Private equity value investing in public markets
Introduction     Avenir Capital specialises in fundamental, value –based and special-situation investments in global     ...
The Model    Avenir Capital applies the best elements of private equity and public market investing to identify and invest...
3 Underlying Pillars         Think About               Focus on Absolute                 Bottom Up not        Downside Fir...
Consistent with Private Equity Heritage    Much of the investment approach and risk management of Avenir Capital is consis...
Principal’s Background    The Principal is an experienced professional investor and manager of third party money          ...
Principal: Private Equity Returns                                                                                         ...
Performance: Avenir Value Fund    Avenir Value Fund Performance (Net of Fees and Expenses)                                ...
Investment Framework         “The market is normally efficient but it is not always efficient.      The difference between...
Investment Framework    Margin of Safety     Search for safe and remarkably cheap investment opportunities     Buy at <6...
Investment Framework     Special Situations       Demergers, spin-offs, restructurings, recapitalisations, rights offerin...
Portfolio Construction     Avenir Capital’s portfolio construction is derived from a fundamental belief that low risk, hig...
Benefits of Allocation to Avenir Capital     Avenir Capital provides exposure to alternative investment opportunities and ...
Risk Management     Risk management flows through every element of the Avenir operating model                             ...
Key Fund Terms     Avenir Capital’s fund terms are designed to maximise alignment of interest between investors and the fu...
Summary      Avenir Capital specialises in fundamental, value –based and special-situation investments in global       eq...
Appendix:     Investment Sourcing and Examples16
Investment Idea Sourcing        The key insight to sourcing investment ideas is the ongoing search for irrational or misgu...
Investment Example: International Coal (US) Investment Thesis                                                        Inter...
Investment Example: Village Roadshow Investment Thesis                                                        Village Road...
Investment Example: Oaks Hotels and Resorts Investment Thesis                                                            O...
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Avenir Capital Value Fund

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Overview of Avenir Capital. Private equity style investing in public markets.

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Avenir Capital Value Fund

  1. 1. Private equity value investing in public markets
  2. 2. Introduction  Avenir Capital specialises in fundamental, value –based and special-situation investments in global equity and debt markets  We search for materially mispriced securities which we can buy well below intrinsic value (that is, with a large margin of safety) and that offer the potential for superior returns with limited risk of permanent loss of capital  Our investment program applies key elements of private equity investing to public markets with 3 underlying pillars:  Focus on the downside first – fixate on avoiding permanent loss of capital  Fundamental, bottom up approach to investment selection  Focus on absolute long term returns not relative short term returns  Avenir has an attractive fee structure aligning the interests of investors and the fund manager and providing some protection for investors in periods of lower returns  Avenir is managed by an experienced and successful investor and manager of third party money1
  3. 3. The Model Avenir Capital applies the best elements of private equity and public market investing to identify and invest in significantly mispriced assets Private Equity Public Market  Greater opportunity set  Focus on low risk investing  Deep discounts to intrinsic value  Longer term investment horizon  Focus on fundamentals  Focus on investment analysis not ‘deal process’  In depth due diligence  Lower transaction costs  Conviction investing  Liquidity  Concentrated portfolio Current Market Sentiment  Active investment selection  Transparency  Lower leverage  Liquidity2 Avenir Capital
