Corsair Capital’s first quarter 2015 letter to shareholders and a pitch on Orbital ATK via Market Folly
Corsair Capital’s First Quarter 2015 Letter
Dear Limited Partner:
For the first quarter ended March 31, 2015, Corsair Capital was up an estimated 3.1%* net, after all fees and expenses. Corsair Select was up an estimated 6.1%* net, after all fees and expenses. Since inception in January 1991, Corsair Capital’s compounded net annual return is 13.8%. Since inception in January 2004, Corsair Select’s compounded net annual return is 13.6%.
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As we started the year, deflation seemed to be on everyone’s mind. While sports fans debated deflated footballs used by the New England Patriots, global investors were worried about deflation caused by sputtering economies and the continued austerity measures required by many governments to bring their national budget deficits under control. Greece remained the poster child for these countries/governments and when the upstart Syriza Party won control of its parliament, investors remained gloomy about the ramifications of a Greek exit from the European Union.
In the U.S., investors’ eyes once again turned to Janet Yellen and when the Fed might lift interest rates. In February, the Fed cited that “the employment situation in the United States has been improving on many dimensions.” Furthermore, parsing her words in a manner which would make her predecessors proud, Ms. Yellen said, “conditions have improved to the point where it will soon be the case that a change in the target range could be warranted at any meeting.” As such, most market participants thought the Fed would begin to raise rates at its June meeting.
European investors turned optimistic, however, as European Central Bank President, Mario Draghi, made official that the ECB would commence a massive quantitative easing program to buy 1 trillion euros worth of bonds by September 2016. This massive printing of euros, combined with the expectation of a near-term rise in U.S. interest rates, accelerated the decline in the value of the euro vs. the dollar. As what happened when Japan similarly moved to devalue the yen, investors bid stocks up as they assumed this would make European companies more competitive and stimulate their economy. Since last summer the euro has now fallen some 25% versus the dollar and European interest rates are at new lows. Short-term interest rates are negative in many European countries and, incredibly (to any classically-trained economist), are negative for bonds with maturities as long as 10 years in Switzerland!
For U.S. equity investors the European QE program seems to be a mixed blessing. On the one hand, U.S. companies’ earnings from overseas are worth fewer dollars and they also now face competitors with newly lowered cost structures. On the other hand, since overseas bond investors in the search of yield are being practically forced to buy U.S. denominated bonds, interest rates are near historical lows here as well. This, in turn, means the earnings multiple put on each dollar of earnings should be worth much more than in the past (as we have discussed in recent quarterly investor letters).
Embedded below is Corsair Capital’s Q1 2015 letter: