Fairfax India new issue

[Viking]

https://www.thehindubusinessline.com/economy/logistics/fairfaxs-prem-watsa-cast-eyes-wider-on-india-infrastructure/article33893957.ece

 

Nice to see Anchorage progressing... As Fairfax India sells off chunks they will get much needed cash and this will also validate the BV of airport which Mr Market is currently discounting heavily (in the share price of Fairfax India). It would be nice to the OMERS transaction close. And if they are able to bring in a couple more partners like OMERS over time the growth could be meaningful.

 

-----------------Scanning railway station re-development and port opportunities

Fairfax Financial Holdings Ltd, Toronto, Ontario-based financial holding company owned by Indian-born businessman Prem Watsa, is prepping up for a bigger play in Indian infrastructure sector beyond airports such as railway station re-development and port development and operation.

 

Multiple people familiar with the plan said that Fairfax through its newly created wholly-owned Indian unit, Anchorage Infrastructure Investments Holdings Limited (Anchorage), has applied on nine railway station re-development tenders for New Delhi, Chhatrapati Shivaji Maharaj Terminus, Gwalior, Nagpur, Tirupathi, among others.

 

“Anchorage will be the flagship company and platform for investing in companies and businesses and for bidding on all infrastructure tenders including the next round of airports to be auctioned,” one of the persons, a banker with the knowledge of the matter, said.

Fairfax has also started consolidating all its India infrastructure investments under Anchorage. As the first step in this direction, it is in the process of transferring the entire stake in Bangalore International Airport Ltd to Anchorage. The stake transfer has received approval from regulators and existing shareholders of BIAL, an official with the Airports Authority of India said.

[ICUMD]

Thanks for posting this.  As a shareholder of Fairfax. India, does anyone know the relationship to Anchorage holdings?  Why is Prem forming yet another holding company and does this negativity affect Fairfax India shareholders?

[petec]

It’s a platform for investing in infrastructure that allows them to attract third party capital. I don’t know whether FIH will just own a stake or take a fee for managing it. I don’t see a negative other than complexity.

 

As a FFH shareholder I’d rather see FIH trade at fair value and issue equity to fund Anchorage internally, because more fees to FFH!

[Xerxes]

ICUMD

 

My view has been that both FIH and ex-FAH were more investment firm with permanent capital that could really make additional investment either by (1) selling another holding (2) issuing equity. The latter was out of option given the huge discount and if you are riding a macro wave, it doesn't makes sense also to sell a holding that has long term potential. Flipping asset makes more sense in a more developed economies.

 

The missing key has been third-party fee, which now they are getting through their revamped African business re-named Helios, and hopefully through something similar with Anchorage. Major difference between the two but ultimate aim is to get that fee machine going.

[Viking]

Thanks for posting this.  As a shareholder of Fairfax. India, does anyone know the relationship to Anchorage holdings?  Why is Prem forming yet another holding company and does this negativity affect Fairfax India shareholders?

 

Fairfax has a successful long term track record when it comes to investing in India. And i think they view Fairfax India as their growth vehicle of the future in India (for non-insurance companies). It appears Fairfax/Fairfax India likes what they have learned with BIAL and want to expand in ‘infrastructure’ type assets in India. The problem is these types of assets will likely be very expensive to buy. And Fairfax India simply does not have the $ today. And currently, neither does Fairfax (a spare $500 million or more kicking around). Anchorage should be a good way to monetize BIAL at a premium valuation and sign on the right like-minded partners with deep pockets and a long term view (like OMERS). If they are successful obtaining more infrastructure assets they should be able to find more partners and fund their contributions from further sales of Anchorage. So they use BIAL as a way to flip into a growing collection of infrastructure assets; and collect some nice recurring management fees along the way. But this will likely be a slow process as approvals can take longer than expected.

[rohitc99]

Thanks for posting this.  As a shareholder of Fairfax. India, does anyone know the relationship to Anchorage holdings?  Why is Prem forming yet another holding company and does this negativity affect Fairfax India shareholders?

