The COSCO Capital Pyramid, first introduced to the public through an article published by Cameron Smith in the December 1997 issue of Oil and Gas Investor, is an attempt to explain graphically how certain types of investors naturally behave in certain predictable patterns and how then each such grouping or tier relates to one another. COSCO’s Capital Pyramid has now been accepted by both energy companies and Private Capital Providers, themselves, as a useful tool in understanding or explaining why certain classes of investors behave the way they do.

There are a few general observations worth making about the COSCO Capital Pyramid, as a whole:

While the greatest amount of aggregate capital is at the base of the Pyramid, the greatest individual “trigger power” is at the top. As a consequence, Private Placements are focused on the top half of the Pyramid (individual negotiation worth the effort), while Public Offerings are geared to the lower half (less or no negotiation, more regulatory protection). Tiers 2-4 typically are short-term investors which/who seek yield and tax benefits. As a consequence, they prefer partnerships and mezzanine structures. Tier 1 investors are funds with fixed lives of 8-12 years, prefer capital gains to yield, and therefore focus on corporate equity.

See the descriptions below for detailed attributes of each Tier.

Tier 1: Institutional Aggregators
Funds which Typically have Raised Capital From Tier 2 Institutions, Primarily Pension & Endowment Funds

Common Characteristics:
• Fund Life 8-12 Years (Non-Redeemable)
• Often Precluded from Purchasing Public Stocks
• Pass-Through Tax Issues: Non Taxable; Unrelated Business Income
• Managements: 3-10, with Majority x-Wall Street Financiers

General Funds:
• Broad Mandate with Subspecialties (Energy)
• Location: Golden Parkway (Baltimore to Boston)
• Size: Total Capital $1-5B; Individual Investment: > $50MM
• Investment Style: Corporate Equity/Mezzanine

Specific Funds:
• Raised for Express Purpose to Invest in Energy
• Location: Combination Golden Parkway & Oil Patch
• Size: Total Capital $0.1 - 1.0B; Individual Investment: $5-50MM
• Investment Style: Corporate Equity/Mezzanine


Tier 2: Institutional Investors
Entities with Annual Budgets/Allocations Affiliated with Larger/Stronger Financial/Industrial/Educational Concerns

Common Characteristics:
• No Fund Life. Allocation/Budget Subject to Periodic Review
• Tax Issues: Other than Pensions/Endowments, Tend to be Taxable
• Location: All Over
• Size: Available Capital $0.1-3.0B; Individual Investment $5-50MM
• Managements: Small (1-5)

Pension/Endowment Funds:
• Invest in Tier 1 Aggregators
• Corporate/Mezzanine

Corporations (Financial, Insurance, Pipeline/Utility, E&P):
• Invest in Property Equity/Mezzanine
• Some add Corporate Equity, but typically not Primary Mode

Tier 3: Individual Aggregators
Typically, Funds or Other Entities which Aggregate Capital from Tier 4 High-Net-Worth Individuals or Families for the Purpose of Providing/Accessing Professional Management and Benefits of Scale

Common Characteristics:
• Funds Organized with Redeemable Capital: Priority on Liquidity
• Tax Issues: Typically Taxable & Tax Conscious
• Location: Golden Parkway, Chicago, or California
• Size: Total Capital $1MM to +$20B; Individual Investment $100K-$100MM (Majority < $5MM)
• Managements: Individual Managers (Lone Rangers)
• Investment Style: Prepackaged for Speed; Nil Individual Negotiation. Tend to Source Investments through National/Regional Investment Banks

Tier 4: High Net Worth Individual Investors
Individuals Investing Their Own Capital, Some of Whom, when Meeting Specific Criteria, are Deemed “Accredited” and Permitted to Invest in Private Placements

Common Characteristics:
• Distracted by Own Corporate/Personal Issues; Short Time Span
• Not Knowledgeable Outside Own Focus Area, Therefore Subject to Fads
• Tax Issues: Motivated by Tax Avoidance
• Investment Sources: Public Quotations; Broker Recommendations
• Size: Total Capital $Trillions; Individual Investment $25K-$1MM
• Not Suitable Unless:
.........• Personal Relationships
.........• Offering Very Small, or
.........• Substantial Retail Marketing Capacity