Fairfax 2024

[Xerxes]

4 hours ago, Viking said:

 I am pretty sure Prem said at the AGM last year that Fairfax India would not be issuing any new shares for less than book value (perhaps someone else can confirm/deny this).

 

 

100%
 

He made that statement after a shareholder (whose family office was heavily invested in FIH) expressed a concern about the discount. 

[This2ShallPass]

2 hours ago, nwoodman said:

If history is any guide, that would be at the bottom of my thesis list.  Not saying they have acted with impropriety but your interests rank much lower than you think.  

100%, lesson learned.

 

I'll say this one last time and then hold my peace (this topic riles me up every time). Big huge Fairfax used money from small retail investors, 100% risk was yours and made more money in FEES than you were able to make in PROFITS!! Their promise is you'll eventually make the money at some future time, but couldn't wait for such future time to collect their fees. Think about that.

 

In my humble opinion, that is not how you should conduct yourself in any situation. Neither fair nor friendly..

 

5 hours ago, Viking said:

Personally, the fee structure has never impacted my decision to invest in Fairfax India

This is not why I invested either but it's fair to bring it up when the discussion is around fees. I reduced my stake but am still in it because of BIAL, it's a true crown jewel.  And honestly there's lot of FOMO for me w FIH or I would have completely exited (stuck w them for the last 8 years and couldn't exit when BIAL is starting to hit it's stride). Just curious, why did you sell?

 

[This2ShallPass]

7 hours ago, SafetyinNumbers said:

They negotiated in good faith with credible counterparties.

We just have to agree to disagree on this @SafetyinNumbers. If they just kept this as a deal with OMERS and Markel then that would be fine. But they opened it up to the public and knew very well retail investors would buy because it has the Fairfax name. 

 

[Viking]

35 minutes ago, This2ShallPass said:

Just curious, why did you sell?

 

@This2ShallPass Fairfax has always been my preferred core holding for a whole bunch of reasons. Fairfax has been cheap since Covid hit in 2020 - so i have been way overweight Fairfax since then. And when i am way overweight Fairfax i am not really interested in holding a big position in Fairfax India.

 

In addition to my core positions, i also will do some tactical trades with a small part of my portfolio. Stocks i think i understand pretty well. Positions of maybe 1% or 2% of my portfolio. Buy when they get cheap and sell when they run up for hopefully a quick 5% or so gain. My trades are done in tax free accounts. I call it mucking around. 
 

Fairfax India is a stock i usually trade in and out of a couple times a year. I haven’t this year because it hasn’t dropped to my buy price. Instead i have traded in and out of Canfor (CFP.TO) a couple of times already. And also Baytex (BTE.TO). I recently also bought some BCE.TO and T.TO (Canadian telecom stocks are hated right now).

 

If i ever get my Fairfax weighting down to something more reasonable then i probably would take a closer look at Fairfax India as more than just a quick trade type of holding. I like management at Fairfax India a lot. And i love BIAL. 
 

My biggest issue with Fairfax India is liquidity. I find it very difficult to build out a position - without causing the price to move. My bigger concern is if i ever need to quickly liquidate my position. Solution? Keep it a small position.

 

Edited March 22, 2024 by Viking

[SafetyinNumbers]

13 minutes ago, Viking said:

 

@This2ShallPass Fairfax has always been my preferred core holding for a whole bunch of reasons. Fairfax has been cheap since Covid hit in 2020 - so i have been way overweight Fairfax since then. And when i am way overweight Fairfax i am not really interested in holding a big position in Fairfax India.

 

In addition to my core positions, i also will do some tactical trades with a small part of my portfolio. Stocks i think i understand pretty well. Positions of maybe 1% or 2% of my portfolio. Buy when they get cheap and sell when they run up for hopefully a quick 5% or so gain. My trades are done in tax free accounts. I call it mucking around. 
 

Fairfax India is a stock i usually trade in and out of a couple times a year. I haven’t this year because it hasn’t dropped to my buy price. Instead i have traded in and out of Canfor (CFP.TO) a couple of times already. And also Baytex (BTE.TO). I recently also bought some BCE.TO and T.TO (Canadian telecom stocks are hated right now).

 

If i ever get my Fairfax weighting down to something more reasonable then i probably would take a closer look at Fairfax India as more than just a quick trade type of holding. I like management at Fairfax India a lot. And i love BIAL. 
 

My biggest issue with Fairfax India is liquidity. I find it very difficult to build out a position - without causing the price to move. My bigger concern is if i ever need to quickly liquidate my position. Solution? Keep it a small position.

 

One could probably call the company if they ever needed to sell a lot shares. They have a weekly block exemption. 