 

Fairfax has a successful long term track record when it comes to investing in India. And i think they view Fairfax India as their growth vehicle of the future in India (for non-insurance companies). It appears Fairfax/Fairfax India likes what they have learned with BIAL and want to expand in ‘infrastructure’ type assets in India. The problem is these types of assets will likely be very expensive to buy. And Fairfax India simply does not have the $ today. And currently, neither does Fairfax (a spare $500 million or more kicking around). Anchorage should be a good way to monetize BIAL at a premium valuation and sign on the right like-minded partners with deep pockets and a long term view (like OMERS). If they are successful obtaining more infrastructure assets they should be able to find more partners and fund their contributions from further sales of Anchorage. So they use BIAL as a way to flip into a growing collection of infrastructure assets; and collect some nice recurring management fees along the way. But this will likely be a slow process as approvals can take longer than expected.

 

The recent budget has also increased the spending on infrastructure by the government by 25%+. There are plans to monetize existing assets to fund the increased spend. A lot of norms are also being liberalized. Also the number of contracts being awarded to domestic construction companies is rising rapidly. so the plans around anchorage make sense to take advantage of this change and plans around infra

[Viking]

One of the challenges with investing is getting anchored with past prices. Especially the current environment where prices for lots of stocks have been on fire for months. It is easy to get paralyzed and 'thumb suck' in this environment (do nothing).

 

Fairfax India closed today at US$12.25/share. November 6th the stock was trading at $7.39/share. So shares have increased 65% in 3.5 months. It is natural to think "well I missed that one".

 

The interesting thing is Fairfax India shares still look cheap and they might even be crazy cheap. Book value Dec 31, 2020 was $16.37. Since Jan 1 (the last 7 weeks) their publicly traded equity holdings are up about $200 million (22% in agggegate) = $1.35/share. We also know one of their private holdings, Seven Islands Shipping, has filed an IPO. Seven Island has a fair value of $92 million which will increase, and perhaps materially, upon completion of the IPO. Bottom line, I think we can safely estimate BV today is north of $17.50.

 

So with share trading at $12.25 and BV currently around $17.50 what gives? BIAL. 

 

Investors must not believe the valuation given to the airport (BIAL) = $1,383 million.

 

This is what makes the Anchorage transaction so important for Fairfax India's stock price. If Fairfax is able to sell a chunk of BIAL that confirms the $1,383 mark investors might start to believe the valuation is real. And if Fairfax India is able to add other infrastructure assets to Anchorage in 2021 then that will help validate the Anchorage structure (and it sounds like they are trying hard).

 

The cool things for investors is with Fairfax India shares trading at $12.25 you are getting BIAL for half price (of its fair value). There is only upside with Anchorage. And there are a lot of tailwinds for investing in India right now and I would expect this will benefit many of Fairfax India's other holdings during 2021. So despite a 65% increase in Fairfax India the past 7 weeks I was happy to add a chunk today at $12.35.

 

PS: attached is an excel file with Fairfax India's holdings (go to FFI tab)... let me know if you see any mistakes :-)   

 

Fairfax_Equity_Holdings_Feb_22_2021.xlsx

[ICUMD]

Thanks for the replies. 

 

If I understand correctly, with Anchorage, they are attempting to set up a structure similar to Brookfield Asset Management with its various subsidiaries.  I also see how they may be able to 'mark to market' some of their assets like the airport by selling stakes to equity firms like Omers. In others they will remain a shareholder.

 

I think BIAL has experienced a transient impairment in its value with ridership down to 30% of usual volumes.  I agree that book value is closer to $18 and could be as high as $20 - 22.   

 

Regardless, this is a 10 - 20 yr play.

[valueinvesting101]

Fairfax India book value growth since 1 Jan 2015 has been 8.7% in USD while Indian rupee depreciating by around 2.45% compared to USD.

 

I can see that stock is currently trading below book value so actual shareholders returns can be higher. Majority of the value of Fairfax India is derived from Bangalore Airport stake. Large percentage of the returns from the airport are capped at 16% in INR. What will be the capped return on this investment in USD? Will those return be enough to outperform indexes?

