Red Deer InvestmentsSpent the morning assembling a set of questions as I’m headed over to Pacific Current today to chat with the CEO. Looking forward to better understanding the current business, build to ‘23E earnings, and talking about the long term future of the alternatives industry.
I wrote the below but don’t feel great about it. I have a lot more thinking to do on the topic. But I’ll post it anyways because it’s what is on my mind.
Following up on yesterday’s post on potential future states of the US, it seems like one of the scenarios is fairly credible (election of multi-race working class party) to cause the stop in certain trends of today that seem a bit crazy but there’s no good explanation as to what would stop them. A few examples of runaway trends in core human needs that have been growing at high single digit growth rates for long periods of time:
To envision a future coalition party whose main goal is to level the playing field between the middle / lower income class vs upper class – the following could be drastic but simple actions that ‘burn down’ the government’s role in driving disparity:
While I’m no expert on any of these topics, and the above may well be *completely erroneous*, I think the broader point is distrust (on my part and I presume many others) of elected officials because core problems are so difficult for these folks to even attempt to make progress on. And it doesn’t seem implausible that at some point, the working class elects a group of officials wholly different than the incumbent swamp consisting of both Republicans and Democrats to make life more equal.
It’s fairly certain that economic / geopolitical forecasting is a fool’s errand. The world is a complex and adaptive system. History is useful but humans / nature also do incredible and unpredictable things.
However the allure of listening someone illustrate the future, often an extreme one, is tough to ignore. I don’t know if this statistic is correct, but this website says that 1 in 5 Americans have consulted a psychic at some point in their life. Despite the fact that they look at cardboard cards and make shit up.
To that end, I indulged the finance version of psychics. A couple billionaires on the All In Podcast recommended a video that Ray Dalio (another fellow billionaire, macro investor, founder of Bridgewater) put out about the rise and fall of empires and said “it is a must watch.” Well I watched it and the conclusion is the US is on the way out and China is going to be the new superpower. It looks back on the history of empires back to whatever, the Ting dynasty of 600 AD (or was it BC?). Basic on his set of indicators (e.g., quality of education, fiscal cycle, etc.) – he says it’s clear the US is on the way down. He also says there’s a 30% chance of civil war in the US in the next 10 years. Oooook bro. He also offers a flagship investment vehicle that curiously is the recommendation without explicitly saying it. Ok bro.
So I looked for people (finance psychics) counter to that viewpoint to understand where this guy could be way off – particularly since it seems like he spent a fortune on the animation in that video vs providing very convincing arguments. Two stood out.
Peter Zeihan has been perhaps the hottest forecaster in the past half year given his prior book predicted the Russian invasion of Ukraine. His approach is based on demographics, specifically how the age distribution of countries helps indicate what their future moves may be. Looking forward, his view is US demographics are extremely favorable versus other nations (e.g., Russia, China, etc.) and it has a long runway of relative advantage versus other countries. That’s nice.
Second, I actually read this guy’s audio book (see left) in a few days, which is a feat as I’ve been unable to sit through a full audio book for about a year, for what reason I can’t understand (attention span shortening for some reason).
His view is that the US, for many reasons, is a unique “empire” that reinvents itself over 50-80 year periods. Examples are the US flipping to massive social program expansion during the New Deal in the ’30s, and dramatic tax regime changes under Regan in the ’80s. He believes that we are at the tail end of the current period where the investor / knowledge expert / technocrat class rules the nation and power shifts to a united multi-race front of the US that is excluded from the current ruling class (primarily the industrial base). The result of this is the dismantlement of government complexities that breed distrust of government (e.g., making laws no ordinary citizen can understand, putting its hand in everything), dismemberment of elite university pipelines (e.g., Yale, Stanford, etc.) that favors the knowledge / technocrat base vs industrial base, and far higher taxes on the wealthy (e.g., aggressive income and investment income taxes) to re-level the wealth disparity. However, he does say with confidence that after this difficult and volatile re-alignment of the US in the 2020s, the US will go on to another period of productivity and calm in the 2030s onwards until the next regime change. That’s nice.