[Cigarbutt]

20 hours ago, This2ShallPass said:

For worst case scenario, I looked at damages from Katrina which is the largest ever ($195B) and adjusted for inflation. So a Hurricane like that would cause $300B in damages today. Someone here mentioned Fairfax typically has 1% cat loss exposure and Berkshire 4%. That would cost Fairfax $3B. 

Then say we're really unlucky and got hit with another hurricane half the size, so 2 bad hurricanes in a 2-3 year period. That would be a loss of ~$4.5B. Bad but manageable, they lose little more than 1 year of operating earnings..

In their annual 'sustainability' report, FFH describe their "catastrophe exposure tolerance".

In 2023, there were 4.0% catastrophe points.

-----

So, from a statistical/model point of view, the unlucky scenario you describe should not happen that often.  

[nwoodman]

13 hours ago, Viking said:

@nwoodman I agree. However, I was quite surprised by how much (little) Fairfax paid to take out Recipe. Fairfax got a good to great deal. But at the time I thought they could have paid less and still got it through. Is this another new trend?

"Fair" point.  Just a no-go for me, but never say never.  

 

One of the things that has been bouncing around in my addled brain was Prem's comments regarding the  100-year company.  He mentioned this in the 2020 letter.  

 

"As you know, we are building Fairfax for the next 100 years (long after I am gone, I think!!). Recently, I came across two books on long lived companies: ''The Living Company, Habits for Survival in a Turbulent Business Environment'' by Arie de Geus, and ''Lessons from Century Club Companies, Managing for Long Term Success'' by Vicki Tenhaken. They both make the point that companies that have survived for over 100 years have four characteristics:

 

1. They are sensitive to the business environment, so that they always provide outstanding customer service.

 

2. They have a strong culture - a strong sense of identity that encompasses not only the employees but also the community and everyone they deal with. Managers are chosen from the inside and considered stewards of the enterprise.

 

3. They are decentralized, refraining from centralized control.

 

4. They are conservatively financed, recognizing the advantage of having spare cash in the kitty.

 

Fairfax has many of these characteristics and we continue to build our company for the future"

 

The characteristics themselves aren't necessarily an epiphany, but I do think they may have solidified something in Prem's thinking.  Perhaps this even extends to the treatment of stakeholders such as passive minority shareholders of public subs.  Time will tell.

Edited March 22, 2024 by nwoodman

[dartmonkey]

11 hours ago, This2ShallPass said:

100% risk was yours and made more money in FEES than you were able to make in PROFITS!! Their promise is you'll eventually make the money at some future time, but couldn't wait for such future time to collect their fees. Think about that.

It's an investment fund, of course the risk is with investors, not the fund managers. If you think they will do a good job getting you a good return, then you invest and pay the fees.

 

What seems to bother you is that the fees are not determined based on the share price, but based on the book value. It is true that this is not the norm in the investment industry, and I wonder how they justified this choice. To me, it seems more fair, since it is a value that can not be influenced by short term movements of the share price. On the other hand, it is something the manager has some control over (Muddy Waters would have something to say about that), and if the share price trails book value at the end of a given calculation period, I can see how it would seem neither fair nor friendly.

 

I haven't been able to find any discussion about this fee structure (that is, the fact that it is based on book value), from 2014 when the structure was set up.

[SafetyinNumbers]

15 hours ago, This2ShallPass said:

We just have to agree to disagree on this @SafetyinNumbers. If they just kept this as a deal with OMERS and Markel then that would be fine. But they opened it up to the public and knew very well retail investors would buy because it has the Fairfax name. 

 

I still don’t understand your point but ok agree to disagree.

[ICUMD]

On 3/21/2024 at 4:08 PM, Viking said:

 

3.) The emerging question is what is Fairfax India's involvement with the bid for IDBI Bank? This would be a massive purchase. Where is the significant $ going to come from? And what does that mean for current Fairfax India shareholders? I am pretty sure Prem said at the AGM last year that Fairfax India would not be issuing any new shares for less than book value (perhaps someone else can confirm/deny this).

This is the billion dollar question.

 

Fairfax has said aside from insurance, Fairfax India will be the vehicle for all other investments in India. They have recently placed an all cash offer for IDBI bank.  Where does the cash come from?

 

If they aren't issuing new shares at discounted market prices as previously stated, their only other option is to find an investment partner, like Omers. 

 

Alternatively, could money laden Fairfax opt to buyout Fairfax India and take it private? They would then have deep enough pockets to chase IDBI. It would also optically solve their issue of discount.

 

Pretty sure Prem wants to close that IDBI deal badly.