[valueinvesting101]

https://www.business-standard.com/article/economy-policy/aai-to-offload-residual-stake-in-bangalore-and-hyderabad-airports-121031500024_1.html

 

 

AAI to offload residual stake in Bangalore Airport. Fairfax is likely to be a buyer. It will interesting to see the valuation and if third party buyer. OMERS could buy it directly from AAI too.

[petec]

https://www.business-standard.com/article/economy-policy/aai-to-offload-residual-stake-in-bangalore-and-hyderabad-airports-121031500024_1.html

 

 

AAI to offload residual stake in Bangalore Airport. Fairfax is likely to be a buyer. It will interesting to see the valuation and if third party buyer. OMERS could buy it directly from AAI too.

 

Sounds like they might get a shot at the GHIAL stake too, and the Anchorage IPO is the ideal opportunity to raise the funds.

[Xerxes]

Thanks for the link,

 

Very much in line with what we have been hearing from Brookfield, that cash strapped government post-pandemic will be looking to offload assets.

Brookfield has third-party capital and dry powder to deploy while Fairfax India somewhat lacks in that area. i.e. FIH has permanent capital that was more or less fully deployed and equity issuance is out of options.

 

The solution is Anchorage. Interestingly, I think as a 'product', the equity of Anchorage is really geared toward institutional investors (i.e. pension), who want the India infrastructure as pure-play but do not want to own it through FIH, where (1) it pays fees to FFH (2) has financials in the portfolio.

 

When a pension fund buys into the equity of Anchorage, effectively, they own the best piece of FIH but without the fees that it pays to FFH.

Of course, that also means that Anchorage would have an overhead and management team that need to procured or outsourced back to FIH.

[ICUMD]

The more I think about this, the more I realize it's a complicated structure that's a bit difficult to understand.  Essentially through Anchorage, Fairfax is selling off the airport via public listing.  Presumably, they are monetizing parts of it at current Mark to market prices, but will necessarily need to keep some equity for future cash flows and growth.  (Otherwise what's the point of having bought it in the first place).  As the airport generates a regulated rates of return, those cash flows will likely go to Anchorage shareholders. Some management fees would go back to Fairfax India for their work on development/management.  Really, for this arrangement to make sense, Fairfax India needs to deploy the capital they raise via the Anchorage ipo in a way better than the airport investment is in and of itself. Maybe it's a way to diversify their investments? If the airport was fully valued this would make sense, but I'm not sure this is the case presently. I'm open to corrections in my interpretation. Thoughts?

[Lakesider]

Yeah to be honest im looking to clear out of this. I dont really get what fairfax are up to, not sure what they will do next. Doing deals for the sake of doing deals it seems.

[hobbit]

The more I think about this, the more I realize it's a complicated structure that's a bit difficult to understand.  Essentially through Anchorage, Fairfax is selling off the airport via public listing.  Presumably, they are monetizing parts of it at current Mark to market prices, but will necessarily need to keep some equity for future cash flows and growth.  (Otherwise what's the point of having bought it in the first place).  As the airport generates a regulated rates of return, those cash flows will likely go to Anchorage shareholders. Some management fees would go back to Fairfax India for their work on development/management.  Really, for this arrangement to make sense, Fairfax India needs to deploy the capital they raise via the Anchorage ipo in a way better than the airport investment is in and of itself. Maybe it's a way to diversify their investments? If the airport was fully valued this would make sense, but I'm not sure this is the case presently. I'm open to corrections in my interpretation. Thoughts?

 

Anchorage is more like a platform to do future infra investments and due to that might even trade at a premium to BIAL valuation. They might sell more equity in anchorage separately through OMERS etc to do more investments

[petec]

You guys are overthinking this.

 

FIH wants to invest in infrastructure in India. That's better done in a separate entity. This is a huge market so with any luck they will need to raise a lot of capital for this venture, and a dedicated infrastructure platform will almost certainly have a lower cost of capital than a general value-oriented closed-end fund like FIH.

 

The advantage for FIH shareholders is that they probably get to charge a fee stream on what could be a substantial amount of third party capital in 5 or 10 years. That's very valuable, and comes at a higher ROIC than it would if FIH supplied all the capital. In this sense they are replicating what Brookfield have done and what Fairfax have done with Helios and Fairfax Africa.

