Fairfax Africa

[petec]

https://www.forbes.com/sites/simonmoore/2019/01/30/the-hidden-signal-in-delayed-earnings-announcements/#246097ad5750

 

The article explains that significantly delayed earnings are statistically a legit red flag.

 

We already know Consolidated Infrastructure Group (CIG) is teetering on the brink of bankruptcy.

 

Consolidated Infrastructure Group was already having to include a section in their reports explaining why the board believes the company can actually be considered a going concern - despite being all but bankrupt (I mean they're literally at the over-drafting their bank accounts level of bankrupt). Management claims that the problems are confined to their largest division, and that the other divisions can stand on their own. They use the health of the company's other divisions as justification for going concern. They say they can draw from the other divisions to cover costs of restructuring and right-sizing the problem division. I'm not so sure though. Someone should look into this, but I think they have a ton of short term liabilities guaranteed at the corporate level. I don't think the liabilities are isolated among the divisions. I think if the company defaults it will be a difficult restructuring. I have a hunch Fairfax Africa's CIG loan is subordinate to all the rest of the debt.

 

CIG's value has plummeted from somewhere north of $500 million to less than $5 million in less than 4 years. It's a rotten company, and it's tied to some industries/geographies that are getting stomped on in Africa.

 

We all know Prem is a master of smoothing things over during acquisition talks. However, poor earnings surprises is one of the primary reasons deals fall apart. And, I think it's possible Helios is watching CIG implode and realizing they are very likely going to have to oversee an ugly bankruptcy proceeding, AND they are going to have to write off the CIG loan (and maybe the PRG2 loan - I don't know what the loan was for, I just know it's collateralized with CIG equity, ouch).

 

I assume the Helios deal was struck on the assumption each party is contributing around $400 million worth of value.

 

Depending on CIG's performance in the 3rd quarter - when combined with other issues in the portfolio - it probably isn't hard to make a case that $100 million of Fairfax Africa's book value is at risk (that's not including ATMA equity or the ATMA Facility).

 

But, here's the other psychological wrench. Helios almost certainly believes they are bringing at least $400 million of value to the table. They have the luxury of basing their value on future projections. By now the realization has sunk in that they are on the cusp of selling MAJORITY CONTROL of their $3 BILLION DOLLAR BABY to Prem Watsa's HEIRS.

 

They are watching the Fairfax Africa dumpster fire burn and asking why they are exchanging CONTROL of their own lives (yes, control, for the next 30+ years they will have to convene the board and ask Prem Watsa's children for permission to invest in any insurance operation, or to make any investment over $50 million), all in exchange for a DUMPSTER FIRE that they fully believe is worth less than what they are bringing to the table. (At the very least they should be jockeying for majority control right now.)

 

I know there's strong psychological bias not to re-trade a deal, etc. But, I think CIG is a deal breaker, and I have a hunch we're watching it play out in the form of:

 

- delayed CIG report

- delayed circular

- deleted webinar access

 

If the deal goes through I believe the stock is instantly worth 50% more. Easily! Which is why it's so hard to sit on the sidelines knowing it could bounce anytime now (on positive CIG news or more signs of deal confirmation).

 

But, right now, given the red flags, I personally think the odds of the deal succeeding have tipped below 50% in recent days (I hope I'm wrong). And, without the deal going through I don't have high confidence Fairfax Africa's current leadership will right the ship.

 

You make a compelling case, although you’re spending far more time than I would speculating about something we will have a definitive answer to soon.

 

One comment though. Read the parts you put in capitals. Do you honestly think Helio’s hadn’t considered these points before?

 

If it’s only just occurred to them that they’re giving up control then they’re morons and I hope the deal doesn’t go through.

[Thrifty3000]

One other key consideration...

 

Much of the value of this deal for Helios is for future publicity and marketing. In fact, the success of Helios's private equity efforts long term will be directly tied to the success of Fairfax Africa.

