Alder Hill Management
Eric Yip is a Managing Partner, Co-Portfolio Manager, and Chief Investment Officer at Alder Hill Management. Prior to founding Alder Hill, Eric spent four years at Appaloosa Management as Senior Analyst from 2010-2014, where he was responsible for the firm’s equity and credit investments in real estate, gaming/lodging/leisure, and was lead analyst in a multi-billion dollar portfolio of commercial mortgage backed securities (CMBS). From 2006–2009, Eric was a principal at Columbus Hill Capital Management where he invested in credit and equity across a variety of industries. From 2004–2006, Eric was an Investment Analyst at Icahn Associates, where he focused on activist equities and distressed credit investments. Prior to joining Icahn Associates, Eric worked at Franklin Mutual Series, Stanfield Capital, and Mellon Bank. He graduated in 1997 with a B.S. in Accountancy from Villanova University.
Mark Unferth is a Managing Partner, and Co-Portfolio Manager at Alder Hill Management. Prior to founding Alder Hill, Mark spent five years as Head of Distressed Strategies at CQS, where he managed $400 million in a number of investment vehicles. From 2007–2008, Mark was a principal (with Eric Yip) at Columbus Hill Capital Management, responsible for making credit and equity investment recommendations. From 1998–2002, Mark served as Managing Director/Co-head of Distressed Research on the Distressed Bond Trading Desk at Credit Suisse/Donaldson, Lufkin & Jenrette. Prior to DLJ, Mark worked at Metropolitan West Asset Management, in Loan Sales & Trading for Citibank, and at the Federal Reserve in the International Finance Division.
Mark received a B.A. in Economics from the University of North Carolina at Chapel Hill in 1990 and an M.B.A. in Finance from the University of Rochester in 1995.
Graham & Doddsville (G&D): Let’s start by talking about your backgrounds and how you got your starts as cross-capital structure investors.
Eric Yip (EY): As far as I know, I am the only investor to have worked for both David Tepper and Carl Icahn, two legends who are in the investing Hall of Fame. But by to-day’s standards, I got my start in a very non-traditional way.
In terms of background, I’m always reading profiles of great investors where people talk about being born to invest, and it seems their whole life was planned with that goal in mind. It was quite the opposite for me. I grew up in a lower middle class immigrant family, and that path was never obvious. I studied business at Villanova and when I graduated in 1997 I was unsure what to do next. I knew I wasn’t going to get into the pedigreed Wall Street pro-grams. I wasn’t interested in working for one of the big accounting firms. So the best opportunity at the time was a job with Mellon Bank in Philadelphia.
I worked in the asset-based lending group as an analyst, not doing anything glamorous, but learning the nuts and bolts of commercial lending. Early on in the training program, there was a lot of reading, particularly lending agreement documentation regarding covenants, terms, etc. Those documents force you to understand your protections and rights as a lender. I might not have recognized the skills that I was acquiring at that point, but they turned out to be very important to what we do today. I also participated in field exams, which entailed meeting clients, evaluating financials, and kicking the tires on collateral. As an asset-based lender, you have limited upside in getting your money back with interest while your downside is a real diminution of capital, so under-standing asset value is critically important. This experience also helped shape my value investing philosophy and in-tense focus on risk and down-side minimization.
After a few years in Philadelph-ia, I wanted to move to New York. I joined Stanfield Capital in their CDO group. The early years were spent working with the senior analysts, attending bank meetings and high-yield road shows, and learning the business and applying some of the lessons from my time at Mellon.
After about a year and a half, the fund hired a PM from the outside to start their distressed hedge fund. He saw the work ethic that I had, appreciated my first in-last out mentality and preached the importance of taking advantage of your opportunities. Once I joined his team, I got a taste of what I found to be the real fun stuff — distressed debt and deep value equities. That’s when I started connecting the dots as an investor.
After that PM left, I went to work for Franklin Mutual Series, which was among the first funds to invest across the capital structure. I wanted to join a traditional value shop that was agnostic about where in the capital structure to invest, as well as to work for one of the most respected distressed groups on the Street (led by Mike Embler and Shawn Tumulty, both of whom are still good friends and mentors).
We had several billion dollars of capital to allocate to distressed at the time and were very active in some of the largest opportunities, particularly companies like Adelphia, NTL, and WorldCom. I focused primarily on utilities and IPPs, where what mattered were replacement values and the power markets themselves. Names like Calpine, NRG, and Dynegy ended up working out well for us.