While I obviously have no idea how this will play out, I do think this small indulgence of mine is helpful to open my mind to what is possible. I do think certain things like education at a top institution coming with a price tag close to $100k / yr, requiring massive “extracurricular” preparation in high school, and test prep coaching is an incredibly unfair standard for all to even try to achieve. I do think that the continued wealth disparity between the base of industrial labor and professional labor is far too extreme and has to correct at some point in the not too distant future. But I truly have no idea how those implications can or should affect actions that I take today. And that’s okay.
The worst feeling during March of 2020 was owning companies that were on their back foot versus on the offensive. I believe that I’ve rotated the portfolio so that is not the case anymore. A few quotes from the largest portfolio holdings:
And so yes, we will be prepared for those cycles. We hold excess capital for those cycles. We will make a lot more money than the case if we get those cycles…
I didn’t know that Enron was going to go bankrupt and we’ll be able to buy pipelines and things of that nature. But having the ability to be there to take advantage of it is what that plan is all about.
We’ve got $1.5 billion of liquidity, and this is pro forma for the 3 transactions that we announced this quarter. And this doesn’t include the $5.5 billion of liquidity that exists within our operations.
…you have heard us to talk a lot about the inherent resiliency of the business model, and how it allows us to thrive in times of volatility, especially investing in a region like Latin America.
Someone posted a comment on Twitter the other day that I find important as an investor:
I find myself spending probably 75% of my time on the public stocks that we already own, learning more about them by reviewing past earnings calls, conference appearances, news articles, etc. It’s like waxing the same spot again and again. I find it astounding how I can pick up one important tidbit or thread together multiple tidbits from difference sources the 2nd or 3rd time around versus simply reading something once and tossing.
B.Riley Financial is a business that I bought shares for us during the Dec / Jan ’21-22 mini-panic (mostly within tech). It’s an odd duck, with half of its revenue from a small cap capital markets / advisory business and half from balance sheet investments in odd old line companies (dial up internet, Magicjack, etc.) and securities. It doesn’t fit in a clean box, so it has little to no analyst coverage nor much investor interest. Never-mind it dished out $10 per share in dividends last year with the stock price between the $40-80 range. While unlikely to repeat in the near / medium term future (capital markets are effectively shut for small caps), the next year may be another productive one for the company, albeit strategic versus peak cash generation.
I was re-listening to their Q4-2021 earnings call and the following stood out to me in the CEO’s parting words:
Well, great. Thank you, everybody. I guess I would close by saying with the recent market dislocation, this is where we gain market share, and this is where we find opportunities, and this is often where we will find great people that might be looking for a more diversified platform or a change, and this has always been the best time for us. So while you might take a little bit of short-term pain in your Principal Investments or our underwriting might be a little slower. If you go back in time, this is really where we’ve been able to make a big difference in our business. So that’s the plan, and we appreciate your support.
RILY Q4-2021 Earnings Call
Strategically it appears that RILY has filled all of its self described product gaps:
…look, we’ve been a capital markets shop. That’s been our strength. And so there were three areas that we thought needed to really be addressed and because we could really leverage what we’ve built, [buying a platform for] M&A was a big one. [Buying a platform for ] Asset Management was a big one, and [hiring a leader for] fixed income and credit was the big one. And so we’ve got all of those pieces in place.
RILY Q4-2021 Earnings Call
Having a comprehensive capital markets business (equity and fixed), private and public M&A practice, restructuring practice, retail liquidation practice, along with a balance sheet to perform merchant banking transactions – paired with an opportunistic management approach seems like a machine that may have a better foundation than in the past.
Disclosure: We own shares of RILY, this is not investment advice. Do your own work.
