SafetyinNumbers

FFH is long the swaps, Canadian banks are short the swaps and long FFH. I think that’s the whole picture. It could be if someone wanted to go short FFH via swaps, the banks would take the other side and sell some shares to offset their net position but that’s likely marginal at best.

I hope Viking doesn’t mind me responding but I’m almost certain the Canadian banks that are acting as counterparties are fully hedged (i.e. they own the shares directly). The play here is the income they earn on financing the TRS for FFH. They are not betting against FFH, they are simply providing credit.

I can shorten this to anything that screens well.

Canadian PMs still treat Fairfax like a hedge. They buy it when they are bearish banks and sell it when they are bullish banks. Bank stocks are doing pretty well lately. I think that’s part of it. There is also probably concern about owning FFH if they announce the IDBI deal or another acquisition that might cause a drawdown even though BVPS will presumably grow faster if they do. No PM wants to own FFH when the market decides Prem made another mistake. Even though we won’t know that for years the next time it happens.

SCR results looked fine. Confirmed they will reach the debt target to begin dividends at the end of Q2. The stock has already rerated somewhat from the lows but it’s still got a long way to go as it is trading well below NAV. I think the analysts should be looking at it based on where the puck is going which is a tight float, strong execution and a dividend mean a rerating and eventual acquisition to get SCR into the Composite. Their reasons for not owning it have nothing to do with intrinsic value but a concern for where the puck is i.e. low liquidity and not in anyone’s benchmark. Ironically, the tight float makes it easier for the shares to be rerated and some institutions may have already figured it’s better to own the shares before the dividends start and before they do an acquisition at valuation closer to NAV to backdoor their way into the Composite.

I don’t know if they can or not but given it’s a bank, I figure there might be some regulatory restrictions like there are in other countries or it’s possible management wants it to be more wildly held thinking that’s the best way to a rerate. I’m surprised they cut 2025 estimates following the guidance which seemed conservative.

It’s not even in the Composite yet. My guess is they buy a smaller component of the index for stock once it rerates and back their way in. The 60 add won’t come until Waterous can dilute themselves down and do a few secondaries.

When do you think SCR goes in the Composite?

As a hypothetical, what if he did start buying more Eurobank this quarter assuming he was allowed to from a regulatory perspective and management was ok with it. Would that be cheered by investors as adding to something he knows really well or will it be seen as propping up an already big holding? Personally, I would love to see it. Eurobank can only benefit from having a lower cost of capital. There are likely accretive acquisitions to be had that would diversify the bank. If they were allowed do you think they would?

I’m not sure why you think fees will be hefty. It’s $6b so even if the fees are small, it’s material to FIH. Why do you frame an investment as a bill for OMERS or other parties interested in Indian bank exposure? Why do you assume they are overpaying? As for funds available, they did provide a backstop LOC for IIFL but that is being refinanced via a rights issue and convertible debentures. So it’s likely they ultimately write a much smaller check. They could tap into the revolver if necessary or sell another asset. They could also contribute their CSB stake which was marked at $400m at year end. This could also be done at a premium given IDBI is the much bigger entity. A $600m investment would be over $4 share for FIH plus there might be leverage in performance fees. it’s a lot of fees to pay to take private and public again with seemingly no benefit in the long term. Again, you might be right but I think the odds are extremely low.

