We are happy to report a strong start of the fund, with 27% return in just four months, with half of our clients' capital invested. We are also content with our current portfolio, that we believe is well positioned for the future from a risk return perspective, and have also been able to strengthen the team considerably during the year.
Note: Historic returns are no guarantee for future returns. The value of any investment may fall as well as rise.
A quick note on Being and investments' Public Active Value:
Our investment strategy and process consist of evaluating active ownership cases, mainly in the US and Europe, in the public markets. All our investments thus have an active and engaged large owner (typically an Activist or Private Equity owner).
The companies we then chose to invest in have three main components. First, they are "cheap" (i.e., trading below intrinsic value). Second, the companies’ operations and/or strategy can be improved (i.e., there is potential to increase intrinsic value). Third, they represent what we call "quality", with a strong competitive position, and thus predictable free cash flows.
We are active in our allocation strategy and consistently weed out the bottom quartile holdings, thus are constantly adding new cases to a portfolio of about ten to twelve investments (when fully invested).
The strategy has a track record spanning back to 2010 and has produced 24% CAGR gross returns since, in line with the best Private Equity and Activist funds.
At the same time, our fees are ~50% lower than the typical activist/private equity fund. We also provide liquidity and flexibility to our clients.
27% returns in four months, with ~50% of our clients' commitments invested.
As we go into 2021 we can say that we are very happy with our results of 2020: we have invested ~50% of our client’s capital, and produced a 27% return on this capital, in just four months*. We have also done so without investing in expensive stocks (e.g., tech), and without taking what we consider to be excessive risks.
What we have done is investing in six companies that meet our requirements of value, value creation and quality.
Furthermore, from a portfolio perspective we are trying to hedge against potential future inflation and a protracted low growth environment. Thus, the portfolio consists of companies with strong competitive positions allowing for pricing power and margin sustainability. For the same reason, all are offering essential products or services, with secular growth tailwinds and potential to accelerate growth, yet still in different uncorrelated markets. We are also diversifying between currencies.
The companies we have held the longest are also the companies that are up the most:
US foods: distribution and processing of food, dislocated during Covid but managed to cut on flexible cost structure. A potential M&A/Roll-up case in a fragmented industry with US foods #2 player with 8% market share. Previous controlling owner KKR (PE) active owner in the case. Entry at EV/Pre-Covid EBITDA of 9,0. Up 67% since our first investment in the stock.
KAR Auction Services: auction marketplace for B2B used cars (e.g., cars coming off leasing). Dislocated during Covid but transferred all transactions through digital auction in less than a quarter. #2player with 32% and growing market shares. Recent reverse carve-out. Expanding Total Addressable Market by a factor 2x+. APAX partners (PE) key active owner. Entry at EV/Pre-Covid EBITDA of 7,5. Up 40% since our first investment in the stock.
Blue Bird Corp: Manufacturer of school buses in the US. One of three players with ~30% market share, but 70%+ market share within Green Buses/Electronic Vehicles (15% green bus penetration in the US vs 95% in Scandinavia). Potential for cost cuts/lean operation/automation. American Securities (PE) active owner. Entry at EV/Pre-Covid EBITDA of 6,8. Up 28% since our first investment in the stock.
Telecom Italia: Near monopoly in Italian Fibre with 80% market share. Fibre rolled out but not yet monetized (last mile being rolled out at high pace). Potential to carve out infrastructure assets (fibre, towers, datacentres) from service operations, thereby monetizing assets early by partly selling assets to lower-cost-of-capital-investors, among them KKR Infrastructure (on track). Elliott Management (Activist) is the active owner in this case. Entry at EV/ EBITDA of 4,7, price to book of 0,5. Up 23% since our first investment in the stock.
Pearson: The Disney of higher education publishing with 40% market share in the US. New CEO from Disney. Dislocated mainly due to move towards digital in higher education publishing. Yet still tech leader (first in Online Program Manager and digital distribution of educational publishing) with potential to move from B2B2C to B2C. Long term a potential EdTech company. ~50% of profits stemming from growing Assessment business, where Pearson has a market leading position. Active owner in case is Cevian (Activist). Entry at EV/Pre-Covid EBITDA of 6,9. Up 13% since our first investment in the stock.
NN Group: The largest insurer in the Netherlands. Stock has seen a decline due to lower interest rates and Covid, yet cash flow generation has not been impacted (interest risk hedged and limited Covid exposure). Potential to sell off specific risk (longevity) to specialized lower-cost-of-capital insurers, rebalance portfolio away from government bonds (increasing yield), take out cost and prune footprint. Elliott Management (Activist) is the active owner in this case. Entry PE of 7,7. Price to adjusted book value (own funds) of 0,6x. Up 5% since our first investment in the stock.
Some brief comments on the market:
We are not macro investors; thus, we cannot predict inflation, deflation, interest rates nor GDP development in the short to medium term. What we can do however, is to be disciplined in how we assess our investment opportunities. This entails hedging/discounting for macro risks, such as inflation, interest rates and cyclical risk.
That said, we are worried about the low expected returns (high valuations) on the stock market, as we ourselves have not decreased our return requirements. We need therefore be cautious of not taking excessive risk to meet our return targets.
We are also worried about the growing government debt piles and money supply, and how this can affect growth and inflation. This is why we have chosen to invest in companies with strong competitive position with pricing power, and with stable/growing end markets.
Other news:
New larger offices: we now reside at Bibloteksgatan 11, in the financial district of Stockholm
One additional Partner: Anders Holst, previously partner at Lynx (Brummer & Partners) – enters with large experience of running a larger international financial institution and has a different perspective on investments, compared to the rest of the team. Together with Emilio Dauvin (McK+SEB Private Equity), Eskil Sylwan (McK+CEO Musti Ja Mirri Sweden) and Mihai Gherman (McK+Nordic Capital+CFO Anicura) the partnership now is made up of four partners.
Significant step up in analytical capacity: we now have an equivalent of 2 FTE analyst on the team. This has significantly increased the number of cases we can assess per week.
We look forward to the next year and wish all of you a happy, productive and rewarding 2021!
If you which to invest please klick here and we will contact you.
Note: Historic returns are no guarantee for future returns. The value of any investment may fall as well as rise.
* Returns measured in USD. Capital-weighted time.
