Unusual Lessons – One Audacious Move That Set Me Up For Success

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It was the biggest career risk I had EVER taken!

2004

I was convinced we had entered the Chinese Century and a Resource Boom of note was about to ensue … I took a MAD plunge.

I moved my young family across the world to —>

 

Sydney, Australia…

In what seems all but farcical now, I would sit in coffee shops around the city with a wireless keyboard in hand and a Palm Pilot (remember those?) and write / type.

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steve870 / Pixabay

Half insane from worry about how to feed the family, I would write about this strange land, her abundance of metallic shiny objects and all those little mining companies to speculate on for BONANZA.

All the while sipping delicious Flat White coffees.

Over the next few years I travelled around the country, got involved in tiny Uranium, Iron, Copper and Gold miners.

For a while I didn’t know what the hell I was doing. What the heck I was even looking for.

I took a Mining Investment Management course, read a lot and mostly wrote on my Palm Pilot.

Lucky!

A Bull market is panacea for utter stupidity.

And it was a risk well worth taking!!

Recounting this story brings back fond memories but I do so because I smell the scent of yet another Resource Boom a headin’ our way.

But I’ll probably handle this one slightly differently ;-)

More to come on this in future missives.

For now let’s wrap up our 3-Part series on 7 unusual lessons from 20 years of investment failures.

Part I can be found here —> 7 Unusual Lessons from 20 Years of Investment Failures

and Part II over here –> Why Leaping Off Fun Locations Makes You a Better Investor

You will recall I was listing out the lessons I had learned from my dismal investment failures through the narrative of a manager due diligence exercise … Wendywood Partners (names changed to protect the innocent and not-so innocent).

To continue … we move on to discuss the 2 main assets we were looking at gaining exposure thru Wendywood, by virtue of their ownership in a loan to own strategy.

Company #1 – Bloem Aerospace

Bloem was founded in 1988 by Gary and Brad Bloem in Kill Devil Hills, NC. The Bloem brothers remind us of another brother combo in flight history … the venerable Wright brothers.

Bloem’s primary focus was on a vertical takeoff and landing aircraft (VTOL) called a gyrocopter.

A gyrocopter is kind of like a helicopter in that it can hover and doesn’t need a runway and kind of like an airplane in that it has short wings and an engine at the back for propulsion.

Helicopters are versatile but dangerous. Their rotor is turned by an engine. If that engine fails the helicopter spins out of control into the ground … something we’ve all seen on tv.

A gyrocopter has a rotor that turns through centrifugal force generated by the plane moving slowly forward. If the engine fails on a gyrocopter it merely glides down to the ground.

Unusual Lessons

In 1997  The Eagle IV Gyrocopter engaged as an aerial observation platform in the government security plan for the Atlanta Summer Olympics. It operated superbly, being mission ready 24/7 and flying sixty-seven observation patrol flights.

In 2003 the US Department of Defense Advanced Research Projects Agency (DARPA) selected Bloem to design a proof of concept high speed, long range, vertical takeoff and landing (VTOL) aircraft for use in search and rescue.  The goals include VTOL, 1,000 lb useful load, 1,000 nautical mile range, and speeds of to 400 mph, over twice the speed of typical helicopters – Bloem dutifully complied.

DARPA pulls its funding a year later due to budget cuts … paving the way for Wayward Fund IV to takeover.

Aeronautical Economics are Brilliant!

The basic gyrocopter model is priced just shy of $1m per unit versus a helicopter equivalent of $4m (source: RHOTHETA). Ongoing maintenance costs are also significantly lower.

The cash flows are 33/33/33. That is 33% payable on order, 33% payable when manufacturing begins and 33% on delivery.

If we assume a 100 unit order such as those proposed by Emerging sovereign militaries that’s $30m instant cash flow!

Since all the R&D is done, Bloem is on a small annual cash burn consisting entirely of general expenses, marketing and sales.

Some business prospects:

  1. Gotham Air – private defense contractor — representing African sovereign military.
  2. Chinese Military – General Xie — no need for a runway fits perfectly into emerging market’s lack of infrastructure
  3. Indian military – Colonel Tendulkur and defense contractor Sultan Holdings (a JV has subsequently been signed with Sultan).
  4. Other domestic law enforcement agencies;
  5. Agricultural companies – Drone technology adapted for crop dusting;
  6. Venture arm of a Unicorn looking to extend the company into passenger flights between cities

Latest developments:

  • Funding of Drone division complete;
  • An ex US army general to assume the helm

Smelly Fuel Technologies (SFT)

Kerosene is a dirty fuel!