I disagree with this analysis almost 100% but that’s what makes a market. I don’t share this framing of FFH in an adversarial position with respect to FIH. Nothing they have done thus far suggests that is the case. There are lots of other reasons to be public besides issuing shares. One of them is buying them back accretively which they have taken advantage of. It also makes it easier to issue debt (leverage increases the returns) and we have already discussed the benefit to capital of being listed for the insurance companies. If thinking in forever terms it makes no sense to give up this optionality. That’s what the original shareholders paid 5% front end load for, why throw it away for free? With respect to IDBI, why is a sidecar structure not considered a possibility? Shouldn’t that be a giant catalyst for the shares as the fees generated offset a lot of the other fees paid to FFH? It’s probably the most popular reason I hear for avoiding FIH. I think that’s much more likely than FIH being taken private. Either way, shouldn’t either possibility be a reason to buy the stock at current levels? I’m dismissing outright the odds of an equity issue below BV. Further, I find the comments around BIAL and coinvestment confusing. If we think BIAL is cheap then how did they pay a premium to buy out partners? I think it’s more likely the partners didn’t want to wait out an IPO process for liquidity and informed FIH, who responded with a bid. If you have some back up for your thesis, please share. You may be right but I’m just going with what I think is more likely. If FIH was to structure this purchase through a sidecar, FFH would be an LP like any other. OMERS and any other institutional investors who participate would be the same. The share discount started in 2018. Anyone who mainly invests outside of the benchmarks will tell you that the shift to passive, quant and crypto really accelerated at that point. 5-6 years is a long time but it’s not 10 plus they did take advantage of it by buying back a giant portion of the float. FIH is certainly not popular for a lot of heuristics that have nothing to do with intrinsic value. The impact of passive (ETFs) and quants (screens) especially means that stocks that the number of opportunities has increased in stocks that don’t screen well while the population of investors willing to buy them has shrunk. As Viking pointed out also liquidity isn’t great. To me that’s more about a desire for immediate liquidity which has become much more important to investors since the GFC. Active investors simply have what they think are better options to meet their hurdle rate and they may very well be right. My hurdle rate is 10% which is about what FIH has compounded at before IPO fees. I get to buy that at a ~30% discount plus I think there is a good chance they have undervalued the two thirds of the portfolio that doesn’t trade. Plus there are near term catalysts to close that discount. It’s the timing that is uncertain which is why active investors prefer to buy things with defined catalysts. Over the past 5 years investing without defined catalysts has meant underperforming. Anyone still doing it has learned that lesson. FIH does have catalysts but the timing is uncertain and it’s possible no one will care because no matter how positive the catalysts, it will never be a “quality” stock i.e. a stock that screens well. By the way, that might also be the case for FFH except that it’s in a major benchmark. FFH also has the benefit of analyst coverage but because its earnings are volatile it doesn’t screen well. It’s hard for sh!tcos to get multiple expansion unless they are meme stocks. The buying is coming from passive and index huggers who are price insensitive. It’s the existing shareholders that decide what FFH is worth by where they choose to sell it. That’s how multiple expansion can get out of hand like it did in the late 90s. FIH doesn’t have these advantages but I think Trevor Scott turned me on to the idea that if FFH got serious multiple expansion then the FIH discount will turn into a premium. That still might happen but if BVPS growth is strong annually then I will easily beat my hurdle rate and I still get to keep all of the right tail optionality that includes a go private which I still believe has an almost zero percent chance of happening but would offer a very nice return nonetheless.

Issuing shares above book value increases book value pretty quickly. In the late 1990s, Fairfax (and BRK for that matter) benefited greatly from issuing shares over 3x book on top of booking 20%+ ROE/year for four years. BVPS roughly doubled on the fundamental performance but BVPS was up another ~$90+ off of the share issuance alone as the share count was up 33%. If the share issuances are used to buy investments with ROI > 10% when combined with the leverage and offset by little dilution increases the ROE. This is the benefit Intact Financial enjoys with its P/B of 2.5x+. They issue equity to do acquisitions at 1x premiums which make them automatically accretive in a big way. The best thing shareholders can do for good capital allocators is to give them a low cost of capital.

Lots of optionality from staying public too including access to cheaper leverage which offsets a lot of the fees that drive investors away,

I’m saying they acted in good faith and bought back a lot of stock at a large discount living up to their side of the bargain. Obviously, they didn’t appreciate that quants and passive would take over the world. Most people still haven’t noticed and think the market is efficient but that’s what’s created the discount. I own E-L Financial and they have bought 55% of the float in the past 4 years and the stock is still at a 50% discount. I guarantee you management and shareholders would have thought that 3 SIBs, a couple of large special dividends and tripling the regular dividend would materially close the discount if you asked them in 2019. It’s hard for me to blame management there for the discount and I think it’s the same with FFH with respect to FIH.