Mark Unferth (MU): After finishing school in 1990, I went to work at the Federal Reserve Board in Washington, D.C. for three years as an economist building large econometric models. I thought I’d end up getting my PhD in Economics but ultimately decided that wasn’t for me and moved to Wall Street.
When I joined Citibank in 1995, I started in a group that was structuring loans. My first introduction to the bankruptcy code and process was from structuring DIP facilities. I did that for about a year and then moved over to the trading desk. Loans were an infrequently traded asset back in the mid-1990s, but this was the early stages of when distressed loan trading was about to be-come a big thing. I worked as a desk analyst for three years before moving over to DLJ where I eventually became Co-head of Distressed Research for the bond trading desk.
In those seven years of working on the sell-side, I had an opportunity to interface with a lot of very large distressed investors. In observing the different styles and approaches those investors took, I started to assimilate what I thought were the best ways to approach distressed and value investing. At the same time, I was putting it into practice by investing capital for the desk, which at the time was run by Bennett Goodman, Tripp Smith and Doug Ostrover who later went on to start GSO Capital Partners.
I moved over to the buy side in 2002 when I joined Metropolitan West Asset Management (now TCW) and it was there that I had my first chance to manage capital during a distressed cycle as a PM. I ended up working on quite a number of bankruptcies during that timeframe. The most salient experiences for me were Fi-nova, Worldcom and Conseco where I sat on official or ad hoc creditors’ committees. I loved that. It was an opportunity to provide insight into investments that are off-market. Distressed investments don’t have the same characteristics that you find in a large-cap equity that is well-followed by the Street. A lot of these things are very situational. There is quite a bit of game theory that’s involved and it’s very analytical.
Eric and I met at Columbus Hill Capital in 2006, where we were principals responsible for generating investment ideas across the capital structure, both debt and equity. We worked closely together in 2007 and 2008, which was the opportunity of a lifetime to invest in distressed situations, and our teamwork in that volatile time is the bedrock for Alder Hill now. I left Columbus Hill in 2009 to become the head of the Distressed and Special Situations group at CQS, a London-based $15 billion hedge fund, where I built a five-year track record investing across US and European markets. I left CQS to reunite with Eric and form Alder Hill.
G&D: Eric, tell us about the transition to working for Carl Icahn and David Tepper.
EY: While I was still at Mutual Series, I built a working relationship with some of the team at Icahn. After a while, the appeal of working for Carl Icahn was hard to resist. He is an iconic figure and I couldn’t say no to the opportunity.
I always found activist investing to be very interesting and I still believe in the value it can create in the right situation. Everyone knows Carl as an activist, but what people don’t of-ten appreciate is how successful he has been at making money in the area of distressed debt. He can take very large stakes in companies in the hopes of restructuring them and controlling them when they exit bankruptcy. It’s all about understanding the process. For Carl, activism in distressed debt and equity activism are not that different. When you look at investors today, there are very few people who can succeed in both of those areas.
I primarily worked on activist equity investments in both the US and internationally due to fewer distressed companies at that point in the cycle. That’s the benefit of shops with a broad mandate and capabilities; it allows you to search a wider area for the very best opportunities.
After a few years there, I had an opportunity to join Columbus Hill, which is where I met Mark. The fund was founded by Kevin Eng and Howard Kaminsky, who, prior to starting it, had been managing domestic and international credit investments at Duquesne for Stan Druckenmiller and had also worked with David Tepper at Appaloosa. What I did at Columbus Hill is very similar to what we do here at Alder Hill, which is investing across the capital structure, looking for event catalysts, and searching out ideas anywhere in the world. I was with the fund from 2006–2009, which encapsulated some of the best times in the market and also some of the worst. In the aftermath of the housing market collapse, I worked on some high profile real estate bankruptcies and near-bankruptcies.
G&D: And Appaloosa came after Columbus Hill?
EY: That’s right, and after joining, David I had two main duties. The first one was helping build out a multi-billion dollar CMBS portfolio. David was well-known as a distressed debt guy, but what he did, which makes him brilliant, was recognize opportunity in other areas and pursue it. He made big investments in equities during the financial crisis when he wasn’t thought of as part of the equity community. Based on what he has done since, people might even consider him a macro guy. But he want-ed to start investing in structured products, mainly CMBS, even though he wasn’t really known for having expertise in that area. That’s why it is hard to define him.
