giofranchi Posted March 30, 2015 Posted March 30, 2015 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. By the way, I guess your numbers are backed by the assumption that 20 years from now FIH will be selling at NAV, right? Well… something that has grown NAV at 12% for 20 years?! Using a discount rate of 9%, it would be worth 1.72xNAV; using a discount rate of 10%, it would be worth 1.43xNAV. Gio
giofranchi Posted March 30, 2015 Posted March 30, 2015 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. The fact NAV reflects reality is a generalization… Instead, imo, it depends on how efficiently priced the growth FIH is going to buy in the near future might actually be. Of course, my best guess is it will be very inefficiently priced! (Like it has been for Thomas Cook and IKYA) Gio
giofranchi Posted March 30, 2015 Posted March 30, 2015 FFI looks at the moment like a hyped investment that comes down to NAV when the first official report is public. Of course it might come down to NAV, and it probably will (great opportunity to buy more!). But that doesn’t mean I agree FIH is a hyped investment right now. Gio
petec Posted March 30, 2015 Posted March 30, 2015 Seems perfectly reasonable to me to pay a small premium to NAV on the basis, quote simply, that cash in Prem's hands is worth more than cash in mine. The premium to NAV in the future will depend entirely on whether the businesses they buy are listed or private. If they're listed, then you can replicate the portfolio at 1x NAV without paying fees, so the fund should trade at around NAV (a bit less if you focus on the fact you pay fees, a bit more if you focus on the fact that you don't know what gloriously value-added deal they will do next). But if they're private businesses then there is no more reason for the fund to trade at 1x NAV than there is for any other business to trade at 1x BV.
giofranchi Posted March 30, 2015 Posted March 30, 2015 If they're listed, then you can replicate the portfolio at 1x NAV without paying fees, so the fund should trade at around NAV (a bit less if you focus on the fact you pay fees, a bit more if you focus on the fact that you don't know what gloriously value-added deal they will do next). In theory... But, when they bought into Thomas Cook, I didn’t follow… When they bought into IKYA, I didn’t follow either… Who was smart enough to do so? Recognizing how mispriced their prospects for growth were? Gio
petec Posted March 30, 2015 Posted March 30, 2015 If they're listed, then you can replicate the portfolio at 1x NAV without paying fees, so the fund should trade at around NAV (a bit less if you focus on the fact you pay fees, a bit more if you focus on the fact that you don't know what gloriously value-added deal they will do next). In theory... But, when they bought into Thomas Cook, I didn’t follow… When they bought into IKYA, I didn’t follow either… Who was smart enough to do so? Recognizing how mispriced their prospects for growth were? Gio If you're prepared to buy the fund at >1x NAV, then you clearly think the underlying assets are mispriced. Why would you pay more for them than you have to? To put it another way, if you are 'smart' enough to see the value in FIH at (say) 1.5x NAV, why would you not see the value in the underlying assets at 1x? Both ways round you get Prem's genius, but why would you choose the method that requires you to pay more for the same assets? Clearly this does not hold if for some reason you can't invest in the underlying. It's like looking at a company trading on 3x book. If I could buy the underlying factories at 1x book I clearly would, but since I can't I settle for buying the company. EDIT: I am talking about when the fund is invested.
giofranchi Posted March 30, 2015 Posted March 30, 2015 Pete, this is my idea of a fair price today: the value I will own 20 years from now discounted to the present with a sensible rate. If I am right about the business opportunities, NAV might grow at a CAGR higher than 12%, and a discount rate in between 9% and 10% seems sensible to me. Cheers, Gio
petec Posted March 30, 2015 Posted March 30, 2015 Pete, this is my idea of a fair price today: the value I will own 20 years from now discounted to the present with a sensible rate. If I am right about the business opportunities, NAV might grow at a CAGR higher than 12%, and a discount rate in between 9% and 10% seems sensible to me. Cheers, Gio I don't disagree with that. I'm just saying the market won't may 2x for a portfolio it can replicate at 1x. Because, clearly, the expected return is higher with the latter option.