I’m on the hunt for more private debt to invest in. While I would love to mail it in and buy an investment grade debt index, the current yield is roughly 2.5%, hardly interesting given inflation. If inflation is ~5%, that’s a -2.5% real yield.
Private / alternative debt is surely more risky than investment grade debt. The principal driving force is smaller companies that on average have higher default risk:
The compensation for the risk is material, the question of is it enough lingers:
The key thing here is thinking about the end market. In my prior post, the end market was high FICO individuals. In this case it is smaller, often PE backed, businesses. While in some cases there may be solid asset coverage – my guess is in most cases material business deterioration results in impairment of these loans despite being senior secured.
Here’s the breakdown of another supposed debt vehicle (but has a reasonably large equity sleeve, both in tradable securities and real estate equity):
Alas, the hunt continues for lower risk alternatives.
One investment I made principally in the major Covid drawdown in March of 2020 was in Ryman Hospitality. It’s a hotel company that owns the Gaylord hotels, which are group / convention specific hotels. Discussion of that business is for another day.
Ryman also has incubated a country music focused entertainment business segment which includes live music venues (Ole Reds, Austin City Limits Venue, Grand Ole Opry in Nashville, etc.) and a country music digital streaming business (Circle). The country business is booming as it is already well above 2019 levels of business and just announced a new Ole Red music venue right on the Vegas strip next to Caesar’s Palace.
Here’s a broad view at country music statistics for the US, showing good tailwinds despite what many (read: anyone who doesn’t like country) may think:
Yesterday, Ryman announced that it recapitalized its country music entertainment division with both equity and debt. It sold 30% of the equity for ~$300M and took out a $300M term loan at the entertainment level, ultimately to dividend ~$600M up to the parentco / hospitality business. This valued the business around 17-18x EBITDA.
Ryman lost ~$600-700M in 2020/2021 due to Covid shutting down its business in totality (zero conventions) – so in large part this gets them back to normal with respect to their balance sheet. The buyer was effectively NBCUniversal / Comcast – so it’s a strategic buyer with deep pockets and a strong interest in growing the business.
All in all, I’m happy Ryman is back on its front foot, and continues to own 70% of the business. If they spin off the country business, it’s one I likely will not sell, and perhaps buy more of if the price is right.
Disclosure: We own shares of RHP, this is not investment advice. Do your own work.
Apollo broadly cuts its investment management into three buckets driven by expected returns. Yield, Hybrid, and Equity. Today Apollo announced that that it closed its second Hybrid Value fund at $4.8B, roughly 40% larger than its prior fund 1 vintage at $3.3B which closed in 2019. I would love to know how large Athene’s commitment to the fund was relative its prior commitment.
After the Epstein drama, there is a lingering shadow over how fundraising for its flagship $25B private equity vehicle will go. An investor I spoke to last week had demonstrable timidity regarding certainty of the $25B upcoming fundraise. This is counter to management commentary so I find it interesting.
While a solid Hybrid Value fundraise isn’t indicative of a solid upcoming flagship PE fundraise, it doesn’t hurt.
Disclosure: I own shares of Apollo Global, this is not investment advice, do your own work.
Following up on yesterday’s thoughts, I took a look at the numbers underlying past / future performance for Pacific Current. It doesn’t seem incredibly compelling without getting more comfortable about how this business will grow over the next five years beyond the initial bump that gets it to ~10x earnings by FY23 (Aussie fiscal year).
What could make this more interesting is:
I plan to reach out to the company to learn a bit more about them.
Disclosure: I don’t own shares of PAX.AX, but may buy shares at any time. This isn’t investment advice, do your own work.
I previously wrote about coming across Pacific Current but placed it on the back burner to keep an eye on.
In checking in on it, a couple things stood out:
Overall, the valuation of the business is low for the existing core but one gets diluted with a higher multiple GQG public stock stake. I’m still working through it, but hope to get to a more firm view of the business.
Disclosure: I don’t own any shares in PAX.AX but may buy at any time. Not investment advice, do your own work.