynamics (i.e, supply and demand), and external economic conditions (i.e., liquidity)

In “normal” finance, the method for valuing a company (or asset) is most commonly determined by a discounted cash flow model.

Basically, you have a spreadsheet that provides both a backwards looking track record of actual financial results, and a forward looking pro forma that projects expected future results.

Then, you discount the value of all future cash flows to today in order to account for the risk and uncertainty of that forecast being proven.

If you’ve ever heard of a company being valued as a multiple of any metrics – whether it’s revenue, EBITDA, or net operating income – you’ll notice the larger the number being multiplied is, the larger the multiple is.

This makes sense when you think about it: the more mature the company is – or the faster it’s growing – the more likely it is that the forecasted results are going to come true.

So what factors – aside from pure supply and demand for the company’s equity – would potentially justify a higher multiple (i.e. higher price) for the same present value?

Why is one business that is in roughly the same starting position as another business sometimes worth 2x, 5x, even 10x more?

Short answer: the expected risk vs reward of the investment

Said another way, risk taking investors who understand they are looking for asymmetric bets are willing to pay a higher price for better odds.

Source: Rigging the Game: How to Achieve Financial Certainty, Navigate Risk and Make Money on Your Own Terms 

So what types of factors might influence the price investors are willing to pay for any asset?

1. Product: Highly engineered product(s), especially critical infrastructure or lifesaving devices
   

2. Market: A large total addressable market, or the ability to expand into adjacent ones
   

3. Revenue: Recurring customer base without significant customer concentration
   

4. Margins: High margin and differentiation from competitors
   

5. Team: Strong leadership team with a track record of success in the asset class
   

6. Growth: The ability to rapidly scale and achieve aggressive growth targets

But how do you value a company that has limited (or no) revenue? Especially companies where there is a significant “risk flashpoint” they have to overcome before they can generate revenue?

To answer this question, we have to think about an investment opportunity as a transfer of risk from the seller to the buyer.

Here’s why…

In the Game of Business, figuring out the price of something is relatively straight forward. 

You have a price for how much something costs to make, how much competing products are selling for, and some amount of profit margin you’re solving for.

For the customer, the risk reversal mechanism often comes in the form of a “make good” or a “refund” from the selling party if the product or service doesn’t perform as advertised.

But in the Game of Money, we’re not buying and selling tangible goods and services. We are buying and selling financial products called securities. 

And with the exception of annuities and US treasuries, no security can be considered a “risk free” asset.

This means by definition, in the Game of Money, the buyer is actually purchasing risk from the sell side…

And the buy side expects to be appropriately compensated for the risk they are being asked to take.

So how does the price of the risk get determined? 

Generally speaking, this is the value the Banker (aka “Sponsor” or “Lead Investor”) brings to the deal – they are responsible for underwriting the risk, setting the price, and making a market to transfer the risk (and potential future value) from the sell side (the Issuer) to the buy side (the Investor). 

For example, when an Issuer raises debt capital by selling bonds, in exchange for money, the company promises to repay the principal at a later date (plus interest).

The risk transferred here includes the credit risk that the issuer might default on its payments. 

However, if the Issuer doesn’t have any cash flow – and therefore have no way of repaying debt – this means their only real option is to raise equity capital by selling stock.

When Investors purchase stock, they essentially accept the risk associated with the company's future performance (i.e. execution risk). 

In return, they gain potential for high returns through appreciation of their equity value if the company succeeds.

But again, when investing in an early stage company – which should be considered high risk and speculative in nature – how do we think about pricing the risk we’re being asked to take? 

For this reason, many professional early stage investors view the price they are willing to pay today based on a “multi stage call option pricing” rationale.

This perspective is based on the idea that investing in a startup involves committing capital in stages, contingent upon the venture meeting certain developmental milestones.

And if we are looking to take smarter investment risks through asymmetric bets…

One of the simplest ways we can manage risk is through proper position sizing and follow on rounds. 

To understand why, here’s a quote from one of my all time favorite books on investing in high tech startups as a small balance investor, The Gorilla Game: Picking Winners in High Technology, by Geoffrey Moore (published in 1998)…

Simply put, if we assume that any early stage company is going to raise multiple rounds of private capital before a liquidity event…

We will have multiple chances to invest – usually at higher prices – as the company matures and “de risks.”

If we assume this to be true, we should consider placing more – but smaller – bets across multiple companies (i.e. buying a basket of stocks)…

Then, as it becomes more clear which ones will be winners and losers, we cut the losers short and add more to the potential winners.

Final Thoughts: The Easiest Alpha is Price

For many reasons, the simplest way to achieve a consensus around price is to identify the significant “risk flashpoints” in the corporate lifecycle…

And then assigning a “value” to the company for successfully moving through these milestones – ideally on (or ahead) of forecast, and on (or under) budget. 

In essence, we are looking for signals that indicate the believability of Management’s forecast – and ideally, some sort of track record where Management has demonstrated their ability to make and meet forecasts in the past.

In other words, we’re looking for Alpha.

With this idea in mind, Equifund strives to be a source of Alpha for our members by underwriting (and pricing) risk.

According to Eric Falkstein’s book “Finding Alpha: The Search for Alpha When Risk and Return Break Down”:

This idea of figuring out what we’re good at, in order to find our source of Alpha, has been a key tenet at Equifund. 

And as much as we’d like to say we are genius stock pickers who can predict what companies will be massive winners…

We know that, statistically speaking, the easiest way to deliver better investment returns is to simply reduce fee drag and negotiate an appropriate risk-adjusted price.

And when you’re a small balance check writer with non-controlling shares in a privately held company…

In many ways, this is the single easiest way to target better investment returns as a completely passive investor.

Looking for an AI-powered oil and gas play?

If so, you might be interested in checking out Pytheas Energy – an upstream oil and gas producer that is currently raising capital on the Equifund Crowdfunding Platform. 

[Disclaimer: By law, Equifund cannot make any buy/sell recommendations, provide individualized investment advice, or otherwise “endorse” any specific investment opportunity – especially ones listed on the Equifund Crowdfunding Platform due to the obvious conflicts of interest. Please do not make any investment decisions based solely on the information published in this article.]

If we believe the secret to successful investing is to correctly identify trends before the market has reached a new consensus on price (i.e., we are narrative driven investors)…

Almost by default, this means we need to have access to information BEFORE it becomes mainstream.

And perhaps more importantly, we need to have the courage and conviction to invest in unloved, out-of-cycle, and under-invested segments of the markets.

Why? Because according to Bank of America, valuation levels explain 80% of the market's return over a 10-year period.

And if we are to believe this one simple idea is true – that the valuation we invest at is arguably the most important factor…

Is price the only thing that makes a “good deal” good?

That’s the topic of today’s issue of Private Capital Insider.

-Jake Hoffberg

P.S. Interested in investing in oil and gas? Pytheas Energy – an AI-powered, early stage oil and gas producer operating in Texas – is raising capital on the Equifund Crowd Funding Portal. 

Go here to review their offering page and learn more.

Private Investor Networking: Unlocking your biggest competitive advantage in private markets

In a previous issue of Private Capital Insider, we talked about one of the “secret weapons” for investing in private markets…

Networking!

According to Denis Shapiro, author of The Alternative Investment Almanac: Expert Insights on Building Personal Wealth in Non-Traditional Ways,

Why? Because if you don’t have proprietary data – and ideally, access to that information before other people do – it’s extremely difficult to gain any sort of “edge” when investing…

Especially as a small balance check writer!

That’s why earlier this week, I decided to attend a monthly social event hosted by a national angel investor community – at a rather swanky restaurant – to do some “boots on the ground” investigating.

After I feasted on the upscale burgers (aka “sliders”) and pizza (aka “flatbread”) – not to mention, spent the ~$26 + tip that cocktails cost in places like this…

I had the chance to talk to a handful of entrepreneurs, investors, and fund managers about what they’re investing in (as well as why they like this specific angel group). 

So, what did we talk about?

When we weren’t talking about how awesome it is to retire in your 40s and 50s, thanks to a significant liquidity event… not to mention the many houses, boats, cars, bottles of scotch, and cigars they have…

The conversation eventually centered around some version of…

“What do you like to invest in?”

To no surprise, many of the now-retired software engineers sitting on an 8-figure nest egg like to invest in software companies involved in spaces where they’ve built software.

A startup attorney I talked to – who told me plenty of war stories of deals gone bad – was very excited about a cyber security deal he was working on (not to mention anything AI).

A former CEO of a biotech company was primarily investing in real estate (I unfortunately didn’t get to ask him much about it).

And a fund manager with 20 years of investing experience said “I’m not a venture investor, and I don’t like to invest in startups. I want to invest in profitable companies that can scale.”

None of these answers were particularly surprising…

But what was surprising is the response I got from almost everyone when I told them what I like to invest in…

Well underwritten deals that are structured (and priced) in a way that allows me to generate an attractive return within 18-36 months (not 7-10 years), ideally via an IPO so I can hold my position longer if I want to… 

Here’s why…

As a small-balance check writer who is investing my own money – not a fund manager getting a guaranteed salary to take risk with other people’s money… 

• I am obsessive about managing downside risk.

I’m sure we can all agree that we’re looking for above-market returns to compensate for the risk we’re taking…

But that doesn’t mean I want to take stupid risks in order to chase returns.

• I care a lot about liquidity 

I don’t want to be stuck in a fund for 7-10 years, I want to be liquid in 18-36 months.

• I want to invest in actual companies, run by competent operators, who are focused on growing enterprise value and profitability.

Why? Because good products don’t necessarily make good companies… and good companies don’t necessarily make good investments. 

But good investments often have one important thing in common… They can get access to all the money they need because investors trust managements’ ability to forecast results.

In other words, the company has excellent financial controls, reporting systems, and governance. 

That’s why, for the most part, I don’t care about:

• Massive Total Addressable Markets: Big markets almost always mean competing against cashed-up competitors and entrenched incumbents, which in turn means raising a LOT of money – and probably operating at a loss – for a long time.
  
  With my small check size, I’d rather invest in a business that will need less than $30m (ideally less than $15m) in total equity capital to reach profitability in the next 18-36 months.
  

• What sector they operate in: In fact, I almost prefer it if they're not in a “hot” sector. Ideally, I am investing in “out of cycle” deals that will turn “hot” as I approach the desired exit window (18-36 months).
  
  This gives me a better chance to “buy low, sell high” instead of trying to “buy high, sell higher”
  

• What they sell (only that there is existing demand for the solution): you do not need to “change the world” or have “breakthrough technology” to sell products and services to customers looking to buy. But you will need enormous amounts of money to convince people to buy things they don’t already want.
  
  If the company hasn’t figured out what their product is and how to sell it – or can’t otherwise prove there is existing demand they can snap into – that is a hard pass for me.
  
  “Sales and marketing” is where money goes to die.
  

• A visionary founder or tech wunderkind: Before you see them on trial for whatever fraud or ponzi scheme they were running, you probably saw them on the cover of Forbes or giving a TedTalk somewhere.
  
  While charismatic people often attract investor attention, I have no interest in using my money to pay for expensive people to do research and development.
  
  “R&D” is also a place where money goes to die.
  

• A name brand investor: I would probably prefer there isn’t any institutional level money in the deal, as that probably means I’m going to be paying up.

In fact, we’ll take it a step further…

To some degree, the ONLY thing I care about is “who am I going to sell my shares to at a future date?”

Because like it or not, if you’re investing in early-stage companies, this is almost certainly the ONLY way you’re getting a return on capital.

And to bring our conversation back to its beginning… 

This is the reason why valuation/price is one of the most important factors of a “good deal.”

In the Game of Money, almost everything can be explained through supply and demand. 

For example, there is a nearly infinite demand for money with a finite supply of it.

In a nutshell, that’s what makes the “money business” such a great business. 

And if you’re in a position where you are one of a few suppliers of capital, in a niche that you understand very well…

This gives you an enormous “edge” over larger investors in broader asset classes.

However, as a small-balance check writer, you have to manage this supply/demand imbalance on the frontend (i.e., you can get in at a good price on favorable terms)…

With all of the capital requirements on the backend (i.e., the company can continue to raise capital on attractive terms that protect your equity). 

The only problem? Because you are a small check writer, you have no real ability to underwrite the deal, price the deal, or otherwise negotiate the terms. 

And more to the point, you have no ability to control the deal once you’re in it, in order to protect your position on the cap table, or otherwise drive business results. 

So how do you get yourself into this “good deal” goldilocks zone where you can get your small check in the deal BEFORE a major inflection point that drives valuation? 

In many ways, it means you need to invest alongside a “banker” – sometimes called a sponsor or lead investor – who can do this work for you.

It’s easier to underwrite a banker than it is to underwrite an individual investment

If Equifund operated inside of the “normal” institutional channels, we would probably be considered an “investment bank” or “sponsor” of some kind (i.e., we are on the sell side).

And if we wanted to get distribution from the traditional broker/advisor channel in order to get our offering “recommended” to their clients…

Chances are, they would spend more time underwriting Equifund as a firm than they would underwriting an individual offering. 

Why? Because underwriting is time consuming – it takes the same amount of time to underwrite a $5-10m financing as a $50-100m financing, but you can put more capital to work in the larger deal (and it’s probably lower risk). 

But if the advisor has a relationship with the sponsor, understands how they think about deal structuring and valuation, and there’s an assumption of good governance…

It’s kind of like going to a restaurant where the chef knows what you like to eat, and no matter what you order, it’ll be something you’ll enjoy.

And for the chefs in our restaurant, underwriting and due diligence is all about looking to properly price in the execution risk of the stage we’re in right now. 

Great management teams want to work with Equifund because we offer them an attractive proposition – for great operators who aren’t great fundraisers, we will help you raise all the capital you need, while you focus on growing the business.

And as long as management teams can accept a lower valuation on the frontend to compensate our members for the execution risk at this early stage…

When they raise their next round of financing, assuming they achieved their forecast, it sets them up to be in an excellent position to continue raising capital at higher valuations on more favorable terms.

And if there is always a market for the company’s equity, because it’s priced correctly for the market environment we’re in…

It means we – the small-balance check writers – have far more opportunities to sell our shares to someone else.

Looking for an AI-powered oil and gas play?

If so, you might be interested in checking out Pytheas Energy – an upstream oil and gas producer that is currently raising capital on the Equifund Crowdfunding Platform. 

[Disclaimer: By law, Equifund cannot make any buy/sell recommendations, provide individualized investment advice, or otherwise “endorse” any specific investment opportunity – especially ones listed on the Equifund Crowdfunding Platform due to the obvious conflicts of interest. Please do not make any investment decisions based solely on the information published in this article.]

While everyone else is talking about Google and Microsoft crushing earnings, Joe Biden’s proposed 44.6% capital gains tax (which includes an absurd 25% tax on unrealized gains), and the bizarre state of affairs on college campuses…

Here are the stories you haven’t been hearing much about:

• Exxon, Chevron Earnings Fall. Supermajors Spar Over South America's Oil Jewel: ExxonMobil (XOM) and Chevron (CVX) reported first-quarter earnings and revenue declines early Friday as lower refining margins and natural gas prices took a toll on the energy giants. Meanwhile, the two U.S. supermajors continue to squabble over Chevron's attempt to move into oil-rich Guyana.

On the face of it, the official narrative makes sense – if all we do is look at oil prices from Q4-’22/Q1-’23 to Q4-’23/Q1’24… they look pretty similar in terms of a price decline coming out of the holiday season. 

And based on what we know about natural gas prices cratering due to oversupply in Texas, this tracks too. 

U.S. and European oil companies reported weaker first quarter results on Friday due to a sharp drop in natural gas prices compared with a year ago. Source: Reuters

But in early February, ExxonMobil and Chevron forecast nearly flat oil production for 2024 compared to 2023 levels.

And the Energy Information Administration estimates the Permian Basin in West Texas and New Mexico will produce more than six million barrels of oil per day in April. 

But as we’ve covered in previous issues, what if the “story they’re not telling you” is the alleged record production we’re supposed to be seeing from the Permian Basin in 2024 simply isn’t going to happen?

Does this all point to the end of the record production coming from Permian Shale – not to mention, the catalyst that finally sends oil above $100?

That’s the topic of today’s Weekend Edition.

-Equifund Publishing

P.S. Interested in investing in oil and gas? Pytheas Energy – an AI-powered, early stage oil and gas producer operating in Texas – is raising capital on the Equifund Crowd Funding Portal. 

Go here to review their offering page and learn more.

Is This The End of Permian Shale?

For the past several weeks in Private Capital Insider – both in the Weekday and Weekend Editions – we’ve been talking a lot about what's going on in oil and gas.

Why? Two important reasons: 

1. At the time of publishing, the only current listing on the Equifund Crowd Funding Portal happens to be a Permian-based oil and gas play, so we’re obviously providing some market coverage on the sector.
   

2. Because energy prices have such a noticeable impact across substantially all parts of the economy, the energy markets serve as a useful bellwether for what's to come in the stock market.

Coming into 2024, there was a pretty clear narrative from one of the main “official” sources, the Energy Information Administration (EIA): global benchmark for crude oil, may average $93 per barrel, up from an expected 2023 global average of $84 per barrel.

However, as Yogi Berra allegedly said, “It is difficult to make predictions, especially about the future.” 

As such, forecasts have to get revised as new data comes in. 

According to the EIA’s April 2024 Short-Term Energy Outlook (called the STEO),

While most people probably aren’t keeping track of the price of a barrel of oil…

A majority of Americans are aware what it costs to fill up their tanks, making gasoline prices (alongside food and rent) an important issue on the campaign trail.

Source: CNBC

President Joe Biden’s top economic advisor recently said the White House will “make sure gas prices remain affordable,” when asked whether the administration would consider tapping the Strategic Petroleum Reserve.

Despite the SPR’s low levels, the Biden administration has space to release another 60 million barrels of crude oil, according to JPMorgan.

But thanks to Iran’s attack on Israel – which for some reason, the market seemed to shrug off – if Israel retaliates, we could see an escalation in the Middle East that could cause a supply side shock. 

Source: CNBC

According to the World Bank, a moderate to severe disruption could send prices soaring.

But as we covered previously… What if that shortfall in supply happened somewhere else, for reasons that have nothing to do with geopolitical conflict or voluntary supply cuts?

Enter: The Permian Basin Conspiracy Theory

In previous issues, we’ve disclosed our skepticism that major downward revisions of January 2024 production numbers were due to “cold weather”...

And even though there was, in fact, cold weather that likely impacted production…

We’re not the only ones starting to question the official data coming from the EIA.

But if we can’t trust the data coming from government agencies… What can we trust?

In a few words, this is one of the key reasons why it’s important to have access to first-party data – especially if you’re planning to invest in early stage oil and gas deals.

In many ways, you can’t ever trust the “official” narrative coming from the “official” sources when doing due diligence. 

Not because there is some grand conspiracy to hide information from you (although maybe that’s also happening)...

It’s because of the value of proprietary information. 

If you are relying solely on third-party data published by government agencies and mainstream sources, it means everyone else has access to that information as well. 

And more to the point, unless the data is specific to the project you’re investing in, it doesn’t really help you in terms of making an investment decision in that specific opportunity.

If you don’t have proprietary data – and ideally, access to that information before other people do – it’s extremely difficult to gain any sort of “edge” when investing.

Generally speaking, oil and gas wells generate an enormous amount of data, which, oftentimes, must be manually transformed and interpreted by highly skilled labor.

However, by leveraging large language models, Josh Zuker – CEO of Pytheas Energy – believes he can significantly improve operating margins through data-driven asset management and artificial intelligence.

Want to learn more about how Pytheas Energy is utilizing artificial intelligence to identify, manage, and potentially improve output from low-volume wells?

Go here now to read all about it.

For investors looking for a way to turn a small bet on oil prices going higher into potential gains, you might consider buying junior oil stocks, oil futures, or options contracts… but each has its risks. 

• Trading physical oil in the short and medium term can be difficult and costly. 

• Futures and options can be complicated and extremely risky for investors who do not have a deep understanding of the derivatives markets. 

• While oil stocks may appear to be surging, they tend to be far more volatile than most investors can stomach.

