Shooter MacGavin

The accounting here is very confusing and the filings/IR don't seem to help. But maybe it's because I'm new to the PE / Asset manager industry. Is the realized performance fee income they show in their investor deck and filings net of what has previously already been accrued and expensed (unrealized carry assets and accrued liabilities on the balance sheet?). Or do they need give 40% away on the realized portion in comp? I would think the former since they have a large accrual expense for carry every period that sits on the balance sheet. Also what is the purpose of the after-tax distributable earnings? That doesn't seem to be a useful "earnings" metric to me. The "realized income" as a revenue item seems a bit confusing to me. Isn' that just a gain on sale? How do the earnings from their PE investments flow through the P&L? Is that through the "realized income" section? Help! Thank you.

Is this your way of saying " this is a terrible deal"?

I have a decent copy (sightly stained, completely legible) well bound hardcover copy of The Great Salad Oil Swindle. I bought it after Todd Combs recommended it saying "it had multiple lessons for shorting" and spotting frauds. Obviously this scandal is the reason that Amex stock fell before Buffett famously bought it for his partnership. I've been looking for You don't know Jack or Jerry for a while. It looks like both of these rare out-of-print books sell for around the same price by Amazon's third party resellers. Please PM if you're interested in swapping. Thank you.

Bought some Hampton DeVille on BNN deal

I run a small fund but i think it can be possibly be improved with the right partner so that we can combine resources and brains in terms of investment ideas as well as marketing muscle and enhancing our process and credibility. An ideal partner would be interested in concentrating in long only ideas and would already be running at least ~$10M in AUM and in the NYC tristate area. If you meet the above criteria and are interested in talking/meeting please PM me. Please note, I'm not interested in hiring anyone. This is strictly about two peers combining forces if it makes sense. Alternatively, if you're run a fund in NYC and are interested just in meeting up once in a while to talk stocks over coffee, please PM me as well. Just getting different perspectives and getting out of our bubbles would hopefully be mutually beneficial.

my favorite questions are 1) "what's the best question I can ask you that you haven't been asked"...2) "I'm 21 and out of college, how do i start my own hedge fund?" and from the Chinese admirers 3) "what do you think about investing in China?".. in case you missed those try any year since at least 2010 - 2018.

I just need some US PPMs done for a fund. Would like it to be reasonably priced and get it done fast. We have offshore docs and fund entities done through another firm, and though they were good, they're pretty slow to respond. Please Pm if you know of one. Thank you very much.

I'm curious what funds do this. I know you don't want to name names, but presumably this info is in their letters and out there. I don't mean it to sound like the funds/ IM's are being deceptive or anything like that by using margin and they should be "called out". I'm saying when we are trying to evaluate their performance, it's not strictly about how much the fund is up overall. It's easy to forget this point. The question of how much risk was taken is very important too. Unfortunately, the latter isn't as easily discernible to the average investor. I don't really want to discuss names, because I don't have access to statements, total holdings,hedges and so forth and I haven't gone over these things with a fine-toothed comb so I could easily be wrong (nor do I have any interest in doing that), but it seems to me that some funds with large out-performances are generally only doing so because of sizeable margin. It also doesn't mean that there's not funds with large outperformances who are using margin that are also highly skilled.

Vinod, I agree wholeheartedly. We should distinguish between margin leverage and the concept of leverage overall. I'll take as much long-term , low cost, non callable leverage as I can get. Margin is where you can get in trouble. You never know when you're going to get called. You could be right on your valuation and still get shellacked.

Sanjeev, On Arlington, fair enough. I haven't paid much attention to them so I'm admittedly uninformed. The Berkshire repurchase thing was of course a nod to them, so you have a right to clear that up. Personally, if i had been an investor, I wouldn't have been thrilled unless there was a hedge on as well. On leverage, you're absolutely right. If you have high amounts and/or the wrong kind of leverage, you WILL impair your capital. It's only a matter of time. To invoke Munger - there are three ways to go broke: 'liquor, ladies and leverage'.

I think that you make some good points but you're generally wrong. First off IB will not let you do 4 or 5x margin. They enforce Reg T margin which is 1:1. In Canada you're actually allowed to have 2:1 margin but IB still enforces 1:1. Of course you can use derivatives to manage that but it's not straight up margin. Second, as long as the strategy is communicated clearly to the investors in the fund I don't see any reason why using margin to generate returns should be a problem. If the investors are ok with it and its risks, game on. Similarly on fees. That is a matter between the manager and his clients. If the clients are aware of what they are paying and they're ok with it why should that be an issue. Thirdly, a lot of what you base your post on is a fallacy. That the people should "do it themselves". Here's the thing: People don't want to do it themselves. So they have other people do it for them. And yes they pay fees for that. It's just how it is. 1) Actually, you're wrong about the margin. I have a portfolio margin account. Lots of people on this board do. But refer to thepupil's post. He's kindly provided the link. 2) Of course. Do whatever you like. It's just a perverse incentive structure rewarding managers for risk-taking over skill with other people's money. I take particular umbrage specifically with funds that are underperforming the market on an unlevered basis, risking investor's capital with high levels of margin (and I make a distinction between margin and leverage overall), throwing up good numbers and receiving the accolades from outside investors who aren't paying attention to this "parlor trick". And it happens ALL the time.

