Fairfax India new issue

[dartmonkey]

The fee structure is exorbitant (2/20 structure like a PE fund)

 

It's not actually quite that bad. It's 1.5% (the administrative fee part), not 2%. The performance is indeed 20%, but only 20% in excess of a 5% annual return. In the almost 9 years from inception in November 2014 to Sept 30, 2023, book value per share was up from $10/share to $20.89/share, i.e. up 109%, but since 1.05^9= 1.55, the fee only applies to the excess over 55%, so it would be approximately* 20% of 44% (8.8%) for the 9 year period, or a little less than 1% every year, not 2%. 

 

*I say approximately because the calculation is a little more complicated than this, and involves issues of the timing of the fee, whether it is paid in cash or in shares, and details I don't know about like how it is applied to the first period which did not begin on Dec 31st, 2014 but rather, I think, on the Closing Date (Jan 30, 2015) , so I don't know how the fee was calculated for the first 3-year period ending Dec 31, 2017. But you get the idea.

[gfp]

Yeah I thought the 2 & 20 line was lazy analysis as well.  I am aware of the 1.5% on invested capital and .5% on uninvested capital plus 20% over a 5% hurdle language, but do we know if the 5% hurdle is annually compounding or just 5% over the last high water mark?

 

At a lot of funds, when they have a hurdle rate and a high water mark - the hurdle doesn't compound annually if they don't exceed it.  So the 5% annually you think you are getting "for free" turns out to be 5% over a multi-year period after a drawdown and isn't nearly what it sounded like.  Does that make sense?  An annually compounding 5% hurdle vs a simple 5% hurdle over the last high water mark.

Edited January 29 by gfp

[giulio]

2022 AR

Fairfax Financial is entitled to a performance fee calculated at the end of each three-year period, of 20% of any increase in Fairfax India’s BVPS (including distributions) above a non-compounded 5% increase each year from the BVPS at inception in 2015

 

2021 AR

The performance fee is calculated at the end of each three-year period since inception, and the amount payable as at the end of any three-year period is the total amount calculated minus the aggregate of the performance fees paid in respect of all prior three-year periods. The performance fee has been calculated on this basis for the first two three-year periods 

[villainx]

@gfp  Thanks for sharing!

[dartmonkey]

19 hours ago, gfp said:

At a lot of funds, when they have a hurdle rate and a high water mark - the hurdle doesn't compound annually if they don't exceed it.  So the 5% annually you think you are getting "for free" turns out to be 5% over a multi-year period after a drawdown and isn't nearly what it sounded like.  Does that make sense?  An annually compounding 5% hurdle vs a simple 5% hurdle over the last high water mark.

 Giulio quoted the relevant blurb in the 2022 AR: Fairfax Financial is entitled to a performance fee calculated at the end of each three-year period, of 20% of any increase in Fairfax India’s BVPS (including distributions) above a non-compounded 5% increase each year from the BVPS at inception in 2015.

 

So I think the fee is not as high as you are suggesting. It is not 20% of the excess over 5% from the high water mark, it is 20% of the excess over 15% of the high water mark, ever 3 years.

 

See if you agree with my example:  If the book value per share (BPVS) goes from $10 to $12.50 in the first 3 year period, then we've had a 25% gain, which is 10% over the 15% hurdle (5% annual hurdle, times 3 years, equals 15%.) A 'compounded" 5% hurdle would just mean that it applies above 1.05^3-1= 15.8%, instead of applying above 15%. Not really much of a difference, but it's always better for it to be clear! So in my example, the 20% performance fee is applied to that excess 10%, meaning that the fee is 2% over those 3 years, or a little less than 1%/year. If in the second 3-year period the book value goes sideways, say down to $12, then there is no fee; the fee only kicks in again above the high water mark ($12.50 + 15%*12.50 = $14.375.

