Author: the_red_deer

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Patria Q4 Earnings Thoughts

Patria Investments posted a nice set of numbers to round out 2021 with just over $1 of distributable earnings. The stock currently sells at ~$17, so it isn’t cheap but if one looks past today and into the 5 year future, it is much more interesting. Here are some of the reasons highlighted on the call:

  1. Patria was backed by Blackstone in 2011 and it’s no surprise they are using the BX playbook. They are publicly repeating that their mission is to be the one-stop shop for alternative investments in Latin America and they are by far the largest LatAm origin alt manager by assets (~$25B). It’s also clear that LPs are looking to consolidate their asset manager relationships so building the full LatAm product suite is high value.
  2. In the near term, its flagship PE, renewable, and infrastructure funds are in market for 2022 with 50% larger funds for PE and renewable / infrastructure combined. Patria has guided to a 50% increase in fee related earnings alone within 2022.
  3. Patria is guiding towards the buildout of its perpetual asset management vehicles strategy (which has been the engine of Blackstone’s growth over the past 3 years) in both corporate equity and real estate niches.
  4. Geographic expansion to cover Mexico, Colombia are in the cards with strong Mexico tailwinds due to on-shoring talent and supply chains currently in Asia.
  5. Currency tailwinds – the difference in inflation between Brazil / LatAm and the US has been substantial and the principal cause of relative depreciation of the Brazilian Real over the past decade. In this time Patria has performed admirable in dollar terms. However with US inflation ticking up to high single digits while Brazilian inflation is moderating (as Brazil began rate tightening last year), there may be a currency tailwind in future performance versus headwind.

All in all, Patria is doing a great job from the outside in to lay the groundwork for strong growth in the next decade. All of it hinges on the ability to execute its product and geographic buildout while maintaining high net returns to investors, no small feat. But its track record supports the odds of this happening.

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Confidence and Stocks

I have been reading The Lords of Finance off and on for the better part of a year. Typically I’ll pick it up during bedtime and I make it through a few pages before it puts me right to sleep. Alas, one of these days I hope to finish it.

I believe the author’s interpretation of a Jesse Livermore quote was a fantastic way to describe the way that stocks over and undershoot their theoretical “correct” value.

The great bear of Wall Street legend, Jesse Livermore, once observed that “stocks could be beat, but that no one could beat the stock market.” By that he meant that while it was possible to predict the factors that caused any given stock to rise or fall, the overall market was driven by the ebb and flow of confidence, a force so intangible and elusive that it was not readily discernible to most people.

The Lords of Finance, Liaquat Ahamed

After pushing through the early parts of the industrial revolution as it pertains to finance, I’m finally into the 1920s and on the heels of the 1929 crash. It truly is fascinating to read how similar some of the actions of market participants, from the Federal Reserve to “homemakers,” rhyme with the actions of the past few years to today. Just a few to note:

  • The market started the 20s bifurcated between old economy and new economy stocks (textiles, coal and railroads vs cars, radio, and consumer appliances)
  • Earnings growth drove the initial major upwards push in the stock market in the 20s
  • The Fed eased rates into a generally strong market
  • On the back of Fed easing, the market as a whole started decoupling from earnings growth
  • The least informed investors were making the most money, while fundamental investors were considered out of date

While these features have been present in most bubbles, I nonetheless find it interesting to refresh on the topic as we have seen similar signs of excess form in crypto assets, software / tech stocks, and renewable energy stocks.

I continue to stay the my own course by paying a reasonable multiple to earnings (~10x earnings or a 10% earnings yield) for very well capitalized companies that tend to take advantage of market dislocations.

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Zooming Out

Yesterday I finally finished the 1.5 hour interview with Lyall Taylor that I had on my to-do list. Lyall is a super controversial figure within the financial Twitter world. One can almost always count on him coming in with an opposing take to news, views, and investments. I find him interesting because few do what he does: solo manages a truly global fund with 150+ positions that is turning over regularly (at least in the smaller position / long tail) in deep value names. That is brutally hard work – and he self describes himself as someone who works constantly, to his own satisfaction.

In the interview, I found it refreshing and a good reminder of what the opportunities in the world are outside of developed Western markets. To that end, he described how 20-30% of his portfolio is in Russian or neighboring countries, a material amount in Hong Kong after the market there has cratered, another chunk in LatAm, a smidge in Africa (with caution that it is extremely inaccessible), and some in North America.