CMBS is really just a portfolio of first lien debt. If I had you look at CDOs, it would typically be a portfolio of first lien syndicated bank loans for corporates. This was not different except it’s backed by real estate properties. You still have to analyze it. The massive growth in CMBS issuance prior to the downturn, like many things at the time, was very artificial. They were purchased by investors who did not really understand what they were buying. As an investor, you have to ask some important questions. What are the cash flows? What’s the replacement value? Does it generate enough cash to pay fixed charges? While most people were running away, we were digging into a new situation that was ultimately not too different from corporate securities.
At Appaloosa, I also worked on the fund’s gaming/lodging/leisure sector coverage as well as everything real estate-related on the corporate side. That includes both debt and equity investments. At Appaloosa, you are taught to be both a value investor and an opportunist, which requires moving around to where the opportunities are.
G&D: Talk about some of the key lessons from working with those two investors and how they’ve shaped your philosophy or process over time.
EY: From Carl, the first lesson was thinking about investments with an ownership mentality. And this wasn’t simply a theoretical exercise, because in the right situation he really could buy the entire business, so I had to apply that same rigor consistently in my analysis. Secondly, Carl is also great at understanding his rights as a shareholder and creditor, and knowing both the business side and the legal side of his investments. A third lesson was the importance of understanding management’s motivations and incentives. Carl has an amazing capacity to understand human nature. Lastly, Carl built a great organization and I had the pleasure to work with in-credibly talented colleagues. Vince Intrieri, who is still with Icahn, and Keith Meister, who has gone on to start his own very successful firm Corvex, were instrumental in my development.
As for David, I’ve never seen anyone who is so great at so many disciplines, yet is also very generous and humble. As a CIO, as a PM, as a trader, as an analyst, and as an economist, he can hold his own with anyone. I have seen him do all those things at Appaloosa, and across a broad range of investing styles. He’s also not afraid to take risks or invest in a situation where everyone else is running away. In my opinion, that’s where he’s the absolute best. He can connect the dots on a theme or idea better than anyone, and that has influenced my way of thinking today. Everybody is focused on E&P and energy services right now, and that’s fine, but now my mind goes to, what about the car dealership chain in Canada that might have got really beat up because they had significant exposure to the Alberta region? How about that bank or hotel company with exposure in Texas? Are there opportunities there that might be more interesting as second or third derivative ideas from the fall-out in oil prices? It’s that type of non-traditional thinking that we’re still very influenced by today.
G&D: What did you learn from him in terms of getting comfortable with making big contrarian bets?
EY: He has been able to do that because there is exhaustive research backing up the ideas. At Alder Hill, we won’t make an investment without first doing the hard work, so that we’re ready to defend our position and stick with that conviction if the market goes against us.
G&D: How influential were they in how you thought about setting up Alder Hill?
EY: Very few hedge fund managers would do this, but early in our process of setting up the fund, David sat down with Mark and me on numerous occasions. He knew that we could invest so he wasn’t concerned with that part. What he really emphasized was the importance of building the business the right way — creating the infrastructure, hiring the right team, finding the right investor base. And these issues are especially important for a fund that may invest in esoteric products or require the flexibility to run toward the ugly and underappreciated situations.
We were very thoughtful about the team. Our current group is made up of senior people. That dynamic is important because our strategy requires the dexterity and variety of talent to switch, for ex-ample, from evaluating foreign sovereign debt, to levered equities, to REIT arbitrage, to high yield credit, to M&A situations and other special situations like equity spinoffs. We require people who are able to do all those types of things, and in order to do that, we needed to hire people who were experienced and were trained in cross-capital structure fundamental investing.
Mark and I have a rule that we always want our entire investment team to be able to fit around a conference room table. If they can’t, then we know we’ve grown too large. We want to go back to the ways of the old-school hedge funds, in that we’re going to run a little more concentrated portfolio, and with a large degree of collaboration and respect for our team’s opinions. We sit around the table and critically review every investment idea as a team. What that means is you’re going to really know your investments, properly create a margin of safety, and develop the conviction needed to succeed.
G&D: Have there been other influences in how you’ve thought about the culture at Alder Hill?
MU: Make no mistake, you have to work really, really hard in this business. That will be true wherever you go, but one thing we learned at Columbus Hill was its culture of collabo-ration. We’ve tried to bring that to Alder Hill.
