Using Hard Assets for Private Placement Investments
Have you ever heard of the saying “their asset rich, but cash poor”? Well, when working in the private placement world, you quickly realize how many people fit into this category. Whether you find an investor with copper mines, diamonds, precious metals, or anything else, the fact is, hard assets have flooded the private placement business. You may say to yourself, “this should be good for everyone right”? Unfortunately, it’s not that simple. As you will see, pursuing hard asset deals can be a double-edged sword, despite what many fee-happy brokers may claim.
In this article, we will cover everything you’ve ever wanted to know about hard asset hypothecation, and how it applies to private placement programs. This will give you both direction and experience, and most importantly, it will teach you how to ask the right questions. Before we go any further, lets define what a “hard asset” exactly is.
By definition in the private placement world, a “hard asset” is any asset that is considered illiquid, containing a “value” that can fluctuate based upon demand. To give you an example of what we mean, we have listed a few of the most common hard assets below. In addition, we have provided detailed summaries to help you avoid the typical “hard asset” learning curve. Scroll down, and take a look!
List of Common Hard Assets in Private Placement
Precious Stones: This can be diamonds, rubies, and other precious stones owned by a collector. These stones will come with a gem certification and appraisal, and should also have a SKR (Safe Keeping Receipt) as well. In most cases, precious stones are very tough to monetize unless you can sell them in the open market, or you have a private investor to loan against them. Either way, though I have heard of gems being used for private placement trades, it should be considered rare and tough to achieve.
Valuable Art: This can be paintings, antiques, collectibles, and other similar items. As you would expect, this would be VERY hard to take into trade because they are completely illiquid items. The value of art is completely based upon demand, and with the unstable global markets, it has becomes tougher to get a loan against art than ever.
Precious Metals: If you have an asset such as gold, silver, platinum, copper or other metals, we may have good news for you. Currently, precious metals such as gold are in high demand, and can be converted into cash far easier than most assets by banks. If you have gold bullion, you’ll almost always be able to get into trade, since most banks will loan against gold bars. On the other hand, if you have lower grade gold (“gold ore”), or other metals, you may still have a tough time finding a program to accept the asset.
In-Ground Assets: In the private placement world, in-ground assets are EVERYWHERE. Some examples of these are oil interests, copper mines, gold mines, and other similar assets. Even though these assets may be worth Billions on their appraisals, in most cases, they are pretty much worthless for private placement investments. This is due to the high excavation costs associated with removing the asset from the ground. If the bank may have to spend their own money to extract value from this “in-ground” collateral, they will pass on it every time.
Real Estate: If you have valuable real estate, private placement is only realistic if you get a loan against the property and utilize the cash to invest. Despite what many private placement brokers may claim, once the real estate market crashed, it became next to impossible to use property to go into trade. Currently, banks are trying to retain all of the liquidity they can, and real estate is no longer a “stable” asset class in their eyes.
Since you now understand what a hard asset is, and some common examples, let’s explore the burning question you all want to know….
Can hard assets really be used for private placement programs?
To greatly simplify the answer, YES, hard assets can be used for private placement investments. Though this is true, you must also know that there are several obstacles associated with completing such an arduous task. To communicate these facts to our readers, we have listed the process below to demonstrate the unlikelihood of this process actually working.
Steps to Success for Hard Asset Investors
1. Asset Must be Valuable in Market and in Strong Demand
2. Private Placement Trader Must be One of the Very Few that are Real
3. Bank or Private Investor Must Lend Against Asset and Specify LTV (Loan to Value)
4. Trader Must Access Line of Credit Against Asset and Make Trades Successfully
5. Asset Must be Unencumbered After the Private Placement Investment
Unfortunately, even though clients with hard assets are abundant in the private placement business, REAL lenders and private placement investments are not. Before the global credit crisis it was already tough to close a hard asset deal, but in today’s private placement market, it is nearly impossible. Banks across the world are holding on to as much liquid capital as possible, and are extremely reluctant to loan against anything that is illiquid, such as the “hard assets” we discussed.
In summary, if someone could successfully convert illiquid assets into a line of credit (100M+) for a real bank instrument trader, they would be one of the richest people in the world. The problem is, the process of doing so relies on many moving parts which in most cases never align as planned. Though we have put effort into countless hard asset transactions which all produced nothing, we can honestly say that we HAVE been close. If you choose to pursue these transactions like we did, remember what you have learned in this article, and you just may have a chance to beat the odds!
InsideTrade LLC Staff
Phone: (949) 444-2111