But what if there was a way to make a bet on oil that offered the downside protection of real assets, the more predictable cash flow of real estate, and the upside potential of technology stocks?

Even better, what if you could buy into this investment opportunity at a discount to market value?

Chances are, you’d be looking at what could rightfully be considered the value investor's “sweet spot.” 

And just in case you’re wondering what the Patron Saint of Value Investing, Warren Buffet, thinks about energy stocks… 

Berkshire Hathaway added $588.7 million – more than 10 million shares – to his bet on Occidental Petroleum (OXY) between Dec. 11-Dec. 13 @ ~$56/share; then, another 5.18 million shares on Dec 19th, and another 4.3m shares on Feb 1, 2024.

Source: StockCircle

With ~$15 billion of total capital invested into OXY since 2019 – a ~28.2% stake of this $53 billion company – thanks to OXY’s dividend, Berkshire receives ~$218.3 million in annual dividend income from this position. 

Occidental pays a dividend, currently yielding 1.5%. Berkshire receives $218.3 million in dividend income from this position. Source: Yahoo Finance

According to Berkshire’s 2023 letter to shareholders

Just to be clear, we’re not making any sort of buy/sell recommendation on OXY…

But if one of history’s best investors has major positions in oil and gas stocks – Berkshire’s fifth largest position is Chevron and sixth largest position is Occidental Petroleum – we take notice.

So, before you go hunting for “value” in the volatile energy sector – especially in smaller, private oil and gas projects…

The #1 thing you must understand is how oil and gas assets are valued, what types of corporate milestones drive valuation, and the many ways management may return capital to investors.

That’s the topic of today’s issue of Private Capital Insider.

Let’s get into it,

-Jake Hoffberg

P.S. Interested in investing in oil and gas? Pytheas Energy – an AI-powered, early-stage oil and gas producer operating in Texas – is raising capital on the Equifund Crowd Funding Portal. 

Go here to review their offering page and learn more.

P.P.S. Want more investor education on oil and gas stocks? If so, be sure to check out our previous coverage on the sector. 

• Is oil and gas a good investment?

• Oil, Gas, and the Texas Paradox

• Texas, Oil, and the Myth of Renewable Energy

• How AI investors can ride the oil and gas boom

• Investing in American “Craft Oil” Producers

A Brief Primer on Investing in Oil and Gas: Why Family Offices are getting in when institutions are getting out

One of the themes we’ll come back to over and over again in Private Capital Insider are the major problems small balance investors have when putting capital to work in private deals. 

Generally speaking, we can think about these challenges across five categories: 

1. Access: Getting access to the top funds is already hard for professional investors with hundreds of millions of dollars under management. You – the average retail investor – have almost no chance of getting invited into the “club.”
   

2. Underwriting: Even if you did have access, you likely don’t have the time or resources required to perform any substantive due diligence.
   

3. Check Size: Even if you did have access and could underwrite the deal, you may not have enough money to meet the minimums (or if you do, it’s probably a significant portion of your investable assets).
   

4. Liquidity: Even if you could get your money in a deal, most retail investors don’t want to get locked up for 7-10+ years.
   

5. Fees: If you are investing through fund vehicles, fees over the life of the fund can seriously eat into returns. In order to produce a 15% net-of-fee return, an investor in a fund vehicle needs to have the manager produce a gross-of-fee return of 22-24%+ (depending on fee structure).

All said and done, this does not paint a favorable proposition for retail investors looking to diversify into private markets on their own.

For this reason, it’s highly likely that retail investors will rely on some sort of relationship with an intermediary/promoter/advisor of some sort to “introduce” them to the types of investment opportunities they are looking for.

However, before we jump head first into a sexy sounding “single stock” opportunity – especially an early stage investment opportunity in the private markets…

We think it’s a good idea to be aware of all the available options you have to express your investment thesis to establish an appropriate “benchmark.”

Why? Because inevitably, you’re going to have questions – like “is this a good investment opportunity?” or “how much should I invest?” – that can only be answered relative to your other available options (called “Opportunity Cost”).

For example, if you believe there’s money to be made in energy stocks due to rising oil and gas prices, and you’re looking for a way to get “exposure” to this theme…

Generally speaking, you’ve got four major strategies to choose from: 

• Passive – Buy and Hold Sector-Based ETFs: The idea here is to “hire” a manager to do the stock picking for you.
  

• Semi-Passive – Create your own basket: Maybe you like the idea of a diversified basket of stocks for the “energy” allocation in your portfolio, but you want something more customized than the currently available products.
  

• Active – Day trading options, futures, and leveraged ETFs: Just in case oil and gas stocks aren’t volatile enough for you, there’s no shortage of “lottery ticket” style opportunities for short term bets.
  

• You Only Live Once – Bet it all (or just way too much) on a single stock: As bad of an idea as this is, we find it’s surprisingly common that individual investors put WAY too much money into a single position they may not fully understand.

Which strategy is right for you? Again, this is another question that can only be answered relative to your financial goals and asset allocation model (i.e., what percentage of your portfolio are you looking to allocate to energy?).

For example, in a world where more than 1,600 institutional investors have soured on energy and are actively divesting from the sector – By 2022, $22 trillion had been divested from fossil fuels across public and private markets, with over $40 trillion assets now committed to divestment, representing almost two-thirds of the total global pension fund assets under management ($56 trillion)...

Source: Wikipedia

Family offices are stepping up to fund oil and gas plays, as this “forced selling” creates an obvious buyers market with the chance to pick up quality assets at attractive valuations. 

According to Joe Flack, attorney for Jackson Walker, 

According to Mike Vlasic, whose family office has invested profitably in oil and gas for decades,

According to one of the Vlasics’ early partners, Frank Lodzinski of Earthstone Energy,

And just in case you’re not convinced this is actually happening, be sure to check out this Digital Wildcatters Podcast with the head of Stephens Inc’s Energy practice.

To be clear, just because family offices are investing in upstream oil and gas plays doesn’t mean you should. 

But if you are considering an Upstream investment – and ideally one where you can get in at an attractive valuation – let’s talk about how these assets are priced.

An Introduction to Valuing Oil and Gas Stocks

The oil and gas industry's value chain is classified into three distinct segments or sectors: 

1. Upstream (also known as exploration and production, or "E&P") extracts feedstocks used to produce fuels and petrochemicals
   

2. Midstream moves and stores feedstocks and finished products
   

3. Downstream processes crude oil and natural gas into finished products

Source: Eland Cables

We’re going to stay focused on Upstream for this article, as this is the most likely type of company you’ll see in private markets.

Generally speaking, the value of an E&P company may be estimated by calculating the fair value of its reserves and then aggregating this with the value of other net assets on its balance sheet, assuming those net assets have been assigned market value. 

Reserves can be classified into three main categories:

• P1 – Proved Reserves: quantities of oil or natural gas that are recoverable in future years from known reservoirs under existing economic and operating conditions

• P2 – Probable Reserves: quantities that have a 50% probability that the reserves quantities will be lower than estimated, in accordance with the engineering definition of the American Petroleum Institute 

• P3 – Possible Reserves: quantities that have a 10% probability that reserves quantities are higher than estimated, and a 90% probability that reserves quantities will be lower than estimated

Reserve reports, generally prepared independently by petroleum (or reserve) engineers, are used for this purpose. The reserve report is essentially a discounted cash flow model for a company’s oil and gas reserves, on a pre-income tax basis. 

The report typically includes the present value (PV) of the projected income based on various benchmark rates, frequently ranging from 10% to 25% discount (often referred to as PV 10 to PV 25).

While the discounted cash flow model is a mainstay of valuation techniques, flowing barrels per day (BPD) is a key metric used by oil and gas companies in both operational and valuation contexts. 

Essentially, BPD represents the volume of oil or gas produced daily from a particular well, field, or asset. For this reason, BPD is crucial for assessing the production capacity, revenue potential, and overall performance of oil and gas assets. 

Here's how upstream oil and gas companies utilize BPD as a valuation metric:

• Production Forecasting: BPD serves as a fundamental input for production forecasting. Oil and gas companies use historical production data, reservoir analysis, and well performance metrics to estimate future production levels.
  
  By projecting the expected BPD output over time, companies can assess the revenue generation potential and make strategic decisions regarding asset development, investment, and operational planning.

• Revenue Estimation: BPD directly impacts revenue generation for oil and gas companies. The daily production volume, along with prevailing commodity prices, determines the revenue stream derived from the sale of oil and gas products.
  
  Companies use BPD as a basis for revenue forecasting, budgeting, and financial planning. Higher BPD levels typically translate to increased revenue potential, assuming stable or favorable market conditions.

• Asset Valuation: BPD plays a significant role in the valuation of oil and gas assets, particularly producing fields or reserves. When assessing the worth of an oil or gas asset, investors, analysts, and industry professionals consider the current and projected production levels.
  
  Higher BPD figures indicate greater production capacity and revenue potential, which can positively influence the valuation of the asset. Valuation methodologies such as the Income Approach often incorporate BPD projections to estimate future cash flows and derive the present value of the asset.

• Comparative Analysis: Oil and gas companies and investors often use BPD as a basis for comparative analysis. When evaluating different assets or investment opportunities, stakeholders may compare the BPD metrics to assess relative production efficiency, reservoir quality, and operational performance.
  
  Comparative analysis helps in identifying high-performing assets, optimizing portfolio allocation, and identifying potential acquisition or divestiture targets.

• Operational Performance Evaluation: Monitoring BPD provides oil and gas companies with insights into the operational performance of their assets.
  
  Fluctuations in BPD levels may indicate changes in reservoir dynamics, well productivity, or production efficiency. By tracking BPD metrics over time, companies can identify operational challenges, optimize production processes, and implement strategies to enhance asset performance and maximize production yields.

Similar to other industries, as the company increases in size and scale, investors are often willing to assign higher multiples as the certainty of future cash flow increases.

This means that as the company begins to grow in size and scale, the valuation multiple on BPD may potentially increase.

According to Pytheas Energy’s management team,

However, while BPD is a useful “look back” metric of historical production and growth/decline, it cannot be relied on in a vacuum for valuation, as it does not take into consideration future production/future cash flow for distributions.

For this reason, to establish a more precise valuation, we also have to consider revenue, margins, targeted yields and distribution model – as well as how these values may change over time as the business matures in size.

However, it’s important for investors considering an E&P investment to understand what this type of valuation model is sensitive to – namely, fluctuations in commodity prices and production rates.

Let’s start with commodity risk…

If oil prices increase (decrease), this has the potential to increase (decrease)…

• the value of the underlying properties

• the cash flow from the assets acquired

• The overall liquidity in the market for these assets

If you want to learn more about oil price forecasts, be sure to check out some of our other coverage on the topic.

[Editor’s note: Our view at Equifund is we think oil prices are likely going to continue to trade above $80 – with a potentially clear path to $100+ – for the next few years]

However, because every investment is subject to the market forces that determine the commodity price, it’s a risk we just have to accept. 

In order to manage commodity risk, the major thing we need to keep an eye on is the average price of oil and gas required to produce at a profit (referred to as the “all-in sustainable cost” or AISC in the mining world).

While this commodity risk has the potential to create plenty of volatility that could blow up the investment opportunity…

Oil has to be one of the best commodities to own in a rising inflation environment (as energy prices tend to be a significant driver of inflation).

However, assuming oil prices remain above the AISC of the field, the main thing we’re looking at is management’s ability to improve production. 

Now let’s talk about execution risk…

Every E&P has essentially the same “Fix and Flip” business model –  buy low, sell high, and don’t lose too much money in between.

Fundamentally, this means we need to believe in Management’s ability to originate (and close) deals, manage the property, and dispose of them at a profit. 

On the buying and selling side…

One of the nice parts about buying oil and gas assets is that there’s a very “bright line” method for determining asset values – the reserve reports

Unlike other early stage companies where much of the valuation is speculative, based heavily on the future value of the intellectual property or technology, with much of the value relying on an often aggressive forward looking forecast…

All producing wells come with a reserve report that  more or less tie future production to historical production rates – which, in turn, sets the fair market value for the asset. 

While asset-light businesses (i.e., technology companies) might have the ability to grow rapidly and deliver extraordinary returns, they offer little downside protection for investors.

Conversely, asset-heavy businesses (i.e., oil and gas companies) have actual assets on the balance sheet that provide downside protection. 

Not to mention, when you’ve got a highly in-demand commodity like oil and gas, there’s basically always a willing buyer somewhere.

For the sake of simplicity, let’s just say that buying and selling oil and gas assets is relatively straightforward, and everyone is equally as good at it.

This means the true “value creation” mechanism for shareholders lies in Management’s ability to improve output of the wells. 

For a lot of obvious reasons, there’s a level of excitement around how artificial intelligence can help with this.

Looking for an AI-powered oil and gas play?

If so, you might be interested in checking out Pytheas Energy – an upstream oil and gas producer that is currently raising capital on the Equifund Crowdfunding Platform. 

[Disclaimer: By law, Equifund cannot make any buy/sell recommendations, provide individualized investment advice, or otherwise “endorse” any specific investment opportunity – especially ones listed on the Equifund Crowdfunding Platform due to the obvious conflicts of interest. Please do not make any investment decisions based solely on the information published in this article.]

While everyone else is talking about Morgan Stanley’s anti-money-laundering problems, Rivian and Lucid closing at all-time lows after Ford slashed prices on its electric pickup truck, and O.J. Simpson passing away…

Here are the stories you haven’t been hearing much about:

• Oil Rally Is Driving Texas Gas Prices Below Zero: There’s so much natural gas flowing from Texas wells that producers are paying customers to take it off their hands.
  
  More oil at current prices means more cash. But one hitch is that those wells also produce gas, and right now, the U.S. gas market is glutted — thanks to an unseasonably warm winter that crippled demand.
  
  Stockpiles are nearly 40% above the five-year average. Pipelines are jammed.

What does this all mean for Oil, Gas, and the Texas Paradox?

That’s the topic of today’s Weekend Edition.

-Equifund Publishing

P.S. Interested in investing in oil and gas? Pytheas Energy – an AI-powered, early-stage oil and gas producer operating in Texas – is raising capital on the Equifund Crowd Funding Portal. 

Go here to review their offering page and learn more.

The Texas Oil & Gas Paradox: Why too much natural gas could stall oil production in the Permian Basin

While we are obviously in favor of developing renewable energy sources that work as advertised…

As investors, it’s important we take notice when the narrative pendulum begins to swing in the other direction. 

The Anti-ESG campaign that’s been running since 2022 appears to have taken hold, and the “rubber” of policy is beginning to meet the “road” of reality. 

Not to mention, the return on regional bank lending to oil and gas.

A group of US regional banks is ratcheting up lending to oil, gas and coal clients, grabbing market share as bigger European rivals back away. Source: Bloomberg, April 14th, 2024

Like it or not, we need oil and gas – and will for the foreseeable future. 

And as the markets start to call for $100 oil – especially now that Iran has attacked Israel – we could be on the edge of a major shift in the narrative around oil. 

Here are some of the headlines (and notable quotes) from this week:

Source: Yahoo Finance, April 5, 2024

“There are a lot of geopolitical reasons to be concerned about supply risks," Claudio Galimberti, senior vice president at Rystad Energy, told Yahoo Finance this week of oil's upward price trend.

"Therefore, I would say triple-digit oil prices are not that far at this point. And this is where we could end up in the next couple of months for sure,” he added.

“Russia is a major oil producer. So the moment you have potentially 500,000, [or] a million barrels a day temporarily impacted — this is when you can see oil prices notch up potentially another $5, $10, and then you are in triple digits,” said Galimberti.

Source: MarketWatch, April 8, 2024

“Brent has rallied to $91/bbl because the market is now pricing in a firmer demand outlook and some geopolitical downside risks to oil supply, which together have boosted positioning and valuation,” says Goldman.

Source: Forbes, April 9, 2024

Officially, OPEC+ rarely admits its moves are designed to shore up crude oil prices. 

However, it knows that the prevailing market conditions give it a measure of control over the direction of the market both to the downside and upside, despite rising non-OPEC production.

But while it would like a sufficiently high price of at least $80 or more, a level that is very high - say $110 to $125 - might well be self-defeating in 2024. 

That's because should Brent hit such a high range, its inflationary impact would stop global central banks from cutting interest rates and maintain them at their current elevated levels for longer.

Demand destruction in its wake is something that OPEC+ will not want. A range between $80-90 might well be what it can work with.

To summarize…

Should there be ~500,000 barrels of net supply shortage for some reason, oil could go above $100, and that would be bad for inflation – but really, it’s bad for central bankers.

In somewhat related news, inflation also seems to be bad news for Wall Street bankers, as JPMorgan is now leading the anti “higher rates fight inflation” narrative (probably nothing, right?).

Source: Bloomberg

As a reminder, we’ve already had the January EIA forecasts revised down by ~762,000 barrels per day due to “bad weather” (which we don’t buy as the reason why). 

U.S. January oil production decreased by 762 kb/d to 12,533 kb/d. The large decrease was due to a severe US winter storm that was spread across most central states. The largest drop came from Texas, 288 kb/d. Source: PeakOilBarrel.com

According to Christine Guerrero – former petroleum engineer for companies like Chevron, Hess, and Schlumberger,

But here’s the part of the story most people miss. Saudi Arabia – who seems to care about having a balanced budget (imagine that) – needs oil prices in the ~$90 range.

Source: @AyeshaTariq

Why does this matter? Because the oil wars have been – in many ways – a war between bankers (and their ability to maintain financing for oil investments during low prices).

For example, in the Oil War of 2014, here’s the story most people have heard: With American shale hitting the market, Saudi Arabia decides to flood the market in an effort to collapse prices and bankrupt the U.S. Shale industry.

Prices crashed from above $114 per barrel in 2014 to about $27 in 2016.

Believing that the new U.S. supply was high cost, they expected a couple of years of ruinously low prices would drive these new producers out of business.

U.S. shale responded with innovation, cost cutting, and major efficiency gains – all of which lowered break-even prices considerably.

Source: World Bank

After several years of massive government deficits as oil revenues slumped, OPEC capitulates to U.S. Shale, making it the de facto marginal cost producer on the international oil market.

Source: Forbes

In September 2016, Saudi Arabia and Russia agreed to cooperate in managing the price of oil, creating an informal alliance of OPEC and non-OPEC producers that was dubbed "OPEC+."

Here’s the story most people haven’t heard: the U.S. allegedly pressured Saudi Arabia to overproduce crude, and intentionally crash prices on the global market, in order to hurt the export-reliant economies of Russia, Iran, and Venezuela.

According to Rachel Bronson, author of “Thicker Than Oil: America's Uneasy Partnership with Saudi Arabia,”

Since then, we’ve also had the alleged Saudi-Russia Price War during COVID that sent prices negative.

According to a 2020 article published by the Federal Bank of Dallas,

For a while now, the world has assumed that Saudi Arabia can produce oil at a price as low as $10 per barrel from some fields, with Russia arguably requiring an average price of $20 or $30…

But what if those assumptions are wrong?

Or more importantly, what if they simply don’t have the available “swing” capacity to increase production – regardless of oil prices?

Especially if Houthi rebel attacks in the Red Sea intensify, and continue to delay shipments from the Middle East…

Or if, oh I dunno, Iran attacks Israel.

If that’s the case, this means we’d have to expect a significant amount of supply to come online from somewhere outside the three largest players.

While there’s a lot of excitement around the major oil find in South America’s Guyana – which has been described as a “transformative” discovery…

Source: Geopolitical Futures

We haven’t even hit the seasonal summertime demand, but are already seeing signs of a supply squeeze forming – Mexico, the U.S., Qatar and Iraq cut their combined oil flows by more than one million barrels a day in March.

Source: Bloomberg

According to Bloomberg,

But again, we come back to the critical question here about supply…

What if U.S. producers don’t have the amount of supply they think they do? Or even if they did, what happens if they – for whatever reason – can’t increase production? 

Strangely enough, the limiting factor in Permian oil production is pipeline capacity for natural gas. 

According to Andy Lipow, president of Lipow Oil Associates:

At West Texas's key trading spot, the Waha Hub, prices have been negative for the majority of March and into April, according to government data released this week. That means producers have essentially paid someone to take it off their hands.

