Greenhaven Road – Finding Value Of The Beaten Path: Best Ideas Conference 2016.
Greenhaven Road - Operating Background Of Portfolio Manager
- Managed a manufacturing business after graduating college
- Co-Founder of Acelero Learning. Several roles including CFO, CTO, Chief Strategy Officer, and currently board member. Acelero has grown from three co-founders in a tiny office to 1,100+ employees in 15 states.
- A touch of traditional - Worked in private equity, a long/short fund, Stanford MBAl
Who We Are
- A long-biased hedge fund.
- Concentrated and patient.
- Pursue both quality companies (compounders) and special situations (spinoffs, rights offerings, SPAC etc.)
What We Believe
- Fundamentals matter, balance sheets matter, cash flow matters, management matters, & incentives matter.
- An investment committee of one is the perfect size - the aspiration is to be a small boutique manager.
Performance History Throughout Life Of Strategy
Strategy has Compounded >21% and the Fund >14% Per Year Net of Fees
“Asset managers with strong balance sheets are underappreciated by the market and provide compelling risk/rewards opportunities.” -Scott Miller
Asset Management Is A Very Attractive Business
Pros
- Very Scalable: Incremental assets can often be managed with minimal incremental expenses. To double the assets under management does not mean doubling the head count. This is very different from an airline, autos, hotels, etc.
- Recurring Revenues: Fees are extracted from client accounts with great regularity.
- High Gross Margins: Cost of goods sold are minimal.
- Supporting Evidence: 8% of Forbes 400 are money managers.
Cons
- Limited Value Proposition: In aggregate very few customers outperform the overall market after fees and expenses are accounted for.
- Limited Barriers to Entry: It varies by type of assets managed and structure - but relative to many industries, entry requires little capital or prequalification.
- Active Management is Out of Favor: Managers face stiff headwinds in raising AUM particularly in specific areas of money management.
Asset Managers Basics
P/E and AUM are Dominant Valuation Methods
- Balance Sheet Often Ignored and Discounted: The sell side valuation analysis of asset managers often ignores the cash and investments on the balance sheet
- Brand/Franchise Receives a Premium: Typically managers with strong franchises deserve premium multiples because of their ability to launch new products and retain assets.
- Management Fees More Valuable than Incentive Fees: Mutual fund managers only earn management fees, but the alternative asset managers receive a combination of management fees (1-2% of AUM) as well as incentive fees (15%+ profits).
Not All Assets are Created Equally
- Fixed Income is Least Valuable: Fixed income assets pay the lowest fees and are generally valued less than other strategies.
- The Flow of Funds Matter: Investors factor in growth/decline rates in AUM and Morningstar ratings/performance in valuing managers and estimating future earnings.
- Longer Lockups are Better: In general money that is locked up (private equity) should receive a higher valuation than “hot money.”
Greenhaven Road - Example 1: Fortress Investment Group
Business Description
- The Company’s Words: Fortress Investment Group is a leading, highly diversified global investment management firm. Fortress applies its deep experience and specialized expertise across a range of investment strategies - private equity, credit, liquid markets and traditional asset management - on behalf of over 1,600 institutional investors and private clients worldwide.
- Glass Half-Empty View: Macro hedge fund blew up, returns on Private Equity funds are poor. This business is going nowhere.
- My View: There is a lot of value in the balance sheet, the business is going to last for a long time, insiders are motivated to unlock value over time. The underlying business of collecting management fees is far more stable than investors give it credit for.
2015: A Tumultuous Year
- Share Price Declines: In 2015 the share price declined 35%+.
- Macro Hedge Fund Closed: The most public figure for Fortress Investment Group, Mike Novogratz, closed down his Macro hedge fund.
- Permanent Capital Vehicle Share Price Declines: This negatively impacts ability to issue new shares/raise new capital as doing so below book value hurts existing shareholders.
Not All Bad
- Agreed to Repurchase 13% of Shares at 17% Discount: This was part of the separation process with Novogratz.
- Springleaf Financial: Merged with One Main. This is the largest holding for Fortress Investment Group in their PE/Funds - shares appreciated in 2015 with potentially more runway in 2016.
- AUM Growth: Best year for capital raising since 2007.
Key Statistics
- A lot of Assets to Ignore:. The AUM generate fees, the embedded incentive has already been earned but not taken, and the cash and investments are very material relative to the share price (>50%)
Diversified Business Model
Stable Management Fees Drive Earnings
- Management Fees are 59% of Revenue and > % of Earnings
Fundamentals Do Not Suggest a Stock Down 35%+
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