  4. 4. 3 Underlying Pillars Think About Focus on Absolute Bottom Up not Downside First Returns Top Down • Focus on minimising • Longer term absolute • Fundamental analysis risk of permanent loss return focus not short of capital term relative returns • Company specific investment decisions • What is probability of • Avoid closet indexing loss; how much can • Don’t try to guess • Avoid asset gathering short term market we lose? behaviour direction • Don’t view volatility as • Patient investing to • Look for materially risk benefit from ‘time mispriced assets • Worry more about arbitrage’ what we can lose than • Not afraid to invest in what we might make ‘unloved’ companies • Margin of safety – Always!3
  5. 5. Consistent with Private Equity Heritage Much of the investment approach and risk management of Avenir Capital is consistent with the Principal’s private equity investing heritage • Concentrated portfolio investing in only the best opportunities Investment • Intense focus on downside risk minimisation Framework/ Risk • Simple businesses: Avoid single product, technology or resource risk Management • Medium/long term investment horizon • Patience, patience, patience • Extensive investigative due diligence and financial analysis experience • Deep experience in assessing competitive position, industry structure and management team Due Diligence • Operational experience in assessing strategy viability, timeframes and operational capability • Extensive experience in assessing capital structure, financial viability and bank pressure points Key Elements Added  Margin of Safety  Low Risk, High Uncertainty Investing  Event Driven/Special Situation Opportunities4
  6. 6. Principal’s Background The Principal is an experienced professional investor and manager of third party money • 17 years in third party investment management • Managing Director/part owner of $1B Australian PE firm Investment • Managing Director of leading pan-Asian PE firm Management • US and Australian investment management • Large cap and small/mid cap public market investments • Extensive operational and board level experience • First hand insight into management and company capability Business Insight • Extensive debt and capital market experience • Deep and varied due diligence and financial analysis • Excellent and consistent investment track record Track Record • 3.7x money return on investments5
  7. 7. Principal: Private Equity Returns Return Measurement(2) Transaction Investment(1) Exit Value IRR Money Multiple ($m) Waters 40 309 225% 7.7x Pacific Brands 236 1,216 129% 5.2x Tech Pacific 138 506 122% 3.7x Mettler Toledo 224 805 91% 3.6x Vertex 15 51 100% 3.4x Affinity Health 247 782 124% 3.2x Frucor 50 155 57% 3.1x Manchester Tank 28 86 55% 3.1x Valley Longwall 88 8 n/a 0.1x Total 1,066 3,918 n/a 3.7x NOTE: Mr Warner does not claim to have been responsible for any portion of the above track record or whether this would be representative of Mr Warner’s investment performance. The results above are the work of teams of professionals and no single individual was responsible for any investment. (1) Includes co-investments6 (2) Before expenses, fees and carried interest
  8. 8. Performance: Avenir Value Fund Avenir Value Fund Performance (Net of Fees and Expenses) 110.0 104.5 104.6 105.0 102.1 102.4 Index = 100 at Inception 101.2 101.1 101.1 100.0 101.0 97.5 98.5 100.0 96.5 96.0 93.7 95.0 92.5 90.0 85.0 80.0 All Ords Accumulation Avenir Value Fund Monthly Performance (Net of Fees/Expenses since Inception 1 August 2011)* Year Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec YTD All Ords^ 2012 5.8% 2.4% 0.1% -3.3% -3.6% -3.9% -1.3% 6.5% 4.0% 6.1% 11.3% 2011 1.0% -5.0% 5.4% -0.1% -4.5% -3.5% -7.9% * Results are unaudited. ^ All Ordinaries Accumulation Index7
  9. 9. Investment Framework “The market is normally efficient but it is not always efficient. The difference between those two propositions is like night and day” Warren Buffett Margin of Safety – Always! Simple Special Businesses Situations The Search for Mispriced assets Low Risk, High Focus on our Best Uncertainty Ideas8
