Gator Financial Partners letter to shareholders for the first half 2014.
This is Gator Financial Partners, LLC’s (the “Fund”) first half 2014 investor letter. The Fund had mixed performance in the period with almost all of the performance coming in February. In this letter, we will briefly review the Fund’s investment performance in the year-to-date period, review the investment thesis for two existing positions, and update you about the Fund’s current net exposure and positioning by sub-sector.
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Gator Financial Partners: Review of First Half Performance
Gator Financial Partners had mixed investment performance in the first half of 2014 with a net gain of 5.36%. The overall market and the Financials sector were up as well. There were four main drivers of the Fund’s performance during the first half of 2014: 1) GSE preferred shares continued to march higher, 2) the Fund’s position in Syncora Holdings Ltd. (OTCMKTS:SYCRF) (see below) gained 155%, 3) the Fund’s position in Zions Bancorporation (NASDAQ:ZION) warrants declined 16% due to a potential capital raise after failing the Federal Reserve’s stress test, and 4) the Fund’s short positions in several large cap REITs underperformed as REITs were strong performers during the first half.
Gator Financial Partners: Investment Thesis of CIFC Corp
CIFC Corp (NASDAQ:CIFC) is an asset manager focused on structured credit products. Specifically, CIFC creates, sells and manages collateralized loan obligations (“CLOs”).
Background: CIFC originally went public as Deerfield Triarc Capital in 2005. Prior to the financial crisis, the company created and managed credit-based CLOs and collateralized debt obligations (“CDOs”). The company used its own balance sheet to invest in equity tranches of its own deals. This did not work out well in 2008, and the company suffered serious losses. However, because the company used structured securities instead of short-term debt to get leverage, the company did not have any liquidity issues and did not have to declare bankruptcy. Deerfield continued to earn management fees from the deals it structured, but the equity tranches lost significant value.
In 2010, Deerfield expanded its management fee revenue stream by merging with Columbus Nova, which managed its own CLOs. In 2012, Deerfield merged with another CLO manager, CIFC, and took the CIFC name. After the CIFC merger, the company was 27% owned by the public, 35% owned by Columbus Nova and 37% owned by CIFC Parent Holdings, which was controlled by Charlesbank Capital Partners. In late 2013, Columbus Nova purchased CIFC Parent Holdings’ stake in CIFC and now owns 75% of the company. Columbus Nova owns its CIFC shares through a holding company named DFR Holdings.
Gator Financial Partners’ investment thesis for CIFC includes the following:
- Inexpensive stock – The stock is cheap. If we look at only the management fee earnings, CIFC trades at 9x earnings while other asset managers trade around 15x earnings. CIFC also has an outsized growth opportunity because it only manages $12 billion and can easily multiply this amount due to strong CLO demand.
- Buy below what majority owner paid – At the current market price of $8.52, we can buy shares below the $9 per share that Columbus Nova paid for a 38% stake in December 2013. Although there may have been some premium in the $9 price due to the stake being a control stake, it is still beneficial to buy shares below this price. In our mind, this provides some semblance of downside protection.
- Potential upside from incentive fees – CIFC earns about 50 bps in management fees on CLOs it manages. If the CLOs perform well, CIFC can earn another 30 bps in incentive fees. Usually, the incentive fees kick in after the deal has seasoned for several years. Since CIFC restarted CLO issuance in 2012, it hasn’t earned incentive fees on new deals to date.
- Potential product expansion into other credit related funds – CIFC has an opportunity to use its core competency of managing credit-related investments to expand into other offerings besides CLOs. It has already embarked upon this expansion by starting a few private investment funds focused on credit. Another opportunity is to open credit-related fixed income mutual funds.
See full Gator Financial Partners – 1st Half 2014 Investor Letter? in PDF format here.