Why? Because in the Permian, the main business model is producing crude oil – any natural gas produced is, in many ways, considered a “free” byproduct.

In fact, once upon a time, oil companies would simply burn it (called “flaring”) to get rid of it. 

According to Christine Guerrero,

Today, flaring is largely considered a “no-no” and generally frowned upon.

Not to mention, a new satellite – called MethaneSAT – backed by Alphabet Inc's Google and the Environmental Defense Fund, launched with a mission to pinpoint the oil and gas industry’s methane emissions from space.

The Environmental Defense Fund said the data will bring accountability to the more than 50 oil and gas companies which, at the Dubai COP28 climate summit in December, pledged to zero out methane and eliminate routine gas flaring.

This, in an effort to “help those preparing to comply” with forthcoming methane regulations in the EU and the U.S., including a methane pollution fee.

However, as oil fields age, they tend to get gassier – about one-third of all the flow from the Permian Basin is now associated gas, with wells becoming gassier and wetter farther west in the Delaware Basin of West Texas and southeastern New Mexico.

With that said, the Gas to Oil ratio for the Permian has been far more stable compared to other unconventional plays. 

Source: NoviLabs

On one hand, there’s a lot to like about natural gas, if you’re into low-cost and relatively “clean” fuel sources. 

But unless you’ve got enough infrastructure to actually MOVE that gas somewhere, oil production is artificially capped. 

Also according to Guerrero,

And as we’ve already covered, because of the dramatic decline rate of “short cycle” shale wells, it requires constant drilling to simply maintain production (let alone increase it).

Not to mention the fact that bringing these short cycle wells online requires a tremendous amount of materials and labor…

A key reason why deep-water exploration and production dominates in terms of investment interest.

Does all this point to a coming oil supply squeeze?

As usual, we don’t like to make predictions about the future… but we do like to track “Narratives and Numbers,” and how they change over time. 

While we came into 2024 with record forecasts for oil production…

Based on revised numbers coming in lower than expected, if February and March numbers also miss forecasts, we could see a major shift in the “$100 Oil” narrative, which could cause everything to reprice higher.

Interested in learning more about investing in oil? Go here now to check out Pytheas Energy – an AI-powered oil and gas producer currently raising capital on the Equifund Crowd Funding Portal.

I recently read an article in the Wall Street Journal titled “A Way for Energy Investors to Ride the AI Boom.”

The gist of their thesis is that AI data centers are power-hungry monsters that need increasing amounts of energy. 

While this thesis makes obvious sense to us here at Equifund – especially if we see oil prices continue to climb higher…

We think the more interesting question to ask is the opposite – how can AI investors ride the prospective oil and gas boom?

More specifically, how are oil and gas companies utilizing large language models to crunch their massive amounts of geological data sets to drive efficiencies?

That’s the topic of today’s issue of Private Capital Insider.

Let’s get into it,

-Jake Hoffberg

P.S. Interested in investing in an AI-enabled oil and gas play? Check out Pytheas Energy – an AI-powered, early-stage oil and gas producer operating in Texas – is raising capital on the Equifund Crowd Funding Portal. 

Go here to review their offering page and learn more.

How AI is Transforming Oil and Gas

For those who are new to Private Capital Insider, we’ve been tracking two major market narratives – the somewhat paradoxical “most predicted recession of all time” Doom narrative and the “Just Add AI!” Greed narrative.

On one side of the equation, we’ve got what appears to be a solid bull case for commodities and other real assets – especially if inflation continues, a market crash wipes out financial assets, or some combination of both. 

On the other side, we’ve got the infinite hype machine, pushing a somewhat messianic view of AI’s impact on increasing productivity and reducing costs amidst a growing labor crisis – but also, it could destroy humanity in a Terminator / Matrix style event.

But every coin has three sides – heads, tails, and the edge that separates them.

So how do we combine both of these narratives into a single “super stock” thesis? 

Simple: look for commodity producers that have the ability to dramatically increase free cash flow, thanks to a combination of higher commodity prices, increased productivity, and lower net costs. 

And if we had to pick the two commodities that seem to be most sensitive to inflation – and also happen to be performing this year – it’s Oil and Gold (both of which have outperformed the S&P 500 year-to-date). 

Source: WSJ

According to the Wall Street Journal,

So how does this connect to AI-powered oil and gas stocks? 

It all comes down to whether or not you think we’re looking at a soon-to-be realized supply side squeeze, similar to what we saw in the 1970s (please refer to our April 6th Weekend Edition for more on this).

Here’s why…

On the surface, the merits of the “AI-Powered Oil Stocks” thesis is pretty obvious…

Energy companies rely heavily on data and analytics for innovation, and are built upon increasingly nuanced and complicated processes...

Especially as we see the explosion of sensors – and other “internet of things” (IoT) enabled devices – being utilized throughout the supply chain.

According to a new research report from the IoT analyst firm Berg Insight, the installed base of wireless devices featuring cellular, satellite, or “Low-Power Wide-Area” connectivity in the oil and gas industry is forecasted to grow at a compound annual growth rate of 19.3%, from 7.8 million units at the end of 2023 to 18.8 million connected devices by 2028.

This growth is primarily driven by remote monitoring of assets, such as industrial equipment, tanks, and pipeline infrastructure, in the midstream and downstream segment.

But now the question becomes, “What do you do with all that data?”

Enter: The AI Magic of Machine Learning and Large Language Models

According to a Columbia University interview with Andy Flowers, Director of Advanced Analytics at ConocoPhillips,

To summarize – oil and gas companies have been experimenting with what is now considered “artificial intelligence” for nearly a decade. 

Why? Because oil and gas is an extremely, mathematically intensive sector – especially the upstream segment.

And somewhat ironically, there’s a major challenge with integrating artificial intelligence models into the oil and gas industry – classically trained engineers aren’t computer scientists that can build AI models.

Naturally, this means there’s no shortage of skepticism from the engineers who’ve had success using classical engineering techniques taught for the last 100+ years. 

But despite this resistance, all of the top 20 global oil and gas producers – be they state-owned entities or public-listed ones – have a clear AI strategy for their upstream (i.e., exploration and production), downstream (i.e., processing and refining) and, where applicable, midstream (i.e., pipeline and logistics) businesses.

Here’s a few highlights worth noting:

• AI Market Growth in Oil and Gas: According to a report by Future Market Insights, AI in the oil and gas market is estimated to grow from $3.5 billion in 2024 to $13 billion by 2034, with a 14.1% compound annual growth during the forecast period.
  
  This growth is driven by the need to optimize production, improve safety, and reduce environmental impact.
  

• Strategic AI Investments: According to Forbes, more than 92% of oil and gas companies are investing in AI technologies, with their capital expenditure on AI projected to hit $2.38 billion by the end of 2023, rising to $4.21 billion by the end of 2028.
  

• AI Accelerating Fossil Fuel Extraction: Global Witness highlights that major oil and gas companies like Shell, TotalEnergies, and ExxonMobil are investing in AI to speed up the extraction of oil and gas.
  
  Shell announced the use of generative AI to hasten oil and gas exploration, and BP's venture capital arm invested in an AI company to unlock critical data for its operations.
  

• AI Importance and ROI: An IBM report states that 56% of oil and gas executives surveyed consider AI important to the success of their organizations, with this number expected to increase to 84% in three years. AI investments have generated an average 32% return on investment in the past year.
  

• AWS AI Innovations for Oil and Gas: Amazon Web Services announced five generative AI innovations for the oil and gas industry, aiming to enhance employee productivity and transform businesses. This includes services like Amazon Bedrock and Amazon Titan Embeddings, which are designed to help oil and gas organizations build new generative AI applications.

• Databricks' Data Intelligence Platform for Energy: Databricks launched the Data Intelligence Platform for Energy, which enables companies to better forecast load, predict outages, and balance supply and demand. The platform is being used by industry leaders, such as Shell and TotalEnergies, to optimize energy infrastructure and mitigate volatility.

So if you’re on the “Just Add AI!” bandwagon and are looking for some creative ways to get exposure to AI that doesn’t include buying more NVIDIA stock…

There’s a real case to be made for why asset heavy commodity producers – like oil and gas – make for a compelling investment. 

Instead of being forced to accept nosebleed valuations based on the potential future value of the intellectual property…

Valuations in AI-powered commodity producers should be reflected by the actual financial results – both in the volume of commodities produced, and the profit margin of commodities sold.

Looking for an AI-powered oil and gas play?

If so, you might be interested in checking out Pytheas Energy – an upstream oil and gas producer that is currently raising capital on the Equifund Crowdfunding Platform. 

Here’s some quick backstory on how the company was founded:

CEO Josh Zuker and COO Geoff Brandt have owned and operated a management consulting firm for 10 years, presiding over a number of various projects. 

In 2020, Josh was introduced to an operating oil field in the Permian Basin, which was in danger of being shut down due to regulatory concerns, and he was asked to execute a turnaround. 

While re-engineering that asset’s operations, Josh and Geoff met Hal Matheson, who was instrumental in raising initial investor funds. 

Living through a “crash course” in the oil and gas industry during that successful experience, the team secured the initial ~$1.5 million in initial funds to begin operations of what would eventually become Pytheas Energy.

According to Zuker,

While Zuker was already bullish on the long-recognized opportunity to modernize operations within the oil and gas sector, the release of ChatGPT represented an even bigger opportunity to implement machine learning and artificial intelligence.

Generally speaking, oil and gas wells generate an enormous amount of data that, often times, must be manually transformed and interpreted by highly skilled labor.

However, by leveraging large, language models, Zuker believed he could significantly improve operating margins through data-driven asset management.

To learn more about the company’s capital raise – as well as the investment thesis behind the hidden opportunity in better management of low-volume “stripper wells” – go here now.

While everyone else is talking about the Truth Social insider trading drama, Tesla's weak performance in 2024, and the “end of days” conspiracy theories surrounding the upcoming total eclipse (featuring: ONE TRILLION cicadas that may have a sexually transmitted bug zombie disease)

Here are the stories you haven’t been hearing much about:

• Biden administration cancels buyback of three million barrels to replenish oil stockpile. The Biden administration has canceled two planned oil purchases aimed at replenishing the Strategic Petroleum Reserve, the Department of Energy confirmed Wednesday, saying it was “keeping the taxpayer’s interest at the forefront” of its decision not to purchase as many as three million barrels of oil for a Strategic Petroleum Reserve site in Louisiana.
  
  Probably nothing, right?

• Oil Advances Near $90 as OPEC Sticks With Its Production Cuts: Brent crude rose to within one cent of the $90-a-barrel psychological level on Wednesday, after OPEC and its allies didn’t recommend any changes to their existing output cuts at an online ministerial review meeting. The move means roughly two million barrels a day of curbs will be in place until the end of June.

• Natural Gas Prices Go Negative in Texas: Everyone is talking about oil prices, but nobody is talking about natural gas prices. Despite surging industrial capacity, natural gas prices in Texas are negative because there’s simply not enough pipeline to carry all the production.

What does this all mean for Oil, Inflation, and the Biden administration?

That’s the topic of today’s issue of the Weekend Edition.

-Equifund Publishing

P.S. Interested in investing in oil and gas? Pytheas Energy – an AI-powered, early-stage oil and gas producer operating in Texas – is raising capital on the Equifund Crowd Funding Portal. 

Go here to review their offering page and learn more.

P.P.S. In case you’re looking for the weekly update on the biggest story no one in the mainstream media seems to care about…

Gold AGAIN hits new highs in basically every single currency… 

And now, it looks like we’re building momentum into the much fabled “silver squeeze”.

We’re going to stay focused on energy for today’s issue. But if you’d like to read our previous coverage on the gold markets, check out some of our back issues. 

When History Repeats Itself

Generally speaking, people love to pull out sage-sounding advice in the form of quotes from “famous” people – especially when it comes to investing.

For example, Mark Twain (allegedly) said, “History doesn’t repeat, but it often rhymes.”

Winston Churchil famously said, “Those that fail to learn from history are doomed to repeat it.”

And today, we are going to say, “Maybe people did learn from history, and maybe it’s not an accident that it’s repeating.”

Why? Because over and over again, we’ve heard that today’s global economy is eerily similar to the 1970’s “stagflation” episode – a mixture of slowing economic growth with rising inflation.

Don’t take my word for it. Here’s some of the headlines in 2024 from the mainstream financial media. 

Source: Business Insider

Source: Fortune

Source: Bloomberg

And just in case your 2024 outlook wasn’t going to be spicy enough…

There’s now growing speculation the Federal Reserve WILL NOT cut rates this year as many expected (or even counted on).

In fact, we could see the Fed be forced to continue to raise rates to tamp down inflation…

Especially as Japan officially ends the Era of Negative Interest Rates with its first rate hike in 17 years.

And if there’s anything we’ve learned about inflation since 2020, the rise in energy prices is probably the single biggest driver.

So how does our current situation compare to the 1970s? Let’s take a look.

According to the Federal Reserve Bank of Boston

To find out what rhymes with this piece of history, let’s take a look at how we’re doing across these various indicators.

• Industrial Capacity: Even though we are seeing a prolific boom in the reindustrialization of America, we are absolutely lacking in terms of industrial capacity – especially relative to Russia and China.

U.S. Treasury Secretary Janet Yellen recently slammed China’s use of subsidies to give its manufacturers in key new industries a competitive advantage, at the cost of distorting the global economy, and said she plans to press China on the issue in an upcoming visit.

• Loose War Financing: Since the Israel-Hamas war started, the U.S. has given Israel about $3.8 billion. Since the war in Ukraine started, the U.S. has given Ukraine $115 billion.

• Home Prices: if we use pre-1983 housing methods, homes are four times more expensive than official inflation numbers.

• Producer Price Index by Commodity: Industrial Commodities: Since April 2020, we’re up ~40%.

• Consumer goods: up ~18% since April 2020.

• Food prices: up ~24% since 2020, and account for one-sixth of the increase in consumer prices overall.

What’s to blame? The official narrative is a combination of  “shrinkflation” and “disruption in the supply chain.”

Let’s start with the Shrinkflation theory.

According to the United States Senate Committee on Agriculture, Nutrition, & Forestry:

In his latest effort to avoid responsibility for the historic inflation in food and grocery prices, President Biden tried to lay the blame at the feet of food companies-- accusing them of a practice called “shrinkflation” -- during his State of the Union Address. 

This follows a similar effort in 2021 to blame inflation on food processors.

However, he will need to keep searching for a scapegoat as data from the Bureau of Labor Statistics (BLS) reveals that product downsizing played only a minor role in the rapid increase in food prices that occurred under this administration.

Across the U.S., the cumulative increase in food costs paid by households under this administration ranges from a low of nearly $2,000 in West Virginia to more than $3,000 in Alaska, California, Colorado, the District of Columbia, Hawaii, Illinois, Minnesota, and Utah. Source: US Senate

Don’t get me wrong. I’m also upset that candy bars and Girl Scout cookies have been a little bit smaller these past few years…

But, maybe it’s just higher oil prices? 

In other news, oil stocks are up ~120% since Biden took office vs a ~50% slump under Trump.

To be fair, COVID heavily distorted these numbers in both directions by creating what could be considered an artificial depression/recovery. 

Under Trump, we could suggest oil stocks were down 20% prior to COVID, down 50% during COVID, and Biden got to step in to benefit from the recovery (it takes a 100% gain to overcome a 50% loss).

We saw a similar dynamic play out during the 2008 housing crisis with Bush/Obama.

Now let’s take a look at supply chain issues

The major supply chain story of the week is the Baltimore Bridge Collapse – the second largest business infrastructure coordinator in the United States.

According to the Washington Post,

But for those of you who find many of the issues surrounding this “accident” rather suspicious…

Three ships have hit bridges in three different countries – in just three months.

Speaking of ships…

Despite the fact that the U.S. once was a prolific ship builder in WWII and beyond, today, the U.S. commercial ship industry has basically vanished. 

At the beginning of 2023, China had 1,749 large oceangoing commercial vessels under construction in its domestic shipyards. America had five.

At the beginning of 2022, China had 1,708 vessels under construction. America had three.

While China consolidates its role as the world’s leading commercial shipbuilder with 40% of global output, the United States produces about one-fifth of one percent of global output.

Even worse, not only does America lack the industrial capacity to maintain the ships we do have…

We have basically no ability to build new ones to replace our aging fleet.

Are you hearing the rhymes yet?

With all that said, there is one noticeable difference between the 1970s and the 2020s…

America is currently the world's largest producer of crude oil, and U.S. suppliers are muscling into OPEC+ territory all across the world. 

According to Gary Ross, an oil consultant turned hedge fund manager at Black Gold Investors, “US production is going up and OPEC and Russian production is going down — so the US, by definition, is going to have more market share.”

So, I guess the only real question we have left to ask ourselves is this:

Are we on the cusp of a 1970’s style “oil squeeze” that sends prices soaring? 

As usual, we’re not going to make predictions about what the markets will do next. 

But we’re most certainly paying attention to the setlist the “band” is playing.

And to us, it sure sounds like energy demand is only set to increase in the coming years ahead – especially with the power-hungry loads required by AI data centers, which require 5-10x as much power per server rack.

According to Elon Musk, “Next year, you will see that they just can’t find enough electricity to run all the chips.”

So if you’re looking for a way to get exposure to the “Just Add AI!” hype cycle – and the prospect of higher energy prices…

Maybe now is the time to consider investing in oil and gas. 

Or if you’re feeling a little bit adventurous, maybe you’re considering an investment in an AI-powered oil and gas company.

While it’s tempting to think of the $2.1 trillion crude oil market as being completely controlled by a small handful of players…

Source: Visual Capitalist

Just like pretty much every other market, oil and gas investors have the option to invest in larger companies that often offer downside protection, income, and reasonable growth…

They can also opt for smaller – significantly higher risk and more volatile – companies that may offer the chance for huge upside returns.

In the oil industry, these smaller companies – known sometimes as “Craft Oil” – are usually “pure plays,” which are hyper-focused on one part of the value chain; such as exploration and production, refining, or marketing. 

They may be more likely to develop new technological innovations that can drive the industry forward, and eventually be acquired by a larger company.

For example, using artificial intelligence and machine learning to reduce costs, increase production, and better manage environmental concerns.

But before considering an investment in the “Craft Oil” space, it’s important to understand the mega trends that have the biggest potential impact on your returns.

That’s the topic of today’s issue of Private Capital Insider.

-Jake Hoffberg

P.S. Interested in investing in a “Craft Oil” play? Pytheas Energy – an AI-powered, early-stage oil and gas producer operating in Texas – is raising capital on the Equifund Crowd Funding Portal. 

Go here to review their offering page and learn more.

Big Oil vs Craft Oil

Big Oil consists mainly of large, vertically integrated companies that combine upstream exploration activity, midstream transportation activity, and downstream refining activities. 

Source: Visual Capitalist

Because of their size, they typically employ tens of thousands of people, generate billions of dollars in revenue, and are responsible for producing, transporting, refining, and marketing much of the world’s oil products (like gasoline and diesel fuel).

Source: Visual Capitalist

They also have the infrastructure to invest in developing long-term oil reserves – in particular, offshore drilling – and operate at an international scale; for example, ExxonMobil explores for oil and natural gas on six continents.

On the other hand, “Craft Oil” producers primarily focus on individual basins within North America.

Source: Visual Capitalist

Interestingly enough, Big Oil drills only 5% of all American oil wells. 

The other 95% of all domestic wells are drilled by the smaller “Craft Oil” companies who focus mainly on the large North American oil basins.

These small companies are usually “pure plays” that are hyper-focused on one part of the value chain – such as exploration and production.

They also may be more likely to develop new technological innovations that can drive the industry forward, and eventually be acquired by larger companies.

Source: RSM

And as the exploration and production industry begins to grapple with the problems of finding new reserves, many companies are exercising increased caution, and shifting their strategies to target more profitable and geologically better-understood regions.

More specifically, we are seeing incredible consolidation in the Permian Basin.

According to Matthew Bernstein, a senior shale analyst at Rystad,

The likely outcome of all this activity? Once this current consolidation cycle is completed, the available acreage, in large part, will be spoken for. 