 

In the future, any prospective Helios PE investor will have complete visibility into the publicly available Fairfax Africa investment performance. If this deal creates negative press for Helios (like having 25% or more of book value evaporate within a year or two of doing the deal) then it will become a vicious cycle for Helios and Fairfax Africa. A massive blunder like that could set Helios back by a decade.

[petec]

Again, what’s new? Do you really think they thought CIG was healthy 3 months ago? Because I can tell you it wasn’t.

[SharperDingaan]

Reporting delays are because 'independents' are balking at signing off - typically 'cause it's not what it seems.

Long-term holders (FFH, FAH) believe going concern is not a problem? but have had to demonstrate it by supporting the market, versus just injecting more equity? Kind of implies that without the support ... they expect a run on the FAH share-price, and a 're-set'.

 

Hopefully we're wrong.

We wish them luck.

 

SD

[elliott]

Again, what’s new? Do you really think they thought CIG was healthy 3 months ago? Because I can tell you it wasn’t.

 

petec, we could say the same in relation to FAH and their injecting more capital into CIG. It really wasnt so long ago, and they had insiders. Yet they made the move... Such a clever move.

 

 

[petec]

Again, what’s new? Do you really think they thought CIG was healthy 3 months ago? Because I can tell you it wasn’t.

 

petec, we could say the same in relation to FAH and their injecting more capital into CIG. It really wasnt so long ago, and they had insiders. Yet they made the move... Such a clever move.

 

That’s slightly different. They already owned it. Injecting capital could have saved the investment. That can’t be said of Helios. Again, I’m just wondering what’s new, if anything, other than the late filing.

[elliott]

That’s slightly different. They already owned it. Injecting capital could have saved the investment. That can’t be said of Helios. Again, I’m just wondering what’s new, if anything, other than the late filing.

 

True.

From a different point of view, I hope CIG was not a case of sunken costs fallacy.

[Thrifty3000]

Reporting delays are because 'independents' are balking at signing off - typically 'cause it's not what it seems.

Long-term holders (FFH, FAH) believe going concern is not a problem? but have had to demonstrate it by supporting the market, versus just injecting more equity? Kind of implies that without the support ... they expect a run on the FAH share-price, and a 're-set'.

 

Hopefully we're wrong.

We wish them luck.

 

SD

 

Darn, still no CIG results or circular. Clock is ticking, and time kills deals.

 

I found a headline from 2 weeks ago (Oct. 1) announcing changes to CIG's board of directors and sub-committees. But, I can't access the article's content, and I can't find an official release from CIG. But, it may lend support to SD's theory that the CIG board is the hold up. The CIG board certainly understands the deal disrupting consequences of tardiness and discord. Bad form.

[Thrifty3000]

I went ahead and dug into the CIG-related investments as of the last quarterly report, just to try to ring fence the bankruptcy-related risk:

 

- CIG stock = $6 million

- CIG loan = $15.5 million

- PGR2 loan = $18.5 million

 

Total = $40 million

 

Bankruptcy scenario:

 

- CIG stock = $0

- CIG loan appears to be secured against CIG assets, so I'm completely guessing there might be a 30% recovery: $5 million

- PGR2 - some good news here is that even though it's collateralized against CIG equity, the loan was to Peregrine so Peregrine could buy CIG shares during the rights offering. It accrues 15% interest annually for FAH, and has to be repaid by Peregrine in 2021 (Peregrine was recently acquired and appears healthy/solvent): $20 million

 

Total value after bankruptcy: $25 million

 

So, it looks like the financial risk in the event of a CIG bankruptcy is maybe $15 million. I wouldn't think that amount on it's own would derail the deal with Helios.

 

I think CIG is only a deal-breaking risk if Helios is concerned about the reputational risk/optics, distraction, and general headache of overseeing a bankruptcy proceeding immediately after a merger. But, like Petec said, that's purely speculation.