I don’t think they will take FIH private. The insurance subsidiaries get much better treatment holding a public security vs a private company. It also makes no sense to raise capital at the FIH level at this discount. They could deploy a sidecar structure with an FIH subsidiary as the GP contributing cash and their stake in CSB as equity. External capital including FFH’s would be injected as LP investors paying fees to FIH as GP for the privilege of investing in IDBI. Lots of funds use sidecars when they find an investment opportunity that is too big for the rest of the portfolio. This seems like an ideal scenario to deploy it and has the added benefit of substantial fees that can offset some of the fees that keep investors away from FIH.

I think long term holders should prefer a much higher multiple because the optionality of raising money at a low cost of capital if it’s needed because of a shock or an opportunity comes along is worth more than buying shares at 1.2x BV. If the goal is a higher ROE and BVPS, a higher multiple helps a lot more.

I still don’t understand your point but ok agree to disagree.

One could probably call the company if they ever needed to sell a lot shares. They have a weekly block exemption.

They negotiated in good faith with credible counterparties. Then they used capital they could have earned fees on to buy back stock. As minority investors, we should want to give them a low cost of capital but at that valuation, we all think we have better uses for our capital. The small set of active investors that can buy FIH still think that at 30% discount.

I’m not clear on what you are trying to say here. Is the argument that investors don’t trust FFH any longer so that’s why the FIH discount exists? Arguably, that’s why the discount on FFH exists. Investor’s don’t like anyone they invest with to invest differently than them. Since most are quality (stocks that screen well) investors they can’t own FFH or FIH.

The parties that fell down are the initial minority shareholders that negotiated on our behalf like OMERS, Markel etc… The mechanism is set up to close the discount every three years based on minority shareholders being incentivized to do so. The world switched to quants (screens for quality) and passive in the mean time so they are likely constrained or afraid to buy more. Investors for the most part don’t buy things because they are cheap anymore. FFH and FIH have fulfilled their end of the bargain by buying a lot of stock back. It’s really hard to say they haven’t tried. I haven’t done the math but they must have offset a considerable portion of the performance fees on an intrinsic value basis. If the IDBI bank deal is structured like a sidecar, maybe the fees generated could offset a lot of the fees paid by FIH to FFH and that will be the narrative change needed to close the discount somewhat. I’m not counting on it but it’s a free option as it stands.

I think they could create a sidecar structure. Other asset managers use it when a particular idea or opportunity is too big for the main fund. In FIH’s case, they could contribute the CSB stake and $300m in cash or abour ~$700m in value depending on the CSB mark. The rest of the funds could be contributed by FFH and other large investors like OMERS etc… With this structure, FIH, could earn a management fee on the outside investors share of the sidecar. It makes no sense to dilute FIH equity to fund this deal or to sell a crown jewel like BIAL so I don’t think they will do that. The sidecar is a sensible solution and FIH would still have ~$5/share of exposure to banking but they might have better ideas.

I think FFH would be pretty likely to go in mostly because it’s so big versus the next option by size. The committee might lean on the weightings to avoid putting it in now but it’s just going to be a bigger weight going forward so it increases the risk of XIU underperforming XIC.

I think they were trying to be good partners and from a long term perspective it would likely hurt FIH from a fund raising perspective in the future if FFH is seen as punishing FIH for the discount. Forever is a long time. They had to take the first two performance fees in stock and have discretion going forward. I still hope they will use the cash to tender for FIH shares so we can get some price discovery.

How does Fairfax India do this without partners and raising additional capital? Besides OMERS, I wonder where it comes from. I wonder how levered can this be at the FIH level. I assume they are looking to avoid dilution at FIH so I can’t see how they can issue equity directly.