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Fairfax India new issue


thrifty

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I have just put 8% of my firm’s stock market investments portfolio in FIH.

 

Maybe I have paid a bit more than many people on this board are used to and like…

 

But we all know the kind of growth Watsa & Company are purchasing in India and at which prices. Not to act on such an opportunity imo would have been a serious mistake of omission! ;)

 

Furthermore, I have left plenty of room to average down: at the right price I would gladly double the percentage of my firm’s portfolio invested in FIH.

 

Cheers,

 

Gio

 

I wondered who'd been pushing it up ;)

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I wondered who'd been pushing it up ;)

 

What I like most about FIH is its great optionality, because I guess a very large percentage of its capital is still parked in cash (USD). And also the fact India is a place quite insulated from what’s happening to the rest of the world: they have a low level of overall indebtedness, and are experiencing inflation… The exact opposite to what we are seeing in practically all developed economies!

 

This facts, and of course the ability of Watsa & Company to buy great growth at reasonable prices, are the reasons I am quite interested to see what FIH could achieve in the medium and long term. ;)

 

Gio

 

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I like it too.  I am just being cheap about paying a 15% premium to cash.  No doubt I will regret this.

 

Well, you surely will get the chance to buy it later closer to NAV, or even below NAV… of course, what nobody can be sure about is how much that NAV would be by then… ;)

 

Cheers,

 

Gio

 

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I like it too.  I am just being cheap about paying a 15% premium to cash.  No doubt I will regret this.

 

Well, you surely will get the chance to buy it later closer to NAV, or even below NAV… of course, what nobody can be sure about is how much that NAV would be by then… ;)

 

Cheers,

 

Gio

 

Exactly.  So I just bought a starter position ;)

 

No discipline, that's my problem!

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Guest notorious546

No discipline, that's my problem!

 

Discipline is not buying above IV... What does that have to do with not buying above NAV?! ;)

 

Cheers,

 

Gio

 

well right now you're giving them credit for things the haven't done.

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Guest notorious546

well right now you're giving them credit for things the haven't done.

 

Not exactly… What about Thomas Cook? What about IKYA? What about ICICI? Etc.? ;)

 

Cheers,

 

Gio

 

doesn't a premium to a NAV (which is composed of only cash/cash equivalents) exclude the above mentioned things?

 

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Gio, how much of a premium to NAV would you pay for this?  ???

 

Well, that clearly depends on the rate of growth we are expecting for the next several years.

 

Take a look at IKYA’s rate of growth in attachment.

 

Do you think FIH could be able to find just one business per year for the next 5 years, which could grow like IKYA? (or almost?)

 

If the answer is yes, I think 2 x NAV could still turn out to be a worthwhile investment! ;)

 

Cheers,

 

Gio

IKYA-Growth-and-Profitability.png.40dd07d4c1fe6700d323a188986f0129.png

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I can understand that there is some premium (3-5%) because its hard to invest yourself in india without being an indian person yourself, but a premium for public stock holdings?

For me this sounds like wishful thinking and FFI looks at the moment like a hyped investment that comes down to NAV when the first official report is public.

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I can understand that there is some premium (3-5%) because its hard to invest yourself in india without being an indian person yourself, but a premium for public stock holdings?

For me this sounds like wishful thinking and FFI looks at the moment like a hyped investment that comes down to NAV when the first official report is public.

 

Can FFI only invest in public stock holdings in India?... or does their prospectus say they can also buy private businesses and do joint-ventures, etc?

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I can understand that there is some premium (3-5%) because its hard to invest yourself in india without being an indian person yourself, but a premium for public stock holdings?

For me this sounds like wishful thinking and FFI looks at the moment like a hyped investment that comes down to NAV when the first official report is public.

 

Can FFI only invest in public stock holdings in India?... or does their prospectus say they can also buy private businesses and do joint-ventures, etc?