[Thrifty3000]

Just for kicks I reached out to an M&A investment banker to hear his thoughts. He said over the course of a quarter if negative developments cause a revaluation of 10% the deal is virtually guaranteed to get renegotiated (or dissolve).

 

He said pulling the webinar from the website is super shady - a giant red flag. Posting the webinar signaled the deal was progressing. However, removing the webinar is almost a sure sign that Helios contacted FAH and said we no longer have a deal.

 

He said the standard M&A playbook for a negative development would be for Helios to jockey for a significant downward revision of FAH's valuation (maybe from $400 million to $300 million) to provide a margin of safety in the event of further negative surprises. Obviously that would throw a huge wrench in Prem's desire to maintain control.

 

If a CIG bankruptcy will destroy $15 million of value, then there only needs to be $20 million or so worth of additional negative developments this quarter to spook Helios. Considering AGH and GroCapital experienced declining valuations totaling $13 million last quarter, I don't think it's farfetched to think we might see similar declines in those or other assets this quarter.

[hobbit]

Just for kicks I reached out to an M&A investment banker to hear his thoughts. He said over the course of a quarter if negative developments cause a revaluation of 10% the deal is virtually guaranteed to get renegotiated (or dissolve).

 

He said pulling the webinar from the website is super shady - a giant red flag. Posting the webinar signaled the deal was progressing. However, removing the webinar is almost a sure sign that Helios contacted FAH and said we no longer have a deal.

 

He said the standard M&A playbook for a negative development would be for Helios to jockey for a significant downward revision of FAH's valuation (maybe from $400 million to $300 million) to provide a margin of safety in the event of further negative surprises. Obviously that would throw a huge wrench in Prem's desire to maintain control.

 

If a CIG bankruptcy will destroy $15 million of value, then there only needs to be $20 million or so worth of additional negative developments this quarter to spook Helios. Considering AGH and GroCapital experienced declining valuations totaling $13 million last quarter, I don't think it's farfetched to think we might see similar declines in those or other assets this quarter.

 

Lets assume deal does not happen, whats the downside at these prices with 100 + 40 mil in cash and zero debt

[Thrifty3000]

Just for kicks I reached out to an M&A investment banker to hear his thoughts. He said over the course of a quarter if negative developments cause a revaluation of 10% the deal is virtually guaranteed to get renegotiated (or dissolve).

 

He said pulling the webinar from the website is super shady - a giant red flag. Posting the webinar signaled the deal was progressing. However, removing the webinar is almost a sure sign that Helios contacted FAH and said we no longer have a deal.

 

He said the standard M&A playbook for a negative development would be for Helios to jockey for a significant downward revision of FAH's valuation (maybe from $400 million to $300 million) to provide a margin of safety in the event of further negative surprises. Obviously that would throw a huge wrench in Prem's desire to maintain control.

 

If a CIG bankruptcy will destroy $15 million of value, then there only needs to be $20 million or so worth of additional negative developments this quarter to spook Helios. Considering AGH and GroCapital experienced declining valuations totaling $13 million last quarter, I don't think it's farfetched to think we might see similar declines in those or other assets this quarter.

 

Lets assume deal does not happen, whats the downside at these prices with 100 + 40 mil in cash and zero debt

 

I think you're referencing cash & equivs from the 2019 annual report. Their position is radically different now. During the financial panic earlier this year they basically had to step in as the de facto Federal Reserve for their bank investees.

 

Now their cash & equivs position is down to $68 million of unrestricted cash (and an additional $18 million of restricted cash - locked in bank accounts at investee banks to help them avoid being forced by regulators to raise super-expensive capital).

 

Regarding downside risk of a failed Helios deal I think you have to look at:

 

- liquidation value of the assets after a failed deal

- future value of assets in a deteriorating portfolio that has been poorly managed since inception (improperly sized investments in geographies and businesses outside of management's circle of competence)

- odds Prem will either liquidate the portfolio and return more cash to shareholders than the current market price, or find new management that can shore up the portfolio and better execute the Africa investment strategy.