 

To take a real example, the 1st period (2015-2018) highwater mark, i.e. the BVPS on Dec 31st, 2017, was $15.24 (before the fee, which would end up reducing book value a bit.)  A 5% non-annualized hurdle would have been 15%, so a book value going from $9.62 (the actual book value after commissions were deducted from the $10 IPO price), to $11.06, so the 20% performance fee should be calculated based on 20% of $15.24-$11.06=$4.18. Book value AFTER the fee was $14.46, meaning they took $0.78 per share, which represents 18.7% of the excess $4.18 amount above the hurdle. (There may be some technicalities of whether they make any adjustment for buybacks below book value which would tend to increase BV...)

 

From 2018 to 2021, BVPS went from $14.46 (adjusted for the 2017 performance fee!) to $16.37, a much more modest increase, or 13.2%. That is under 15%, but the relevant comparison is not Dec 31st, 2017, it is back to the $9.64 opening BV again, but subtracting performance fees alread paid. So $9.62 plus 6 years of non-compounded 5% would bring us to $12.51, and so the performance fee should be 20% of the excess of $3.86, or 0.77/share. But since $0.78 in performance fees have alread been paid, there should have been no performance fee at the end of 2020. In actual fact, they paid $0.03 per share ($5.2m), so there is something wrong with my calculation, but it is close.

 

Now we have finished the 3rd period, but we don't yet have the BV for the end of 2023. We know it was up to $20.89 at Q3 end, so the fee will be much more substantial, and in the Q3 FIH report, they noted that a performance fee of $82.6m had been accrued (amounting to about $0.61 per share.) Because there had been 8.75 years since the IPO, the calculation of the performance fee, if it had applied as of Sept 30, would have been that day's book value, $20.89, minus the 8.75 5% hurdles, or $9.64*(1+8.75*0.05) = $13.86, so the fee would apply to the difference, $20.89-$13.86=$7.03, times 20%, or $1.41, less the performance fees already applied, i.e. 0.78 and 0.03, leaving a new performance fee of $0.60. Given the BV gains in Q4, it is going to be a bit higher than this, maybe around $0.70.

 

Please feel free to pick apart my logic! 

[ICUMD]

@dartmonkey

Thanks for writing this detailed explanation.

Your rationale and explanation make sense.

 

However, we can't be certain that is how they are actually calculating the fee, as there are slight discrepancies.

 

I wonder if it would be reasonable to submit your assumption to Fairfax India investor relations for confirmation or clarification.  Really, they should offer an appendix showing their calculation to the annual report, at the end of each 3 yr period.

[Crip1]

1 hour ago, ICUMD said:

@dartmonkey

Thanks for writing this detailed explanation.

Your rationale and explanation make sense.

 

However, we can't be certain that is how they are actually calculating the fee, as there are slight discrepancies.

 

I wonder if it would be reasonable to submit your assumption to Fairfax India investor relations for confirmation or clarification.  Really, they should offer an appendix showing their calculation to the annual report, at the end of each 3 yr period.

 

Concur in full that showing actual calculation would be the right thing to do.

 

Reminds me of when I took on a supplier management position at my former employer. One of the contracts with a supplier called for a bonus if volume exceeded a certain threshold. The problem was that the way it was written, it could have been interpreted 3 different ways, each of which resulted in vastly different dollar amounts. Fortunately my predecessor who negotiated the contract was still with our company, and the supplier contact who negotiated on their behalf was also still with his company. The kicker...neither one remembered the intent of the bonus language. This is where I learned that whenever there is a mathematical reference in a contract, to ALWAYS give examples to illustrate the verbiage. 

 

I never saw that in any report of FFH or FFHI...

 

-Crip

[dartmonkey]

13 hours ago, ICUMD said:

@dartmonkey

Thanks for writing this detailed explanation.

Your rationale and explanation make sense.

 

However, we can't be certain that is how they are actually calculating the fee, as there are slight discrepancies.

 

I wonder if it would be reasonable to submit your assumption to Fairfax India investor relations for confirmation or clarification.  Really, they should offer an appendix showing their calculation to the annual report, at the end of each 3 yr period.

That would be ideal, mabe I will send investor relations a note.