[This2ShallPass]

8 hours ago, SafetyinNumbers said:

I still don’t understand your point but ok agree to disagree.

You're saying Fairfax negotiated with OMERS and Markel as counterparties and it's up to OMERS, Markel and other large minority investors to take care of the discount and also represent the minority overall in the negotiation. Am I correct? To me, those other people don't matter as much as very few investors would have bought FIH because of them.

 

[This2ShallPass]

On 3/21/2024 at 8:03 PM, Cigarbutt said:

So, from a statistical/model point of view, the unlucky scenario you describe should not happen that often.  

Definitely hope not Good to see Fairfax has stated 1 yr op earnings as their upper limit of loss tolerance. The chart shows they have done pretty well over the years, only year they came pretty close was during Katrina..

[Parsad]

1 hour ago, ICUMD said:

This is the billion dollar question.

 

Fairfax has said aside from insurance, Fairfax India will be the vehicle for all other investments in India. They have recently placed an all cash offer for IDBI bank.  Where does the cash come from?

 

If they aren't issuing new shares at discounted market prices as previously stated, their only other option is to find an investment partner, like Omers. 

 

Alternatively, could money laden Fairfax opt to buyout Fairfax India and take it private? They would then have deep enough pockets to chase IDBI. It would also optically solve their issue of discount.

 

Pretty sure Prem wants to close that IDBI deal badly.

 

I think Fairfax will take FIH private.  If they took their performance fee in shares, FIH would have to issue those shares increasing the float.  FFH took cash to buy shares in the open market and reduce the available share count...I suspect they will continue to take cash going forward.  At some point, they will offer to take FIH completely private.  FFH is generally happier when they own the whole pizza, rather than a few slices. 

 

In the meantime, they will bring in outside investors including some of their friends to fund the purchase of IDBI.  Let's see where this $1B goes that they just raised.  I suspect they will inject it into FIH, increasing their percent ownership dramatically!  Fairfax will be one of the largest foreign institutional investors in India in 20 years...outside of nation-state owned entities. 

 

Full disclosure:  I own zero FIH.  I just let FFH handle the investments in India.  I don't have the time, expertise or access they do to know the Indian market nearly as well as they do.  Cheers! 

[ICUMD]

6 hours ago, Parsad said:

  FFH is generally happier when they own the whole pizza, rather than a few slices. 

 

In the meantime, they will bring in outside investors including some of their friends to fund the purchase of IDBI.  Let's see where this $1B goes that they just raised. 

Thanks Parsad,

 

If I were Prem, instead of inviting my investor friends to share another golden company that is IDBI, I would issue shares of FFH to buy FIH.U from existing investors to make it private, while conserving cash.

 

I would then use available cash to purchase IDBI.

That way I get to keep the whole pizza, including the airport.

 

I think this will happen sooner than later since IDBI divestment will happen within the next 12-24 months.

 

Of course, I own only Fairfax India, so I may be simply over optimistic.

[SafetyinNumbers]

7 hours ago, Parsad said:

 

I think Fairfax will take FIH private.  If they took their performance fee in shares, FIH would have to issue those shares increasing the float.  FFH took cash to buy shares in the open market and reduce the available share count...I suspect they will continue to take cash going forward.  At some point, they will offer to take FIH completely private.  FFH is generally happier when they own the whole pizza, rather than a few slices. 

 

In the meantime, they will bring in outside investors including some of their friends to fund the purchase of IDBI.  Let's see where this $1B goes that they just raised.  I suspect they will inject it into FIH, increasing their percent ownership dramatically!  Fairfax will be one of the largest foreign institutional investors in India in 20 years...outside of nation-state owned entities. 

 

Full disclosure:  I own zero FIH.  I just let FFH handle the investments in India.  I don't have the time, expertise or access they do to know the Indian market nearly as well as they do.  Cheers! 

I don’t think they will take FIH private. The insurance subsidiaries get much better treatment holding a public security vs a private company.
 

It also makes no sense to raise capital at the FIH level at this discount. They could deploy a sidecar structure with an FIH subsidiary as the GP contributing cash and their stake in CSB as equity. External capital including FFH’s would be injected as LP investors paying fees to FIH as GP for the privilege of investing in IDBI.
 

Lots of funds use sidecars when they find an investment opportunity that is too big for the rest of the portfolio. This seems like an ideal scenario to deploy it and has the added benefit of substantial fees that can offset some of the fees that keep investors away from FIH.