 

If the Helios deal fails you might be able to make the case for a liquidation value of as much as, say, $325 million. But, I don't think there's as much margin of safety as you might think. I think the portfolio is basically one negative economic shock - like war or another oil price collapse - away from being impaired to $225 million or less.

 

Also, the portfolio's current manager is not right for the job, but how do you attract a new management team with the requisite talent to manage such a small portfolio? I'm assuming you would need at least a billion dollar portfolio to attract/compensate an effective management team. Further, how would Prem be able to raise a billion dollars to right-size the portfolio given the failed track record?

 

Honestly, I think Prem pretty much HAS to either do the deal with Helios or liquidate ASAP - and both sides know it. I think Prem and Tope are reasonable and will deal fairly with each other. But, I think Prem is in a tough situation. Does he give up majority control (I doubt it, but it might be the best solution)? Does he commit Fairfax to buy/guarantee more of the assets (tough call)? Does he infuse more cash into FAH by issuing more FAH shares - diluting current owners (another tough one)?

 

After all those considerations my opinion is the range of outcomes is too broad for FAH to be a sound investment for a minority equity owner. I think there are plenty of scenarios resulting in permanent loss of capital, thereby making this a value investing anathema.

 

(PS. I'm going to feel REALLY dumb when this deal sails through as it was originally laid out and the stock price jumps 50%. Haha. Oh well.)

[hobbit]

Just for kicks I reached out to an M&A investment banker to hear his thoughts. He said over the course of a quarter if negative developments cause a revaluation of 10% the deal is virtually guaranteed to get renegotiated (or dissolve).

 

He said pulling the webinar from the website is super shady - a giant red flag. Posting the webinar signaled the deal was progressing. However, removing the webinar is almost a sure sign that Helios contacted FAH and said we no longer have a deal.

 

He said the standard M&A playbook for a negative development would be for Helios to jockey for a significant downward revision of FAH's valuation (maybe from $400 million to $300 million) to provide a margin of safety in the event of further negative surprises. Obviously that would throw a huge wrench in Prem's desire to maintain control.

 

If a CIG bankruptcy will destroy $15 million of value, then there only needs to be $20 million or so worth of additional negative developments this quarter to spook Helios. Considering AGH and GroCapital experienced declining valuations totaling $13 million last quarter, I don't think it's farfetched to think we might see similar declines in those or other assets this quarter.

 

Lets assume deal does not happen, whats the downside at these prices with 100 + 40 mil in cash and zero debt

 

I think you're referencing cash & equivs from the 2019 annual report. Their position is radically different now. During the financial panic earlier this year they basically had to step in as the de facto Federal Reserve for their bank investees.

 

Now their cash & equivs position is down to $68 million of unrestricted cash (and an additional $18 million of restricted cash - locked in bank accounts at investee banks to help them avoid being forced by regulators to raise super-expensive capital).

 

Regarding downside risk of a failed Helios deal I think you have to look at:

 

- liquidation value of the assets after a failed deal

- future value of assets in a deteriorating portfolio that has been poorly managed since inception (improperly sized investments in geographies and businesses outside of management's circle of competence)

- odds Prem will either liquidate the portfolio and return more cash to shareholders than the current market price, or find new management that can shore up the portfolio and better execute the Africa investment strategy.

 

If the Helios deal fails you might be able to make the case for a liquidation value of as much as, say, $325 million. But, I don't think there's as much margin of safety as you might think. I think the portfolio is basically one negative economic shock - like war or another oil price collapse - away from being impaired to $225 million or less.

 

Also, the portfolio's current manager is not right for the job, but how do you attract a new management team with the requisite talent to manage such a small portfolio? I'm assuming you would need at least a billion dollar portfolio to attract/compensate an effective management team. Further, how would Prem be able to raise a billion dollars to right-size the portfolio given the failed track record?