  10. 10. Investment Framework Margin of Safety  Search for safe and remarkably cheap investment opportunities  Buy at <60% of intrinsic value (Margin of Safety); Sell when price returns to near intrinsic value  When we buy an asset for substantially less than it is worth we reduce downside risk and increase the prospect for higher return  All discounts to intrinsic value eventually close “The function of the margin of safety is, in essence, that of rendering unnecessary an accurate estimate of the future” Benjamin Graham Simple Business/Durable Moats  Avenir invests in simple businesses with a durable competitive advantage (the Moat)  Our investments are generally in industries with slow rates of change  We only invest in companies and industries we understand  The businesses we invest in don’t have to be great businesses but they have to be bought at great prices9
  11. 11. Investment Framework Special Situations  Demergers, spin-offs, restructurings, recapitalisations, rights offerings, asset sales, liquidations, etc  Value can often be found in complex situations, poorly followed/’unloved’ companies, ‘hidden’ assets  Often the most mispriced assets are to be found in stressed or distressed opportunities Low Risk, High Uncertainty  Most investors measure risk as volatility or deviation from a benchmark  Avenir fixates solely on minimising the risk of permanent loss of capital  Avenir also differentiates between an uncertain outcome (i.e. a range of possible outcomes) and the risk of loss of capital  Low risk, high uncertainty is a great combination for finding investment value as it can lead to severely depressed prices for businesses – the market hates uncertainty  We seek to invest only in “Heads I win; tails, I don’t lose much” investment propositions Focus on Our Best Ideas  Our approach is to bet heavily when the odds are overwhelmingly in our favour; at other times, we don’t bet!  We fixate on minimising permanent loss of capital so we only invest in assymetric opportunities when downside risk is very low  The non-market risk of owning one stock is reduced by ~80% with 8 stocks and over 90% with 16 stocks10
  12. 12. Portfolio Construction Avenir Capital’s portfolio construction is derived from a fundamental belief that low risk, high return investments are rare and that risk is adequately managed with a moderately diversified portfolio Portfolio Construction ‘Representative’ Portfolio Holding Investment Return $ Return %  Total portfolio approximately 15-25 positions Holding 1 $50 $10 -80% Holding 2 $50 $20 -60%  Focus only on the best investment opportunities when Holding 3 $50 $40 -20% the odds are overwhelmingly in our favour Holding 4 $50 $50 0%  High conviction/concentrated portfolio (consistent with Holding 5 $50 $50 0% private equity heritage) Holding 6 $50 $60 20% Holding 7 $50 $60 20%  Portfolio structure: 3%, 5%, 10% framework Holding 8 $50 $70 40% Holding 9 $50 $70 40%  No position in excess of 15% of net fund assets Holding 10 $50 $75 50% Holding 11 $50 $75 50%  Top 10-15 holdings roughly 60-70% of net fund assets Holding 12 $50 $80 60% Holding 13 $50 $90 80%  Cash position is a function of opportunities rather than policy Holding 14 $50 $90 80%  Cash will grow in times of few compelling opportunities Holding 15 $50 $100 100% Holding 16 $50 $100 100% and decline when opportunities are plentiful Holding 17 $50 $100 100% Holding 18 $50 $120 140% Holding 19 $50 $150 200% Holding 20 $50 $150 200% Total $1,000 $1,560 56% Portfolio Internal Rate of Return (IRR) 1 year 56.0% 2 years 24.9%11 3 years 16.0%
  13. 13. Benefits of Allocation to Avenir Capital Avenir Capital provides exposure to alternative investment opportunities and an alternative risk management philosophy • Access ‘unloved’ part of market • Avenir targets above market rates of return • Ex ‘mainstream’ stocks • Focus on absolute returns not benchmark relative returns • Increase exposure to special situations • Patient disciplined investing in only low • Focused international exposure risk, high return opportunities Broaden Above Investment Market Exposure Returns • Experienced high conviction Avoid cost of • Avoid opportunity cost of market investment manager Risk moving ‘sideways’ for prolonged ‘Sideways’ test Management period • Provides exposure to different risk Market management philosophy • Benefit from active stock selection • Minimise risk of permanent capital loss • Reduced market correlation rather than risk of deviation from benchmark or annual volatility • Margin of safety investing12