This is directed at the forum, not really at any particular poster, but I would question, in general, if one should applaud an investment manager margining up 5x and then paying himself on the upside. If you want to take that kind of risk/reward trade off, just do it yourself. Lever up with the S&P500 Index. IB will let you borrow up to 4-5x your equity. I've come across more than a few funds (no specific names mentioned) that post these astronomical returns and I've looked at their letters and the their holdings where they literally haven't outperformed the S&P500 on the majority of their holdings. One was even short a bunch of FANGs and Tesla (which has obviously proved to be a terrible idea over the last 5 or 6 years) and they're still posting these incredible returns. And the only way that happens is with a lot of margin. Yet, if you then see what you yourself could've done instead with an index or Berkshire levered 5X yourself over the past 8 years, you would have a far better record than them and you wouldn't pay them an extraordinary fee. But that doesn't necessarily make it smart unless you were able to hedge the downside at a low cost. Berkshire fell 45% from top to bottom in September 2008 - Feb 2009, so this notion that the stock won't trade below the 1.2x repurchase price is not accurate, in my view. Anything can happen in the markets. You can't know how others behave. If you simply had a portfolio margin account, and margin'ed 5 to 1, borrowed at 2% and invested in the index earning 14.5% over the last 8 years, you would've had 10x your money and you would be on the cover of barron's, arms folded looking out a window. And it would work like a charm until you have a 1st quarter 18 type event or a 2008 event or a 1987 event or whatever in which case you stand a pretty good chance of getting a margin call and closing out at a huge loss (depending on your particular portfolio of course). If you want to take that risk for yourself, then by all means. May be a worthwhile gamble. But why pay someone else to gamble for you? If any investment manager is touting his or her fabulous returns without mentioning the margin risk he or she took as a fiduciary of his or her clients or is not comparing him/herself to what the index would've done with the same level of margin, I think people should definitely raise an eyebrow. Showing great returns with margin is really easy. But it doesn't make it smart. I'm not opposed to leverage. For example, generally speaking most of what a PE investor is paying for is not for the investment genius of the manager but for the cost of capital arbitrage a PE Firm is able to procure, vs. its investors themselves. Hedge funds have an even lower cost of arbitrage, but its far far riskier because of how quickly it can get called back at the worst time.

PATK. Anyone done any work on this name? would love to compare notes.

hey sculpin. Thank you for posting this from VIC. It's a very interesting idea. I took a little position in MHY. Figured if I was going to making a bet on Cline ultimately, the payoff would be comparable with a quarter of the capital vs MAR. I'm not much of a metals and mining guy but I am wondering about a few things f you or anyone else has some insight. If this mine is not profitable at $140/ton of met coal, would it be profitable to a strategic buyer for any reason? are there cost synergies in mining? If mgmt wasn't able to receive bids during the huge run up in met coal last year, why would they receive bids now? have you ever spoken to the marret or cline management about their outlook for new elk? thank you very much and thanks for the idea

ok. Thats a good idea. thanks

Yeah IB didn't let me. I forget what they had told me about it at the time. Maybe something like you need to be an Indian citizen but I don't remember.

Hi, I know this has been asked before so I apologize but I can't find the answer. How does a US person invest in India? I mean directly, not through Matthews India or Fairfax India etc. Is there an online broker that can help facilitate that process? I would like to get this setup for myself personally and for my fund. Any help would be greatly appreciated, I haven't really found an easy answer online. Thank you for your help. :)

competition is always prevalent but it's a big market. Visa and Mastercard's clients are financial institutions and they do all the marketing. Financial institutions are incentivized to get people to use credit for payments and the providers of credit are banks. I suspect there will be multiple acceptance points at vendors and multiple payment mechanisms in India.

thank you everyone for your responses. I need to do more work on it. They do have great assets. My thinking is that I wouldn't pay 1.3x or 1.4x NAV to buy in a mutual fund or an ETF for example unless I thought the book was very conservatively stated and/or I thought the upside was far higher in spite of the 40% premium. I would for Berkshire or Markel because I'm valuing their earnings separately and adding it to their liquid investments. The book value also accrues for the ultimate performance fee so that's a plus from the point of view of a new buyer.

http://s1.q4cdn.com/293822657/files/doc_presentations/2017/Fairfax-India-Annual-Meeting-4.20.2017.pdf ? thank you for the link!