giofranchi Posted March 30, 2015 Posted March 30, 2015 I'm just saying the market won't may 2x for a portfolio it can replicate at 1x. Because, clearly, the expected return is higher with the latter option. Of course, you are right! :) Gio
thepupil Posted March 30, 2015 Posted March 30, 2015 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. By the way, I guess your numbers are backed by the assumption that 20 years from now FIH will be selling at NAV, right? Well… something that has grown NAV at 12% for 20 years?! Using a discount rate of 9%, it would be worth 1.72xNAV; using a discount rate of 10%, it would be worth 1.43xNAV. Gio yep, in order to value something that is going to grow at a rate that is above your required return, you have to somehow deal with the fact that, in theory, if you assume something will grow forever at an above RoR rate you would pay an infinite price (like something with above market earnings growth). An imperfect way of dealing with this is to say "I will make above market returns for 5, 10, 20...etc. years and then this thing will make market returns or be liquidated and worth NAV. 20 yrs is a long time. Over the past 20 yrs we've seen plenty of capital allocator/guru stocks fall from grace to prices at or below NAV. I think to assume a permanent premium to NAV on a fee laden vehicle is pretty optimistic, but faith/optimism is your style so that's fine. I would just note that you probably could've made an argument for great returns and big premiums to book/NAV on any of these when they traded at big premiums 10 -20 yrs ago. Loews (founders died, a shadow of what it once was, 80% of NAV) Berkshire (has re-rated from as high as 3X book to more reasonable multiple as it has matured, if you marked wholly owned subs to market, it would probably be at about 1X NAV) Leucadia (2X book to 80% over past 10 or so yrs) I don't think you'll hurt yourself at today's modest premium to NAV, but if I saw a manager double AUM with one capital raise right after a year of Modi-induced euphoria (India Small Cap was up like 90% last year, right?), I'd be wary, rather than get excited and say that 2X NAV may be the right price. I'm skeptical of everyone out there that is monetizing their track record; there seem to be more public GP's/asset managers and permanent capital vehicles every week. As for IKYA, I don't really see how 1 company's spectacular growth in earnings justifies anything or makes an argument either way. High quality fast growing businesses in India trade for lofty multiples in my limited experience (check out the subs of multi-nationals like Unilever and Nestle or some smaller cap niche businesses); it's not like the sellers over there are idiots and are going to give away companies for free. Now lots of those same high multiple companies have historically made great returns despite their valuations because they've grown at very fast rates, but that doesn't mean you'd want to pay a large NAV premium on top of fees for them at a time when every institutional investor in the world and every Indian out there is super bulled up and excited about India. But it's tough to argue about an investment that is 100% cash because there aren't many thingss to analyze here (except for HWIC India excellent track record on much smaller $). I could probably use a little more of your faith and optimism, but I'll venture to say you could probably use a touch more skepticism http://in.reuters.com/article/2015/02/06/hedgefunds-india-performance-idINKBN0LA1UY20150206 http://www.wsj.com/articles/india-hedge-funds-best-global-performers-this-year-1415789542 http://www.cnbc.com/id/102220187
thepupil Posted March 30, 2015 Posted March 30, 2015 btw, is FIH's hurdle hard or soft? And is the 5% hurdle in growth of NAV in rupees or dollars?