What was interesting is how he describes the quality of the businesses he owns, particularly in the financial services sector, and the price one can pay for them in those geographies. It makes a North American investor sweat hearing those metrics and prices. That said all emerging market businesses trade at those levels for a reason. But there are markets in which the capital balance is simply the inverse of North America. Specifically, there is a lack of capital that drives relative undervaluation versus an oversupply of capital driving relative overvaluation.

Russia is borderline un-investable. Africa has burned so many Western investors that only the intrepid wade in. LatAm is almost on its own cycle of recessions and recoveries. However keeping the rest of the world within the lens of what exists and is possible is always worth keeping tabs on.

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Apollo Q4 / FY21 Earnings Thoughts

While others will dissect the numbers ad nauseam – I enjoy spending the majority of my time examining strategy, both to improve the internal and external surface areas of a business. To that end, that requires an investment in a company where the balance sheet is theoretically not an issue and non-GAAP earnings are not twisted beyond general utility. While some may disagree, I believe Apollo fits this bill.

To that end, a few things stood out to me from the Q4/FY21 earnings call. They all fall under what I would label as culture.

First, employee culture. While I absolutely can’t describe what is happening internally at Apollo post departure of the broken former CEO, Leon Black, nor the supposed heir apparent Josh Harris, it is clear that the management team (via Marc Rowan) has placed culture at the forefront of strengthening the platform. He has mentioned culture as the single most important thing that Apollo needs to get right. In his words, “culture beats strategy everyday.” You can’t change culture on a dime, you often can change quickly alter strategy. He outlines that Apollo culture is anchored by “the clear strategic vision, the authentic nature of the people they meet and our cultural values.” To that end, the one metric we can look at to understand progress is turnover, and “turnover is the lowest it has been in a very long time.”

Second, investment culture. The problem to be solved is sourcing excess returns for clients at the same or less risk than a passive benchmark. While other competitors such as Blackstone, KKR, etc. have shifted to thematic based investing, such as Blackstone going all in on industrial real estate in massive size, Apollo has stood by its legacy values of not constraining one’s self to one theme. It goes where the complexity is greatest and where others don’t want to be seen. Examples include recent PE acquisitions of Yahoo/AOL, Lumen’s fiber carve out, Michaels, etc. Not names you would expect for a fund that has an IRR in the 40s gross, low 30s net to investors. Rowan indicated:

They are perhaps the only mega-cap alternative investment firm pursuing this strategy alone versus swimming with the pack pursuing late cycle growth investments.

Third, execution culture. Apollo laid out a series of 5 year targets as recently as October. The general idea was (1) double AUM by expanding origination from ~$60B -> $150B, (2) expand retail distribution, and (3) double capital markets revenue. Simply put, they have made massive progress on all three in less than 6 months.

After a string of origination platform acquisitions or JVs, Apollo is at a run rate of ~$100B in annual origination already. The acquisition of Griffin accelerated their retail distribution strategy by ~18-24 months and Apollo Debt Solutions is in market with ~$1B raised in the back end of Q4. And capital markets, Apollo originated a mammoth $4B loan to Softbank’s Vision Fund 2, as Softbank reels from declines in tech investments. While its still early days, it’s clear that the Apollo team sets goals that are aggressive in absolute (doubling one’s business in 5 years is no small feat), but execution against these goals is rapid as a result of the focus Rowan has put on the organization (via clear strategic vision).

To boot, the stock sells at about 10x 2021 earnings. And that’s a small part about why I like owning shares in the business.

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TDM Growth on the Tech Crash

I wasn’t familiar with TDM Growth Partners out of Australia until someone posted their recent missive to LPs on the seemingly confusing tech crash or lack thereof.

First, they clearly outline where the crash is and where it isn’t:

Furthermore they looked at EV / Sales metrics for the BVP Index and dropped a few major outliers representing nosebleed valuations that have persisted and the result is EV / Sales is basically within spitting distance of the long term average:

They go out to outline reasons why, with an appreciable acknowledgement of their basic of call of maybe this time is different, what is demanded of these businesses by the stock market today in terms of growth isn’t aggressive, and that it potentially indicates downright cheapness. Furthermore they go on to make accommodations for higher rates, lower exit multiples, etc. and continue to think that today’s prices are attractive.

The only thing they don’t fully acknowledge, in my opinion, is the potential for capital scarcity in the economy. Said more plainly, if the economy slows and the Fed has withdrawn its dramatic firehose of liquidity. The early 70s are symbolic of a time in which dramatic undervaluation in the market was persistent but no capital wanted to enter the market. But that is a scenario that may affect all types of businesses, not just technology. A pessimist may argue that tech stocks have further to drop in a downside scenario. An optimist, however, may rightfully say that ignores the dramatic upside that may exist.