 

The disadvantage is that with their prime asset (and 90% of their NAV) trading publicly, there will be no reason for FIH to trade above book value because the portfolio will be easily replicable in the market.

 

This is not a deal for dealing's sake. And it doesn't mean FIH are selling BIAL, other than the portion they have already sold to OMERS - Anchorage will IPO for new capital that can be used to fund investments in new assets (or in accelerating BIAL's real estate rollout, which to my knowledge is not funded, unlike BIAL's investment in expanding airport capacity for which they have debt lined up).

 

 

 

 

[ICUMD]

Thanks Petec for the explanation.  This makes a lot of sense to me.  And is certainly much more reassuring to my concerns.  Even if this thing can trade at book value, I'll be happy.  I think the value of the airport has been short changed with the current setup. Hopefully Anchorage will help realize some of this value.

[Xerxes]

I agree with Pete's post except at this point the third-party capital is purely a guess. Based on what we know now it is not FairfaxAfrica/Brookfield-like asset manager model.

 

Which brings me to my earlier point that OMERS-like entity do not want to own FIH directly because (1) of the fees it pays FFH and (2) non-infrastructure asset exposure that it has like financials services companies and banks. Anchorage gives that freedom. It is no different than when Brookfield allows an institutional investor to invest alongside it, as oppose to that entity being part of a fund (which extract management fees)

 

Anchorage is defined as a "holding company" with permanent capital in the annual letter. So at this point it is no different than FIH as a close-end fund.

OMERS (and others in the future) are coming in as equity shareholder with permanent capital. OMERS will own 11% of Anchorage, which currently has only the airport, but will be a 11% owner of everything else Anchorage might invests in the future. Then FIH can either sell more of its 89% stake to other OMERS like entity or (unlikely) issue equity at Anchorage-level.

 

I do recall Prem Watsa accidently blurting out the word "Brookfield" in Q3 or Q4 2019 conference call when discussing India. Transforming his business into an asset manager with third-party capital would bring much needed dry powder. Specially now that Government in India is unloading assets. Saw an article on WSJ just now saying Shipping Corp of India is on the block. Of course us being here in the West, probably do not see the whole scale.

 

[petec]

I don’t really understand the distinction you’re trying to make.

 

BAM absolutely charges fees when investors invest alongside them.

 

My guess - and it is only a guess at this point - is that Anchorage will pay fees to FIH in the same way that FIH pays fees to FFH (and BIP pays fees to BAM).

 

If so, OMERS (and any other shareholder in Anchorage) will effectively pay a fee to FIH in the same way that any of us, owning shares in FIH, effectively pays a fee to FFH.

 

I could obviously be wrong about this, but only if Anchorage pays its own investment team. If FIH makes the investment decisions for Anchorage, I’d be amazed if it doesn’t get a fee.

 

I also disagree that it is unlikely that Anchorage will issue equity. It is highly likely. In fact I think it is the whole point. That (plus issuing debt) is how Anchorage will get the capital to grow. If FIH sells Anchorage shares the money goes to FIH, not Anchorage.

[ICUMD]

Picking up on Petecs last line is key. 

 

If FIH sells Anchorage shares, money goes to FIH and is a disposition of the airport (and other assets Anchorage holds). OTOH, if Anchorage sells Anchorage shares, it's a dilutive equity raise which allows Anchorage to purchase additional assets.

 

The flow of fees and OMERS not wanting to hold the other FIH assets is purely speculative at this point.  However, following a tried and proven model like BAM certainly makes sense.

 

Interested to see if FIH purchases the 13% BIAL stake for sale by AAI and National Shipping.

[Xerxes]

ok maybe i am confused.

 

My understanding was that entities like Blackstone, Brookfield, Onex etc, when they invest in assets, there could be several different layers/ways of doing it.

 

(1) investing their fund (which has their client money + some of their own many); this is exposed to management fee and carry. Some of them like Onex have a much larger portion of their own equity into the fund, some which are more asset-light like managers have less.

