Gator Capital: Beyond Banks Presentation
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A look at reasons investors dislike bank stocks. Then, a review of five potential opportunities in non-bank financials.
- 1. Strictly Confidential. Not for Public Distribution. BEYOND BANKS: SELECT OPPORTUNITIES IN NON-BANK FINANCIALS MARCH 2016
- 2. STRICTLY CONFIDENTIAL. NOT FOR DISTRIBUTION. GATOR OPPORTUNITIES FUND General Disclosures This summary, which has been furnished on a confidential basis to the recipient, does not constitute an offer of any securities or investment advisory services. This summary is intended exclusively for the use of the person it has been delivered to by Gator Capital Management, LLC, and it is not to be reproduced or redistributed to any other person without the prior consent of Gator Capital Management, LLC. Past performance generally is not, and should not be construed as, an indication of the future results. An investment involves a high degree of risk including the possibility of a total loss. Returns represent the return history from date of inception to the date of this document. Performance information is net of all fees and expenses including management fees and other expenses and includes the reinvestment of dividends and other income. Information provided herein is presented as of March 15, 2016 (unless otherwise noted) and is derived from sources the advisor considers reliable, but it cannot guarantee its complete accuracy. Any information may be changed or updated without notice to the recipient. Past portfolio characteristics are not necessarily indicative of future portfolio characteristics. Portfolio characteristics are based on notional long market values. This document may contain forward-looking statements and projections that are based on our current beliefs and assumptions and on information currently available that we believe to be reasonable, however, such statements necessarily involve risks, uncertainties and assumptions, and prospective investors should not put undue reliance on any of these statements PAGE 1 GATOR CAPITAL MANAGEMENT
- 3. STRICTLY CONFIDENTIAL. NOT FOR DISTRIBUTION. GATOR OPPORTUNITIES FUND Agenda PAGE 2 • Introduction • Why Investors Dislike Banks • Our View of Banks • Listing of Other Industries within Financial Services sector • Select Opportunities • Voya Financial • TransUnion • KKR & Co. • Colony Capital • Ambac GATOR FINANCIAL PARTNERSGATOR CAPITAL MANAGEMENT
- 4. STRICTLY CONFIDENTIAL. NOT FOR DISTRIBUTION. GATOR OPPORTUNITIES FUND Brief Introduction to Gator Capital PAGE 3 Investment Manager ? Manage $67 million ? Based in Tampa Long/Short Financials ? Focus on the Financial Services sector ? Emphasis on off-the-run stocks Long-only Small Cap ? Manage a long-only Small Cap Portfolio ? 30 holdings with emphasis on Consumer, Financial Services and Energy GATOR FINANCIAL PARTNERSGATOR CAPITAL MANAGEMENT
- 5. STRICTLY CONFIDENTIAL. NOT FOR DISTRIBUTION. GATOR OPPORTUNITIES FUND Portfolio Manager’s Career Timeline PAGE 4 ’92 ’93 ’94 ’95 ’96 ’97 ’98 ’99 ’00 ’01 ’02 ’03 ’04 ’05 ’06 ’07 ’08 ’09 ’10 ’11 ’12 ’13 ‘14 ‘15 Duke University 1992 BA in Economics Federal National Mortgage Association Analyst 1994- 1998 Provided interest rate risk analysis for the company’s mortgage investment portfolio, portfolio net interest income forecasting, and corporate strategy projects including competitive analysis and securitization reverse engineering University of Chicago Booth School of Business MBA 1998-2000 MBA with honors in Finance and Accounting Goldman, Sachs & Co., Inc. Co-Chair of Investment Committee and Portfolio Manger 2002 to 2008 Analyzed, selected, and managed investments in publicly-traded Financial Services firms for Goldman, Sachs’ Fundamental Equity Group’s funds across various sectors and all market capitalizations Gator Capital Management, LLC Managing Member and Portfolio Manager 2008 to Present Founded, launched, and manages a Financial Services sector portfolio along with a long-only small cap portfolio. GATOR FINANCIAL PARTNERSGATOR CAPITAL MANAGEMENT
- 6. STRICTLY CONFIDENTIAL. NOT FOR DISTRIBUTION. GATOR OPPORTUNITIES FUND Why Investors Dislike the Banks PAGE 5 Regulatory Pressures ? Higher capital requirements and liquidity requirements directly lowering returns ? Compliance infrastructure costs ? Business line exits ? Debit card ? Trading ? Reduced CRE exposure Economic & Competitive Environment ? Low interest rates pressure returns ? Large brokerage firms have introduced banking to mass affluent and high-net worth customers ? Consolidation in consumer lending has increased pressure on C&I lending Disappointing M&A Activity ? Largest banks cannot acquire anymore deposits ? Technology enables banks to enter new markets with low branch footprint ? Banks are closing branches and reducing size of branches, so no need to buy more branches GATOR FINANCIAL PARTNERSGATOR CAPITAL MANAGEMENT
- 7. STRICTLY CONFIDENTIAL. NOT FOR DISTRIBUTION. GATOR OPPORTUNITIES FUND Our Current View of Banks PAGE 6 Short-Term 1. Valuations are too low given the lack of credit issues across the industry. 2. Banks have significant earnings leverage to higher short-term rates. Long-Term 1. We share many of the concerns about the banking industry. 2. Competitive intensity is increasing. 3. Banks with unique loan origination or deposit gathering capabilities may generate excess returns. GATOR FINANCIAL PARTNERSGATOR CAPITAL MANAGEMENT