To that end, tech stocks don’t typically pay material dividends to their shareholders, and in many cases for good reason. However it doesn’t fit my process and to that end, while fun to keep tabs on the economy broadly speaking, these stocks ultimately aren’t a fit for me.

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Petershill Partners Tepid Market Reception

Petershill is a publicly traded fund traded out of London (as most public funds are due to regulatory barriers in the US), which is externally managed by Goldman Sachs. It focuses on GP stakes in asset management businesses, something that I have been exploring due to my opinion on the cash flow quality and growth potential of these types of businesses. More recently I’ve been looking at Pacific Current, an Australia listed GP stakes business.

Petershill’s structure is that it’s a public vehicle that co-invests with the Petershill PE fund (currently on fund 4) and utilizes the existing infrastructure on the GS platform. It went public with stakes in funds 2 and 3. Post IPO, the price of the the shares has declined by about 40%:

To that end, the business is interesting due to the diversification, management team, and ~3.5-4% dividend. It’s not interesting due to the pass through partnership status and fee load on top of it.

Plan to look into both to flesh out whether it’s something that fits our typical investment profile.

In case anyone is interested – they put out good materials on the business and future strategy along with an informative webcast.

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Apollo Q4 Earnings

We’re flying today with the kids and one has a fever, oof. No time for posting, just reposting what I put on Twitter yesterday with respect to Apollo Q4-21 earnings.

Click into it for the full thread – it’s roughly 5-7 posts. Adios!

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“Inflation Nation”

News is abuzz with the latest inflation figures clocking in at 7.5%. The US 10-year government bond yield crossed into 2% territory in response to the data. The barrage of news questioning whether the root causes are transitory or secular.

What is especially interesting about interest rates and inflation moving around is lots of assets in the market had reset to pricing reflective of very low yields. In practice it means that people would pay more for cash flows that may materialize far into the future than they would if interest rates are high, and returns today matter more than they did in the past. The net result is a lot more volatility as the market tries to guess what the Federal Reserves actions will be over the course of this and next year to combat inflation.

What is one to do to navigate this environment? The most simple blanket action one can consider is not own assets with very long dated cash flows that make up the vast majority of the cash flows. In plain English, own assets with reasonable cash yields on today’s earnings. Say a 7.5% earnings yield or more. Second, own things that may benefit from a higher rate environment. It’s no surprise that financials and energy have posted positive returns this year while technology has posted losses. Third is to fight the urge to “do something drastic” in light of a lack of simple decisions / investments to make. Keep a shortlist of companies / investments that straightforward purchase decisions, keep a reasonable amount of dry powder available, and continue cautiously investing excess cash flows regularly.

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Business Model Evolution

Brookfield announced this morning that it is considering separating its asset manager from its balance sheet assets. It obviously is looking longingly at Blackstone’s rich multiple based on its asset-light approach to the business (specifically, BX holds little / no balance sheet assets beyond minimal GP commits and distributes all of its earnings).

Other asset managers have taken different approaches. KKR is similar to Brookfield in that it is actively building its balance sheet as a corporate strategy. Apollo took its insurer on balance sheet. Same with Carlyle and Ares.

In Brookfield’s case, its asset manager is growing so quickly and generating so much associated cash flow, my expectation is that it spins off its assets to shareholders in a semi-organized fashion after pruning non-core or mature assets. While having the balance sheet is helpful or has been helpful in the past, Brookfield should be able to fund its growth and / or strategic transactions off of its asset manager cash flows. Furthermore with a higher multiple, it can use shares as necessary to fund strategic actions.

I’m assuming the Brookfield transformation will happen, else they wouldn’t talk about it publicly. But that said, I believe it will happen over the medium term as there’s a lot of work to do to separate the two pieces of the business.

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Learning in Public

Yesterday I read about GQG Partners, a mutual fund company that has grown from ~$0 in assets in 2016 to ~$100B today. An equity investment in the GQG Partners management entity returned ~65x in that time frame (not the funds GQG manages, to be clear).

While reading about it, I posted an abbreviated version of the above on Twitter. Within 15 minutes two people wrote to me about why not to invest in the management entity (it recently went public). While I agree with them, it was very helpful to receive fully crystallized thoughts while I was chewing on how to articulate it.

As mentioned on my post on asset manager business models via Michael Vranos, public securities asset manager businesses can implode when things go bad. Investors can redeem all of their money in very short order and a business can go from managing billions to almost nothing quickly. In contrast, private fund asset managers have management fees locked in for the majority of the fund life (so secure they are being securitized) and can often contractually force additional capital calls if it needs. Extremely different business models for investors effectively performing a similar function.