The players that remain will have amassed vast swaths of acreage, and there will be two pressing questions: 

• How can we manage this portfolio of assets as efficiently as possible?
  

• How can we reduce our cost basis, reduce our carbon footprint, and also maximize the profitability of the assets we have?

The companies who can successfully answer these questions – and transition to the new reality – will stand to capture the enormous opportunity ahead.

A New Era Of Oil: The shift from big discoveries to asset management

If the last 100 years have been about long-term bets on land assets, innovation at the wellhead, and maximizing short-term profits to capture windows of favorable pricing…

The next decade will likely shift toward managing assets, maximizing long-term profitability, and handling environmental issues.

Even though Big Oil will almost certainly be the biggest winner of this new paradigm, thanks to their tremendous economies of scale, they have the same weakness all large commodity producers have – they have to focus on large, producing projects. 

While mergers and acquisitions provide opportunities to consolidate new assets, and increase focus on what’s called “core assets”...

They also tend to force a divestiture of “non-core assets,” in order to free up resources as wells become “marginal.”

But interestingly enough, research suggests only ~30% of oil and gas is ever extracted from most existing wells using conventional methods.

Here’s why…

In theory, every oil and gas well goes through something called a decline curve - a method used to determine estimated ultimate recovery for an oil or gas reserve.

The 3 decline curves – exponential, hyperbolic, or harmonic – are important because they are used as one of the factors in determining the value of minerals or land. Source: Rock River Minerals

With conventional wells, the decline curve is often slow and steady. 

With unconventional wells, it’s anything but. 

For these reasons, it’s critical for anyone interested in investing in oil and gas plays to understand what we call…

The 5 Profit Killers of Shale Wells

At their foundation, oil exploration plays have two major challenges: 

1. Oil reserves eventually run dry, so there is a constant need to drill for more oil
   

2. Exploration is an extremely capital-intensive business, which carries high risk due to price volatility. 

This creates an interesting problem. In order to fund operations, we need high oil prices and access to credit facilities.

In an era of near zero interest rates, epic monetary expansion, and booming oil prices... it’s relatively easy to get access to investor capital and credit facilities.

However, when the inevitable downturn comes, lenders lose their appetite for these sorts of investments, and these companies often go under.

And this problem is only made worse due to the nature of unconventional wells.

Challenge #1: High Exploration Costs

In oil exploration, wells are typically defined by how deep the company needs to drill in order to find oil. 

They’re split into three categories. Shallow, deep, and ultra-deep.

Shallow wells – which are anything less than 3,000m (or <10,000 ft) – represent the conventional oil and gas reserves that are now scarce. 

That’s why the majority of newer fields in production today are deep wells, which reach depths from 3000m to 6100m (10,000−20,000 ft).

The problem with deep wells should be immediately obvious. The deeper the drilling, the more expensive it gets; both for successful drills and dry wells.

But the initial drilling costs are only the beginning.

Up until recently, oil was recovered using vertical drilling – or “conventional” – methods. The method is rather simple; drill a hole down into the earth until you hit a patch of oil. Assuming there’s enough pressure in the well, oil will come out the top. 

In the early stages of the well, pressure is provided by the gas (or water) already in the reservoir. But as it depletes, oil has to be pumped – or otherwise “lifted” – from the wells. 

If you’ve ever seen one of these contraptions, called a “pump jack,” that’s what they’re for.

But only 30-35% of the well is recoverable with these methods. To get the rest, drillers boost pressure by injecting water or gas into the reservoir.

Once that stops working, they move to the final step called “enhanced oil recovery” or EOR. This is where fracking comes into the picture.

In conventional wells, going through this multi-stage process means producers can sustain flow for years, or even decades.

But in the case of unconventional shale oil wells, drillers go right to the EOR stage.

Why? Because shale oil is not produced from a reservoir. It’s trapped inside a nearly impenetrable rock.

And because of this, shale wells ramp up fast, and fall off fast.

A typical shale well in the Bakken region of North Dakota declines 65% in the first year, 35% in the second year, 15% in the third, and 10% per year afterward. 

As indicated in the chart below, within four years, a shale well’s production has fallen to below 20% of the initial level; A conventional oil well is still producing at between 70-80% of its initial rate.

This steep decline rate creates a huge problem. In order to maintain (or grow) shale production, there’s a constant need to drill new wells. 

But the bigger problem lies in the cost to not only drill, but maintain operations. 

Challenge #2: High Operational Costs

With conventional wells, once they’re drilled, they’re relatively inexpensive to run. But unconventional wells require much higher ongoing operational costs; shale production requires not just drilling but then fracking and often re-fracking the same wells. 

Because the majority of shale wells are drilled by the smaller “Craft Oil” companies – and due to the speculative nature of the business – the day-to-day operations are usually handled by third-party contractors. 

This adds an additional premium to the already expensive costs to continue drilling for new reserves.

When oil is trading above $80 a barrel, and you need to move fast, the economics make sense. But once prices dip, it usually means an over-leveraged operation that can’t afford to pay people to continue pumping oil.

With conventional wells, turning off production – or “shutting in” wells – is a relatively simple matter. 

But with unconventional wells, they can’t be easily “shut in” or “re-opened” on command. There are real costs to doing this.

“Turning off” shale oil is more like shutting down a manufacturing plant than turning a spigot. Bringing wells back online often means additional costs to re-pressurize the well. And if not done properly, it could mean permanent loss of recoverable reserves.

But even more problematic is the deal structure most shale companies have with the landowners: If they stop drilling, they could lose the lease and opportunity to produce in the future. 

Combine this with the typically overleveraged producer carrying debt, it means in order to make interest payments and meet stricter credit conditions, they needed to maintain or even increase output.

That’s why shale producers are incentivized to get as much oil out of the ground as fast as possible. 

However, the race to get oil out of the ground is met by the problems with storage and transportation costs. 

Challenge #3: High Storage and Transportation Costs

Again, because smaller “Craft Oil” players drill the majority of new shale wells, it means they’re at the mercy of market forces when it comes to storage and transportation costs. 

During boom times, they’re competing against all the other producers for access to pipelines. And if they can’t, it means they have to ship by land at greater costs.

Additionally, if they don’t have access to storage during downtimes, it means they can’t continue to pump during depressed oil prices and sell later, when prices rebound.

But perhaps the biggest problem with unconventional wells is the environmental costs, which are both expensive and politically unpopular.

Challenge #4: High Environmental Costs

Exploration and production companies face two major environmental issues:

1. They need a massive amount of water to drill for new wells
   

2. They have to do something with the large volume of wastewater that comes up from the wells once oil and gas is extracted

While water usage varies by region and specific wells, overall, water usage is rising. In 2008, an average of just 5,618 barrels of water were used for the injection stage of fracking, according to the USGS. In 2014, that ballooned to 128,102 barrels of water for an oil well, and 162,906 barrels for a gas well.

A lot of this increase is due to the shift from conventional vertical wells, to unconventional horizontal wells.

Source: Visual Capitalist

Simultaneously, the Government Accountability Office estimates that 40 of 50 states have at least one region that will face some kind of water shortage by 2023. This crisis has increased social and regulatory pressures on oil and gas firms, while making the supply of usable water less dependable.

But the final challenge is one that is just beginning to show its effects: the quality of shale oil, and the impact on refinery economics.

Challenge #5: Oil Quality

Eventually, all oil has to be refined into petroleum products for commercial use. But not all oil is created equal.

Source: Kimray

Like any commodities market, the highest quality - most in demand - stock will always fetch a premium price.

At a high level, oil is measured by two important metrics.

1. Weight (API): this refers to how “heavy” or how “light” the crude oil is
   

2. Sweetness (Sulfur Content): high sulfur oil is called “sour” and low sulfur oil is called “sweet”
   

3. Total Acid Number (TAN) Count: This is the measure of how corrosive the oil is. If a crude has a high TAN number, producers must use more robust metallurgy than is standard, so their processes can handle that corrosivity and keep the crude in the pipe.

There are over one hundred different crude oils traded on the market today.

These oils are typically labeled by the region they come from, and they have a specific chemical makeup. This graph below shows the sulfur content and weight of some of the most common.

Now, without going into the nitty gritty details of exactly how the refining process works, the important thing to understand is this; there are a lot of steps between getting it out of the ground and turning it into a finished product. 

Source: World Oil

Every single step of the process is impacted by the quality of crude oil, all of which impact margins. 

Generally speaking, refiners like shale oil because... 

• It’s relatively cheap to get 

• A secure domestic supply enables long term, profitable planning

• The low-sulfur content means it can be blended with higher-sulfur, low-cost oil

With shale oil, there is a lot of variance from formation to formation, as well as in the same formation.

In practice, this means refiners need to use the right chemical additives to keep equipment clean, costs down, and quality high.

But in the current economic climate, it means there’s more pressure to not only get it out of the ground cheap, but also deliver high quality raw material that refineries can process easily.

Which brings us to perhaps the most important question we have to ask ourselves, if we’re planning to invest in a “Craft Oil” play.

Is there a way to get the upside potential of Craft Oil WITHOUT taking the risks of drilling for shale?

While there is certainly no way to avoid the inherent risk and volatility that comes from investing in any early-stage company – much less an oil and gas play…

There is one notable way to significantly reduce the major risks that come from betting on small explorers/producers.

As it turns out, America has a LOT of what’s known as stripper wells; by IRS definition, an oil or gas well with a maximum daily production below 15 BOED – which is 15 barrels of oil or 90,000 cubic feet of gas per day – over any consecutive 12-month period.

Generally speaking, all these stripper wells come from shallow wells (which are conventional wells by nature).

By current estimates, the United States has 760,000 stripper wells in production – about 400,000 oil and 360,000 natural gas wells. 

That means, of the roughly one million active oil and natural gas wells in the United States, 76% are low production stripper wells.

In addition to this, researchers estimate that there are between 2-3 million abandoned (a.k.a. “orphaned”) oil and gas wells in the United States that may have producible reserves, but simply aren’t in operation.

If you’re interested in learning more, go here for the full story on investing in stripper wells.

While everyone else is talking about the Baltimore Bridge fiasco, Sam Bankman-Fried sentenced to 25 years over FTX’s collapse, and Trump's Truth Social (NYSE: DJT) adding a few billion to his net worth…

Here are the stories you haven’t been hearing much about:

• The Destruction of a Massive Texas Solar Farm Highlights the Fragility of “Renewable Energy”: The recent destruction of a massive solar farm in Texas highlights the fragility of “renewable” energy infrastructure, and has raised concerns about the negative environmental impacts of supposedly “environmentally friendly” energy sources

That’s why today, we’re going to be talking about Texas, oil, and renewable energy.

-Equifund Publishing

P.S. Interested in investing in oil and gas? Pytheas Energy – an AI-powered, early-stage oil and gas producer operating in Texas – is raising capital on the Equifund Crowd Funding Portal. 

Go here to review their offering page and learn more.

P.P.S. In case you’re looking for the weekly update on the biggest story no one in the mainstream media seems to care about…

Gold continues to hit new highs with Chinese demand going absolutely berserk (and still, almost no one is talking about it): Exceptional strong gold demand from both the Chinese central bank and private sector has been driving up the gold price over the past two years, by which they have taken over control of the gold price from the West.

China net gold imports through January 2024. The purple bars show exceptional strong demand coinciding with an escalating price. None of the publicly disclosed gold imports are destined for the PBoC. The Chinese central bank buys gold abroad and repatriates that gold outside the scope of customs statistics.

For our own sanity, we’re just going to send you to the other several issues we’ve already published on gold, if that’s a topic you’re interested in. 

Otherwise, we’ll save the gold updates for another issue and stay focused on oil for this one.

The Myth of Renewable Energy

I believe we can all agree that, in principle, we all think renewable energy is a good idea... 

Especially when it can be produced in large amounts, at low cost, and in an environmentally friendly way.

Had we all decided to bet on nuclear power – instead of wind and solar – we might have achieved one of the most important milestones of our civilization: abundant and incredibly low-cost energy.

But instead, what we got was a massive, government-mandated shift into expensive, unreliable, and potentially environmentally toxic power sources…

Not to mention, these projects often require 300-600x more land than a natural gas plant, don’t last as long as projected, and don’t actually reduce carbon emissions compared to fossil fuels (or at least not nearly as much as claimed).

Even worse, they can be easily damaged by severe weather incidents – which are happening more and more often.

To follow up last week's issue about Texas, thanks to a massive hail storm…

This image, courtesy of Houston Chronicle media partner KTRK-TV, shows golf ball-sized hail that fell this month near Needville.

A large solar farm about an hour southwest of Houston – the 3,300 acre Fighting Jays Solar project, capable of producing 350 megawatts of electricity, enough to power 70,000 homes – got wrecked.

Images captured by Fox affiliate FOX26 Houston KRIV show extensive damage to Fighting Jays Solar in Fort Bend County, Texas. (FOX26 Houston KRIV)

For reference, the Fighting Jays began construction in February 2021 and became operational in July 2022.

• Total cost to build: ~$350 million

• Expected life of facility: 35 years

• Total time in operation: Less than 2 years

• Current value today: worthless?

Who's going to pay for repairs? Probably the taxpayer.

This is far from the only large-scale solar project to be walloped by hail. 

According to GCube’s 2023 report “Hail No! Defending Solar from nature’s cold assault,” hail claims now average around $58.4 million per claim and account for 54.21% of incurred costs of total solar loss claims being attributable to hail.

So how much would it have cost to build a 350 MW natural gas plant – which, by all accounts, produces cleaner and more reliable power?

According to the EIA, in 2021, wind cost ~$1,428/kW vs natural gas at ~$920/kW – about 35% less.

But hey, it’s not like the Texas energy grid has a history of problems, especially during hot summers and arctic winters, right?

Source: Bloomberg

But hey, it’s Texas. They’ve got tons of oil and gas, and are producing at record rates. 

They’re totally going to be fine, right?

Ok, so in theory, there’s plenty. 

But most of our production comes from recently drilled wells… of which, thanks to the hostile posture towards the oil and gas sector by the Biden administration, we’re not doing much new drilling.

Good thing we’ve got that strategic petroleum reserve thing, right?

Source: Federal Reserve Bank of St. Louis

Okay, so we don’t have a lot left in that either. 

So I guess we’re just going to have to rely on buying oil from hostile foreign nations – like Saudi Arabia and Russia. 

Let’s see what’s going on in Russia right now.

Source: NY Sun

Okay, so Ukraine is bombing the Russian oil industry, and even Joe Biden is like “yo, please don’t?”

I guess it’s all up to Saudi Arabia to make sure we’ve got enough oil to not cause a massive supply shock that sends prices through the roof. 

Source: The New York Times

So what do we have left? 

As it turns out, America has a LOT of what’s known as stripper wells: – by IRS definition, an oil or gas well with a maximum daily production below 15 BOED – which is 15 barrels of oil or 90,000 cubic feet of gas per day – over any consecutive 12-month period.

By current estimates, the United States has 760,000 stripper wells in production – about 400,000 oil and 360,000 natural gas wells. 

That means, of the roughly one million active oil and natural gas wells in the United States, 76% are low production stripper wells.

Combined, these stripper wells make up over 7.8% of the total of all oil and natural gas produced domestically (7.4% oil and 8.2% natural gas).

In addition to this, researchers estimate that there are between 2-3 million abandoned (a.k.a. “orphaned”) oil and gas wells in the United States, which may have producible reserves, but simply aren’t in operation.

According to 2005 article published in Science Daily:

According to a 2009 report published by the Interstate Oil and Gas Compact Commission: 

This means that if all of these wells could be brought under management, and production could be increased by one BOED, that could mean hundreds of thousands – if not millions – of additional barrels per day could be produced each year.

Source: USGS

Interestingly enough, many of these wells are plugged without undergoing any sort of enhanced recovery effort, even though they could still be economically viable.

Why? Because many of the new technologies that can be used to extend the life of their wells – and increase production rates – are often too cost prohibitive for smaller operators. 

However, with the prospect of oil prices staying higher for longer, this could be exactly what we need to finance the revitalization of a major source of domestically sourced oil and gas.

Want to learn more about the hidden opportunity in stripper wells? Go here to read the full story.

Before the Industrial Revolution, agricultural staples like corn and wheat ruled the commodities markets. 

Today, crude oil – and it’s derivatives – reign supreme.

While most people think of oil as primarily a source of energy to power cars, trains, jets, and ships…

Oil is the most actively traded commodity in the world, touching almost every aspect of the global economy.

Refined oil (aka “petroleum products”) is used to make thousands of products we use on a daily basis.

Even though it’s hard to argue the importance of renewable energy sources, crude oil isn’t going anywhere for the foreseeable future.

In fact, based on some of the growing anti-ESG sentiment, backpedaling on things like fully-electric vehicles in favor of gas hybrids, and what could be a looming supply shortage in 2024/2025…

We could be entering a new era of elevated oil prices (and oil profits).

But most investors have little to no experience investing in commodity-based businesses – much less one as volatile as oil. 

So if you’re seeing a potential opportunity in the oil and gas industry like we do… and you’d like to get yourself oriented as to how this major industry segment works…

Today is Part 1 of a multi-part series we’re publishing on Investing in American Oil and Gas.

-Jake Hoffberg

P.S. Interested in investing in oil and gas? Pytheas Energy – an AI powered, early-stage oil and gas producer operating in Texas – is raising capital on the Equifund Crowd Funding Portal. 

Go here to review their offering page and learn more.

P.P.S. It seems like our latest issue of the Weekend Edition – Texas, BlackRock, and American Oil – hit a nerve with our readers.

At the end of this issue, I’ll be posting some of the poll responses we received.

The consolidation of the $604bn U.S. Oil and Gas industry

With an estimated $3 trillion up for grabs each year, the global oil and gas (O&G) industry has been one of the most important – and potentially lucrative – markets over the past 160 years ($604.8 billion in U.S. drilling and extraction alone in 2023).

Not only does this commodity serve as the backbone of energy infrastructure everywhere, for decades, O&G stocks have offered investors a much-needed source of diversification – and potential growth & income – for their portfolios. 

In fact, companies like Exxon Mobil Corp (NYSE: XOM) and Chevron (NYSE: CVX) have increased their dividend payouts every year, for over 35 years… CVX for 36 years and XOM for 40, and counting. There’s no guarantee they’ll keep raising them, but that’s a pretty good track record.

However, despite the consistent payouts to investors, there's been no shortage of volatility since the 1970’s.

Here’s why…

At the core of the O&G industry lies two things: Economic interests (i.e., “energy security”) and national security interests (i.e., “energy independence”). 

But traditionally, nations have had to make a choice between one or the other.

For energy independence, the goal is to remove our dependence on foreign oil – or at the very least, remove our dependence on the Middle East, and only buy from North American suppliers. 

However, the trade-off with this model is the acceptance of higher prices.

For energy security, the goal is to have a reliable source of oil at stable prices. This typically means participating in the global oil market, and accepting supply from wherever it’s most efficient to do so. 

Big Oil historically opposed energy independence, which often works to the advantage of their smaller, domestic Craft Oil competitors. 

However, because of America’s unique position of having oil priced in dollars – along with its vast, and still untapped oil reserves – it’s the only country in the world that could potentially achieve both interests at the same time.

That’s why it’s important for any investor seeking to participate in O&G-related investments to understand that oil tends to operate in a cyclical manner – The Boom Bust Cycle

Source: The Economist

Oil’s Boom Bust Cycle Explained

During boom times, we hear greed-fueled stories in the mainstream media like this one from the Wall Street Journal:

But eventually, the proverbial music stops playing, and it all comes crashing down. 

Why does it happen?

It has to do with the capital intensive nature of the business. 

Unlike software startups that can be launched quickly and cheaply… producing, transporting, and refining O&G products requires considerable infrastructure and upfront capital expenditures to bring new projects online.

However, because the price of O&G is determined by supply and demand, changes in price can have significant impacts on investment activity in the sector.

Because of this, we see five predictable stages that drive the Boom Bust Cycle:

• Stage 1: At the bottom of the cycle, there’s too much supply. This creates low oil prices and a period of under-investment by the oil industry. Generally speaking, low prices stimulate higher demand.

