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1Mby1M Deal Radar 2010: BullionVault, London, UK

Posted on Wednesday, Aug 18th 2010

BullionVault is an online, person-to-person platform for buying, selling, and storing gold directly from the gold exchange. Before 2003, the private investor in gold was unable to trade in large bar “good delivery gold” – the bullion product traded by professionals and the one that offers the lowest trading costs and the highest degree of safety. BullionVault opened the professional bullion market and good delivery bullion bars to retail participation.

The London-based company was founded in 2005 by Paul Tustain, who specializes in post-trade processing systems for European bond and equity markets. His primary skill is designing settlement and control systems. Through his previous company, which he founded in 1990 and ran for twelve years, he provided PTP software for several of Europe’s biggest banks.

The idea for BullionVault took root when in May 1999 Gordon Brown, then chancellor of the exchequer, announced the British government’s decision to sell the country’s gold reserves, which it had held for centuries, at the bottom of the market. This was a move which, according to the Times (London) cost taxpayers more than than £2 billion as the market eventually tripled.

Tustain saw that there had been little investment in gold market infrastructure because of the prolonged slide in price: gold fell from $850 an ounce in 1980 to $270 an ounce in 2001. BuillonVault researched private investor attitudes and found there to be a gap for a fairly priced, reliable, straight bullion investment. It also found that the market lacked knowledge and was hungry for education, which it could provide for nothing over the Internet. Finally, it found little search competition and realized that it could dominate Google searches on gold-related subjects.

BuillonVault’s mission is to make it cheaper, easier, and safer for the retail customer to own gold. By buying professional-market good delivery gold, customers save at least 7% of the cost of coins or small bars than if they were to buy on professional markets. But unlike on the professional markets, on BullionVault there is no minimum trade size. Customers are also not restricted to dealing in U.S. dollars; they can buy and sell directly in euros and pounds sterling, which saves an additional 3% in currency conversion costs. It also aims to have low rates: BullionVault’s highest commission rate is 0.8%, and this drops for customers investing $30,000 (£20,000, or €20,000) or more.

BullionVault also aims to make its option cheaper than other markets by cutting out the middleman by enabling customers to act like market makers, which means they can quote their own buying or selling prices to other buyers and sellers on BullionVault’s exchange. In this way, customers avoid paying the spread that a market maker usually takes.

The company also competes with professional markets and private online exchanges such as GoldMoney on security. Customers’ bullion is stored in a fully insured and accredited professional bullion vault at a cost of 0.12% a year. According to BullionVault, exchange-traded funds (ETFs) cost more than three times as much: They usually charge 0.4% a year and don’t include insurance. The company’s vault operator is ViaMat, Switzerland’s biggest bullion storage and transportation business. An independent auditor checks the accuracy of the daily reconciliation, and The Stewart Group inspects and re-verifies annually the quantity and quality of gold held by BullionVault customers.

The company targets buy-to-hold gold investors. It was strongly influenced by research on the characteristics of millionaires: It turns out that a large proportion believe their own analysis and judgment more than they believe professional advisers, and accordingly do their own research accordingly. These are classic BullionVault buy-to-hold customers, and they represent 80%–85% of customers.

However, the combination of self-confident buy-to-hold investors and a very low-cost trading infrastructure encourages about 12% of the company’s customers to finesse a proportion of their bullion holding by selling into strength and immediately posting buy orders once they sell, which tend to fill on subsequent weakness. These opportunist traders operate essentially like market makers on their own account, providing additional liquidity and making small profits on low-risk trades. The commissions they pay are also now a significant revenue source for BullionVault.

The company has found it impossible to identify ages, socioeconomic types, education levels, and so forth. But it knows that self-research and a long-term record of judicious investment are characteristics of its customers. BullionVault’s 100,000 registered users currently come from eighty-three countries. Customers can start at $2,000 and go up to $5 million. The average investment is $50,000 and the median investment $18,000.

BuillonVault has raised several rounds of funding: a £500,000 seed round largely from the founder’s proceeds from his previous business in October 2003; £2 million in equity (16.6%) and convertible bonds (83.4%) sold to angels in March 2003 (bonds were invested in gold and protected by mezzanine provided by founder and would get a 92% payout after two years if not converted); a £1 million angel round where the company sold above the conversion price for the prior bonds in November 2006; about £4 million when 83.4% of bonds raised in 2005 converted into equity in March 2007; and £2.5 million in new funds when the World Gold Council (WGC) and Augmentum Capital each injected funds and purchased existing shares from original investors for an 11% stake each in June 2010.

Shareholders funds now exceed £13 million, and the asset value per £1 ordinary share now exceeds £35 per share. Sales are about $400 million with profits about about $6 million. The pre-tax earnings yield is approximately 7% and growth continues satisfactorily.

An exit is not in the plan. BullionVault started paying dividends to shareholders last year, and its policy is to increase dividends at 10% per year for the foreseeable future. It doesn’t impose restrictions on shareholder transactions for small holders, which are 95% of its shareholders. Angels hold about 34% of the company and can exit when they want to.

As founder, Tustain sold a small number of shares in the recent transaction, leaving him with about 44%. He doesn’t wish to sell any more. That being said, the WGC has some additional rights to acquire more of his shares if they are a successful marketing organization. Tustain is relaxed about this: If the WGC succeeds, BullionVault succeeds.

Recommended Readings
Deal Radar 2010: Firm58
Deal Radar 2008: Carbonetworks
Buying Gold Online (A CNBC feature discussing the trent of buying gold and BullionVault)

This segment is a part in the series : 1Mby1M Deal Radar 2010

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Really interesting post about gold bullion investment – especially from a UK perspective (I live in the UK, Gordon Brown selling the nation's gold reserves is still a sticking point for many people even after such time). And really interesting to see how investors and VCs and seeing this business and industry grow and development. Thank you for the post!

Gold Matrix Monday, May 9, 2011 at 8:54 AM PT