[SafetyinNumbers]

8 hours ago, This2ShallPass said:

You're saying Fairfax negotiated with OMERS and Markel as counterparties and it's up to OMERS, Markel and other large minority investors to take care of the discount and also represent the minority overall in the negotiation. Am I correct? To me, those other people don't matter as much as very few investors would have bought FIH because of them.

 

I’m saying they acted in good faith and bought back a lot of stock at a large discount living up to their side of the bargain. Obviously, they didn’t appreciate that quants and passive would take over the world. Most people still haven’t noticed and think the market is efficient but that’s what’s created the discount.

 

I own E-L Financial and they have bought 55% of the float in the past 4 years and the stock is still at a 50% discount. I guarantee you management and shareholders would have thought that 3 SIBs, a couple of large special dividends and tripling the regular dividend would materially close the discount if you asked them in 2019. It’s hard for me to blame management there for the discount and I think it’s the same with FFH with respect to FIH.

 

 

[Redskin212]

I don’t think they will take FIH private. The insurance subsidiaries get much better treatment holding a public security vs a private company.

 

Only reason FIH exists and likely the reason it will continue to exist.

[SafetyinNumbers]

12 minutes ago, Redskin212 said:

I don’t think they will take FIH private. The insurance subsidiaries get much better treatment holding a public security vs a private company.

 

Only reason FIH exists and likely the reason it will continue to exist.

Lots of optionality from staying public too including access to cheaper leverage which offsets a lot of the fees that drive investors away,

[hardcorevalue]

The stock has negative returns for almost a decade and at a time when the Indian markets have been the hottest in the world. 

At this stage Fairfax India is a bit of a nuisance to the renaissance at Fairfax Financial and with FFH's improving balance sheet it just becomes easier to take out FIH.u shareholders at a premium to book value and acquire the crown jewel BIAL holding rather than keep this public. 

 

I don’t think it’s a coincidence that they changed the AGM to the day before the Fairfax Financial one. Who wants to end their week with a bunch of disgruntled shareholders' at this tiny vehicle when there is so much to celebrate at the far more significant parent!

 

I keep a position because I believe in Fairfax’s investment skills in India and trust their stewardship. I’m not optimistic that the discount will ever close in its current form. However, I think there is value and the Anchorage IPO will surface this or Fairfax will take this private at book value at some point (an outcome I am ok with even though I think book value is understated).

Edited March 28, 2024 by hardcorevalue

[Viking]

13 hours ago, ICUMD said:

This is the billion dollar question.

 

Fairfax has said aside from insurance, Fairfax India will be the vehicle for all other investments in India. They have recently placed an all cash offer for IDBI bank.  Where does the cash come from?

 

If they aren't issuing new shares at discounted market prices as previously stated, their only other option is to find an investment partner, like Omers. 

 

Alternatively, could money laden Fairfax opt to buyout Fairfax India and take it private? They would then have deep enough pockets to chase IDBI. It would also optically solve their issue of discount.

 

Pretty sure Prem wants to close that IDBI deal badly.

@ICUMD below are some thoughts building on your post.
 

1.) prior to Modi’s election, Fairfax’s vehicle for investing in India was Thomas Cook India. That is why Quess started out there. After Modi was elected Fairfax decided they wanted to get much more aggressive investing in India. But they had a problem… Thomas Cook was the wrong vehicle / structure. Solution? Do what any rational actor does in investing - when the facts change - you pivot your strategy. And Fairfax India was born. 
 

Today Fairfax has an opportunity to make what could be a once in a generation purchase of a massive bank in India. But they have a problem. Fairfax India is likely the wrong vehicle / structure (as it exists today). What to do? What any rational actor does - pivot/update the strategy to fit the facts/reality as they exist today. 
 

2.) i have long thought the ‘solution’ to Fairfax India’s big discount in recent years is for Fairfax to take it private. Step one - approach the remaining large shareholders and see if they are interested - and what price. Step two - take out remaining small shareholders - perhaps at BV. 
 

To fund a big price of the takeout, Fairfax India could sell down some assets. The real prize for Fairfax would be getting 100% of Fairfax India’s position in BIAL. 
 

As @Redskin212 notes, the perspective of insurance regulators likely matters.

 

Regardless, India is shaping up to be a super interesting geography for Fairfax in 2024:

- rumours regarding bid for big bank

- Digit IPO

- possible Anchorage IPO / next steps for BIAL

- what all this means for Fairfax’s strategy in India 

- what all this means for Fairfax India

Edited March 23, 2024 by Viking

[ICUMD]

56 minutes ago, Viking said:

 

2.) i have long thought the ‘solution’ to Fairfax India’s big discount in recent years is for Fairfax to take it private. Step one - approach the remaining large shareholders and see if they are interested - and what price. Step two - take out remaining small shareholders - perhaps at BV.