giofranchi Posted March 30, 2015 Posted March 30, 2015 faith/optimism is your style so that's fine. Usually I like neither faith/optimism nor skepticism. If I am wrong about the business, I am ready to make no money or to lose some. But, if I am right, I think I deserve to make some. I don't think you'll hurt yourself at today's modest premium to NAV, but if I saw a manager double AUM with one capital raise right after a year of Modi-induced euphoria (India Small Cap was up like 90% last year, right?), I'd be wary, rather than get excited and say that 2X NAV may be the right price. I'm skeptical of everyone out there that is monetizing their track record; there seem to be more public GP's/asset managers and permanent capital vehicles every week. That, of course, is not the way I think about the business. As for IKYA, I don't really see how 1 company's spectacular growth in earnings justifies anything or makes an argument either way. Of course I don’t know either… But Thomas Cook and IKYA are two wonderful examples, and as I have said, you just need a few more choices like those two to build lots of value. The demographics are there, a new pro-business government is there, India’s overall debt level is quite low: those are three wonderful tailwinds for business! The stock market is ebullient right now? Well, we have lots of cash, don’t we? And will be ready to use it when opportunities come. Imo they will. Then, again, if I am wrong and great opportunities won’t come FIH’s way, I am ready to accept the consequences. Gio
frommi Posted March 30, 2015 Posted March 30, 2015 Of course I don’t know either… But Thomas Cook and IKYA are two wonderful examples, and as I have said, you just need a few more choices like those two to build lots of value. The demographics are there, a new pro-business government is there, India’s overall debt level is quite low: those are three wonderful tailwinds for business! The stock market is ebullient right now? Well, we have lots of cash, don’t we? And will be ready to use it when opportunities come. Imo they will. And who doesn`t know that? :) Anyway its irrelevant for the pricing of FFI relative to its NAV. What should matter is the fees, arbitrage and the possibility to sell it any day and based on that it deserves to trade a slight discount to NAV or at NAV. Its the same reason Ackman can talk all day long that PSH deserves a premium to NAV, but probably will never get it. (Except in times of exuberance)
netnet Posted March 30, 2015 Posted March 30, 2015 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?). I get a different number at 20% gross return, subtract out the hurdle 20 -5 = 15% take out the incentive fee 15% - (.2 * 15) = 12% take out the management fee -1.5 = 10.5% add back the 5% hurdle = 15.5 Also it seems to be trading just about NAV anyway, with the C$ at 1.27 to 1. I don't know what the exact proceeds are.
thepupil Posted March 30, 2015 Posted March 30, 2015 my calc was assuming the incentive fee was a hard hurdle after the mgt. fee. I don't know whether it is or not. I just assumed the most investor friendly way possible since I didn't want to look like I was trying to skew it either way. I have no objection to FIH at this price. I do think people should be a little more wary / skeptical of diving into a full fees permanent capital vehicle that represents a doubling of a manager's AUM after the first 60% or so of a nice bull run in India. I was just pointing out the unfavorable math of paying a steep premium to NAV of a vehicle with fees. Gio, it's difficult to argue with "if I'm right, I'll be right, if I'm wrong, I'll be wrong". I've always heard you say in the past you look for mid teens returns or something like that. Then you say you might pay 2X NAV for this. To make mid teen's paying 2X NAV would require some absolutely fantastic investment results. To make 8 or 9% would require pretty damn good investments results (15% or so) if you paid a big NAV premium. I've always found statement that you make like this to be a little incongruous to your stated return goals. But I really just need to resist commenting. You have your way of investing and it works for you and once you like a capital allocator/stock, you stick to it. There's a lot to be said for that.