We wanted a close-knit group where everyone can collaborate and where we value people’s thoughts and participation. Our view is that the more eyeballs you have looking at something, the more likely you get to the right answer. When we have meetings, one of the things that we picked up over the years at different spots that we worked was to allow people to take a contrarian position. It’s okay to ex-press it if you have a different view, because at the end of the day the most important thing is we get to the right answer for our investors.
G&D: How would you describe yourselves as investors?
MU: I am really a distressed investor. I lean toward the situations that have an element of active involvement, where I’m rolling up my sleeves and getting involved in the restructuring, working on ad hoc committees, or maybe a litigation situation in bankruptcy like Six Flags or Visteon in the last cycle.
I would say that’s the side of investing that I particularly enjoy because it’s a bit like putting together a really complicated puzzle. There are of-ten times these things take a little gestation to work them-selves out and for the pieces to fall in place and you decipher all of that, but that’s the kind of work that, generally speaking, and this is not to knock the sell side, but that’s not the kind of stuff that they do. Very often when things become special situations in that manner, they lose cover-age. They become less followed and it gives you a real opportunity to invest, and that’s what really appeals to me as an investor.
EY: I’m opportunistic in my ideas, and I consider myself an old-school Munger geek, particularly his passions for reading, retrospective/contrarian thinking and psychological self-awareness. I also enjoy the Buffett-ism of buying dollars for fifty cents, which increases upside while also minimizing downside. Since value oscillates across cycles, you need to have the tools to invest in both equity and credit to find those fifty-cent dollars. And lastly, it’s not just identifying the idiosyncratic value situations, because anyone can run a spreadsheet, but you need to understand the process and catalysts to realizing full value. When I was growing up, Macy’s would have their big annual sale and the dream was to buy that elusive thing that never went on sale, like a white Polo shirt, for 50% off. So, I guess from an early age that is what really appealed to me.
MU: The other thing that really stands out is that we are both value investors that can move around the capital structure. Eric and I have been through several cycles, and given that we were initially both credit-trained but have also extensively invested in equities, we really understand upside/downside and where things can move around.
G&D: Some people view cred-it investing and equity investing as being quite distinct. You don’t run into that many people that have very successful at both. Is that false logic or why do you think that is the case?
EY: What we’re trying to do is to find assets that we think are trading at a deep discount to intrinsic value. They could be credit or equity. If our man-date was to be a cross-capital structure fund and I started telling you about our equity investments in growth companies that trade at 10x revenue or 50x P/E, or that we invested in investment grade, low yielding paper trading at par, then I’d agree that would be a strange mix.
What we’re investing in for credit and equities is actually quite similar. I will give you one historical example: MGM Mirage is the type of company we would typically look at. It has high yield debt and levered equity. During the 2008–2009 downturn, MGM had senior bonds that were trading in the 30s and 40s. As the company started to fix its balance sheet and the market was improving in the 2010–2011 period, the equity became a play on the continued repair of the balance sheet, continued repair of the fundamentals, and with upside optionality from a normalization of industry growth. On top of that, you had an opco/propco element that you were seeing elsewhere. It’s that type of situation that we focus on at Alder Hill — one day it’s the equity we’ll invest in, but then in the next downturn, we may invest in the credit of the same company and vice versa, depending on the cycle. When you stick to value-based situations like that, the credit vs. equity dynamic is not really an issue. The question for us is consistently, what is the fulcrum security which creates the most value based on our analysis? That could be debt, or equity, or debt that might one day be converted into equity. Covering that whole range of outcomes gives us an advantage over funds with restricted mandates.
G&D: Can you give us another example where your debt expertise helped you identify an interesting equity opportunity or vice versus?
EY: I’ll give you an example without giving you the company’s name. There was a gaming company we invested in that was trading at 7x EV/EBITDA and the leverage was 5x EBITDA. As we all know, that is clearly a levered equity. It’s a high-yield issuer, and when we put on our credit hats, we noticed the most junior debt was trading at a 6.5% yield. The high-yield markets appeared to be comfortable with the lever-age.
Meanwhile, the free cash flow yield on the equity was around 20%, so there was some dis-connect in how the two markets were looking at it. Yes, it is levered and that’s part of why the FCF yield was so high, but this is the type of stuff where we start off by asking “what is the credit market view?” and, in this scenario, it seemed different than the equity market. The credit metrics were solid. They were generating free cash flow and using all of it to delever. We thought the equity was especially interesting because we didn’t feel like there were any knockouts for the credit — no liquidity issues, no near-term maturities to worry about; interest coverage was fine.