 

Honestly, I think Prem pretty much HAS to either do the deal with Helios or liquidate ASAP - and both sides know it. I think Prem and Tope are reasonable and will deal fairly with each other. But, I think Prem is in a tough situation. Does he give up majority control (I doubt it, but it might be the best solution)? Does he commit Fairfax to buy/guarantee more of the assets (tough call)? Does he infuse more cash into FAH by issuing more FAH shares - diluting current owners (another tough one)?

 

After all those considerations my opinion is the range of outcomes is too broad for FAH to be a sound investment for a minority equity owner. I think there are plenty of scenarios resulting in permanent loss of capital, thereby making this a value investing anathema.

 

(PS. I'm going to feel REALLY dumb when this deal sails through as it was originally laid out and the stock price jumps 50%. Haha. Oh well.)

 

one of the conditions of closing

 

"

As of immediately prior to Closing, the Buyer Entities shall have Cash equal to at

least the sum of $102,000,000, including Cash deposits held at any Portfolio Investment of the

Buyer, plus the undrawn amount under the Atlas Mara Facility less any Transaction Expenses paid

for by any Buyer Entity prior to such calculation of Cash;

[Thrifty3000]

Just for kicks I reached out to an M&A investment banker to hear his thoughts. He said over the course of a quarter if negative developments cause a revaluation of 10% the deal is virtually guaranteed to get renegotiated (or dissolve).

 

He said pulling the webinar from the website is super shady - a giant red flag. Posting the webinar signaled the deal was progressing. However, removing the webinar is almost a sure sign that Helios contacted FAH and said we no longer have a deal.

 

He said the standard M&A playbook for a negative development would be for Helios to jockey for a significant downward revision of FAH's valuation (maybe from $400 million to $300 million) to provide a margin of safety in the event of further negative surprises. Obviously that would throw a huge wrench in Prem's desire to maintain control.

 

If a CIG bankruptcy will destroy $15 million of value, then there only needs to be $20 million or so worth of additional negative developments this quarter to spook Helios. Considering AGH and GroCapital experienced declining valuations totaling $13 million last quarter, I don't think it's farfetched to think we might see similar declines in those or other assets this quarter.

 

Lets assume deal does not happen, whats the downside at these prices with 100 + 40 mil in cash and zero debt

 

I think you're referencing cash & equivs from the 2019 annual report. Their position is radically different now. During the financial panic earlier this year they basically had to step in as the de facto Federal Reserve for their bank investees.

 

Now their cash & equivs position is down to $68 million of unrestricted cash (and an additional $18 million of restricted cash - locked in bank accounts at investee banks to help them avoid being forced by regulators to raise super-expensive capital).

 

Regarding downside risk of a failed Helios deal I think you have to look at:

 

- liquidation value of the assets after a failed deal

- future value of assets in a deteriorating portfolio that has been poorly managed since inception (improperly sized investments in geographies and businesses outside of management's circle of competence)

- odds Prem will either liquidate the portfolio and return more cash to shareholders than the current market price, or find new management that can shore up the portfolio and better execute the Africa investment strategy.

 

If the Helios deal fails you might be able to make the case for a liquidation value of as much as, say, $325 million. But, I don't think there's as much margin of safety as you might think. I think the portfolio is basically one negative economic shock - like war or another oil price collapse - away from being impaired to $225 million or less.

 

Also, the portfolio's current manager is not right for the job, but how do you attract a new management team with the requisite talent to manage such a small portfolio? I'm assuming you would need at least a billion dollar portfolio to attract/compensate an effective management team. Further, how would Prem be able to raise a billion dollars to right-size the portfolio given the failed track record?

 

Honestly, I think Prem pretty much HAS to either do the deal with Helios or liquidate ASAP - and both sides know it. I think Prem and Tope are reasonable and will deal fairly with each other. But, I think Prem is in a tough situation. Does he give up majority control (I doubt it, but it might be the best solution)? Does he commit Fairfax to buy/guarantee more of the assets (tough call)? Does he infuse more cash into FAH by issuing more FAH shares - diluting current owners (another tough one)?

