I'm so proud! This article got featured by the Planetary Society!!! The foremost space advocacy non-profit organization and a great community of space lovers, founded by Carl Sagan and led by Bill Nye. You can read the article on their site here
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Today's post was unwittingly inspired by a colleague of mine (and fellow Texas Longhorn & San Antonian!) at the investment bank I work at, so here's your chance to learn some finance in addition to the usual space topics! We were talking about the pros and cons of entering the private equity industry, and he was like, "Hans doesn't care about private equity, Hans is out to LBO an asteroid!" What on earth does that mean? Let's break it into two parts, the asteroid and the finance
The Asteroid - Turning space rocks into fat stacks of cash $$$
The prospect of asteroid mining is not a new one, given that terrestrial reserves of elements like zinc, iridium, platinum, and cobalt that are the backbone of our modern society may be exhausted by the end of this century. The asteroids that intersperse our solar system are the leftover chunks from when the planets formed billions of years ago, which means the Earth and these asteroids are basically made of the same materials. However, because of Earth's stronger gravity, these useful heavy elements sank down to the core and out of our reach, leaving our crust relatively depleted; not so with asteroids, where viable mining reserves can be obtained near the surface |
| Can you imagine the engines we'd need to move these massive space rocks? |
There's a number of techniques and considerations behind asteroid mining - we're looking for Near Earth Asteroids that are chock-full of resources in easy to reach orbits. Asteroids can be categorized a number of ways: C-type asteroids have more water (useful for life support and rocket fuel) whereas S-type and M-types are far more metallic
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| Pie charts are an investment banker's best friend! | Credit: Chemical & Engineering News |
The difficulties of actually extracting ore from the asteroid notwithstanding, even once a viable asteroid has been identified and reached, how do you get the material back? Like everything else in spaceflight, it's a trade-off: should we just send the raw ore back to Earth for terrestrial processing, or is it cheaper to construct processing facilities on the asteroid so that only the refined minerals are transported back, saving weight? And with future advancements in asteroid redirection, could we place a high-value asteroid in Earth or lunar orbit so that it's easier for us to access? The possibilities are endless! But are the profits...
The Finance - LBOs, Dry Powder, and the Private Equity Industry
So now that you're familiar with the basics of asteroid mining, it's time for a primer on leveraged buyouts (LBOs)!
An investment banker's job is to advise companies on mergers and acquisitions, so if you read about a company buying another company in the Wall Street Journal, that's the surest sign some senior banker way above my pay grade just earned himself a fat bonus. But it's not just companies buying other companies, private equity investors buy companies all the time through LBOs. My best metaphor for an LBO is house flipping using borrowed money - imagine you buy a $100,000 house using 20,000 of your own money and borrowing the rest. You own the house for 5 years and rent it out to tenants, generating cash flow. At the end of the 5 years, you sell the house for more than you bought it for, pay back the money you borrowed, and pocket the rest. But instead of a house or a business, why not an asteroid?
I see two main obstacles. First, for reasons discussed above, asteroid mining requires a massive initial investment, and as you can see, having to sink more money up front reduces your returns. And second, although many articles on asteroid mining tout enormous valuations ("one asteroid holds a quadrillion dollars worth of platinum!"), flooding the markets with a massive influx of raw material will crash commodity market prices. There's precedent for this; when the New World was discovered, Spanish mines in Mexico and Peru produced ridiculous amounts of silver, causing rampant inflation and wild price fluctuations
So is asteroid mining beyond the reach of private equity? Well, not so fast... in recent years, PE fund managers have struggled with an excess of "dry powder," or capital that the PE firm has raised from its investors but hasn't found a good investment for yet. The latest statistic I've seen is about \$2 trillion in global dry powder - lots of investor capital, not enough good assets to buy. In response, PE firms are gravitating towards "evergreen funds" that approach potential investments with a much longer time horizon than the traditional 5 years. I think that's the lens with which to view asteroid mining, or investing in space in general. Rome wasn't built in a day, Mars won't be colonized overnight
Look, my point here isn't to come up with some wild financial justification for throwing the Earth's resources into space. But we didn't justify the Apollo Program by its discounted cash flows (even though its economic benefits FAR exceeded its costs), we justified it by our desire to reach for the stars (and one-up the communists along the way). The most common argument against space exploration is "it's too expensive, we should spend that money here on Earth." But when \$2 trillion of investor capital is sitting around undeployed, perhaps it's less that we can't afford it, and more we're too impatient and earthbound to appreciate the opportunity
An investment banker's job is to advise companies on mergers and acquisitions, so if you read about a company buying another company in the Wall Street Journal, that's the surest sign some senior banker way above my pay grade just earned himself a fat bonus. But it's not just companies buying other companies, private equity investors buy companies all the time through LBOs. My best metaphor for an LBO is house flipping using borrowed money - imagine you buy a $100,000 house using 20,000 of your own money and borrowing the rest. You own the house for 5 years and rent it out to tenants, generating cash flow. At the end of the 5 years, you sell the house for more than you bought it for, pay back the money you borrowed, and pocket the rest. But instead of a house or a business, why not an asteroid?
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| Leverage (i.e. debt) is the secret sauce to either getting rich quick or going bankrupt |
I see two main obstacles. First, for reasons discussed above, asteroid mining requires a massive initial investment, and as you can see, having to sink more money up front reduces your returns. And second, although many articles on asteroid mining tout enormous valuations ("one asteroid holds a quadrillion dollars worth of platinum!"), flooding the markets with a massive influx of raw material will crash commodity market prices. There's precedent for this; when the New World was discovered, Spanish mines in Mexico and Peru produced ridiculous amounts of silver, causing rampant inflation and wild price fluctuations
 |
| Not quite as explosive as the PBAN-APCP that powered the Space Shuttle Solid Rocket Boosters, but still a lot of firepower! | Credit: Preqin |
So is asteroid mining beyond the reach of private equity? Well, not so fast... in recent years, PE fund managers have struggled with an excess of "dry powder," or capital that the PE firm has raised from its investors but hasn't found a good investment for yet. The latest statistic I've seen is about \$2 trillion in global dry powder - lots of investor capital, not enough good assets to buy. In response, PE firms are gravitating towards "evergreen funds" that approach potential investments with a much longer time horizon than the traditional 5 years. I think that's the lens with which to view asteroid mining, or investing in space in general. Rome wasn't built in a day, Mars won't be colonized overnight
Look, my point here isn't to come up with some wild financial justification for throwing the Earth's resources into space. But we didn't justify the Apollo Program by its discounted cash flows (even though its economic benefits FAR exceeded its costs), we justified it by our desire to reach for the stars (and one-up the communists along the way). The most common argument against space exploration is "it's too expensive, we should spend that money here on Earth." But when \$2 trillion of investor capital is sitting around undeployed, perhaps it's less that we can't afford it, and more we're too impatient and earthbound to appreciate the opportunity
Humorous and insightful as always!
ReplyDeleteThank you! I'm so glad you liked it. I sure learned a lot researching and writing it :D
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