  14. 14. Risk Management Risk management flows through every element of the Avenir operating model  Margin of safety - Always!  Buy at well below intrinsic value  Fixate on minimising permanent loss of capital  Private equity heritage Philosophy  No single investment over 15% of net fund assets  Leverage not used to drive returns  Sufficient diversification in portfolio Fund Structure  Investment discipline – patience, patience, patience  Invest in simple companies and simple industries  Low Risk, High Uncertainty opportunities  Manage correlations within portfolio Investment Framework13
  15. 15. Key Fund Terms Avenir Capital’s fund terms are designed to maximise alignment of interest between investors and the fund manager. There is no management fee so the Fund Manager only earns income based on return performance above a threshold Management Fee:  0% management fee (other than to cover administrative costs of fund including accounting, audit, rent, etc) Performance Fee:  25% of annual increase in fund profit - Only paid if returns above 6% (catch up in place above 6%) - High watermark Gross Return Return to Investors 6% 8% 10% 12% 15% 20% Index fund (0.5%) 5.5% 7.5% 9.5% 11.5% 14.5% 19.5% Mutual Fund (1.5%) 4.5% 6.5% 8.5% 10.5% 13.5% 18.5% Hedge Fund (2%/20%) 3.2% 4.8% 6.4% 8.0% 10.4% 14.4% Avenir Capital (0%/25%) 6.0% 6.0% 7.5% 9.0% 11.3% 15.0% (no performance fee <6%) Redemption:  Monthly Reporting:  Quarterly update; annual meeting; high level of access for investors14
  16. 16. Summary  Avenir Capital specialises in fundamental, value –based and special-situation investments in global equity and debt markets  We invest in materially mispriced securities which we can buy well below intrinsic value (a large margin of safety) and that offer the potential for superior returns with limited risk of permanent loss of capital  Our investment program applies private equity style disciplines to the public market with the 3 underlying pillars being:  Focus on the downside first – fixate on avoiding permanent loss of capital  Fundamental, bottom up approach to investment selection  Focus on absolute long term returns not relative short term returns  Avenir has an attractive fee structure aligning the interests of investors and the fund manager and providing some protection for investors in periods of lower returns  Avenir is managed by an experienced and successful investor and manager of third party money15
  17. 17. Appendix: Investment Sourcing and Examples16
  18. 18. Investment Idea Sourcing The key insight to sourcing investment ideas is the ongoing search for irrational or misguided sellers Read widely with antenna tuned to Investigate situations/ opportunities Stay close to sources of value market overreaction others avoid investing ideas Newspapers  Poorly covered or unloved stocks  52 week low lists  WSJ, FT, AFR, SMH, etc  Spin offs  Company screens Magazines  Restructurings / Reorganisations  Low P/E  Barrons, Forbes, Fortune  Companies or industries out of favour  Low price to book value  Overleveraged situations  High equity free cash flow yield Websites  Value Investor Insight  Post bankruptcy equities  Value investor forums  Tickerspy  Focus on Margin of safety and  Value Investors Club  Motley Fools minimising downside risk  SumZero  Marketwatch  Gurufocus  Seekingalpha  Valueforum  Bloomberg  Value investing conferences  CNBC, etc  Value investors congress  Hedge fund SEC filings and investor newsletters17
  19. 19. Investment Example: International Coal (US) Investment Thesis International Coal (ICO US) ICO provided the opportunity to buy into an underfollowed coal A$ business with sizeable natural resources and backed by renowned value investor Wilbur Ross ICO had a messy and confusing beginning: Buy  formed by the bringing together of 3 previously bankrupt Sell companies  underwent a major debt to equity recapitalisation  Issued new equity to further paydown debt  Confusing financials due to complex formation and short life The underfollowed and unloved company, however, had several attributes  highly contracted medium term sales Source: Bloomberg  a low cost position  increasingly shifting output to higher margin metallurgical Estimated 2011 EBITDA ($m) 285 Estimated 2011 EBITA ($m) 185 coal in an environment of rising prices  >1bn tons of coal reserves backed by a well formed and Pro Forma Plus Tygart No. 1 mine financed development capital plan Increased volume 3.5 m tonnes Avg margin($/t) 15 *  significant recent capital expenditure and excess plant Increased margin ($m) 52.5 capacity Multiple PF 2011 EBITDA ($m) 338 3.3 x PF for Tygart mine no. 1 We bought at an average price of $4.55 per share which was just PF 2011 EBITA ($m) 238 4.6 x PF for Tygart mine no. 1 over TBV and, we estimated, at approx. 