 

Thinking about this further, they note that the 5% annual hurdle, under which no performance fee applies, is not compounded. For a 3 year period, this makes very little difference: uncompounded 3*5%=15%, compounded 1.05^3-1=15.8%. But obviously, compounding over a longer period would make a difference. So when they look at the hurdle over 9 years, are they taking a 45% return from $9.62 (or from $10, maybe) as the hurdle? Over 9 years, 9*5%=45% but 1.05^9-1=55%, so it is starting to be important to know whether the hurdle is $14.50 or $15.50 - an extra 20c/share. And the difference will keep increasing, obviously, from one period to the next. In the very long term, it might mean that that 5% hurdle ends up being a lot less than 5%. For instance, for 2024 (year 10 of the plan), a 5% compounded hurdle would mean that they only take the fee on BV gains beyond $0.775/share (5% of $1.55), whereas an uncompounded 5% of $10 means they only take their fee above a 50c/share gain in BV  . And in 10 more years, a 5% gain on the original $10/share would end up being like a 1.5% hurdle...

 

[wondering]

I went to Bangalore for two weeks for work.  I was there 10 years ago.

• Terminal 2 is absolutely spectacular.  Not good, not good for by Indian standards. Burt good by world class standards!!!  A tourist destination in of itself.
• Also used Terminal 1.  They have streamlined the enter process since when I was visited 10 years ago.  Not perfect, but certainly better than it was before.
• My Indian colleagues said the Modi "rigged" the system ensuring that the BJP party will rule for the next +20 years.  
• Previous Indian political parties were not really align in the typical left/right model.  My Indian colleagues said now that has changed and BJP is the party of the right
• Please if anyone disagrees, please speak up.  I just reporting what my Indian friends told me.
• Nothing really more insightful to add - Bangalore is growing by leaps and bounds, traffic is worse, and it crazy that FIH is selling at 60% of book when there is such growth and growth potential.  The Airport will continue grow nicely.

[gfp]

8 hours ago, wondering said:

I went to Bangalore for two weeks for work.  I was there 10 years ago.

• Terminal 2 is absolutely spectacular.  Not good, not good for by Indian standards. Burt good by world class standards!!!  A tourist destination in of itself.
• Also used Terminal 1.  They have streamlined the enter process since when I was visited 10 years ago.  Not perfect, but certainly better than it was before.
• My Indian colleagues said the Modi "rigged" the system ensuring that the BJP party will rule for the next +20 years.  
• Previous Indian political parties were not really align in the typical left/right model.  My Indian colleagues said now that has changed and BJP is the party of the right
• Please if anyone disagrees, please speak up.  I just reporting what my Indian friends told me.
• Nothing really more insightful to add - Bangalore is growing by leaps and bounds, traffic is worse, and it crazy that FIH is selling at 60% of book when there is such growth and growth potential.  The Airport will continue grow nicely.

 

Thanks for the post wondering.  I am just a basic American know-nothing but I shared your post with my much smarter friend from Kerala and this was his reply:

------------------

I agree 100% about the standard of the airport. I had a chance to see it while I was there a year ago, and I was mindblown that this is an Indian airport. The new airports in Mumbai and Delhi are also apparently world-class, but I didn't see them, so i have to take the word of a 100mn people for it

