Alternative Investments, Illiquidity, And Endowment Management

I am a risk manager first, and a profit maker second.  I tend not to trust solutions that are "magic bullets" unless there is some barrier to entry — why can you do it, and few others can?  Knowledge travels.

So, regarding the "endowment model" of investing, I have been partly a believer, and partly a skeptic.  A believer, because endowments do have the ability to invest for the long-term, and not everyone else does.  A skeptic, because many endowments were taking on too much illiquidity.

Liquidity is an underrated factor for investors who have charge over portfolios that have a long-term stable funding base.  I had that advantage once, as the main investment manager for an insurer the had a large portfolio of structured settlements.  In insurance liabilities, nothing is longer than a portfolio of structured settlements.

Buy long-dated debt?  Illiquid debt?  If the pricing is right, sure; you should have to pay to rent the strength of a strong balance sheet, where the funding is intact.  WHen managing that company's portfolio I didn't have to worry about a run on the portfolio, because I kept more than enough liquid assets to satisfy the demands of policyholders should they decide to surrender.


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Gold ETF backed Gold Participating Bond scheme for resource finance

In the opening presentation on Mining Journal's Gold Day, sponsor Steve Sharpe of investment banker Canaccord Adams' London office unveiled an innovative financing scheme which can be used to help raise finance for a gold related resource project .  The idea behind what it calls a Gold Participating Bond, is a proprietary mechanism developed by Canaccord Adams that affords the investor full gold price exposure, whilst achieving a running yield, by circumventing conventional financial markets and pre-purchasing gold direct from the mining company, with settlement by way of a gold ETF (currently the Zurich Kantonal Bank's gold ETF).

The idea is that in effect the mining company issues the bond which is based on a maximum of 20% of the mine's annual gold production giving a strong degree of commercial safety.  The bond is set on a fixed term and carries a set coupon - in the case of the example put forward by Sharpe at 8% per annum - and is repayable by the issuer (the mining company) in equal quarterly payments in the form of the gold ETF.  Thus, in effect, the bond becomes a securitised gold loan repayable out of future production.

Sharpe told Mineweb that this is the kind of deal he used to structure when he worked for Rothschilds in London, although in those days the ETF element was not available.

He reckons the Gold Participating Bond will be of particular interest to funds looking for pure gold exposure, those already holding gold ETFs or those wishing to undertake a phased purchase of gold ETFs at a predetermined price, while carrying a good interest rate and with very limited risk.


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