50% of intrinsic value As is often the case when we buy cheaply, ‘good things happen’ Target EBITA multiple 8.0 x Assumed Target Enterprise Value ($m) 1900 Outcome Target Market cap ($m) 1729 Target share price ($) 8.48 Arch Coal Inc. made an offer at $14.50 per share Current share price ($) 4.55 Discount to intrinsic value 46% We sold post announcement at ~$14.43 (IRR 365%) * Cons erva tive a s ma na gement s tated $40/t ma rgi n18
  20. 20. Investment Example: Village Roadshow Investment Thesis Village Roadshow (VRL AU) VRL provided a prime opportunity to buy high quality, cash A$ $1.00 generative assets at 50-60 cents on the dollar when management 20c div Special making clear efforts to simplify the business div VRL has historically had a very complicated corporate and capital structure leading to market aversion Austereo stake confused market as to underlying value and provided value creation opportunity Current Key insiders increasing their economic control highlighted the Buy value material undervaluation (as did share buybacks below intrinsic value)  Proposed take private in 2009; 26% share buyback in Nov 2009; 21% proposed share buyback Sep/Oct 2010 Source: Bloomberg Pre- Post- Company was poorly covered and materially undervalued with (A$m) Buyback Buyback continued share buybacks or full privatisation attempts likely FY10 EBITDA (incl 100% Austereo) 255 255 Austereo EBITDA 89 89 At our entry price of $2.45, we estimated VRL was trading at a 40- Net FY10 EBITDA (excl Austereo) 166 166 50% discount to intrinsic value Assumed EBITDA Multiple 6.0 6.0 LTM P/E = 6.3x (current shares outstanding); pro forma for Enterprise value (excl Austereo) 996 996 announced buyback = 5.1x Net Debt (pre- and post- buyback) 827 914 Less: Austereo debt 209 209 LTM price to FCF (post tax) = 1.6x (current shares outstanding); 0.4x Net debt (excl Austereo) 618 705 (pro forma for announced share buyback) Equity value (excl Austereo) 378 291 Outcome Plus: value of 52% stake in Austereo 298 298 Total VRL equity value 676 589 Austereo business sold; $1 special dividend paid and market better # shares (m) (Pre- and post- buyback) 166 131 realised underlying value Equity value per share 4.06 4.48 Current value ~$3.20 plus $1.20 dividend (IRR 91%) Average share price 2.45 2.45 % discount to intrinsic value 40% 45%19
  21. 21. Investment Example: Oaks Hotels and Resorts Investment Thesis Oaks Hotels and Resorts (OAK AU) The company found itself amidst great noise and confusion as the A$ Founder/CEO’s personal 35% stake was placed into receivership and he was removed from board Sell The ex-CEO subsequently sought to overturn the board and instate his own nominees A mysterious Chinese investor appeared as a material holder on Buy the register and gained a board seat Amidst the chaotic activity and negative press, the market lost sight of the fact that the business owned stable, long term and separable assets and was generating record revenue/earnings We acquired shares at an average of $0.26 per share (less than 60% of NAV and 4x FCF) with our estimated intrinsic value being Source: Bloomberg $0.60-0.70 per share NET ASSET VALUE CASH FLOW MULTIPLE 2010 2011 (1) 30 June 10 Net asset value 70.8 Core EBITDA 25.8 30.0 Outcome Plus: October placement 6.5 Capex/Depreciation 5.2 5.2 An overseas listed leisure and hospitality operator launched an 30 Oct 10 Adj NAV 77.3 Core EBITA 20.6 24.8 initial $0.32 per share hostile bid during the confusion Less # shares 173.8 Cash finance costs 8.8 8.8 We expressed our view of value to the board and ultimately sold NAV per share 0.44 Tax 4.0 4.0 into the revised offer of $.52 per share (IRR 462%) Average entry share price 0.26 Free cash flow 7.8 12.0 While our view of intrinsic value was significantly higher than Discount to NAV 42% $.52 per share we did not have the financial firepower to join the Current share price 0.26 0.26 # shares 173.8 173.8 battle so grudgingly accepted the revised offer Equity value 45.2 45.2 Equity / FCF 5.8 3.8 FCF yield (%) 17% 27% (1) Ba s ed on mgmt gui da nce of $30-32m.20

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