- 8. STRICTLY CONFIDENTIAL. NOT FOR DISTRIBUTION. GATOR OPPORTUNITIES FUND Listing of Other Industries within Financial Services Sector PAGE 7 • Asset Managers (BLK, BEN & TROW) • Alternative Asset Managers (BX, KKR & APO) • Business Development Companies (ARCC, ACAS & PSEC) • Exchanges (ICE, CME & NDAQ) • Financial Processing Companies (V, MA & FISV) • Boutique Investment Banks (LAZ, EVR & MC) • Life Insurance (PRU, MET & AFL) • Mortgage Banks (PHH, WAC & FBC) • Mortgage Insurance (MTG, RDN & ESNT) • Mortgage REITs (NLY, AGNC & STWD) • Property & Casualty Insurance Companies • Brokers (MMC, AON & WLTW) • Commercial Lines (TRV & CB) • Multi-line (AIG, HIG & CINF) • Personal Lines (ALL & PGR) • Specialty (MKL, WRB & AFG) • Reinsurance (XL, ACGL & RE) • Title (FNF & FAF) • Retail Broker Dealers (SCHW, RJF & AMTD) • Specialty Finance (AXP, SLM & OMF) GATOR CAPITAL MANAGEMENT
- 9. STRICTLY CONFIDENTIAL. NOT FOR DISTRIBUTION. GATOR OPPORTUNITIES FUND Potential Opportunity: Voya Financial (NYSE: VOYA) ? Life insurer with large defined contribution and investment management businesses. Former ING US business. ? Management came from AIG’s insurance business where they had divested 17 units. ? Multi-year program to increase returns by shrinking capital intensive businesses and growing capital-light businesses. ? Strong stock buybacks. In 2015, repurchased 12% of shares outstanding. We expect a similar repurchase amount in 2016 ? Trades at 0.55x tangible book. We believe 1.0x is within reason. Book value grew 6% in 2015. PAGE 8 Source: ycharts.com GATOR CAPITAL MANAGEMENT
- 10. STRICTLY CONFIDENTIAL. NOT FOR DISTRIBUTION. GATOR OPPORTUNITIES FUND Potential Opportunity: TransUnion (NYSE: TRU) ? Consumer credit reporting agency. Recent IPO after private equity ownership ? Oligopoly business with stable competition from Equifax and Experian. ? Recurring revenue business as lenders pay a transaction fee when consumer applies for credit. ? Potential to benefit from cyclical upturn in demand for consumer credit. ? Light leverage improves returns. ? Trades at 10x EBITDA. We see potential for double-digit EBITDA growth and an increase in valuation multiple. PAGE 9 Source: ycharts.com GATOR CAPITAL MANAGEMENT
- 11. STRICTLY CONFIDENTIAL. NOT FOR DISTRIBUTION. GATOR OPPORTUNITIES FUND Potential Opportunity: KKR & Co. (NYSE: KKR) ? Top-tier private equity firm. ? Generating consistent AUM growth. Firm has doubled in last five years. ? Expanding investment platform: real estate, Asian private equity, Infrastructure, Energy, Leveraged Credit, Private Credit. ? Stock trades ~$14, but company has ~$10 of net investments on its balance sheet. ? Management fee business generates $0.68 of earnings. We value this business at 12x or ~$8. ? This values all future incentive fees of KKR at $-4 per share. We think incentive fees should be valued at $4 per share. PAGE 10 Source: ycharts.com GATOR CAPITAL MANAGEMENT
- 12. STRICTLY CONFIDENTIAL. NOT FOR DISTRIBUTION. GATOR OPPORTUNITIES FUND Potential Opportunity: Colony Capital (NYSE: CLNY) ? Commercial real estate investment company. ? Merged with external manager. ? Significant low-yielding investments that can be recycled into higher return investments. ? We believe the asset management business is worth $6 per share and is growing. ? Real estate investment business is worth $16.50 per share ? 9.7% dividend yield which is well covered by earnings. PAGE 11 Source: ycharts.com GATOR CAPITAL MANAGEMENT
- 13. STRICTLY CONFIDENTIAL. NOT FOR DISTRIBUTION. GATOR OPPORTUNITIES FUND Potential Opportunity: Ambac (NASDAQ: AMBC) ? Municipal bond insurance company in run-off. ? Potential 3x upside. ? Over-reserved for RMBS losses between $0.5 billion and $1.5 billion versus $0.7 billion market cap. ? Suing BAC for R&W in RMBS. Peers have had success in similar suits. ? Ambac recently settled with JPM for 40% more than they had reserved. ? Mitigating losses by repurchasing Ambac- guaranteed bonds. ? Underfollowed post-reorg equity: exited bankruptcy May 2013, only boutique sell-side research firm publishes research, not writing new business, obvious downside risks (Puerto Rico and Illinois). PAGE 12 Source: ycharts.com GATOR CAPITAL MANAGEMENT
- 14. STRICTLY CONFIDENTIAL. NOT FOR DISTRIBUTION. GATOR OPPORTUNITIES FUND Working With Gator PAGE 13 We’d appreciate the opportunity to tell you about our funds, firm, and how we can add value to your investment portfolio. Contact us today for an initial meeting and to receive a copy of our ADV. Our Competitive Advantage ? Experience: Our firm founder and portfolio manager has extensive experience investing ? Specialization: Our strategies are founded on our proven investment approaches ? Focus: We focus on buying the underlying business and maintaining concentrated portfolios Contact Information ? Website: gatorcapital.com ? Phone number: (813) 282-7870 ? Address: 100 S. Ashley Dr., Suite 895 Tampa, FL 33602 ? Email: Derek Pilecki, [email protected] GATOR CAPITAL MANAGEMENT