 

After all those considerations my opinion is the range of outcomes is too broad for FAH to be a sound investment for a minority equity owner. I think there are plenty of scenarios resulting in permanent loss of capital, thereby making this a value investing anathema.

 

(PS. I'm going to feel REALLY dumb when this deal sails through as it was originally laid out and the stock price jumps 50%. Haha. Oh well.)

 

one of the conditions of closing

 

"

As of immediately prior to Closing, the Buyer Entities shall have Cash equal to at

least the sum of $102,000,000, including Cash deposits held at any Portfolio Investment of the

Buyer, plus the undrawn amount under the Atlas Mara Facility less any Transaction Expenses paid

for by any Buyer Entity prior to such calculation of Cash;

 

Hmm. In the Liquidity Risk and Subsequent Events sections of the recent quarterly report that statement is worded a bit differently:

 

"Furthermore, immediately prior to closing of the Transaction, the company must hold at least $102,000 in cash and cash equivalents, restricted cash and marketable securities, less any Transaction expenses."

 

I guess it's not really specific enough to know whether they're falling short on that one. The $40 million Atlas Mara Facility has been fully drawn. No telling if they're able to pay some of it down.

[hobbit]

https://www.moneyweb.co.za/mny_sens/consolidated-infrastructure-group-limited-cautionary-announcement-and-changes-to-the-board-of-directors/

 

All Fairfax Africa nominated directors resigning from CIG

[wondering]

the information circular is on sedar.  sorry I couldn't attached it.

 

I am still digesting it, but I saw they are going to pay a 2% dividend yield.

[Thrifty3000]

https://www.fairfaxafrica.ca/News/Press-Releases/Press-Release-Details/2020/Fairfax-Africa-Holdings-Corporation-Third-Quarter-Financial-Results/default.aspx

[elliott]

Lets assume deal does not happen, whats the downside at these prices with 100 + 40 mil in cash and zero debt

 

We only need for things not to change to see the company going further down.

 

Btw, thanks Thrifty3000 for your informative posts!

[hobbit]

Michael Wilkerson in Annual Letter , Q1 investor call , ATMA earnings --

 

- Tangible book value of $2 ( June 2020 )

- UBN doing well even in COVID. NPAs stable

-"All operating banks maintained capital adequacy ratios above the regulatory minimum, reflecting stable balance sheets." ( june 2020 )

 

Michael Wilkerson in circular -

 

- happy to sell ATMA stake at 0.55 without ever trying to market it to a third party apart from Fairfax. And since its a related party transaction they need a majority of minority shareholder to approve this.

- The reason Fairfax is paying 40mil is because they cannot pay more than 25% of market value of FAH without a formal valuation , this being a related party transaction. Its hard to imagine a scenario where they try to sell their stake at a 50% discount to TBV and there are no takers . But they didn't even try.

 

"MI 61-101 provides that, unless exempted, an issuer proposing to carry out a related party transaction

described in paragraphs (a) through (g) of the definition of “related party transaction” is required to obtain

a formal valuation in respect of the transaction. Fairfax Africa is relying on the formal valuation exemption

in section 5.5(a) of MI 61-101 given that, at the time the Atlas Mara Transaction was agreed to, neither the

fair market value of the subject matter of, nor the fair market value of the consideration for the Atlas Mara

Transaction, exceeded 25% of Fairfax Africa’s market capitalization."

 

Moreover Michael Wilkerson/Prem has taken 'zero' responsibility for the destruction of shareholder capital. Not in one annual/interim report/call the mgmt has admitted that they made terrible investments one after the other. Until announcing this deal they have maintained ( until as recently as April 2020 call) that the prices are just depressed and provide no insight into the intrinsic value of businesses. I don't understand on what basis Mr Wilkerson is being retained as an executive chairman of the new entity.