This is the type of investment where we feel like we have an edge over the typical equity investor, because those investors may not know or even look where the debt trades. They’ll come across something like this, see that it’s 5x levered, and get scared off. It is not for the faint of heart but this is our bread and butter, where we get to apply our credit expertise into under-standing the equity. The added benefit in this particular investment is that it came from an industry that I had been covering for over ten years so I knew the fundamentals very well and understood there were multiple other ways to win.
MU: The Holy Grail of investing is finding a situation with an asymmetric upside/downside ratio. Part and parcel with that is how you can get there, what are the paths to realization. If we had to add one other thing that we’ve taken from our prior jobs that applies here, it would be the idea that when you’re investing, if you can find a number of different paths that you can go down for value realization, all of which can get you where you need to be, the more the better.
EY: When we started looking at this situation, we had a starting point that even if nothing else happens, you’re getting a 20% levered FCF yield and you’re already trading at a significant valuation discount to the 10x EBITDA deals that were getting done in the market. So if valuation remains the same and they use the FCF to keep paying down debt, the stock should go up 20% one year from now. And then you still had other sources of potential upside that we didn’t think we were paying for. If the valuation gap closed, if the company explored an opco/propco structure, or if a buyer acquired them, all of which seemed like reasonable possibilities, then we had meaningful upside potential.
G&D: What are the dynamics you see in the market today? Where are you seeing the most interesting opportunities?
MU: There are various points in time where credit is cheap to the borrower. Out of that comes a lot of very interesting transactions, and thus event-driven investment opportunities. That is the type of market we see today. Managements and boards feel compelled to do something for shareholders and there are a number of tools by way of cheap credit that they accomplish that. How do we capitalize on it? Part of it comes from Eric’s experience working for Carl Icahn and knowing the activist play-book so we can spot where these transactions are likely to occur and start investing in advance.
EY: You have two things. With this cheap credit, it is very hard for a credit investor because the risk/reward is not attractive. But of course that means it’s a great time to be a borrower. The other thing we know is that topline growth has been very elusive, and companies have cleaned up their balance sheets and have the firepower and credit market support to put on leverage to manufacture growth. The M&A space will be very active given how cheap it is to finance these deals.
Activist investors have raised tons of capital. But they also have two other positives going for them. One is that corporate management teams have been more receptive to listening to them. It doesn’t mean they’ll agree with their ideas but there seems to have been a shift in the paradigm in their willingness to listen. The other thing is that the large mutual funds are feeling pressure from low-cost ETFs, so they are looking to find alpha in these types of situations. In the past, it was a lot harder to get a blue chip mutual fund to sup-port you. Nowadays they are much more willing to. In fact, I have heard that a lot of times they are actually suggesting certain names to the activists.
We think all of this is leading to a golden age of event-driven opportunities. For us, it is really about focusing on these types of situations — companies that we think are going to ac-quire, get acquired, break up, do recaps, convert to a REIT or MLP, etc. Those types of ideas are a large portion of our current portfolio.
G&D: How much time are you spending on the energy sector?
MU: Energy is another hot topic. In the last seven or eight years, there was around $1 trillion of debt issued in the E&P space. There are probably $150 billion of bonds still out-standing, which is around 20% of the high-yield space. A fair number of these companies are not going to make it with-out a significant amount of capital that will come in and either subordinate everybody in the debt stack or dilute the existing equity.
EY: But it’s not clear to us yet how compelling the opportunity is at today’s valuations. Yes, some of these energy names that now trade in the 50s or 60s with double-digit yields traded at par and had 5% yield to maturity a few months ago when oil was much higher, but it doesn’t necessarily mean they’re cheap. Just because it’s traded down doesn’t mean it’s cheap, as there has been a distinct bifurcation between high quality and low quality companies, and you can’t fix bad hard assets. Our concern is that some of these names are going to have liquidity issues and because the docs have covenants with holes you could drive a truck through. So like Mark said, you’re going to see a lot of issuance of first and second lien debt that will layer the rest of the stack.
We’re focused on that area, but today our limited energy exposure is in companies that are secondarily connected to oil prices and where the valuation overhang is inconsistent with oil’s impact on the fundamental business. For example, we have a position in a $10 billion market cap MLP which is the subsidiary of a high pro-file energy company. Its revenues are completely contract-ed, yet it trades at a 25% discount to NAV, with a strong current dividend yield. All of the headline issues which are worries for the parent are only sources of further upside for the MLP. Many of our energy positions today are similar in that they are in companies that have sold off for no good fundamental reason, have great upside if oil recovers (and good upside even if not), but for whatever reason aren’t trafficked so thoroughly by the sell side and conventional hedge funds.
