By Peter Grosskopf
On the eve of Sprott’s planned listing on the NYSE, I thought it appropriate to take stock of our history and the decade of my tenure as Chief Executive Officer of the firm.
The Early Days
Eric Sprott founded our business in 1981. Already an accomplished accountant and stock-picking analyst at Merrill Lynch and other Canadian firms, he saw the opportunity to specialize in growth stocks. Eric’s style was always numbers-driven and hard-hitting. His system was based on un-covering value (in his words “stealing” it, before there were other believers) in the form of an equity proposition that offered high-test upside with limited downside.
The firm rapidly built a reputation for success on the investing side, for managed client accounts as well as for the firm’s capital, and as an investment dealer to other institutions. I joined Sprott in 1993 before founding my own similar business with outside partners. During my short initial time as Eric’s partner, I gleaned an understanding that success required a fierce determination to assume a position of leadership, being first to act to get the best sizing and pricing for a position, acting as a contrarian, and to win for clients.
The First Inflection Point
The 2000s marked a watershed moment for Sprott. Eric had become convinced that NASDAQ was dangerously overvalued, that central banks would become accommodative to cushion the fallout and that gold was the natural hedge and seriously undervalued. Not only did he publish his views accordingly in our publication “Markets at a Glance”, he captured the opportunity by becoming one of the largest buyers of quality gold equities at their nadir. Sprott’s private clients were offered the opportunity to convert to new hedge or mutual fund L.P.s, the firm applied to become a registered asset manager in North America, and the investment dealer was spun off to employees to focus exclusively on managing assets.
It was an epic call. The decision powered the returns and growth of Sprott for most of the next decade. Clients were rewarded with outstanding returns for the decade and the firm’s profits and performance fees soared. By 2008, the then-$5 billion asset manager filed for an initial public offering on the Toronto Stock Exchange, and Eric was ready to start diversifying the firm from his own leadership and funds.
A Larger Foundation
When I re-joined Eric in 2010 as CEO, the timing seemed wonderful. I had spent my career arranging gold investments or financing gold producers. A lifetime libertarian, I was convinced the Great Financial Crisis had done lasting damage to government finance, and that gold was ready to prove its worth as a hedge to fiat currencies and their ballooning debts and deficits. I was right for nine months, after which I would have been well-advised to retire immediately — because I came brilliantly close to top-ticking the gold price at $1,900.
Almost to the day of my arrival, a Sprott executive came into my office and handed me a blueprint for “institutionalizing Sprott.” I jumped on the idea of creating a more systemized version of Eric’s DNA. We founded the project lending business, launched exchange-listed physical bullion products, hired experienced talent to broaden the team, and purchased Rick Rule’s global resource boutique, which brought the technical expertise required to assess earlier-stage development projects.
Both our physical trusts and the resource lending business were well-conceived in that they offer clients unique products that deliver tangible and significant benefits. In the case of the Trusts, 100% physical bullion backing on a tax-efficient basis, and for lending, yield and upside based on gold collateral.
A Bear Market
The 2011 to 2017 period was brutal in the gold universe. These were the most difficult years of my career, with the upside that they gave our management team ample time to build a broader foundation for servicing clients across the precious metal spectrum, with value-added strategies to better suit their needs. The bear market also afforded me a lot of time to make, oversee and correct a good number of rookie CEO mistakes.
Eric’s funds did not fare well during this period, as he stuck with his resource-levered junior gold and silver bets. As he left his day-to-day PM duties to prepare for his fabulously successful new gig as a family office investor, the firm could not have been struggling more with our gold strategies. There was no retail and less institutional interest in the sector, and it seemed like the only tickets were sell and redemption orders.
Our spirit during these darker days flickered but continued to burn brightly. We knew that slowly but surely the global markets and economies were becoming dependent on central bank accommodation. We continued to try to launch new strategies to address global gold markets — in China, the U.K. and globally. All were successful innovations, but not in the way of raising material funds. We ran the numbers on acquiring many specialist precious metal managers, and most deals fizzled. Meanwhile, the competition, with the exception of GDX and GLD, was slowly dying off or winding down.
Another Inflection Point
During 2017, we decided that we should focus on alternative gold strategies — as a firm, Sprott was going “all in.” We purchased the Central Fund of Canada, with more than $3 billion in assets and a large client base, for over $100 million. We sold our diversified mutual fund and private credit business to the managers of those businesses. We completed the $570 million raise of our first proper institutional private resource credit fund. We started an investment dealer in Canada to open our business to syndications and corporate advisory in our sector.
These decisions were surprisingly easy to make, given our proclivities. We knew gold was going to provide an eventual uplift, and that everyone else was giving up on it. Decades of contrarian discipline was at work. We knew we could be the best in the world at gold investments — our brand, our reach, our relationships and the technical team we had in the sector were irreplaceable. Deep inside our firm, there was a simmering resolve to be brave, to dig in, to get back up every time we fell.
The reaction? At first, “crickets.” It seemed that we were healthy, and we kept paying the dividend. We bought a large block of shares from Eric and distributed them to our senior execs over time as pay. Our insiders were buying more shares. Clients seemed to take notice, but there were no buy orders in the funds save for a few institutions that were starting to take the long view.
Source: Sprott
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