• Stage 2: As demand increases relative to stable or easing supply, this causes prices to rise.

• Stage 3: As prices rise, marginal projects become economically viable, and companies begin to deploy capital into expansion. The higher prices climb, and the longer they stay elevated, financiers and investors become more attracted to the opportunity.

• Stage 4: As speculators begin to enter the market, price action begins to separate from underlying fundamentals. This inevitably leads to inflation, as high energy prices drive up the cost for everything else.

• Stage 5: Eventually, a market shock causes a crash, leading to bankruptcies and consolidation, and the cycle begins again.

Throughout history, we can see one irrefutable fact about the oil industry: We oscillate between eras of relatively stable prices and eras of volatility.

The “Eras of Stability” depend on one major factor: a monopolistic entity (or “cartel”) to act as the “swing producer,” in order to regulate supply. 

“Eras of Volatility” happen when the swing producer loses control – or is absent altogether – and new powers emerge.

Source: The Quest: Energy, Security, and the Remaking of the Modern World by Daniel Yergin

Between 1855 and 1879 (Boom Bust I) – when oil was first discovered in America – it was an all out “free market” war.

Then, John D. Rockefeller began to dominate the oil markets, and from 1880 to 1911 (The Rockefeller Era), the markets were brought under control and prices stabilized. 

That all changed once the empire was broken up in 1911 via the Sherman Antitrust Act. From 1911 to 1931 (Boom Bust II), volatility returned in full force, with the price of oil being driven by the will of the “free market.”

In an effort to stabilize the markets, U.S. officials – most notably, the Texas Railroad Commission – imposed quotas. 

Abroad, a new cartel of seven international oil majors – collectively known as the “Seven Sisters” – rose to control the newly discovered deposits in the Middle East. 

Thanks to these controlling powers, between 1932 and 1972 (The Texas Era), the world enjoyed a level of stability never before seen.

Then, between 1973 and 2004 (The OPEC Era), the balance of power shifted firmly into OPEC’s hands, and more specifically, Saudi Arabia. With the largest proven oil reserves - that were also cheap and easy to recover - the Kingdom gained massive power over the global oil markets.

However, that all began to change, thanks to a new technology that unlocks “unconventional” oil reserves: horizontal drilling and hydraulic fracturing.

These two technologies led to the U.S. Shale Revolution, and marked the beginning of a new era of all-out oil wars between America and OPEC nations.

From 2004 to 2020 (Boom Bust III), monthly crude price changed an average of 38%, on par with the volatility from 1911 and 1931.

According to a 2020 article published by S&P Global Market Intelligence, an analysis of the past 25 years of M&A action in oil and gas:

Source: S&P Global

Fast and loose spending from the 2004 to 2014 exploration and production (E&P) rush saw 27 major oil producers triple capital spending. Over-leveraged oil companies that took on too much debt in 2016 were unable to refinance, causing a wave of bankruptcies that decimated U.S. oil producers.

Over 100 small to mid-sized oil and gas companies went bankrupt between 2015 and 2020, including not only E&P operations, but also oilfield services, and even refineries.

Then, the famous COVID Crash of 2020 happened amidst shutdowns, a temporary supply glut, and a new wave of bankruptcies…

Source: Visual Capitalist

Yet, when demand returned following the COVID shutdowns, there weren’t plentiful new wells readily available to fill calls for more production.

Addressing the situation, Raymond James analyst Pavel Molcanov noted,

This pressure, in turn, drives consolidation as companies seek to improve profits by achieving economies of scale…

Especially as supply uncertainty from OPEC+ led to lower, more volatile commodity prices. 

Source: PeakOilBarrel.com

Thanks in part to sustained geopolitical tensions and supply chain issues, the American O&G industry quickly recovered and achieved record production levels in 2023 of 13.4 million average barrels per day (BPD), surpassing only 2019’s previous record highs, of 13.3 million BPD, according to the EIA, with some estimates reaching 13.5 million BPD.

The industry also rocketed to record profits in 2022 of nearly $333 billion, up 63.4% from 2021.

We saw record high stock prices as 2022 drew to close, with the proxy S&P 500 Energy Sector Index reaching an all-time high.

However, despite President Biden’s climate agenda – which includes the bipartisan 2021 Infrastructure Law, and 2022 Inflation Reduction Act – American Oil has continued to pump record crude. 

The industry has also produced record cash flows in 2021-2022…

Source: Reuters

Significantly reduced debt…

Source: Reuters

Not to mention, massive dividends and share buybacks for investors.

And if KKR’s forecast of ~$80-$100 per barrel in 2024 comes true, that will likely only continue to drive profitability for oil majors.

Source: KKR

All of which puts Biden (and the Democrats) in a weird position – According to the Washington Post,

Even crazier? Permian oil production is projected to hit new all-time highs in 2024 – 6.4 million barrels per day (MMbpd) at the end of this year, up from 6.1 MMbpd at the end of 2023.

Thanks to the hostile posture coming from the Biden administration – as well as growing pressure to deal with environmental issues, the continued shift towards renewable energy, along with higher interest rates, and tighter credit conditions – the consolidation cycle has only continued to accelerate.

In recent months, the oil and gas sector has experienced a remarkable surge in merger and acquisition (M&A) activity, with over $155 billion in deals in the fourth quarter of 2023–  more than the prior five quarters combined.

Similar to what we’ve seen in the gold mining industry, O&G companies started to grow through mergers and acquisitions, in order to achieve economies of scale, increase reserve depth, and gain/maintain market relevance.

This is especially the case in the most productive formation in America, the Permian Basin (i.e., West Texas and New Mexico)...

Source: EIA

All of which is becoming increasingly concentrated in the hands of Chevron, Occidental, ConocoPhillips, and ExxonMobil.

In 2023 alone, the industry had seen more than $250 billion in mergers and acquisitions by mid-December, according to Investors Business Daily. This was the highest annual year-to-date total since 2014.

Analysts are projecting that this M&A activity will steadily continue in the coming years, led by investments in the Permian. CFRA analyst Stewart Glickman said, "If you are going to grow in the U.S., it makes sense to try to either expand or find a foothold in the Permian. I think the wave of consolidation [will] continue.”

According to a December 2023 article on OilPrice.com

Also similar to the gold mining industry, there has been a severe lack of major oil discoveries in recent years, which only continues to put pressure on supply.

Which leads us to an uncomfortable question…

Is America Running Out of Oil?

Although the United States is currently the top producing country, every year of record production that isn’t replaced by new supply means our reserves are shrinking.

Discoveries of new oil and gas fields have dropped to a fresh 60-year low, as companies put a brake on exploration and large fields have become harder to find.

According to Occidental Petroleum's CEO, Vicki Hollub, over the past 10 years, the world has replaced less than half of the oil that was produced.

The slowdown in exploration success shows that the world is likely to become increasingly reliant on “unconventional” resources, such as U.S. shale oil and gas, to meet demand for energy in future decades. 

The slowdown also reflects both the cyclical cuts in exploration made by companies struggling to stay afloat after the drop in oil and gas prices since 2014… 

As well as the structural shift in the industry towards onshore shale and similar reserves – especially in North America.

These looming shortages, often called “Peak Oil,” could one day threaten the security of the United States and its allies. 

How did this happen?

It all has to do with what we call the Big Oil vs Craft Oil dynamic – which we’ll cover in next week’s issue of Private Capital Insider.

Mailbag: Texas, BlackRock, and American Oil

As always, I want to give a big thank you to everyone who regularly reads Private Capital Insider, rates the issue using the poll feature, and leaves a comment. 

Everytime a new issue goes to “print,” I’m hitting that refresh button like crazy during the first 24 hours to see the poll data.

Overall, this issue was one of our most-voted-on issues of all time. 

Not only was this the most voted, but it had the highest number of comments on any issue we’ve published so far. 

Here are some of my favorites: 

Here’s the good news for everyone who is enjoying our coverage on precious metals and now oil: Much of the conversations about the future of currencies rests on top of both the re-monetization of gold/silver, and access to oil and gas. 

Here’s the bad news: Investing in asset-heavy commodity businesses is a different beast than investing in asset-light technology companies (often characterized by “high flying” and “fast scaling”). 

That’s why we’re going to focus our next several issues on investing in oil and gas.

If you read this far, please be sure to rate the issue and leave me any comments or feedback.

While everyone else is talking about the DWAC SPAC officially voting to acquire Trump’s Truth Social, Neuralink introducing the first person implanted with its brain-computer interface, and the weird drama surrounding the Princes of Wales – Kate Middleton…

Here’s the story you haven’t been hearing much about…

• Texas Board of Education Divests $8.5 Billion from BlackRock Due to Firm’s ESG Guidelines: The Texas Permanent School Fund will be terminating its financial relationship with BlackRock and searching for a new firm to manage its $8.5 billion of state assets.

As a quick disclaimer, we don’t take political sides in our editorial. Instead, we prefer to analyze Narratives, how they are evolving, and the impact these Narratives have on markets (and otherwise forming a new consensus around price).

So why should you care what’s happening in Texas if you don’t call the Lone Star State home? 

Because unlike Vegas, what happens in Texas tends to spread across the country… especially to other conservative states.

And this announcement – along with the increasing Anti-ESG sentiment, especially as it relates to the energy transition, in general – could set the stage for a new paradigm in the oil and gas markets.

That’s what we’re talking about in today’s issue of the Weekend Edition.

-Equifund Publishing

P.S. Interested in investing in oil and gas? Pytheas Energy – an AI powered, early-stage oil and gas producer operating in Texas – is raising capital on the Equifund Crowd Funding Portal. 

Go here to review their offering page and learn more.

Texas Strikes Back, Pulls $8.5bn from BlackRock Over ESG Policies

Among the many, many, many strange things that have happened in Texas over the past 12 months… 

The decision to pull $8.5bn from BlackRock – arguably the global ambassador of “alarmingly large asset managers who probably have too much power and influence” – might become the tipping point of the “Anti- ESG / Anti-Woke” Narrative.

According to the Texas State Board of Education:

What kind of revenues are we talking about? The fossil fuel industry contributed about $26 billion in state and local taxes in 2023 — about $1.8 billion of which went into the fund.

Following the news, Wayne Cristian – commissioner of the Texas Railroad Commission, which regulates the Texas oil and gas industry – said:

Now, there’s a lot to unpack here in terms of why Texas pulled money from BlackRock…

But let’s start at the beginning of the Anti-ESG / Anti-Woke agenda.

Terms like “impact investing” – or the idea of investing for both financial returns and positive social or environmental impact – have been around for a while (especially in Europe)…

But the ESG “meme” in the investing world didn’t really exist until BlackRock CEO, Larry Fink, published his now infamous 2020 letter to CEOs, calling for a fundamental reshaping of finance.

Once this happened, the ESG feeding frenzy began.

In fact, according to a 2021 article by Bloomberg, ESG assets were on track to exceed $50 trillion by 2025 – more than a third of all global assets combined!

On the surface, it sounds like a win for the environment and a win for the people!

Unless, of course, you have an economy that is heavily dependent on oil and gas – the de facto boogey man of the ESG / climate change movement.

Who, pray tell, might have one of those? Texas, the second largest state by size (behind Alaska), second largest state by population (behind California), and the 9th largest economy in the world, with $2.3 trillion in annual GDP.

So, Texas being Texas, decides to respond to what they perceived as a highly “Anti-Texas” position and basically run a reverse boycott – if you’re going to be anti-Texas, then you’re not going to get to do business with Texas.

So, in 2021, Texas passed two laws – Senate Bill 13 and Senate Bill 19 – which restrict government contracts with companies that take what state officials regard as punitive stances toward the fossil fuels and firearm industries.

List of states that introduced bills either in support of or against integrating ESG principles into investment decisions in 2021

In 2022, several Republican-led states took steps to prohibit state investment funds from doing business with asset managers that use ESG principles.

This eventually led to a handful of states – Arizona, Arkansas, Florida, Louisiana, Missouri, South Carolina, and Utah – divesting ~$4bn in state assets from BlackRock’s funds.

But for BlackRock, who had nearly $8 trillion in assets under management, the $4bn was hardly a drop in the bucket.

However, it most certainly acted as the primary catalyst that reversed the massive inflows to ESG funds. 

ESG investments have lost their luster given high interest rates, political backlash, and greenwashing scrutiny. Source: Visual Capitalist

In September of 2022, BlackRock responded to a letter they received from 19 Republican State Attorneys General who accused BlackRock of putting its “climate agenda” ahead of clients, collaborating with climate activists, and boycotting energy companies.

In its letter, BlackRock says that the firm has never dictated specific emission targets to any company, and that it doesn’t coordinate its investment decisions or shareholder votes with others on climate issues, much as the attorneys general claimed. 

Far from boycotting, BlackRock says it has invested “hundreds of billions of dollars” in energy companies, which, strangely enough, is true. 

According to a January 2024 article in Bloomberg, 72 BlackRock funds on the prohibited list have invested more than $2 billion in the oil industry.

According to Mark McCombe, Vice Chairman at BlackRock:

BlackRock – undeterred by the Texas boycott – continued to look for ways to build rapport with Republican officials. 

At a February summit, Fink said BlackRock could help Texas get $10 billion in private investment to strengthen its power grid, after bouts of extreme weather over the last few years, from heat waves to winter storms, left millions without electricity and heat.

Not a bad olive branch if you ask me.

So why the sudden divestment of capital from BlackRock?

It seems like the oil producing nations are calling BS on the energy transition.

For example, in 2023, the 28th annual climate change conference – the “Conference of the Parties” (or COP) – was held in the United Arab Emirates. 

And in case that seems like a kind of weird place to hold a climate change conference…

The president of COP28, Sultan Al Jaber, has claimed there is “no science” indicating that a phase-out of fossil fuels is needed to restrict global heating to 1.5C, the Guardian and the Centre for Climate Reporting can reveal.

Al Jaber went on to say:

Oops.

This only got worse when Saudi Arabia Energy Minister, Prince Abdulaziz bin Salman, said the kingdom won’t agree to a text that calls for the phase down of fossil fuels.

Don’t worry, there’s more.

On March 18th, 2024, Texas hosted the annual industry conference, Cera Week, in Houston, where they continued to denigrate the energy transition plans. 

Meg O’Neill, chief executive of Woodside Energy, said that the transition to clean energy cannot “happen at an unrealistic pace,” predicting that cleaner fuels could take up to 40 years to develop.

According to Amin Nasser, chief executive of Saudi Aramco:

So the question remains…

What happened at the conference that caused the Texas Permanent School Fund to notify BlackRock that they were divesting via a public press release? 

We can only speculate. 

But personally, my favorite conspiracy theory is this: Texas is getting ready to make good on its long-standing threat to secede from the Union.

Which brings us back to our routine coverage of “what’s going on with gold?”

Is Greg Abbot Preparing for Texit?

Voters in the Republican Party across Texas headed to the polls on Tuesday, March 5th, to weigh in on 13 propositions on the GOP ballot – all of which received majority YES votes. 

Most notably…

• Proposition 7: The Texas Legislature should establish authority within the Texas State Comptroller’s office to administer access to gold and silver through the Texas Bullion Depository for use as legal tender.

For those who’ve been following our gold coverage, the reason we’re bringing this up should be rather obvious…

If the Lone Star State succeeds in the long-held sound money fantasy of returning to a pseudo gold standard – allowing all Texans to transact in gold/silver – it may potentially be the “Catalyst of the West” that drives investor interest.

But more than that, it could offer Texans a safeguard from the threats of inflation and tyranny.

According to Texas State Representative, Mark Dorazio, who urged Texans to vote YES on Proposition 7:

This ballot proposition is important because it shows the underlying stable grassroots demand for the use of gold not only as an investment, but also as currency.

And it’s not just Texas taking steps to make use of precious metals as legal tender…

Lawmakers in Florida and Oklahoma have introduced bills into their respective state legislatures that would follow Texas by creating their own state-run depositories.

We’ve also seen a crop of states pass bills to eliminate capital gains taxes on the sale of gold and silver, treating the buying and selling of metals as an exchange of currency, not a profit/loss on a commodity.

Not to mention, on March 21st, Wisconsin became the 44th state to eliminate sales tax on the purchase of precious metals

According to Jp Cortez, executive director of the Sound Money Defense League:

At the time of writing, more than a dozen other states have introduced pro-sound money legislation in 2024 –  including Alaska, Indiana, Iowa, Georgia, Kansas, Kentucky, Missouri, Idaho, Arizona, Utah, New Hampshire, Oklahoma, Nebraska, Kansas, Vermont, and West Virginia.

Last month, we made the decision to start providing more coverage on the major, publicly traded, private equity firms.

Why? According to Pitchbook,

Said another way, all seven firms have eyes on the profit potential that comes from expanding access to retail investors (and charging fees for the privilege).

We’ve already covered KKR and Blackstone…

Today, we’re diving into Apollo Global Management and their efforts to win market share via the Apollo Academy.

Let’s dive in, 

-Jake Hoffberg

P.S Looking for back issues of Private Capital Insider?

Go here to read everything we’ve published.

A Brief History of Apollo

Founded in 1990 by three partners – Leon Black, Joshua Harris, and Marc Rowan – the Apollo Global Management’s initial focus was on distressed debt.

Leon Black, left, founded Apollo Global Management in 1990 with Joshua Harris, right, and Marc Rowan, center.

While there is no shortage of drama surrounding the firm – especially with its ties to Jeffrey Epstein – Apollo has been involved in some of the largest leveraged buyouts in history.

But to get us up to speed on today’s topic, let’s do a quick overview of some key dates in Apollo’s history:

In 2009, the firm launched Athene, with aspirations to become a leading retirement services company.

In 2011, Apollo Global Management, LLC made its initial public offering on the New York Stock Exchange, with the ticker symbol APO, further solidifying Apollo’s position as a leading global alternative asset manager.

In 2016, Athene Holding Ltd. made its initial public offering on the New York Stock Exchange under the ticker symbol ATH.

In May 2021, Apollo established its dedicated Global Wealth Management Solutions vertical within its Client and Product Solutions group, furthering the firm’s strategic imperative to better serve individual investors.

In January 2022, Apollo completed its merger with Athene, bringing the two strategic partners together in full alignment, and under one publicly-traded parent company bearing the Apollo name.

According to the firm’s Fourth Quarter and Full Year 2023 Earnings, they raised “more than $8 billion of capital during 2023 from a combination of successful product launches, ongoing distribution expansion, and continued education focused on providing solutions for individual investors”

And just like KKR and Blackstone, Apollo is putting serious resources into advisor education on alternatives – a platform broadly known as The Apollo Academy.

Why? Because the advisory channel is the main distribution channel for financial products.

And if we take a look at the firm’s July 2022 white paper, How alternatives can address your 60/40 portfolio blues, we can see a compelling thesis around “why alternatives?” and “why now?”

Also just like KKR and Blackstone, the primary focus is on the “Just Add Alts!” narrative, and comes back to the historically weak performance of the 60/40 portfolio in 2022.

But unlike other firms that tend to focus on the more surface level aspect of performance…

Apollo dedicates a significant amount of attention to explaining why the 60/40 might not meet investor expectations going forward. 

Simply put, thanks to a combination of factors, public markets today are primarily Beta, not Alpha… 

Visible by the fact that a staggering 94% of active equity managers have underperformed the S&P 500 benchmark on a 20-year basis.

Fewer companies and higher concentration have combined to reduce the opportunity for investors to harvest excess returns in the public markets.This trend has sparked a massive flight of capital from active strategies into passive strategies.

Let’s run through those factors…

Factor #1) Fewer publicly traded securities: 

Since 2000, the number of publicly traded companies in the U.S. has declined by close to 40%. Even after the IPO Boom of 21, there’s only a little over 4,200 public companies.

Factor #2) Increased concentration: 

By mid-2022, the companies in the S&P 500 Index accounted for 80% of the U.S. equities markets, while the top five made up a quarter of the Index – compared to 12% roughly two decades ago (note: see our Feb 24th issue for an update on stock market concentration).