 

As per the circular Helios brings the the depth and local connections including knowledge of french which is now apparently necessary for making good returns in Africa  ;D. Idk on what basis was the current mgmt investing in Africa if as per the circular they had such limited knowledge of African market .

 

This situation provides a good deal of insight into the muddled thinking at Fairfax group where they have been blaming market for being overvalued over the past decade while investing in gems like BB, ATMA, RFP, CIG etc . No wonder their shares are being sold at a 50% discount to BV across FFH, FIH and FAH. They have given market no reason to believe that they are trustworthy , transparent and will actually admit/learn from their mistakes going forward. Contrast this behavior with someone like Pabrai who has also had pretty underwhelming returns over the past 3 years but admits to his mistakes openly in letter and hopes to draw some lessons.

[petec]

What makes you think that, in the middle of a pandemic, they could have sold ATMA for 50% of book when it hasn’t traded that high in years and there are plenty of FAR better banks available at or below that price (Wells, Lloyds, even Eurobank)?

 

And even if they could, what makes you think they could have done it fast enough to satisfy Helios and get this deal done?

 

They’ve made some huge errors here, so they have sold the whole entity (as opposed to stakes) and given operating control to a third party. That’s a fairly clear admission of failure in my book and actions speak louder than words so I value it more than even the most groveling apology.

[elliott]

Did anyone actually say that?

 

As I see it, you dont sell something worth $1 for 50 cents it you really think it is worth $1.

I have not followed this drama that  much, but if Helios was "forcing" FAH to sell Atma to close the deal, they you have to think why. Why would they force selling something worth $1 for 50 cents. Well, yes, because they do NOT agree with that valuation.

Another reason FAH may do such a sale is because they think they can turn the 50 cents back into $1. Good luck Wilkerson! Good luck Mr. Watsa!

 

 

[petec]

Did anyone actually say that?

 

This is what I was responding to:

 

“Its hard to imagine a scenario where they try to sell their stake at a 50% discount to TBV and there are no takers .”

 

And if it was not clear (tone does not always come across well) my question was a genuine one not an aggressive/rhetorical one. I’m genuinely interested to know why anyone thinks ATMA could have fetched more right now.

 

It might be worth more later, which might be why FFH remain bullish on its value, but there is room to disagree, which might be why Helios isn’t. 

[jfan]

Did a brief scan over the management circular for the upcoming transaction with Helios. Petec summarized the transaction in a prior post quite succinctly. Thought I would add a few rough details and a bit of math.

 

Helios generated ~ $3.6 million in base management fees (aka excess fees) on 3.6 billion of AUM. Their net profit margin margin was ~ 14% with a ~$5 million after expenses (they paid no tax).

 

Of the 4 fund vintages (I, II, III, IV), they have closed out I completely on Sept 2020, and sold 2/8 positions from II. Fund I, had an initial value of $303M. Fund II, had an initial value of $908M.

 

The carried interest on Helios Holdings Limited (HHL)was $11M. This amounts to 50% of total carried interest generated from the funds of which the other 50% is earned by the investment team. The hurdle rate was 8% and the performance fee was 20%. The exited positions (by my rough approximation) probably had an original capital contribution from investors at an amount of $532 M ($303M + 2/8*$908M). By my math, their achieved CAGR over a ~12 year period was 8.7%.

 

For Helio Fairfax Partners (HFP), they will pay a base management fee of 1.5% of NAV for deployed capital and 0.5% on undeployed capital. They will have a 5% hurdle rate with a 20% performance fee.