BJP will rule for the next +20 years for sure. They have a lot going for them. They are nowhere as corrupt, they have an understanding of the majority of the population, especially the Hindi-speaking, north Indian belt. They have a cadre system tied to the Hindu society that trains them young, and they are very active in rural India, college unions, temples, etc. The only other party that has anything similar is the Communist Party which is only relevant in 2 states. They have proper organization and structure for absorbing anyone, including from your opponents, with clarity about their future, and a way up. They are very intentional about avoiding bureaucracy and nepotism, which is hard to avoid in a developing country like India. 
Indian political system has always been rigged, but that does not mean the elections. For the first 60 years after Independence, it was rigged in the favour of the Indian National Congress, and now BJP has "unrigged" the system through several acts like demonetization - which hampered the black money funding that INC used to benefit from. In the absence of an official lobbying system like in the US, all funding is under the table. In addition, political power used to be exerted by goondas or criminals. Even religious minority groups used to be funded in the name of secularism but were criminal organizations for INC's benefit. Those groups have been dismantled by several goonda acts. The Kashmir/ Pakistan border was a contentious issue with such groups standing in the way of any development/ changes. BJP enabled the police/ army to dismantle such groups, flirting with human rights issues. 
Previous Indian political parties used to play politics with religion, favoring one over another to create divisions and also use them for votes. BJP is the party of the right, and transparent about what they are. They maintain that India is a country of Hindus as the name suggests (Hindustan) and the others are welcome. Previously, we used to call the country secular, as in the constitution. But, I also think most of the population were never of this belief, nor will be. This was only an idea among socialist elites who ran the country till India opened up the economy in the 1990s. 
None of this is surprising including what his Indian colleagues said. BJP has a much smaller presence in South India where Bangalore is situated as well. We have 6 different states speaking 6 different languages, who think their cultures are way different than northern Indians'. As I said very different from the Hindi-speaking belt. But they don't form a majority. All these states have different parties ruling them, who can't get along with each other, and hence a fractured opposition. 
The main reason why the BJP will rule for another 20 years is the absence of leadership, strong opposition, or a semblance of a nationwide structure/ organization that can build something to beat them. Modi and the leadership of the BJP are quite selfless in prioritizing the party, Hinduism, and the country in that order. People respect that and the lack of corruption and nepotism which the INC was notorious for. INC leader - leader of the opposition is the grand grandson of the first Prime Minister. Every generation in that family has gone on to become the Prime Minister. Most people have had enough. 

-------------------

[ICUMD]

Modi commands a crowd today that no other leader can.  He's basically inspiring the country and millions of diaspora around the world to achieve what was previously impossible.  

 

Under his leadership, India is that economic snowball lifting people out of poverty and inspiring them on an individual level.

 

You don't have to understand what he says, you just have to listen and see the reaction of the crowds.

 

 

[hobbit]

terminal 2 NatGeo doc

 

 

[Xerxes]

Not exactly the same market, nor growth rate nor maturity. But there was a passage on The Economist few back years back about Gatwick airport as it changed hands between GIP and a French infrastructure investor. 

 

From 2018

 

2023:

 

“London Gatwick Airport has served 32.8 million passengers in the fiscal year ending 31 December 2022, achieving 70.4% of 2019 traffic. The passenger numbers increased by over 420%, from 6.3 million in 2021”

 

still at 70% of pre Covid traffic !

[hardcorevalue]

"Shares of Athens International Airport SA jumped 15% at the start of trading on the Athens Stock Exchange, in the country’s biggest initial public offering in more than two decades. 

 

The stock began trading at €9.40 a share, compared with the IPO price of €8.20, the high end of the initial range."

[jfan]

Perhaps this is already explained above in this thread. I was just trying to figure out the impact of the fees on their returns. Is my math off here?

 

 

If everything was market to market instead of market to private valuation, this should normally trade at a 23% discount + hold co discount (?20%) or 57% of NAV normally given the high fees.

 

So this implies that their true NAV needs to be at a minimum > $26/share to get a 10% return at a current market price of $15/share. 

 

To get a 15% return over 10 years, the market price needs to be at 30% of true NAV, or an intrinsic value of $50/share at current market prices.

[gfp]

Year end results press release:

https://www.fairfaxindia.ca/wp-content/uploads/02_February_15_2024-PRFIH-2023_Q4_Press_Release_Final.pdf

 

surprising:

"

• During the fourth quarter of 2023 and the first quarter of 2024 the company entered into agreements to sell its equity interest in NSE for gross proceeds of approximately $189 million (15.7 billion Indian rupees). The original cost of the company's investment in NSE was $26.8 million. On January 29, 2024 the company completed one of the sales and received gross proceeds of $132.3 million (11.0 billion Indian rupees). The remaining sales are subject to customary closing conditions and are expected to be completed in the first quarter of 2024."