G&D: Can you talk about your idea generation process in more detail? Do you take a macro view, or a bottoms-up approach?
MU: We’re a bottoms-up shop. We do think you need to be aware of the top-down risks that are going to potentially affect fundamentals. It helps inform us in how we manage the portfolio and think about risk management. Most of our ideas are internally generated. We prefer dislocations, disruptive change, anything that complicates the analysis and lessens sell-side coverage. Think of Eric’s earlier example in CMBS. Then we use our 35 years of experience to act quickly in identifying key drivers to valuation, the catalysts to unlock that value and the process to get there.
G&D: There has been a lot of talk about “Outsider” CEOs recently since the book was published in 2012. How do you think about the importance of management teams in the companies you invest in?
EY: With distressed, a lot of times you are unfortunately dealing with very weak management teams and you have to be able to get comfortable with that. Ideally, we would love to invest behind some-body like a John Malone or a Bill Stiritz, but you won’t find these kinds of super value generators in most of our names. Interestingly though, we did invest in a spinoff of a larger company in which a well-respected CEO was involved. We originally invested in it because it was trading at what we thought was a 50% discount to intrinsic value. It was a portfolio of private equity investments. When you see these big discounts, however, you have to look at the management teams to say, “Are they going to unlock this val-ue?” What made this one interesting was management was announcing value-enhancing catalysts — they were spinning off various assets, giving cash back to shareholders — while the stock price was declining. It really was an orphaned stock.
Again, this is the type of situation where we would invest because it had the classic spin-off dynamics. It was barely covered on the Street. At less than $5 billion market cap, you just have less eyeballs looking at the names. You won’t find this type of opportunity on screens. We found it just from following all of the spinoffs that are happening and then doing the work to get comfortable they would unlock value.
G&D: Are there any other ideas or themes you would be willing to share?
EY: One area that we’re spending a lot of time on now is what I would call “broken IPOs.”
These are situations where a private equity sponsor still owns a large stake, and where the current price is something like 25% below where the IPO priced within the last year. With the sponsor overhang reducing liquidity, these companies tend to be a little small-er so again they don’t get the same attention.
We’ve invested in a ski company that trades at a substantial discount to its peers and has a hidden real estate angle to it. If you back out the real estate, we think we’re buying it around 7x EBITDA when its main peers trades for 10–11x. It was a busted IPO that we like for a few reasons. The valuation discount is one. It’s also generating a double-digit free cash flow yield and its balance sheet is fine. It’s 4x levered with just a term loan and 4–5% cost of debt. It generates around $115 million of EBITDA.
I think all of the companies that have hidden real estate will eventually be forced to do something with it because of the massive arbitrage. In this particular company, that’s optionality. Now they probably won’t do it because they would have $1 billion plus of NOLs so there is no tax arbitrage from doing that, but somewhere down the line it will make sense. But given they’re not going to pay taxes anytime soon, what are they going to do? They’re going to buy stuff.
The sponsor is smart and certainly understands financial engineering so you would think there would be optionality in monetizing that NOL, but we’re not assigning value to it in our own valuation. We’re also not giving full credit to the land value — we have it at 50% of its 2006–2007 book value. It used to be $300 million of value that we are assuming is $150 million in our model. The land could be used to develop condos and time shares — there is value there.
I don’t think it should trade at 11x, but 9x wouldn’t be unreasonable. If you mark it to our numbers, you’re looking at a stock that could easily end up being a double, but it’s because it’s still majority-owned by a private equity sponsor, so you have this overhang and with a sub-$1 billion market cap, investors just aren’t going to be focused on it. That allows a fund like us who isn’t afraid of companies that are a little hairy to get involved.
We are also spending time on potential activist targets, either by our fund or another firm. We’re currently looking at a $1 billion market cap company with an extremely inefficient capital structure. The company has no debt, but a comparable business was recently taken private with leverage equivalent to the entire EV / EBITDA multiple of this company. So there is opportunity for 20% accretive share buybacks, an LBO at a 50% premium, or a merger with the #1 player in their market, which could also work at a 50% premium. As always, we’re remaining flexible and trying to find those 50 cent dollars in underappreciated places.
G&D: Thanks to you both for taking the time to talk with us.