 

(2) investing directly from their balance sheet alongside their own fund. Additionally, (as we have seen with Softbank), they could have their fund invested (in which they are also investor), but can also use their own balance sheet to bring in additional firepower. Effectively this allows the asset manager to get more of an upside for its own balance sheet at the expense of the management fee it charges the client.

 

(3) getting a co-investor to share the risk. So this would be completely outside the fund and the co-investor brings something that the asset manager doesn't have. In this case, I do not believe that the co-investor is paying the management fee/carry. They are implicitly "paying" because they are sharing the risk and maybe without them a Brookfield wouldn't want to go at it on his own. Call these cornerstone institutional investors.

 

So, in my head, i was kind of placing OMERS in the bucket #3 and not #1

[ICUMD]

My understanding is that Anchorage is an entity that will be listed on the Indian stock exchange.  It will essentially be a route to indirectly list private holdings like BIAL.  OMERS I believe has simply become a pre IPO investor in the entity.  As there seems to be an appetite for good infrastructure assets, Fairfax is hoping to unlock value in BIAL through a public listing.  Funds raised through a share sale if Anchorage will allow purchase if additional infra assets.  Now that I understand the motives, I believe it's a very smart move.  Management fees will likely become part of the equation at some point. 

[petec]

ok maybe i am confused.

 

My understanding was that entities like Blackstone, Brookfield, Onex etc, when they invest in assets, there could be several different layers/ways of doing it.

 

(1) investing their fund (which has their client money + some of their own many); this is exposed to management fee and carry. Some of them like Onex have a much larger portion of their own equity into the fund, some which are more asset-light like managers have less.

 

(2) investing directly from their balance sheet alongside their own fund. Additionally, (as we have seen with Softbank), they could have their fund invested (in which they are also investor), but can also use their own balance sheet to bring in additional firepower. Effectively this allows the asset manager to get more of an upside for its own balance sheet at the expense of the management fee it charges the client.

 

(3) getting a co-investor to share the risk. So this would be completely outside the fund and the co-investor brings something that the asset manager doesn't have. In this case, I do not believe that the co-investor is paying the management fee/carry. They are implicitly "paying" because they are sharing the risk and maybe without them a Brookfield wouldn't want to go at it on his own. Call these cornerstone institutional investors.

 

So, in my head, i was kind of placing OMERS in the bucket #3 and not #1

 

This might be better for the BAM thread, but can you give an example of no3?

 

I do not think investors get a free ride simply because they are sharing the risk. They share the risk in a fund also, but pay a fee to have BAM manage the asset. I think that would be the same with co-investments. The only way I would imagine investors don't pay a fee is if they bring something to the table in terms of managing/improving the asset. But if it is BAM doing that, my guess is they always charge a fee.

 

I assume the same goes for Anchorage. Either it will have its own management/investment team, or it will outsource that function to FIH for a fee.

[Xerxes]

Sorry for late reply.

Was out of town.

 

When Blackstone carved out the quant division out of Reuters to merge it with London Stock Exchange, I saw the latter as a strategic co-investor.

Without it no deal was possible.

 

When ONEX bought WestJet that was entirely out of its funds (so Onex itself + its client), but 15 years before when they bought Beechcraft from the old Raytheon, they did it with Goldman Sachs with the latter as a co-investor.

 

Whenever you see Brookfield bought XXXX, i assume it to be through its funds (so its client + its own equity). But sometimes i believe when they have a strategic partner they mention them in the press release. For instance, believe Caisse was the co-investor in this case. I realize that the press release is (obviously) not saying anything who pays whom management fee.

 

https://www.bnnbloomberg.ca/brookfield-to-buy-johnson-controls-unit-for-us-13-2b-1.1167280 

 

this is obviously speculation and how i kind placed these in my head

[valueinvesting101]

Looks like Sanmar Chemical is also planning IPO.

https://www.livemint.com/market/ipo/chemplast-sanmar-gets-ready-for-ipo-launch-11617644343783.html

https://www.business-standard.com/article/companies/chemicals-major-sanmar-plans-to-raise-equity-to-repay-restructure-debt-121030800307_1.html

Not clear about valuation but with Sanmar and BIAL IPO, Fairfax India's largest private holding should get public valuation and hence added transparency for Fairfax India valuation.