I would actually say they are being too conservative in their valuation. for example, in case of BIAL their DCF assumes a growth of 3% or something like that. i think thats the case for almost all the private holdings where they have assumed such low single digit growth rates. they may sound right in NA, but in india (where i invest), this way below par. inflation itself is 6-7%. on average 10% is the starting point and finding companies growing at 15%+ in not difficult. for example IIFL is growing 30%+ and thats not extra-ordinary ..par for the course in this sector for well managed companies. BIAL has been growning passenger traffic at 20%+ and i have travelling via that airport for ages. that part of the city is expanding the land around airport is going to far more valuable in the future. that does not mean the stock is fairly priced or something like that ..just that these companies have very good growth opportunities ahead of them ok that's helpful. thank you. Do you believe that at 1.35x book per share, that this stock is still worth kicking the tires on at this point? It has all the makings of a really good investment potentially...

To the Fairfax India Investors, I just recently started doing work on this. I wanted to get your opinion on something. I really like the idea of buying into a company that has a strong board and good investors partaking in a really fast growing region of the world. But why do they focus on change in book value as a proxy for their success? You don't see Markel or Berkshire or others focus on change in book value for their private businesses. I know in general they have focused on it for the insurance side and MKL still does for the insurance operations because the majority of it is still liquid and marked to market, but for the private pieces they do not really emphasize that. Certainly you don't see them do a level 3 valuation for the private businesses. You see them disclose earnings. Fairfax India do a subpar job of disclosing earnings trends for their private businesses, so you have to trust their internal valuation. But the way they value stuff - at first glance - is so incredibly subjective and for them to reward themselves based on this is really odd. As an example of why it could be goofy, Let's assume I bought 100% of GM stock at 6x earnings ($6.00 per share/ $36 dollar stock). And then I turn around and say using a 10% discount rate , i value it at $60. Well, that may be fair, but something seems a bit off about that to me. Isn't that some of what's going on at Fairfax India? They're buying both public and private businesses, but then they're re-valuing upwards the private businesses..which may be justified by improved earnings power, increased capital retained and an increased business outlook, but it also may be a valuation arbitrage. The stock is now trading at a 35-40% premium to book value, which already bakes in some of the upside from the private businesses because the investments are getting valued upwards on their books. They may have great assets but it seems like not a great buy. Just trying to get your food for thought. Thank you.

With all due respect, I don't think your rules would be useful to you. I'm using examples at extremes to make the point: Let's say you have a company that has EV/EBITDA of 6x but its levered and the company's interest charges and depreciation (or maintenance capex) is consuming 100% of EBITDA. Then an EV/EBITDA of is 6 equal to P/E of infinity. Or in other words, the company, with its current capital structure is not adding any value to shareholders. If no changes can occur to the cost structure, the shares of this company are worth zero. Now let's say you have a company that has a recurring annuity stream of a software license with an EV/EBITDA of 6x, fully funded by equity, and has no capital requirements. In this case, an EV/EBITDA of 6x is more like a P/E of 12.5x with taxes being the only leakage from EBITDA. This is why you can't compare EV/EBITDA of a capex heavy company to an EV/EBITDA of a software company. But you certainly can compare their multiple on economic earnings. At the end of the day, the EV/Rev, EV/EBITDA, EV/eyeballs multiples are a shortcut to a multiple on "economic" or "run rate" earnings. Now let's say you had two companies trading at 10x. The first was able to reinvest 100% of the economic earnings at 20% incremental returns on capital. The second reinvested 100% of economic earnings at 5%. Well, Is 10x cheap for both? Not really. The first company will make you 2.5x your money in 5 years (20% IRR), assuming the multiple is flat. The second will make you 1.2x your money (5% IRR). Therefore, you can't generalize and say 10x earnings is cheap. 10x is not cheap if companies are reinvesting at low rates of return. 20x earnings is extremely cheap if companies are investing at very high rates of return. Let's complicate this further. 10x may be cheap if a company is reinvesting at 1%, but it has $100B of excess cash or real estate that isn't factored into the stock price. But it may only be cheap if shareholders have a way to force management to either do something useful with those excess assets or distribute it, hopefully in a tax efficient manner.

Hi, I'm in discussions with an investor and we are trying to launch an offshore fund. I've spoken to a few lawyers and administrators, but was wondering if anyone could recommend any vendors (tax advisors, fund setup lawyers, administrators) they've used in the past. I'm based in tri-state area and would love to work with someone who is familiar with NY tax /registration requirements as well. Any recommendations, please PM me. Thank you in advance for your help.

thanks. Yes, I'm in discussions with attorneys at the moment. Besides cost, what's the disadvantage of setting up a fund structure instead?