If you’ve ever been camping and burnt kerosene you will know the pungent smell of which I speak.

That’s the sulfur content burning off the fuel.

For environmental reasons, governments around the world mandate the PPM (parts per million) of sulfur content permissible in different types of hydrocarbon liquid fuels.

The process by which a refiner currently removes sulfur from fuels is called oxidative desulfurization and currently entails injecting a cutting agent into the fuel (Hydrogen) and heating to high temperatures until the sulfur evaporates off.

Huh?

Hydrogen in combustible fuels at a high temperature?

Sounds like a bomb to me.

SFT have developed a unique patented method for reducing sulfur content of liquid hydrocarbon fuels in a cost effective manner to achieve mandated sulfur levels.

The process has been validated on diesel, kerosene and jet fuel by the Yakshamush National Laboratory. The largest lab in the USA owned and operated by the US department of energy.

To remove the sulfur, SFT fuel is first oxidized with hydrogen peroxide which operates much like OxiClean on a stain and then other proprietary chemicals are added. The fuel is heated to a lower temperature which is safer and requires lower initial capex.

The margins are quite spectacular.

Using Jan 2016 prices, a barrel of pre and post desulfurized Diesel was $45 and $61 respectively.

A $16 spread.

The OPEX for SFT on one barrel ~$2.15!

For a net profit of ~$13.85 per barrel or 23% gross profit

Currently SFT have a test facility in Boise, ID for Kerosene and they are constructing a similar plant for Diesel.

The cost of the test facility for Kerosene a pittance @ $550k

The technique is proprietary and protected by over 100 registered patents!

Interested parties include Malaysian Oil, Santos Oil Company , Emerald Oil Distributor — a JV would probably entail a per barrel license agreement.

Pour Conclure

Sure Wendywood contains other funds … 20% to be exact in an eclectic mix of distressed, restructuring managers. But it’s the 80% we’re playing for. Which, by the way, is why we don’t get hung up on investing in a fund of funds, a manager or SMA or whatever … our litmus test, as long as we can access our investment thesis at a reasonable price.

Our capacity originates from some existing LPs that need the liquidity and wanted us to replace their capital.

Which we have dutifully done.

Aside from a minor (uhmm) 35% mark-up at the end of 2015 – a consequence of a stock swap involving the funding of the drone division – we are now playing for the next Dude & Phillips valuation.

Remember the two main valuation points were:

  • illiquid 25% haircut
  • 28% weighted average cost of capital

We believe those will both be partially re-addressed at the next valuation because the companies are beginning to generate cash flow and have shown the ability to raise further equity through us and others.

That said, a mark-up is definitely not the same as liquidity.

The exit of these investments is expected to be a 2018 or 2019 event and will entail one or all of the following:

  • Management make a cash tender offer for shares using cash generated from operations
  • Management use assets as collateral for lines of credit and make a special distribution back to shareholders
  • A strategic sale to a defense contractor and/or refinery

For their troubles Wayward IV LP is sitting on a $155m+ uncollected performance fee. Uncollected until they turn the investment back into cash … I’d call that a STRONG alignment of interests!

Which leaves us finally with:

Lesson #7 – put your eggs into one basket and watch that basket like a HAWK

Having the right ingredients doesn’t always make a great cake. Wendywood has the right mix of characters, conditions and catalysts. But we have to be vigilant in the bake!

That’s what we do!

And why I’m off to play 18 with our friend Mr. Steven Skinner.

Your Private Investment Scout

Greg.

Thank you for reading my post. I regularly write about private market opportunities and trends. If you would like to read my regular posts feel free to also connect on LinkedIn, Twitter or via Atlanta Capital Group Investment Management.

Nothing in this article should be interpreted as a recommendation to buy any security. Please conduct your own due diligence.

Greg Silberman is the Chief Investment Officer of Atlanta Capital Group Investment Management [ACGIM]. Atlanta Capital Group Investment Management specializes in creating custom private market solutions for RIA/Family Office clients.

Advisory Services offered through Atlanta Capital Group Investment Management.

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