Tiburon Capital Management: Climate, Themes, Opportunities And Risks
Tiburon Capital Management: Primary investment strategies
Special Situations
- Spins/split-off orphans
- Process-driven legal trades
- When-Issued relative value trades
- Misunderstood Acquirer Companies
- Rich Balance Sheet stories
- Broken Merger value trades
- Corporate Structure Changes
- Reversed Tight Merger Spreads
Fundamental Distressed & Stressed
- In or near bankruptcy, in default, facing liquidity issues, and post-reorganization
- Covenant defaults
- Out of favor and/or limited research coverage
- Change of control language
Capital Structure Arbitrage
- Intra-credit capital structure arbitrage (Holdco/Opco, Sr. vs. Sub)
- Structural seniority trades
- Negatively biased “long put” capital structure arbitrage
- Short-biased “layering” credit trades
Strategies seek to be opportunistic with a plausible Revaluation Catalyst Long or short anywhere in the capital structure, predicated on the optimal risk-adjusted returns.
The 2015 Tiburon Panorama: Climate, Themes, Opportunities And Risks
Executive Summary
- 2015 a Nervous Calm – Mature Phase of Bull Market
- Favoring DM over EM; US Marginally over Europe-US one of only major economies expected to accelerate in 2015. Divergent Global Central Bank Objectives and GDP prospects. Gentle Rate Rise 2H15 earliest
- Europe and Quantitative Easing; UK the Best of the Bunch. ECB QE drives equity out performance and events
- Favoring DM Equities over Bonds; DM Equities are cheap to bonds on a yield basis
- In Mature Phase of Bull Market, but not Overvalued – Shareholder Friendly Behaviors and Revaluation Catalysts buoy downside. Prefer Liquid Large Caps as out performers in Mature Phase
- Social Contract – 3 Arrows in Quiver: Cash on B/S, Access to Capital Markets, High Share Price as a Currency
- Strong US$ – Favor Companies with High US Sales, Costs in Euros even Better
- Oversupply of Oil Creates Sovereign Winners and Losers – US, China, Japan, India vs EM
- Make the Easy Bets and Hard Bets Related to Oil Price Drop (Easy: Consumer, Cost of Goods driven; Hard(er): Energy Ecosystem – But Look for methodological edge)
- Prefer High Yield to Investment Grade Bonds – Oil will make it a Bond Picker’s Market. Lower Rates Longer
Tiburon Capital Management: Favoring DM over EM; US Marginally over Europe
- US one of only major economies expected to accelerate in 2015
- Increasing employment, industrial capex (+11% 3Q14) acceleration due to increased corporate capex and private consumption (jobs, gas price “windfall”)
- Global deflation, central bank easing (16 cuts this year and counting) = rates lower longer in US
- Estimate 3% GDP in US 2015, US assets attract global flight capital (safe haven, higher yielding)
- Watching out for Strong US$ and impact on US companies with international revenues
Tiburon Capital Management: Europe and Quantitative Easing; UK the Best of the Bunch
- Europe QE is = US QE x .70 (not as robust an impact)
- The unintended consequence of QE: Shareholder-Friendly cash use, not top line borrowing
- Dysfunctionalityof Europe and lack of structural reform requires parsing economic vs company
- One will influence the other and requires close attention
- Hand pick companies with catalysts, mindful of revenues, costs, eye on macro
Tiburon Capital Management: Favoring DM Equities over Bonds
- Solid momentum in US, coming momentum in Europe with low rates and low inflation
- Prospect of gentle rate rise in US (though very modest, possibly not 2015) good for equities
- Materializing “wealth effect” -greater disposable income should stimulate consumption
- “Fairly” valued US and European equities are cheap to bonds (S&P 500 total return= 4.2%* vs 10 Year Treasuries at ~1.70%)
Tiburon Capital Management: Are We Properly Compensated Long US Equities at Present Valuations (Yes)
- With interest rates low worldwide, return expectations should adjust lower too
- Prospect of gentle rate rise in US (though very modest, possibly not 2015) good for equities
- Scant evidence of cyclical excesses or inflationary pressures that historically end bull markets
- We are in the “mature” phase of the US bull market, begetting higher volatility and lower returns
Tiburon Capital Management: Cash on Balance Sheets and Ample Access to Capital Markets Drives Events
- Three Arrows in the Quiver –Cash on balance sheet, Access to Capital Markets, High Share Price as a Currency
- Shareholder-Friendly behaviors: share buybacks, new dividend initiation or increases, special dividends, accretive M&A
- Goldman anticipates 18% increase in share buybacks, 8% dividend growth in 2015
- Unintended consequence of QE and low interest rates
- Companies reward shareholders versus organic growth (statements about future confidence and historic rewards for proper Return on Invested Capital (“ROIC”) policies
- Provides ballast in choppy markets (mature companies –equities are bond-like)
- Buybacks and dividends for multiple immunization in a fair to rich priced equities market
See full PDF below.