Factor #3) The rise of passive investing: 

As a result of these secular changes, the correlation between public stocks and bonds has been on the rise, weakening the ability of traditional portfolios (i.e., 60% equity/40% bonds) to deliver the diversification benefits they once did. 

To be fair, you could have gleaned these insights from just about any firm’s white paper on alternative assets…

But Apollo takes it a step further by discussing a topic we haven’t yet presented in Private Capital Insider – Volatility Drag.

We’ve talked plenty about the importance of reducing Fee Drag from your portfolio, as it is mathematically the easiest way to improve returns without taking on more risk…

But the other sneaky trick you’ll often find being used by those selling investment opportunities is how they present average annual returns – are they using arithmetic returns or geometric returns?

Here’s why…

When you’re using arithmetic returns, you are simply taking an average of returns over a total period of time. 

But here’s the problem with using an arithmetic return…

If in Year One, you generate a 100% return… but in Year Two, you suffer a 50% loss… how much money did you make (or lose)?

If you’re using an arithmetic return, you just experienced a 25% annualized return [(100% + (-50%) / 2].

But in reality (i.e., using geometric returns), doubling your money, and then cutting it in half, means you just made a round trip – no change in value.

The difference between the two numbers is what is referred to as “Volatility Drag” – or the total impact that the deviation from average annual return creates on your portfolio.

Check out the table below for a hypothetical example of how this works:

When taking the simple average of annual returns, both Portfolios A and B had similar average returns of 6.5%. Portfolio A—with stable values and zero volatility—earned a compounded return of 6.5%, while the greater volatility of Portfolio B led to a compounded annual return of 5.8%. 

The end impact of that volatility is palpable: Portfolio A ended the 10-year period with a terminal value of $9.38 million while Portfolio B lagged at $8.80 million, a substantial 6.2% difference.

So remember this: whenever someone tells you something like “the public market returns, on average, 10% per year”...

That doesn’t mean you are going to get a nice, clean, consistent compounding each year. 

And even though all the data suggests dollar-cost averaging into low-cost index funds is a winning strategy…

When you simply buy the market, you also have to accept the market volatility that comes with it. 

In fact, a recent J.P. Morgan analysis shows that – over the past three decades – the traditional 60/40 portfolio delivered annualized returns of 9.04% with annualized volatility at 9.33%. 

For this exact reason, institutional investors will often turn to asset managers to build them a product that may wind up underperforming the benchmark…

They are willing to make the trade off, if they can reduce the volatility drag.

As you’d imagine, one of the main selling points of private investments is there isn’t much observable volatility during the hold period, because of their illiquidity.

But in exchange for being locked up for a number of years, this winds up being an attractive feature for investors with longer-term horizons.

However, one of Apollo’s most compelling cases for “Why alternatives?” comes from a factor most people don’t talk about – competition.

One of the investment pillars we come back to over and over again is this: the price of any good, in any market, is a function of supply and demand.

This means that the larger the market, the more liquid it is, and the more competitive it is…

The harder it is to maintain an “information advantage” that can support Alpha.

As a point of comparison, the total market capitalization of U.S. publicly traded equities and bonds amounts to $68 trillion…

But across the global private capital markets, there’s ~$10 trillion of assets under management.

That makes U.S. public markets alone 6.8x bigger than global private markets. 

Not to mention that because public markets have what is considered “perfect information,” everyone (supposedly) has simultaneous access to any information that could change price assumptions. 

However, in private markets – or thinly traded public markets, for that matter – this is where smaller investors can attempt to find an information advantage that gives them an edge. 

According to Apollo: Incremental additions of alternatives to this baseline 60/40 allocation, however, can dramatically change that picture, delivering potentially better returns, while also dampening volatility.

That’s why the firm’s research suggests that adding alternatives to a public-only portfolio is the key to enhancing potential risk-adjusted returns.

Please keep in mind, the lack of liquidity can make it hard for investors to find a buyer to unload a position if they need to sell. Investors must be prepared to hold onto these assets for an extended period, whereas publicly traded positions, generally speaking, can be sold on short notice.

But does this mean that YOU should add alternatives to your portfolio?

Final Thoughts: Alternatives, although attractive, have hard-to-solve problems

For all the hype around alternatives, and for most individual investors, there is a significant problem that hasn’t really gone away – access to opportunities (or at least ones comparable to those touted in research suggesting private markets outperform public markets).

Sure, it’s all fine and good to have a fun chart that looks like this…

But where do you buy those financial products?

And even if you could, alternatives add complexity to portfolios, creating hesitancy on the part of investors (and advisors to recommend them). 

Common concerns include: lack of manager alignment, illiquidity, dealing with J-Curve (where you lose a bunch of money upfront, as capital is invested before returns start to appear), capital calls, layered fees, and complex reporting...

Not to mention the complexities of diversifying across both asset classes, as well as sectors and industries.

While the JOBS Act is certainly expanding retail investor access to private markets…

We are seeing the most significant inflows of retail money going into the perpetual vehicles launched by publicly traded private equity firms like Apollo.

Sure, there’s a fee to having a name brand asset manager do it for you…

But as always, is the illiquidity fruit worth the squeeze?

Who knows? Maybe Apollo’s right: Liquidity is overvalued.

While everyone else is talking about the proposed TikTok ban…

So are we! But here’s the side of this story that hasn't been getting much attention. 

• Steve Mnuchin says he is putting together a group to buy TikTok. Combine this with the $1bn NYCB investment, the rumors of Trump selling Truth Social to X/Twitter, Musk's plan to turn X/Twitter into an “everything app,” and the pending March 22nd shareholder vote on a merger involving Trump Media & Technology Group (Truth Social) with the Digital World Acquisition Corp (Nasdaq: DWAC), which might result in a $4bn gain for President Trump…

This story is quickly turning into something weird. But the other story that’s turning a little weirder?

• Gold continues to be the story no one is talking about, despite fever pitched buying activity in China.

That’s what we’re talking about in today’s issue of the Weekend Edition.

-Equifund Publishing

Steven Mnuchin Strikes Again As The TikTok Drama Continues

In our previous Weekend Edition, we devoted the entire issue to the “NYCB Story You Haven’t Heard” – a short expose on Trump Treasury Secretary, Steven Mnuchin, and his $1bn investment in NYCB.

And in a “fact is stranger than fiction” moment, this week, we have this bizarre intersection of several different narratives we’ve been tracking over the past six months.

To lead things off…

Mnuchin & Friends are putting together an investor group to purchase TikTok.

For those who’ve never heard the name Steven Mnuchin, the Yale graduate joined investment bank Goldman Sachs in 1985.

After leaving Goldman in 2002, he briefly worked as vice chairman of a hedge fund called ESL Investments, owned by his Yale roommate and Goldman Sachs alumni, Edward Lampert (who would later be kidnapped in 2003, and allegedly managed to persuade his captors to let him go after two days)… 

Mnuchin was named in a lawsuit filed by Sears’ holding company accusing its former chairman, hedge-fund manager Eddie Lampert, of a “multiyear and multifaceted scheme” to siphon more than $2 billion from the company’s coffers to himself, his hedge fund E.S.L. Investments, and other insiders. Source: Vanity Fair

Then, in 2003-2004, he worked as CEO at SFM Capital Management, a fund backed by George Soros…

This was followed up by founding a hedge fund called Dune Capital Management, alongside two former Goldman partners. The firm invested in Trump International Hotel and Tower in Honolulu, as well as the one in Chicago – and was eventually sued by Trump.

In 2004, Mnuchin also launched Dune Entertainment – a film production company that financed more than 75 films (like the X-Men film franchise, including Avatar, The Lego Movies, Godzilla, Mad Max: Fury Road, War Dogs, Ready Player One, and a bunch more you’ve heard of).

So if this story sounds like it comes straight out of Hollywood, that might have something to do with it. 

Since then, he pursued what can reasonably be considered garden variety private equity shenanigans, involved in the bankruptcies of both Kmart and Sears, as well as the entire IndyMac/OneWest/CIT Group saga, which the NY Times alleged “was involved in a string of lawsuits over questionable foreclosures, and settled several cases for millions of dollars.”

In 2016, Mnuchin accepted his nomination for Secretary of the Treasury…

And then, formed his current investment fund, Liberty Strategic Capital, following the 2020 election.

That brings us up to today’s TikTok drama.

For a Congress that is divided on basically every single issue there is, they moved with incredible speed and unity to pass a bill forcing the sale of TikTok.

While the official story is that this sudden interest in banning TikTok is somehow related to China…

President Trump, who once led the charge on the TikTok ban, via executive order – and effectively hooked up his buddy, billionaire Larry Ellison, co-founder of Oracle, to be the American server that all U.S. traffic has to run through, via the $1.5bn Project Texas – has now reversed his position in an interview with CNBC stating:

When asked if TikTok is a national security threat, potentially exposing sensitive data to China, Trump responded: 

While we don’t take political sides here at Private Capital Insider, the logic here makes reasonable sense…

If the issue is China getting access to sensitive information about Americans – and they can still get that data from other American companies – shouldn’t we be talking about that instead? 

So what is the real motivation behind this bill? Who is really behind this bill? And more specifically, why now?

There’s a LOT of speculation the issue is around Gen Z, their overwhelming support for Palestine on the TikTok platform, and a desire to court their vote in the upcoming election.

Oh, and billionaire Jeff Yass – the biggest donor to the conservative organization Club for Growth – owns 15% of ByteDance (TikTok’s parent company)...

And Dave Urban, a longtime lobbyist for ByteDance, has pitched TikTok’s effectiveness as a campaign tool for some time to people around Trump.

However, because this is a finance-related newsletter, let’s get back to the potential suitors lining up to buy TikTok.

• Steven Mnuchin’s Liberty Capital, which has made a number of investments in Israel – including Cybereason, a shadowy tech firm with ties to Israel intelligence, running doomsday election scenarios – not to mention copious amounts of capital raised from Japan’s SoftBank, the sovereign wealth fund of Saudi Arabia, and Abu Dhabi-based sovereign wealth fund Mubadala.
  

• Rumble, a “free speech” online video platform that is popular among conservatives, shared a statement from its CEO, Chris Pavlovski, on X on Tuesday. Pavlovski addressed TikTok CEO Shou Zi Chew, and offered to “join a consortium with other parties seeking to acquire and operate TikTok inside the United States.”
  
  Rumble has high-profile investors including Peter Thiel (of Palantir, alleged to be a CIA front, among other things) and Senator J.D. Vance, R-Ohio.
  

• Former Activision Blizzard CEO Bobby Kotick has expressed his interest in buying TikTok to ByteDance co-founder Zhang Yiming and OpenAI CEO Sam Altman.
  

• Kevin “Mr. Wonderful” O’Leary has tossed his hat in the ring, because why not?

While it’s unlikely Microsoft, Alphabet (Google’s parent company) or Meta (Facebook’s parent company) could purchase TikTok, due to antitrust concerns…

Here’s where the story gets even weirder:

According to some guy on Twitter, this entire thing could be some set up for what I can only describe as a MAGA/QAnon bingo square – a massive merger between Truth Social, TikTok, Rumble, and X/Twitter…

And who knows, for good measure, let’s just throw in NYCB too, and now we have a super bank app controlled by Elon Musk.

Or, what might be considered a more sober – but alarming – theory, according to Whitney Webb, a tour de force in investigative journalism:

As William Shakespeare once said, “All the world’s a stage, and all the men and women merely players.

They have their exits and their entrances; and one man in his time plays many parts.”

So I guess the only question remains is this – how will you play your part in today’s market conditions?

For one idea, let’s take a look at our favorite story no one is talking about – Gold.

China Gold Buying Fever Sending Prices Higher?

We’ve been covering gold on a regular basis here in the Weekend Edition for one simple reason…

In many respects, outside of your own private credit, gold (and silver) are the origin of money.

And even though the media attention has overwhelmingly focused on the price action in Bitcoin – sometimes called “digital gold” – which has a tiny market cap in comparison to gold…

How is it possible that there is an asset class that is hitting all-time highs in every single currency, and almost no one in the mainstream media seems to care?

Especially with the looming commercial real estate crisis, regional bank failures, and persistent inflation… something that should be an overwhelming reason to talk about gold? 

One potential answer – investors just don’t care about commodities anymore…

And they especially don’t want to own precious metals. According to Daily Chart Book, 75% of advisors have little to no exposure in gold (<1% of assets) – the highest since 2019 – and 90% showing no interest in the metal at all.

But what makes this even stranger? The fact that as gold is hitting record highs, there is basically no demand for gold mining stocks – which are trading at what might be record discounts to net asset value (NAV).

Why? Because here’s the truth about the stock market – share price is based entirely on supply and demand. 

And with AI stocks and Bitcoin capturing the world's attention, there aren’t many people out there looking to buy miners (except Stanley Druckenmiller that is).

According to SOP Advisors:

Even stranger, the price of gold is climbing DESPITE net outflows from ETFs.

How is it possible that gold is continuing to climb higher in the face of this selling pressure? China.

Yes, there are plenty of central banks buying gold… but that’s been going on for years now, and it hasn’t put much upward pressure on price. 

This means that what is driving up the price of gold IS NOT demand for paper gold, but for physical gold. 

And so much so, it’s forcing the price of gold higher in the West, as there is likely some obvious arbitrage happening in the markets.

According to CTN News,

As usual, we don’t make predictions, buy/sell recommendations, or provide individualized advice…

But if the key to being a successful investor is to be contrarian and right – and then have the rest of the market agree with you (i.e., a new consensus)...

Is there any other asset class that shows more obvious signs of market sentiment being more asleep at the wheel than gold? 

Hit the poll below and let us know your thoughts.

If you’re looking for one of the easiest ways to make more money without doing more work, here it is…

Do whatever it takes to reduce (or eliminate) fee drag from your portfolio – whether it’s fees charged by your government, financial advisor, investment manager, broker, or bank.

Why? Because in the Game of Money, every percentage point matters.

Source: SEC

And the better you become at managing your finances – and directing your investments – the less you have to spend on the endless army of consultants and advisors, who will charge you to do it on your behalf.

To be clear, I’m not saying that you shouldn’t hire advisors to help you achieve your financial goals…

But if you’re going to pay fees for something, you should only be paying for the value they deliver.

So how do you figure out what is worth paying advisors for and what isn’t? 

That’s the topic of today's issue of Private Capital Insider.

-Jake Hoffberg

P.S Looking for back issues of Private Capital Insider?

Go here to read everything we’ve published.

Finding Alpha in a World of Beta

According to economists, in order to generate market-beating returns (called “Alpha”), you must take more risk and more volatility (called “Beta”). 

Why? According to the Efficient Markets Theory (EMT), all share prices in the stock market reflect all publicly available information.

This essentially means any ability to “beat the market” over the long term is purely a function of dumb luck and risk tolerance.

Armed with this theory, millions of investors have been sold the benefits of low-cost index funds; if you can’t beat the market, you might as well join it.

Even Warren Buffet says that for most small investors who don't have time to research individual companies, cheap index funds are the best way to invest in the stock market.

But here’s what the Oracle of Omaha wrote in a 1988 letter to Berkshire Hathaway shareholders:

I know you’ve been taught to believe that markets can’t be beaten. But if that were true… 

How is it possible that of every single person I know who has more than a $10m net worth, not a single one of them achieved that wealth by dollar cost averaging into low-cost index funds? 

Assuming they didn’t inherit it, the vast majority who built such a fortune in a single generation did it by using “Cheat Codes” – wealth-building “hacks” and “super formulas” that I’ll admit are hard to find. 

Everyone wants to find Alpha in a world full of Beta - but few do: 

• Warren Buffet used something called “float” from his insurance companies to generate piles of low-cost capital, giving him a massive advantage over other investors.

• Jeff Bezos was able to sell products online without charging sales tax (for a while at least), giving him a massive advantage over his brick-and-mortar competitors who did.
  

• Jimmy “Mr. Beast” Donaldson – a 23-year-old who made $54m in 2021 on YouTube – spent nearly a decade trying to crack the code on the YouTube algorithm, and in the process, discovered his Cheat Code (and has 10 billion views and counting).

So the real question we now have to ask ourselves is this…

In the public markets – which are dominated by institutional investors – is there any Alpha to be found? 

Or are we – the average retail investor – part of the Alpha for institutional investors? 

Sure, you might get lucky in the short term. But are you willing to put in the time, money, and effort to win long term? 

For me, the answer was an easy “no way!” That’s why I rarely do anything other than invest in low-cost index funds.

So where do I turn for Alpha? 

It should be pretty obvious that the Private Capital Insider is biased towards private markets. 

And the reason for it is simple – it’s the only segment of the market where I feel I can gain any sort of long-term advantage, specifically because of its inefficiencies.

There is a common saying that there are “riches in niches” – and I knew that it was going to be easier to attempt to be a big fish in a small pond than the other way around.

I think Denis Shapiro, author of The Alternative Investment Almanac: Expert Insights on Building Personal Wealth in Non-Traditional Ways, has a great take on this:

For Shapiro, the solution he came up with was a 50/50 split between public and private assets.

Source: Denis Shapiro

In this model, the PUBLIC side of the portfolio is built for growth, while the PRIVATE side is built for cash flow.

By running this split portfolio, it frees Shaprio to let each side of the portfolio do what it does best, and not fault it for what it doesn’t do. 

However, the tradeoff with this portfolio is this: while the left side is very simple and consumes little time, the right requires a LOT of work.

But the time saved by having 50% of his portfolio on autopilot frees up his time to spend on networking and researching private market investments.

According to Shapiro,

Naturally, Shapiro now runs a small fund where he seeks to be a slice of his investors “right side of the pie”...

But does that mean you should give half your money to some private equity manager? 

Again, we come back to the issue of fees.

When you invest, you aren’t buying a hypothetical return with no costs. You are buying a financial product that has various fees, which are the killers of returns.

Source: Wall Street Journal

According to Jason Zweig,

And if you’re interested in the increasing number of alternative-asset-oriented funds hitting the market…

Their past returns might sound great—but only net returns, after subtracting all costs, count.

Source: WSJ

Today, as the fees on index funds and ETFs collapse to zero, Wall Street is looking for new products they can make their margins on. 

That’s why it's no surprise to see this major market shift towards offering private assets to retail investors…

And it is for this reason in which we find the opportunity to invest directly into private companies – with no management or performance fees – a compelling value proposition for retail investors searching for passive investment opportunities.

[Note: the only fee Equifund charges its investors is a $24 transaction fee, which is designed to cover the technology and compliance costs we incur per transaction.]

Final Thoughts: Don’t Hire Beta Managers if You're Looking For Alpha

For nearly 10 years, I’ve had one simple thesis about financial advice and wealth management: 

But in my opinion, the fee you pay needs to reflect the work that was performed, or the value created. 

Unfortunately, the vast majority of investment managers simply cannot outperform their benchmarks – which means there is no reason to pay them to manage investments on your behalf, if you can beat their performance by dollar-cost averaging into a low-cost index fund.

Because if they aren’t generating Alpha (for you, at least), what they are really doing is managing Beta.

However, if you’ve got the right team who understands how to create the proper structures and strategies that provide downside protection, regular cash flow, and upside potential…

And by outsourcing that complexity to an outside advisor, it frees up your time (and emotional energy) to focus on other things…

That is one of the best forms of Alpha you can buy.

Remember: the goal isn’t to “beat the market.” The goal is to live a great life.

Your life shouldn’t revolve around generating financial returns in your portfolio. Your portfolio should revolve around the life you want to live.

Yes, having more money in the bank certainly does help.

But in my experience, it is financial education that shows you the path towards freedom – not a number in your bank account.

While everyone else is talking about the Biden-Trump rematch, more drama around the Musk/OpenAI lawsuit, and the State of the Union…

Here are the stories that haven’t been getting much attention. 

• U.S. bank profits drop 44% in Q4 as big firms cover failed bank costs: The U.S. banking sector saw its profits drop by nearly half in the last quarter of 2023, as large firms began paying hefty fees to help recoup costs incurred by several bank failures last spring, the Federal Deposit Insurance Corporation reported Thursday.
  