 

Does it matter? They will certainly pay a premium for growth and that is already reflected in the NAV. A premium on FFI is like a premium on a premium. (And you pay fees for that luxury, so in reality it should trade at a slight discount to NAV.). Otherwise FFH could just setup a hedgefund on a hedgefund on a hedgefund on a hedgefund and in the end you pay a 1000x premium on the original business. The stock market crash of 1929 came through this type of packaging.

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I can understand that there is some premium (3-5%) because its hard to invest yourself in india without being an indian person yourself, but a premium for public stock holdings?

For me this sounds like wishful thinking and FFI looks at the moment like a hyped investment that comes down to NAV when the first official report is public.

 

Can FFI only invest in public stock holdings in India?... or does their prospectus say they can also buy private businesses and do joint-ventures, etc?

 

Does it matter? They will certainly pay a premium for growth and that is already reflected in the NAV. A premium on FFI is like a premium on a premium. (And you pay fees for that luxury, so in reality it should trade at a slight discount to NAV.). Otherwise FFH could just setup a hedgefund on a hedgefund on a hedgefund on a hedgefund and in the end you pay a 1000x premium on the original business. The stock market crash of 1929 came through this type of packaging.

 

Ya it matters because private businesses might sell for 5x earnings whereas the stock indices aren't exactly that cheap in India. I wasn't trying to argue, I just was asking whether or not they could invest in private businesses or not. Do you know the answer to that off hand?

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I can understand that there is some premium (3-5%) because its hard to invest yourself in india without being an indian person yourself, but a premium for public stock holdings?

For me this sounds like wishful thinking and FFI looks at the moment like a hyped investment that comes down to NAV when the first official report is public.

 

Can FFI only invest in public stock holdings in India?... or does their prospectus say they can also buy private businesses and do joint-ventures, etc?

 

Does it matter? They will certainly pay a premium for growth and that is already reflected in the NAV. A premium on FFI is like a premium on a premium. (And you pay fees for that luxury, so in reality it should trade at a slight discount to NAV.). Otherwise FFH could just setup a hedgefund on a hedgefund on a hedgefund on a hedgefund and in the end you pay a 1000x premium on the original business. The stock market crash of 1929 came through this type of packaging.

 

I think you are making an assumption here. Look at thomas cook - fairfax was able to buy it at 10X cash flow. IKYA was around at sub 10 levels and a lot of other tuckin accquisitions in IKYA have happened at fair decent valuations. same for sterling holiday resorts

 

As an indian investor i can tell you that growth may be overvalued in a lot of cases, but not always. So fairfax india can always find attractive deals

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Ya it matters because private businesses might sell for 5x earnings whereas the stock indices aren't exactly that cheap in India. I wasn't trying to argue, I just was asking whether or not they could invest in private businesses or not. Do you know the answer to that off hand?

 

No, sorry. :)

 

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I think you are making an assumption here. Look at thomas cook - fairfax was able to buy it at 10X cash flow. IKYA was around at sub 10 levels and a lot of other tuckin accquisitions in IKYA have happened at fair decent valuations. same for sterling holiday resorts

 

As an indian investor i can tell you that growth may be overvalued in a lot of cases, but not always. So fairfax india can always find attractive deals

 

Yeah thats fine, after some years of operating and buying private businesses it might trade at a premium to NAV because NAV doesn`t reflect the reality anymore. But not in the first years of operating and surely not before they bought the first business.

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We do not know whether $10 USD (less underwriter's fees) is still reflective of the current NAV since we do not know for sure whether any investments have been made since the IPO on January 30th.

 

Also---the investment mandate is very wide---not limited to just public or private equities. Public and private debt as well as infrastructure investments are possible  investment choices. They can also utilize leverage.

 

They raised USD during the IPO which means that one also needs to  be mindful of the USD/India Rupee exchange rate fluctuations.

 

As for the management fees --- these were negotiated on behalf of all investors by Fidelity (one of the cornerstone investors) so they reflect hard bargained market rates for these services.