giofranchi Posted March 31, 2015 Posted March 31, 2015 Gio, it's difficult to argue with "if I'm right, I'll be right, if I'm wrong, I'll be wrong". I've always heard you say in the past you look for mid teens returns or something like that. Then you say you might pay 2X NAV for this. To make mid teen's paying 2X NAV would require some absolutely fantastic investment results. To make 8 or 9% would require pretty damn good investments results (15% or so) if you paid a big NAV premium. I've always found statement that you make like this to be a little incongruous to your stated return goals. No. I repeat what I have said: if FIH can find one investment like IKYA each year for the next 5 years… than 2xNAV could probably turn out to be a good investment. FFH bought IKYA for 10x fcf while IKYA increased net earnings more than 200% YoY for the next two years... IKYA's net earnings in 2014 have been 3 times its 2013 net earnings! And revenues have doubled last year! Gio
giofranchi Posted March 31, 2015 Posted March 31, 2015 Its the same reason Ackman can talk all day long that PSH deserves a premium to NAV, but probably will never get it. (Except in times of exuberance) And it is also the same reason why investors in PSH (and FIH) will make a disproportionate amount of money! :) (imo!) Gio
thepupil Posted March 31, 2015 Posted March 31, 2015 Gio, it's difficult to argue with "if I'm right, I'll be right, if I'm wrong, I'll be wrong". I've always heard you say in the past you look for mid teens returns or something like that. Then you say you might pay 2X NAV for this. To make mid teen's paying 2X NAV would require some absolutely fantastic investment results. To make 8 or 9% would require pretty damn good investments results (15% or so) if you paid a big NAV premium. I've always found statement that you make like this to be a little incongruous to your stated return goals. No. I repeat what I have said: if FIH can find one investment like IKYA each year for the next 5 years… than 2xNAV could probably turn out to be a good investment. FFH bought IKYA for 10x fcf while IKYA increased net earnings more than 200% YoY for the next two years... IKYA's net earnings in 2014 have been 3 times its 2013 net earnings! And revenues have doubled last year! Gio Ikya looks like it was a $47mm check and so far is a 3x, correct?. If you paid $2b for $1b of NAV, 5 $50mm deals would turn $250mm of NAV into $750mm, increasing your NAV, pre-fees, by $500mm which is less than the NAV premium you paid. To make up your NAV premiuj you would need 5 5X's before fees. So, I disagree, once again with your statemt , but who cares because FIH doesn't trade at 2x NAV. Edit: or for there deal size to increase, ii know nothing if competitiveness of Indian PE market, so maybe there is no problem with increased size of deal
giofranchi Posted March 31, 2015 Posted March 31, 2015 So, I disagree, once again with your statemt 5 businesses in 5 years which become a 3x investments in 2 to 3 years won’t justify a 2xNAV price?! Sincerely… I have not done the math! Therefore, I trust what you say, and I hope this ends a discussion I guess no one really cares about! ;) Cheers, Gio
frommi Posted March 31, 2015 Posted March 31, 2015 And it is also the same reason why investors in PSH (and FIH) will make a disproportionate amount of money! :) (imo!) Gio Maybe :)
giofranchi Posted April 1, 2015 Posted April 1, 2015 And it is also the same reason why investors in PSH (and FIH) will make a disproportionate amount of money! :) (imo!) Gio Maybe :) Well, what I mean is that it just boils down to a business judgment: if those businesses can increase NAV per share at a CAGR of 15% for many years, and they always sell at NAV per share (or below), then it automatically follows that their owners will make a disproportionate amount of money. The role of valuation in investing in this case ceases to be meaningful… Gio
SoonParted Posted April 5, 2015 Posted April 5, 2015 Doesn't the Canadian home of FIH make it a PFIC for US investors? At least, it would seem to be a risk that it could be deemed one.
Jurgis Posted April 5, 2015 Posted April 5, 2015 Doesn't the Canadian home of FIH make it a PFIC for US investors? At least, it would seem to be a risk that it could be deemed one. It likely will be unless it acquires controlled operating businesses fast.
giofranchi Posted April 10, 2015 Posted April 10, 2015 So, I disagree, once again with your statemt , but who cares because FIH doesn't trade at 2x NAV. By the way, Fairfax will receive the Performance Fee in the form of Subordinate Voting Shares if their price is below 2xNAV… To me that sounds like Fairfax doesn’t think any price below 2xNAV is too high… Of course Fairfax doesn’t pay any fee, therefore the price it is willing to receive and hold shares might be higher than outside investors… Gio
Packer16 Posted April 10, 2015 Posted April 10, 2015 One question I have is what are the fees on the illustrative India fund returns they include in the prospectus? Packers
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