 

Assumptions:

- if Helio's AUM stays at 3.6 Billion, running ~ 3 x $1 billion funds at any point in time

- tax rate of 26% for HFP

- current price of FAH being $3.50/share on 59 M shares

- 9% dilution with the deal spread over 10 years

 

1) Total fee generation after-tax will be ~ $7.4 M (at current market price --> gives a 3.6% return)

2) With the $391 M of current FAH equity in Helios' hands compounding at 8.7% into the future, the 10-year future value after carried interest payout will be $847 M. (at current market price gives a 15% return from NAV growth)

3) 1.5% drag due to base management fee

4) 1% stock dilution drag due to one-time stock dilution over 10 years

5) African inflation ranging from 3-12%

 

Total personal return will be 3.6% + 15% - 1.5% - 1% - (3 to 12%) =

 

4 - 13% annual return.

 

 

[Thrifty3000]

Did a brief scan over the management circular for the upcoming transaction with Helios. Petec summarized the transaction in a prior post quite succinctly. Thought I would add a few rough details and a bit of math.

 

Helios generated ~ $3.6 million in base management fees (aka excess fees) on 3.6 billion of AUM. Their net profit margin margin was ~ 14% with a ~$5 million after expenses (they paid no tax).

 

Of the 4 fund vintages (I, II, III, IV), they have closed out I completely on Sept 2020, and sold 2/8 positions from II. Fund I, had an initial value of $303M. Fund II, had an initial value of $908M.

 

The carried interest on Helios Holdings Limited (HHL)was $11M. This amounts to 50% of total carried interest generated from the funds of which the other 50% is earned by the investment team. The hurdle rate was 8% and the performance fee was 20%. The exited positions (by my rough approximation) probably had an original capital contribution from investors at an amount of $532 M ($303M + 2/8*$908M). By my math, their achieved CAGR over a ~12 year period was 8.7%.

 

For Helio Fairfax Partners (HFP), they will pay a base management fee of 1.5% of NAV for deployed capital and 0.5% on undeployed capital. They will have a 5% hurdle rate with a 20% performance fee.

 

Assumptions:

- if Helio's AUM stays at 3.6 Billion, running ~ 3 x $1 billion funds at any point in time

- tax rate of 26% for HFP

- current price of FAH being $3.50/share on 59 M shares

- 9% dilution with the deal spread over 10 years

 

1) Total fee generation after-tax will be ~ $7.4 M (at current market price --> gives a 3.6% return)

2) With the $391 M of current FAH equity in Helios' hands compounding at 8.7% into the future, the 10-year future value after carried interest payout will be $847 M. (at current market price gives a 15% return from NAV growth)

3) 1.5% drag due to base management fee

4) 1% stock dilution drag due to one-time stock dilution over 10 years

5) African inflation ranging from 3-12%

 

Total personal return will be 3.6% + 15% - 1.5% - 1% - (3 to 12%) =

 

4 - 13% annual return.

 

jfan, thanks for breaking it down. I think one of the main reasons Helios did a deal with Prem was to boost their brand and get a seat at the "Value Investor Legends Club" table - similar to what Charlie Munger did for Li Liu. I'm assuming much of the appeal of associating with Prem is an ability to at least triple or quadruple AUM over the next few years. To be honest I don't know why they'd give up half their future earnings stream in exchange for a group of somewhat crappy, illiquid, assets, if they didn't think associating with Prem would pretty much guarantee at least $12 billion AUM in 10 years (they could have probably pretty easily grown to $6 billion AUM on their own).

 

I know the payout ratios for future funds will be more favorable for Fairfax Helios. What would the returns look like 10 years out if Helios grows AUM to $10 or $15 billion?

[jfan]

Assuming that they don't achieve scale economics on their current roster of specialists, and other profitability measures staying the same, the fees should increase proportionally to AUM growth.

 

So from a 3.6B fund --> 10B-15B AUM, the approximate additional growth --> ~ 10-15% on top of the 4-13% that I estimated, for a total of return of 14%-28%. Lots of assumptions obviously, with future fund performance, AUM size, and their skill in managing inflation risk.

 

It makes sense for Fairfax to salvage their mistake and gives Helios a brand boost.