• NYCB Raises More Than $1 Billion in Equity Led by Steven Mnuchin’s Firm: Commercial real estate lender New York Community Bancorp received an equity investment of more than $1 billion, gaining a vote of confidence in the struggling lender from investors, including former US Treasury Secretary Steven Mnuchin.
  

• Fed’s Powell Says Significant Changes to Bank Capital Plan Likely: Federal Reserve Chair Jerome Powell said that U.S. regulators are likely to significantly change their plan to require large lenders to hold more capital — a move that would mark a major win for Wall Street giants.
  

• Powell: ‘There will be bank failures’ caused by commercial real estate losses: Powell also said Thursday he expects to see some banks fail due to their exposure to the commercial real estate sector, which has declined significantly in value following the shift to remote work. Probably nothing, right?

And if we had to sum it all up in one FinTweet, here it is. 

That’s what we’re covering in today’s Weekend Edition of Private Capital Insider.

Let’s dive in,

-Equifund Publishing

P.S. Gold also hit an all time high, miners are still trading a deep discount, and pretty much no one is talking about it. While this is certainly a story we’re tracking as part of the “most predicted recession of all time” narrative, we’ll see where we are after we get through next week.

Also notable news we’ll likely cover next weekend, HR 2799 passed the House and is on its way to the Senate. 

The NYCB Thing Gets Worse. Then Better. But Also Worse.

As a reminder, we don’t like to make predictions, nor do we particularly enjoy doom and glooming. 

But the slow motion dumpster fire that is NYCB is like the news story that keeps on giving. 

For whatever reason, this single regional bank stock manages to connect to a variety of other stories we’ve been following in Private Capital Insider. 

For those not in the loop on what’s going on, here’s the short version…

• Friday, March 1st: NYCB revealed major weaknesses in its ability to monitor risks and replaced Thomas Cangemi as CEO with Flagstar Bank’s Sandro DiNello… and the stock tanks on the open.
  

• Wednesday, March 6th: NYCB announces they need to raise funds. After The Wall Street Journal reported on the fundraising effort, the stock plunged more than 40%.
  
  Steven Mnuchin, along with a rather interesting cast of characters, steps in with a $1bn offer that will dilute the heck out of existing shareholders.

However, the deal doesn’t officially close until Monday, March 11th – which just so happens to be the end of the Federal Reserve’s BTFP (which we covered in the March 2nd Weekend Edition).

To kick things off, let’s start with a bit of a roundup of the mainstream media coverage. 

According to Jenny Van Leeuwen Harrington on the March 6th CNBC Halftime Report Investment Committee:

Lots to unpack here, but let’s go in order. 

First, the acquisition of Signature Bank’s assets 

When NYCB acquired Flagstar Bank – and then parts of Signature Bank – this moved NYCB into a “Category IV” Bank.

Source: SIFMA

According to SIFMA,

This acquisition also moved NYCB directly into the crosshairs of the Basel III reserve requirements. If approved, they would force a 19% jump in the required capital for the biggest lenders.

While there is some growing indication these reserve requirements may change – Federal Reserve Chair Jerome Powell said that U.S. regulators are likely to significantly change their plan to require large lenders to hold more capital…

Until they do, willingly putting your bank into these crosshairs is just… a weird decision.

Second, the management team

Last week, NYCB revealed major weaknesses in its ability to monitor risks, and replaced Thomas Cangemi as CEO with Flagstar Bank’s Alessandro DiNello.

So who are Mnuchin & Friends bringing in to lead NYCB?

Joseph Otting, the former head of the Office of the Comptroller of the Currency – and previous turnaround CEO for Mnuchin when he bought failed mortgage lender IndyMac (which became OneWest) – will become CEO, replacing DiNello, who had taken over less than a week ago. 

Joseph OttingPhotographer: Victor J. Blue/Bloomberg

Mnuchin, Otting, Reverence’s Milton Berlinski, and Hudson Bay’s Allen Puwalski will join the NYCB board, which will be reduced to nine members and purged of all legacy NYCB directors.

Third, the entrance of predatory players and potential market manipulation 

While CNBC didn’t go into much detail on this topic, it’s one worth paying attention to.

Here’s one of the strangest parts about this deal. According to Bloomberg,

In 2019, New York renters won sweeping new protections that stopped landlords from raising rents on regulated apartments. Owners were outraged, and their banks found themselves under pressure. 

NYCB’s loan portfolio was almost all mortgages, mostly multifamily, and most of those subject to New York rent rules.

Remind me again why exactly anyone wants to acquire a book of loans concentrated in rent-stabilized buildings?

Maybe they don’t. 

Let’s take a look at what FinTwit thinks.

Could this be just another round of “pass the hot potato of toxic assets,” while scraping out all the good ones? 

Or maybe the better question… What happens when the bank that bailed out a failed bank, fails?

Apparently, if you’re Mnuchin & Friends, you get one of the most incredible trades of all time, when you basically double your money in two hours.

I wonder if they shorted the stock on the way down too?

Fourth, the highly dilutive terms that have all but wiped out the previous investors.

According to Bloomberg,

However, this 41.4% number DOES NOT include the warrants, which have a strike price of $2.50 – a 25% premium above what they paid for the common stock.

I guess we’ll see what happens next week.

Everyone likely knows they’re supposed to “do their own research” before making an investment. 

But here’s the cold hard truth about due diligence, which we all have to deal with…

For the vast majority of retail investors interested in private investments, they may have neither the time, opportunities, resources, or skills necessary to perform proper due diligence. 

Here’s the good news: The secret to successful investing is to simply avoid the obvious losers.

Here’s the bad news: Most people have no idea what to look for to spot the obvious losers.

In today’s Private Capital Insider, we’ll discuss how the average retail investor can perform basic due diligence to spot potential “Red Flags” that make it easier to say no, faster.

-Jake Hoffberg

P.S Looking for back issues of Private Capital Insider?

Go here to read everything we’ve published.

Evolution of Investment Due Diligence: How to Navigate New Terrain

Years ago, emerging companies were primarily funded with the help of small investment banking firms. Those underwriting departments were, and continue to be staffed by well-experienced, fully licensed personnel.

However, since the JOBS Act of 2012, and the crowdfunding boom in the U.S., many people without traditional investment banking or corporate finance background have entered the fray. 

Some crowdfunding portals have gone so far as to advertise their embarrassingly short due diligence processes, and in some cases, companies can have their capital raising campaign live on certain platforms in less than 24 hours. 

While this short timeframe might be under the assumption the company has all of its documentation ready to go…

How is it possible the platform performed adequate, or any, due diligence in a single day?

How are you – the average investor – expected to perform sufficient due diligence within the extraordinarily limited timeframe and information provided?

And perhaps more to the point, even if they did provide sufficient information, would you really understand what you’re looking at?

Short answer: because you likely cannot perform adequate due diligence in the situations described, you are often forced to rely on the representations provided by the Company.

And almost by definition, being forced to rely solely on information provided by the selling party, the transaction is suspect and should be considered “high risk.”

That’s why it’s not a stretch to say that many retail investors rely on third-party due diligence – by a licensed financial professional, an investment platform, or a publisher – when considering an investment opportunity.

While I think we can all agree that anyone investing in alternative investments understands these are often high-risk opportunities, and they’re okay with the realities that most of these plays will not generate positive returns…

The #1 thing we hope we NEVER have to worry about is losing our investment due to outright fraud – something we’re seeing more of on various alternative investment platforms.

To be fair, investors may make mistakes, and criminals may certainly be clever people. But more often than not, fraudulent activity relies on the assumption that investors may be too lazy or time constrained to read the paperwork and do some basic fact checking.

According to former SEC Commissioner Luis A. Aguilar:

If we believe this to be true, then as retail investors, our goals shouldn’t be to figure out which private investments could become winners, but instead, to focus on ones that are obvious losers – or otherwise they fail to provide a chance for better risk-adjusted returns than opportunities in public markets.

Basic Due Diligence: Say “NO!” Faster By Looking For These Common Red Flags 

As a general consideration, the majority of all investors share a similar problem – deal flow. 

More specifically, access to deals that fit our investment criteria.

When investing in public markets, because of the sheer amount of available information, finding stocks that fit your thesis is rather straightforward. 

In fact, there are plenty of software solutions that may help you identify these stocks, by simply entering in the variables you’re looking for. 

However, in private markets, it’s more of a “kiss a lot of frogs” type thing, especially if you’re investing in early-stage deals. 

That’s why professional investors will look at 1,000+ investment opportunities per year, and maybe invest in only 10-20 of those deals.

While you’re probably not going to look at that many deals…

As you’d imagine, simply getting exposure to a large volume of data means you have some sort of reference point to “pattern match” against.

And if you’re anything like the typical retail investor, you simply aren’t writing big enough checks for this level of effort to be “worth it,” relative to far simpler strategies (like dollar cost averaging into a low cost index fund).

Realistically, this means the only thing you can perform reasonable due diligence on is the platform hosting the offering, and the promoter introducing you to the opportunity, which may be the same entity.

This means first and foremost, investors need to be on the lookout for conflicts of interest. 

Of course, crowdfunding platforms make money through a combination of listing fees, transaction fees, and success fees. 

The conflict arises when platforms rely too much on listing and transaction fees, rather than success fees.

Alternatively, if the platform makes claims regarding the strength of its deal flow and selection process – but doesn’t clearly articulate exactly what it is, or by what reasonable industry standard it is making this assessment – this calls into question the believability of the platform’s claims. 

It’s also important to remember there is a big difference when it comes to how investment platforms underwrite debt offerings (private credit) and equity offerings (private equity). 

Credit risk and analysis is the bread and butter of traditional lenders, and debt is underwritten using clear metrics regarding the borrower’s ability to repay.

However, underwriting an equity offering often requires:

• a specialty firm that understands the specific nuances of that industry, 

• the competitive landscape, 

• market capitalization, 

• current market conditions, 

• forward-looking perspectives, and 

• the inherent uncertainty that comes with financing emerging companies. 

Generally speaking, this is called “investment banking.”

With all this information in mind, here are some questions you might want to ask platforms and businesses before you invest:

1. Regarding the quality of investment products: Has the platform ever listed an offering for a simple agreement for future equity (or SAFE)? If so, what percentage of those SAFEs either never converted into equity, or the repurchase clause was exercised? Has the platform ever listed an offering where management, or other insiders, sold personal shares as part of the offering?

2. Regarding due diligence: How often does the platform perform site visits? What documentation does the platform request from the issuer? Does the platform require thorough investigation into, not only, the financial viability of an issuer, but also the structure of its corporate entity, where it stands among its peer group, and if the management team is well qualified?

3. Regarding underwriting: What processes are in place to review the financial models provided by the issuers? How many offerings are listed, absent a financial model? In addition to the required reviewed or audited financials, does the platform provide current financials? If so, have there been any adverse events, identifiable on the income statement and balance sheet, since those financials were stated?

4. Regarding valuation: How exactly does the platform determine — or otherwise challenge — the valuation of the issuer’s offering? Does the platform allow the issuer to make forward-looking projections that are abnormal, unusual, or otherwise out of character with comparable companies?

5. Regarding marketing communications: Does the platform understand regulatory guidelines, including what is and isn’t permissible to say or predict? How does it enforce this on its platform? What is its compliance and review process? Have the claims presented by the issuer’s offering pages been thoroughly vetted for accuracy and proper citation? 

6. Regarding investor education: Does the platform provide educational materials to help retail investors understand how to do their research? If so, what information does the platform supply that can only be provided by the issuer, which would be necessary for an investor to do their own research? Does it provide original research on industry trends comparable by sector? Does it provide thorough information on the corporate entity, management team, and board of directors? 

All of this leads to a point…

Let’s assume you’re satisfied with a potentially intermediary’s compliance process, assume there is a low risk of fraudulent activity, and you also can reasonably assume the promoter is acting in good faith.

There is still the question of whether, or not, the offering is worthy of further consideration. 

Remember: if you are being solicited for an investment, it means the company is selling a regulated financial product called a “Security.” 

While these legal documents associated with the offering of a security aren’t the most fun things in the world to read, they may contain a lot of useful information regarding the investment opportunity. 

Here are the types of “Red Flags” you may want to look for within the offering documents.

• Lack of a Clear Business Plan (or confusing Use of Proceeds): Every offering must disclose what they are planning to use the capital for. If the use of proceeds doesn’t make sense, and it is primarily being used to pay down debt (especially debt owned by the founders), or has the majority of funds going to something non-specific or vague (like “working capital”)... this could be a major red flag of a lack of governance.
  

• Minimal Work Hours by Founders: How comfortable are you investing in a business where the founders generally don’t work more than 30 hours per week? What about a company that has no full-time employees, and the founder needs the capital to quit their full-time job and run the company?
  

• Founder (or preferred) shares with disproportionate voting rights: While small investors are unlikely to acquire enough voting rights to make a notable difference, this is more of an issue of accountability and governance, than an indication of fraud. Even if you never plan on voting, this may create problems down the road, with regard to the company’s ability to continue raising capital – especially from institutional investors.
  

• Proxied Votes or “Lead Investor” provisions: These terms often require you to relinquish voting rights, and receive a form of carried interest for “managing” the shareholder base.
  

• Interest payments not commensurate with the risk taken by debt-holders, often below market rates: We see this all the time with real estate offerings that offer retail investors demonstrably lower interest rates than would be provided to institutional investors. If an investor can find a comparable bond product in the public markets, a private offering would likely offer a better potential yield.
  

• Messy Cap Table: Most early-stage companies have a relatively simple capitalization table (a list of the shareholders with number of shares, dates purchased, and so on) – it’s the management team. But sometimes, they’ve raised capital from outside investors, and there might be some confusion around things like warrant provisions, options, SAFE notes, and the impact that may have on future dilution.
  

• Confusing Ownership Structure: Is it difficult to understand who actually owns the company or has the controlling interest? For example, is there any ownership from shell companies and dummy corps? How about foreign-domiciled corporations?

• Insider Selling: In some cases, you may notice in the offering circular a section called “selling shareholders.” Surprise, surprise – in some cases, the people selling are the founders/management team. This begs the question, if this company is such a good investment, why are the insiders selling their shares to you?

As a reminder, any issuer conducting a Regulation Crowdfunding (or Regulation A+) offering must electronically file its offering statement on Form C (or Form 1-A) through the Commission’s Electronic Data Gathering, Analysis and Retrieval (EDGAR) system, and listing the intermediary (crowdfunding portal or investment bank) facilitating the offering. 

In addition, they are required to file ongoing updates with the SEC. 

While many companies raise capital using Regulation Crowdfunding or Regulation A+ are first time capital raisers…

Be sure to look them up on EDGAR to review any previous filings they’ve made, as part of your due diligence process.

Final Thoughts: Knowledge Breeds Confidence

The landscape of alternative investments is evolving rapidly, making adequate due diligence more crucial than ever. 

While we are, of course, in favor of expanding retail access to private markets… 

There are still significant risks that most people may not understand. 

That’s not to say retail investors should avoid investing in private markets. 

In fact, we are clear supporters of providing more investor education, for both retail investors and the financial professionals that serve them. 

Being armed with knowledge, asking the right questions, and maintaining a healthy skepticism, investors might navigate the complex alternative investment terrain more safely. 

Whether dealing with emerging technologies or traditional investment vehicles, the principles of thorough due diligence remain the same: A critical, discerning approach is a key component for mitigating risk of one’s investment against the unpredictable waves of market trends and hype.

While everyone else is talking about Bitcoin’s dramatic upward swing, Elon Musk suing OpenAI, and more Trump drama…

Here are the stories that haven’t been getting much attention. 

• Gold Futures closed at a new record high, despite ETF outflows. This week marks 15 consecutive weekly closes above $2,000, with all-time high daily and weekly closes.
  

• The pending regional bank crisis continues as New York Community Bancorp stock dropped ~30% at the Friday open. They’ve also fired their CEO as losses mount to $2.7bn.
  

• The Federal Reserve’s Bank Term Funding Program ends March 11th, and things could get spicy.

That’s what we’re covering in today’s Weekend Edition of Private Capital Insider.

Let’s dive in,

-Equifund Publishing

P.S. As a reminder, we cannot provide any individualized advice or investment recommendations. 

If you need help, please consult with a qualified financial professional who is licensed to provide investment advice.

Behold a Pale Horse: The End of The Fed’s Bank Term Funding Program

"Behold a Pale Horse" is a book written by Milton William Cooper, published in 1991. 

It covers a wide range of conspiracy theories and controversial topics, including government cover-ups, secret societies, and UFOs. 

The title is derived from a passage in the Bible's Book of Revelation, which describes the Four Horsemen of the Apocalypse, with the pale horse representing death.

While we don’t like to engage in the often-foolish errand of predicting the future…

What we do like to do is build assumption-driven forecasts that describe how certain scenarios might play out. 

For regular readers of the Weekend Edition, we’ve dedicated plenty of space towards the slow motion dumpster fire that continues to be the regional banking sector.

This was especially illustrated with New York Bancorp taking a swan dive on Friday, March 1st, dropping ~30% at the open.

New York City Bancorp shares drop 29% at the open after it said it discovered “material weaknesses” in how it tracks loan risks. Source: Bloomberg

So if you’re watching the markets and wondering “what will be the pin that finally pricks the bubble?” and triggers the consensus shift in the market (i.e., the Pale Horse)...

Let’s take a look at the hot topic on FinTwit these days, the Federal Reserve’s Bank Term Funding Program (BTFP) that is set to expire on March 11th, 2024. 

For those who’ve never heard of the BTFP, it’s a temporary emergency measure created by the Federal Reserve in March 2023 in response to the bank runs that caused the failures of Signature Bank and Silicon Valley Bank. 

This temporary program has allowed banks to take advances from the Fed for up to a year by pledging Treasurys, mortgage-backed bonds, and other debt as collateral, which is valued at par. 

By allowing banks to pledge these bonds, they can meet customer withdrawals without having to sell their bonds at a loss, which is what Silicon Valley Bank did last March, sparking a run on the bank that sent tremors through the industry.

The program offers loans of up to one year in length, and to eligible depository institutions – such as banks, savings associations, credit unions, and others – that pledge collateral eligible for purchase by Federal Reserve Banks in open market operations. 

But here’s the kicker – Up until recently, the BTFP was effectively a “free money giveaway” to banks.

Here’s why…

The traditional role of central banks is to be a lender of last resort, and the traditional means by which the U.S. Federal Reserve provides this backstop to the financial system is through what’s known as the discount window.

And yes, once upon a time, that was a literal window the bankers would use to borrow cash by pledging collateral, but received less than it’s worth (i.e., the discount).

The New York Fed's Discount window in the 1960s

The Federal Reserve created the discount window to help banks avoid bank runs.

However, because of this so-called “haircut” they take on borrowing, the discount window was often seen as an undesirable option…

And by extension, using the discount window attached a stigma to any financial institution using it.

According to the Federal Reserve Bank of New York,

And just in case you think banks are probably abusing the discount window for some sort of government sponsored free cash giveaway…

Let’s do a quick review of what happened in 2008.

• The Federal Reserve dropped interest rates to basically zero, kept it there for years, and gave banks access to essentially unlimited free money.
  

• Banks then borrowed practically interest-free money to buy yielding Treasuries or mortgage-backed securities.
  

• Then they pocketed the interest rate spread.

Why bother lending money to businesses and consumers when you can take a risk-free trade?

Then, in 2022, we finally saw interest rates ratchet up…

And even though everyone assumed the Fed would pivot and drop rates, they didn’t, and carnage ensued. 

Immediately following the bank failures in 2023, we saw record high levels of borrowing from the discount window.

Discount window borrowing

And then, the BTFP was announced and – as you’d expect – even more borrowing happened: In the first week of the BTFP, banks borrowed $11.9 billion from the program, along with more than $300 billion from the already-established Fed Discount Window.

BTFP borrowing

Except unlike the discount window, under the BTFP, financial institutions DID NOT have to take the haircut – instead, they could borrow against them at face value (par).

Typically, the amount banks can borrow is based on the current market value of their bond portfolios. As bonds tanked, their borrowing ability shrank. 

But by valuing collateral at par, the Fed allowed banks to borrow as if the value of the assets never dropped. 