Edited February 16 by gfp

[ICUMD]

Great results overall I think. 

 

They will have about 400M after the NSE sale, and about $288M after paying the performance fee in cash.  Should allow some interesting acquisitions.

 

Trading at about 0.65 BV.

 

Hopefully they do more buybacks or announce the Anchorage listing.  Bial is developing nicely, and is conservatively valued.

 

 

[giulio]

3 hours ago, gfp said:

surprising

I was a bit disappointed honestly. A part of me wished that they could hold on to it for a very long time. 

Anyone here share the sentiment?

Do you think they will treat the airport differently?

[longlake95]

2 minutes ago, giulio said:

I was a bit disappointed honestly. A part of me wished that they could hold on to it for a very long time. 

Anyone here share the sentiment?

Do you think they will treat the airport differently?

I'm in the same camp. Just OWN the hard-to-come-by assets, basically forever. Munger's "sit on your ass" philosophy. But, maybe there's more to the story....

 

Maybe a worthy question for Prem & Co at the FIH AGM...

[ICUMD]

NSE is a great asset no doubt.

 

OTOH, they need to be able to raise cash for acquisitions.  This can only happen through churning non core assets. Otherwise they have to use credit.

 

25M to 189M is a great capital gains.

 

Sell it and move on hopefully to something better!

[longlake95]

3 minutes ago, ICUMD said:

NSE is a great asset no doubt.

 

OTOH, they need to be able to raise cash for acquisitions.  This can only happen through churning non core assets. Otherwise they have to use credit.

 

25M to 189M is a great capital gains.

 

Sell it and move on hopefully to something better!

Prem has said publicly several times about deploying $5B in India in the next several years. With a notoriously bureaucratic government in India, maybe this sale is a "goodwill gesture" to show engagement. Allowing for bigger and better opportunities looking ahead. We'll see...

[ICUMD]

Great to see progress on this front.

BIAL becoming a southern hub for Air India should help ensure it's torrid growth in coming years.

[glider3834]

4 minutes ago, ICUMD said:

Great to see progress on this front.

BIAL becoming a southern hub for Air India should help ensure it's torrid growth in coming years.

reported last year, but Air India are ramping up their fleet too

https://www.reuters.com/business/aerospace-defense/air-india-firms-up-order-with-airbus-boeing-470-planes-2023-06-20/

[netcash1]

Zurich Insurance to buy 70% stake in Kotak arm upfront in amended deal

Reuters

February 23, 20249:38 AM PSTUpdated 4 days ago

 

 

[1/2]The logo of Zurich Insurance is seen at its headquarters in Zurich, Switzerland January 13, 2022. REUTERS/Arnd Wiegmann/File Photo Purchase Licensing Rights, opens new tab

BENGALURU, Feb 23 (Reuters) - Zurich Insurance Group (ZURN.S), opens new tab will buy a 70% stake in Kotak Mahindra Bank's (KTKM.NS), opens new tab general insurance arm by paying 55.60 billion rupees (nearly $671 million) upfront instead of staggering the purchase as planned last year, the Indian lender said on Friday.

Under the original deal, announced in November last year, Zurich was to buy a 51% stake in the Kotak unit for 40.51 billion rupees and an additional 19% holding within three years of the first purchase.

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The deal will be the largest investment by a global insurer in a non-life insurer in the Indian market.

The change in the deal's terms will not affect Kotak General's valuation, which was 79.43 billion rupees according to the filing from November 2023.

Kotak Mahindra Bank said the other terms of the transaction remain unchanged.

($1 = 82.8720 Indian rupees)

[gfp]

Thanks for posting @netcash1 - sounds like this deal would be more relevant to Fairfax Financial than to Fairfax India but an interesting data point nonetheless.   Seems like Fairfax should be allowed to take majority ownership of Digit.  I wonder what is holding it up behind the scenes.