 

Full disclosure --- I acquired my shares in Fairfax India during the IPO and for my wife a few days after the IPO. I strongly believe buying at even the current market price offers an investor a rare opportunity for significant long-term growth however time will tell on this point.

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I can understand that there is some premium (3-5%) because its hard to invest yourself in india without being an indian person yourself, but a premium for public stock holdings?

For me this sounds like wishful thinking and FFI looks at the moment like a hyped investment that comes down to NAV when the first official report is public.

 

Not to worry, I bought a very modest amount today, therefore the price should drop by Monday at the latest.....your welcome

 

cheers

Zorro

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Gio, how much of a premium to NAV would you pay for this?  ???

 

Well, that clearly depends on the rate of growth we are expecting for the next several years.

 

Take a look at IKYA’s rate of growth in attachment.

 

Do you think FIH could be able to find just one business per year for the next 5 years, which could grow like IKYA? (or almost?)

 

If the answer is yes, I think 2 x NAV could still turn out to be a worthwhile investment! ;)

 

Cheers,

 

Gio

 

Gio, I realize you are just throwing numbers out there with a smiley but if one paid a 2X NAV multiple with an investment period of a full 20 yrs (assuming liquidation and or slowing down of compounding to be worth NAV at yr 20), FFH India would have to make a gross return of 20% in order for the guy who paid 2X NAV to generate a 12% return.

 

The math is a 20% gross return becomes an 18.5% after mgt fees becomes 15.8% after incentive fees (assuming the 5% is  hard hurdle after mgt fees, is it soft or hard?).

 

$1 of NAV becomes $18.8 of NAV for which you paid $2 multiplying your capital by 9.4X which comes out to 12% annualized.

 

Of course as your time period shortens from a lengthy 20 yrs to anything less, the math becomes even less favorable. 10 yrs of 15% gross returns before normalization/liquidation/rerating to NAV would come out to 11.8% returns on NAV after fees and a 4.3% return to investors who paid a 2X NAV multiple. 10 yrs of 15% returns is nothing to sneeze at.

 

At a 1.3X NAV multiple and 15% gross returns, the return to the investor is about 9% (using 10 yrs again, at 20 it's 10.3%, at infinity it is equal to the net return of 11.8% since you have no re-rating effect).

 

When you pay a premium for a NAV vehicle that charges decently high fees, you need very high gross return or multiple expansion to make a good return.  I know you expect Mr. Watsa and crew to do very well in India and I have no reason to think they won't, but I wouldn't count on NAV multiple expansion since the math really starts to work against you as the multiple moves up.

 

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We do not know whether $10 USD (less underwriter's fees) is still reflective of the current NAV since we do not know for sure whether any investments have been made since the IPO on January 30th.

 

Also---the investment mandate is very wide---not limited to just public or private equities. Public and private debt as well as infrastructure investments are possible  investment choices. They can also utilize leverage.

 

They raised USD during the IPO which means that one also needs to  be mindful of the USD/India Rupee exchange rate fluctuations.

 

As for the management fees --- these were negotiated on behalf of all investors by Fidelity (one of the cornerstone investors) so they reflect hard bargained market rates for these services.

 

Full disclosure --- I acquired my shares in Fairfax India during the IPO and for my wife a few days after the IPO. I strongly believe buying at even the current market price offers an investor a rare opportunity for significant long-term growth however time will tell on this point.

 

I agree, I am also a strong believer in India's future. The demographics are amazing relative to other economies.

 

About 12 years ago, I started a very small business there which was operated for a couple years after which we shut it down. My partner, however, went looking to buy commercial land on city borders thereafter and I invested with him. This land now, even with the prior government in place, is now worth multiples of what we paid and our plan is eventually to put a large multi-floor condo building on it - say 5 years down the road. We also bought other smallish plots of urban and rural/agricultural land that have done quite well. All that to say, it looks like I am already quite heavily invested in India relative to my net worth (assuming this land continues to appreciate). This is the main reason I am hesitating with this Fairfax fund because I agree that this seems like a special opportunity despite the management fees.

 

Importantly,

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