Simply put, the BTFP allows banks to borrow more than they otherwise could…

And more importantly, did so in a way that created yet another risk-free trade for banks. 

According to Money Metals Exchange,

Which is why the Fed announced on January 24, 2024 they were closing this free money trade, and raising interest rates on the BTFP to match interest earned on reserve balances.

But now comes the critical question…

One year later, did any of these banks ever bother to address the underlying problems? Or did the can just get kicked down the road?

And with the increasing reserve requirements of Basel III… how many of these banks will be able to survive without another “free money” program like the BTFP?

Only time will tell, but in the meantime, let's take a look at what’s going on with gold.

Could the End of the BTFP (and Rate Cuts) Finally Trigger the Fabled Gold Bull Run?

Even though the 10 Bitcoin ETFs are vacuuming up cash at record rates…

Gold – and gold miners – continue to defy logic as investors’ attention is firmly on Bitcoin and the “Just Add AI!” narrative.

But just like in the fable “the boy who cried wolf” – could we see the gold bull market that’s decades in the making finally come true?

This week marks 15 consecutive weekly closes above $2000, with all-time high daily and weekly closes…

Implied volatility on gold call options has plummeted to one of its lowest levels in history, which could be a signal it’s ready to pop…

Gold mining stocks (like Newmont) are still in the dumps, trading at a significant discount…

And hardly anyone in the mainstream financial media seems to be reporting on the action in gold, as it seeks to break the psychologically significant $2,100/ounce barrier – a new all-time high.

Market analysts at CPM Group are also not optimistic that the gold market can hold Friday’s gains as it is caught in a well-defined trading pattern:

But the real kicker here is this…

Even though the Bitcoin ETFs are swallowing up enormous amounts of capital, what will happen to gold prices if – in response to the BTFP ending – we get rate cuts instead? 

If we get a repeat of 2008, we could see gold make a significant move higher.

If you’re tired of the “commercial real estate apocalypse” narrative building momentum in the financial media these days…

Home prices continue to climb – faster than any other industrialized nation – as rates stay higher for longer and inflation continues.

Source: Daily Mail

According to the NY Times,

As the American political activist, Vietnam War veteran, and NYC political candidate, James McMillian III, once said – ”The rent is too damn high.”

That’s why today, we’re going to dig into one of the most important issues facing our economy today – affordable housing.

Let’s dive in, 

-Jake Hoffberg

P.S. Considering an investment in affordable housing? 

Be sure to check out FG Communities offering on the Equifund Crowdfunding Portal to learn more.

FG Communities recently announced the company plans to end its Reg-CF offering early.

The last day to invest will be Monday, March 4, 2024.

P.P.S Looking for back issues of Private Capital Insider?

Go here to read everything we’ve published.

The “Highest and Best Use” Paradox:
Why Upcycling, Zoning Laws, and Construction Costs Ruin Affordable Housing Efforts

On the surface, the solution to the U.S. housing crisis may seem obvious – just build more affordable housing. However, this solution isn’t as practical as it may seem.

Here’s why…

The United States is not experiencing a shortage of available housing stock; there’s plenty of inventory around the country. 

There are 44.1 million renter households and 46.0 million rental units with complete kitchen and plumbing. For every 100 extremely low-income renter households, there are only 33 affordable and available rental homes; Source: NLIHC

The real problem is the economics of affordable housing in desirable places to live. There’s simply no economic way to “build” affordable housing when the cost to build and operate new homes exceeds what low-income renters can afford.

Nationally, the average monthly operating cost for a rental unit in 2018 was $439, excluding mortgage and other debt-related expenses.

In other words, even if landlords set rents at the bare minimum needed to cover costs – earning no profits – housing would remain unaffordable to most very-low-income households, if without government subsidies.

The problem has only gotten worse thanks to burdensome regulations and approval processes in some communities and, in recent years, growing material, labor, and land costs.

And without substantial government subsidies, like the Section 8 Housing Choice Vouchers – which simply shift the cost burden to the taxpayer instead of solving the affordability problem – homebuilders and landlords face a dilemma…

Do you build low-income housing – at either breakeven or at a loss – and hope for government subsidies to make up the difference? 

Or do you focus on building housing for the more affluent households?

Not surprisingly, the new rental housing is largely targeted at the higher-priced part of the market. 

As more housing is built towards the higher end, it creates an unwinnable game of “musical chairs,” as everyone is forced to compete for what's available, even if they can’t afford it.

The Area Median Income (AMI) is the midpoint of a region’s income distribution, by household size, as determined by the Department of Housing and Urban Development (HUD) – Source: KRONBERG URBANISTS + ARCHITECTS

This forces low-income renters to hope that older housing stock “trickles down” as it ages, and higher-income renters move into newer properties.

However, in reality, what happens is something called “Upcycling” (or “gentrification”).

• In stronger markets, owners have the incentive to redevelop their properties to justify asking for higher rents from higher-income households.

• In weaker markets, owners have the incentive to abandon their rental properties – or convert them to other uses when rental income is too low – to cover basic operating costs and maintenance. 

In aggregate, this means that properties that were once affordable become unaffordable for one simple reason: properties tend to get upcycled in the pursuit of the “highest and best use” (HBU).

How is HBU determined? Through four criteria:

1. What is physically possible? This is a matter of the available space and limits of architectural design
   

2. What is legally permissible? This is a matter of zoning issues or other restrictions
   

3. What is financially feasible? This is a matter of available financing to improve or rebuild the physical structure
   

4. What is maximally productive? This is a matter of how the property is structured to produce the best net operating income

Overwhelmingly, the HBU defaults to single-family homes. Today, restrictive single-family zoning practices make it illegal to build anything other than a detached single-family home on nearly 75% of all residential land in America.

As this “Upcycle” process continues – and new inventory is built for wealthier tenants willing to pay higher rents – what we inevitably see is the hollowing out of the more affordable housing stock, referred to today as the “Missing Middle Housing.”

“Missing Middle” building types, such as duplexes, fourplexes, cottage courts, and courtyard buildings, provide diverse housing options and support locally-serving retail and public transportation options. Source: Missing Middle Housing, KRONBERG URBANISTS + ARCHITECTS

The term, coined by Dan Parolek of Opticos Design, refers to certain building types – such as small apartment buildings, multi-unit houses, and simple mixed-use structures with a storefront and a residence – that were the building blocks of those blossoming 19th-century metropolises, but which are scarcely produced anymore. 

They are called “Missing” because they typically have been illegal to build since the mid-1940s, and “Middle” because they sit in the middle of a spectrum between detached single-family homes and mid-rise to high-rise apartment buildings in terms of form and scale, the number of units, and oftentimes, affordability.

However, they are not friendly to the business model of production builders and big finance, which has been characterized as “predicated on vast amounts of institutional complexity and debt.”

In many cases, developing this “Missing Middle” is blocked by the status quo of special interest groups seeking to protect property values and tax revenues, by keeping the “unwanted” out.

While zoning remains invisible to many people, the problems it's connected to increasingly are not. Cities have typically prioritized single-family homeowners above other groups, with the old belief that dense housing hurts their property values.

That conviction is at least as old as the 1926 Supreme Court decision that upheld zoning in America (Village of Euclid v. Ambler Realty Co., 272 U.S. 365).

According to the opinion delivered by Supreme Court Justice George Sutherland:

Since then, no one has challenged the policing powers held by municipalities to enforce zoning laws… and the economic consequences for those deemed “undesirable” have been enormous.

As you may already know, household wealth in the U.S. is mostly a function of real estate ownership. 

It’s also the primary source of the racial wealth gap, largely due to a history of legalized discrimination called “redlining.”

However, like many narratives – especially ones related to racial discrimination – the truth is often messier and more complicated than meets the eye.

Source: Kronberg Urbanists + Architects

As we altered our systems to legally and administratively favor single-family homes, we changed how people build wealth – from an income-based paradigm to an asset-based paradigm. 

Prior to the 1920s, the way in which real estate was used to build wealth was fundamentally different than it is today. Because there weren’t any zoning laws to “protect” the value of the property, the only real value in real estate was the income the property generated. 

This meant that anyone who owned land could earn extra income by building additional rooms.

When wealth is created primarily by income, it encourages a fairly entrepreneurial approach to the asset class, which tends to drive positive outcomes – for both personal wealth creation and the health of the surrounding community.

Under an income-based paradigm, more people are better (more customers), more variety is welcome (diversity of products), and more wealth is created at the local level through increased local participation.

All of that changed thanks to zoning’s ability to artificially restrict supply, and therefore artificially boost asset prices: If the value of your asset is directly tied to supply and demand, fewer houses are better (less competition), less variety is welcome (standardization of products), and less wealth is created at the local level, as more of it is absorbed by the landlords and financiers.

According to Kevin Klinkenberg…

Under the asset-based paradigm of the last 100 years, wealth has been "created" by the price of the asset – in this case, a house – going up and then capturing financial gains through buying and selling the asset (or by using creative financing arrangements). 

Property owners now have real economic incentives to force exclusion through regulations. 

More specifically, these exclusions provided an opportunity for more standardized “monoculture” developments that are easier to underwrite, and therefore, easier to expand financing options.

This meant Wall Street could more easily package mortgages into mortgage-backed securities to sell to large institutional investors.

The Critical Question:
Why is Affordable Housing So Expensive to Build?

For the last century, almost all the rules around development have been written in ways that entrench the dominance of a few styles of development.

Most notably, the regulatory and financial system we have today is optimized to build the “cookie cutter” monoculture developments of the Suburban Experiment.

The Suburban Experiment can be described, using this illustration by Léon Krier, as a sudden shift from the model of growth depicted on the top—organic expansion through duplication of an existing development pattern based on multi-purpose complete neighborhoods—to the model depicted on the bottom— horizontal hyper-growth, with the rise of a skyscraper district in the core dependent on suburban commuting
Source

However, it also punishes the type of incremental infill – the Missing Middle – that was once underwritten by community lenders and residents, for an unexpected reason…

There’s not enough liquidity in a secondary market to effectively securitize and syndicate these types of loans.

Today, there is a massive secondary market for home mortgages, dominated by Fannie Mae and Freddie Mac, which buy home mortgages and bundle them into mortgage-backed securities (MBS). 

These loans are a pretty typical financial product that offer low-interest rates, preferential terms, and a straightforward, streamlined process to qualify. 

Today, the American MBS market is one of the largest and most liquid global fixed-income markets, with more than $12 trillion of securities outstanding (as of 4Q21) and ~$250 billion in average daily trading volume  (as of February ‘23).

The catch is that all of these programs are designed to support primarily single-use, residential properties. There is no equivalent for mixed-use loans. 

Because land-use regulation restricts the vast majority of urban land in the U.S. to single-use structures – and in the case of residential areas, typically 80% or more to single-family homes – banks don’t find it worthwhile to create loan products for building types that are uncommon.

This effectively shuts out the kinds of projects that many incremental developers want to do—urban infill buildings that are often mixed use, usually rental properties, and often denser and with less parking than has been the norm for the last 70 years. 

Many of these issues date to the Federal Housing Administration’s original sin, in the 1930s, of defining mixed-use buildings and apartments as “hazardous” for the purpose of insuring loans, a key component of mortgage redlining.

These rules were intended to protect taxpayers from what were considered riskier commercial loans, even though much of Main Street America was built on the notion of mixed use. 

Recent research indicates that single-use projects may actually be riskier than ones with higher shares of non-residential uses.

In recent decades and especially since 2008, mixed-use areas have gained or sustained value far better than single-use areas, contradicting the view that mixed-use neighborhoods are riskier.

This creates a strange paradox of market inefficiencies.

While there is clear demand for this type of mixed-use product, developers have a difficult time explaining why their non-conforming project is a good investment.

Final Thoughts: Could manufactured housing solve the affordable housing problem?

Because of these multiple and entwining issues, simple-sounding policy reforms aren’t going to fix the affordability problem.

To make a meaningful impact in the lives of the 38 million people who are cost-burdened today, outside of massive government subsidies, the only reasonable option is to implement rent controls and reduce property values. 

For any elected official – especially of a financially distressed state or local government – this move would be political suicide.

This means long-term affordability has little to do with what we build this year or next, but rather, the decisions we make with our existing supply of homes, in which the vast majority of people live.

The most important thing we can do is protect the existing supply of affordable housing through professional management…

And we need a way to significantly reduce the cost of building new homes to meet the growing demand WITHOUT the need for expansive government subsidies. 

The answer could be hidden inside a century-old solution, manufactured homes – formerly called “mobile homes.” They’re gaining ground as a viable homeownership option, and manufactured housing communities are a sought-after place to live.

While everyone else is talking about the Dow Jones Industrial, S&P 500, and Japan’s Nikkei 225 hit new all-time highs, Nvidia having the largest single day market cap gain in history, and Reddit’s plans to go public on the NYSE…

Here are the stories that haven’t been getting much attention. 

• Despite the stock market exuberance, billionaires (like Jamie Dimon, Mark Zuckerberg, Bill Gates, and Jeff Bezos) and members of Congress (like Senator Tommy Tuberville) are all selling massive amounts of stock. Probably nothing.
  

• The North American Securities Administrators Association issues a letter opposing HR 2799 or the Expanding Access to Capital Act – legislation that is designed to help entrepreneurs and small businesses, while boosting the economy. 

That’s what we’re covering in today’s Weekend Edition of Private Capital Insider.

Let’s dive in,

-Equifund Publishing

P.S. As a reminder, we cannot provide any individualized advice or investment recommendations. 

If you need help, please consult with a qualified financial professional who is licensed to provide investment advice.

When Insiders Sell In Concentrated Markets

While this newsletter is primarily focused on what’s happening in private markets…

There’s simply no ignoring the impact public markets have when it comes to the majority of investor portfolios. 

Especially when the paradoxical narratives we’ve been tracking – ”the most predicted recession of all time” and “Just Add AI!” – are battling it out. 

But no matter how convincing any narrative sounds, inevitably, there needs to be a clear catalyst that forces a new consensus in the market (and therefore, new price discovery).

As usual, we do not make predictions, nor do we make buy/sell recommendations…

But we have to talk about the absurd concentration in the stock market right now.

At the time of publishing, the top 10% of stocks in the U.S. now reflect ~75% of the entire market – levels we haven’t seen since the Great Depression and Dot Com crash.

But more specifically, the top 10 stocks by market cap are ~30% of the entire market.

And to reiterate one of our key assumptions – that all market crashes inevitably begin due to a liquidity crisis – stock market concentration and liquidity have an inverse relationship.

But where has all this money been concentrated? 

According to Khuram Chaudhry, Head of European Quantitative Strategy at J.P. Morgan:

Basically, it’s all gone into Nvidia and Meta (the “Just Add AI!” narrative winners).

Which, to our amusement, has produced some solid memes about the stock. 

And just to make the Nvidia story a bit spicier, Nvidia is being accused of a fun financial engineering trick called “Round Tripping” – artificially boosting by making investments, or providing vendor financing, in (sometimes) fake companies, which then spend the cash you gave them to buy your products.

Nortel & Cisco's collapse during the dot-com era by the use of "vendor financing," where a vendor loans money to customers so they can buy their products...

Palantir was accused of doing this during the SPAC craze, losing ~$400m.

Speaking of SPACS, even SPAC King Chamath Palihapitya is further stating that a huge amount of VC money being put into startups eventually winds up at Nvidia.

With that bit of backstory and context in place, let’s talk about the insider selling issue. 

• Jeff Bezos: $8.5 billion of $AMZN

• Mark Zuckerberg: $428 million of $META

• Jamie Dimon: $150 million of $JPM, marking his first sale since taking the helm in 2005.

Not to mention, the Bill & Melinda Gates Foundation, as per their 2023-Q3 13F filing, has apparently wholly divested from stocks of Apple, Meta, Amazon, Alphabet, and Nvidia.

Source: Punjab Capital

To be fair, rich people selling stock doesn’t mean there is a crash coming…

But when they have a track record of conveniently selling right before a major crash happens, maybe we should pay attention?

Either way, in order for the momentum in the market to shift and cause sentiment collapse, there needs to be some sort of catalyst (or event) that triggers it.

According to Khuram Chaudhry, Head of European Quantitative Strategy at J.P. Morgan:

While I think we’re all assuming the “they” who run things won't allow a major stock market crisis during the run up to the 2024 election…

We still are of the opinion that prioritizing downside protection and liquidity is often the correct posture to take for small-balance investors. 

Remember, no one ever went broke selling too soon.

Now might be a good time to consider how your portfolio is allocated, whether or not you need some more defensive positions, or should otherwise increase your cash holdings.

As usual, if you need help with your specific situation, please consider contacting a qualified financial professional.

Rules and Regulations: Expanding retail investor access to private markets

In a previous Weekend Edition, we talked about the consortium of 15 bills floating through Congress known as the “JOBS Act 4.0”

Of those fifteen, four were passed by the House of Representatives in 2023:

• H.R. 2792, the Small Entity Update Act, sponsored by Chairman Ann Wagner (MO-02), would direct the SEC to assess regulatory costs of compliance for small and growing businesses, ensuring that regulations placed on these businesses are not overly burdensome.

• H.R. 2795, the Enhancing Multi-Class Share Disclosures Act, sponsored by Rep. Gregory Meeks (NY-05), would ensure shareholders receive more uniform information in proxy materials without prohibiting multi-class share structures altogether.

• H.R. 2796, the Promoting Opportunities for Non-Traditional Capital Formation Act, sponsored by Rep. Maxine Waters (CA-43), would empower underrepresented and rural small business owners to learn about capital formation opportunities.

• H.R. 2797, the Equal Opportunity for All Investors Act, sponsored by Rep. Mike Flood (NE-01), would increase the number of pathways to qualify as an accredited investor by instituting a test administered by FINRA, allowing sophisticated-but-not-wealthy individuals to access high-growth asset classes that would not otherwise be available to them.

Earlier this month, the North American Securities Administration Association (NASAA) published a letter to Congress opposing The Expanding Access to Capital Act (H.R. 2799).

As a quick refresher, the bill pledges to make a significant upgrade to Regulation A+. 

How? By turbo-charging the maximum offering amount from $75M to a whopping $150M per year.

If enacted, it would be a seismic shift for Reg A+ and equity crowdfunding, making the exemption far more attractive to larger companies with hefty capital appetites. 

H.R. 2799 also proposes a get-out-of-jail-free card for some low-revenue companies, allowing them to court accredited investors sans the tedious SEC registration process. 

In a nutshell, it's about making capital more accessible, and plentiful, for small- and medium-sized businesses.

So why is NASAA opposed to this? According to their letter,

NASAA is the entity that represents state securities regulators, as well as regulators in Canada and Mexico. 

Historically focused on investor protection, NASAA has been a consistent critic of investment crowdfunding, as well as improvements to the capital formation process.

While it’s easy to dismiss the concerns of NASAA as little more than a desire to protect their powers…

They present what we would consider reasonable objections, especially with regards to the looser registration requirements for “finders.”

However, if we look at the current state of FINRA revenue, it’s pretty obvious they are looking for new ways to generate revenue (which primarily comes from fines and license fees). 

FINRA reported a net loss of $218.1 million in 2022, compared to net income of $218.8 million in 2021.

FINRA's losses are concerning because they raise questions about the organization's ability to effectively regulate the securities industry. 

FINRA is supposed to be a watchdog for investors, but it is difficult to do that when the organization is losing money.

For this reason, one of the items we’ve long had on our Equifund Bingo Card is FINRA creating a new license for the swath of “creators” who publish financial-oriented content online...

Especially those who want to be able to legally get paid a sales commission on capital raised, when introducing an issuer’s stock to their audience.

But I digress from the main point of this article…

This week, the Grandfather of equity crowdfunding, Sherwood “Woodie” Neiss, issued a response to NASAA (note: we interviewedWoodie in 2022).

Neiss states:

Selfishly speaking, we are, of course, in favor of anything that would benefit our core business at Equifund, attract more – and higher quality – issuers into the crowdfunding ecosystem, and allow more people to participate in those private offerings. 

However, we also recognize that private markets carry significant risks that many individual investors simply aren’t aware of, or prepared to take.

What are your thoughts? Be sure to rate this issue, and leave us a comment on the poll.