Speculative, but Fairfax taking Fairfax India private is the best and most likely play.

 

Consider:

 

• Recent all cash offer for IDBI by Fairfax - the are serious bidders.
• BIAL is a jewel company with guaranteed return and growth. I suspect they view IDBI as another diamond in the rough. It probably is.
• They only coinvest with select pasive investors like OMERS.  (They weren't too happy with GMR and paid a premium to kick them out of BIAL).  Coinvestment only helps them manage their risk at the expense of their ownership and control. I doubt they will be keen to be part of a consortium to purchase IDBI when then can do so easily via FFH. Plus, they will need to share ownership with the government and LIC as it is.
• Fairfax India has performed poorly in North America, but Anchorage will truly value their Indian asset base.  This I think will occur after they take Fairfax India private, since doing so before risks inflating the share price and increasing the price of a buyout.
• The only advantage I can see of Fairfax India trading publically is it's ability to raise capital through sale of shares. Ironically, due to depressed share price x 10 yrs now, they are now capital constrained to make large purchases, such as IDBI.  
• They have used their 200M in the bank to back stop IIFL.  They will need a billion or two in short order if they get IDBI. 
• When your kid needs money in short order for a worthy venture, who is most likely to offer it? 

[Viking]

46 minutes ago, ICUMD said:

Speculative, but Fairfax taking Fairfax India private is the best and most likely play.

 

Consider:

 

• Recent all cash offer for IDBI by Fairfax - the are serious bidders.
• BIAL is a jewel company with guaranteed return and growth. I suspect they view IDBI as another diamond in the rough. It probably is.
• They only coinvest with select pasive investors like OMERS.  (They weren't too happy with GMR and paid a premium to kick them out of BIAL).  Coinvestment only helps them manage their risk at the expense of their ownership and control. I doubt they will be keen to be part of a consortium to purchase IDBI when then can do so easily via FFH. Plus, they will need to share ownership with the government and LIC as it is.
• Fairfax India has performed poorly in North America, but Anchorage will truly value their Indian asset base.  This I think will occur after they take Fairfax India private, since doing so before risks inflating the share price and increasing the price of a buyout.
• The only advantage I can see of Fairfax India trading publically is it's ability to raise capital through sale of shares. Ironically, due to depressed share price x 10 yrs now, they are now capital constrained to make large purchases, such as IDBI.  
• They have used their 200M in the bank to back stop IIFL.  They will need a billion or two in short order if they get IDBI. 
• When your kid needs money in short order for a worthy venture, who is most likely to offer it? 

@ICUMD thanks for sharing… your take makes a lot of sense. 

[SafetyinNumbers]

54 minutes ago, ICUMD said:

Speculative, but Fairfax taking Fairfax India private is the best and most likely play.

Consider:

• Recent all cash offer for IDBI by Fairfax - the are serious bidders.
• BIAL is a jewel company with guaranteed return and growth. I suspect they view IDBI as another diamond in the rough. It probably is.
• They only coinvest with select pasive investors like OMERS.  (They weren't too happy with GMR and paid a premium to kick them out of BIAL).  Coinvestment only helps them manage their risk at the expense of their ownership and control. I doubt they will be keen to be part of a consortium to purchase IDBI when then can do so easily via FFH. Plus, they will need to share ownership with the government and LIC as it is.
• Fairfax India has performed poorly in North America, but Anchorage will truly value their Indian asset base.  This I think will occur after they take Fairfax India private, since doing so before risks inflating the share price and increasing the price of a buyout.
• The only advantage I can see of Fairfax India trading publically is it's ability to raise capital through sale of shares. Ironically, due to depressed share price x 10 yrs now, they are now capital constrained to make large purchases, such as IDBI.  
• They have used their 200M in the bank to back stop IIFL.  They will need a billion or two in short order if they get IDBI. 
• When your kid needs money in short order for a worthy venture, who is most likely to offer it? 

 

I disagree with this analysis almost 100% but that’s what makes a market.
 

I don’t share this framing of FFH in an adversarial position with respect to FIH. Nothing they have done thus far suggests that is the case. There are lots of other reasons to be public besides issuing shares. One of them is buying them back accretively which they have taken advantage of. It also makes it easier to issue debt (leverage increases the returns) and we have already discussed the benefit to capital of being listed for the insurance companies. If thinking in forever terms it makes no sense to give up this optionality. That’s what the original shareholders paid 5% front end load for, why throw it away for free?

 

With respect to IDBI, why is a sidecar structure not considered a possibility? Shouldn’t that be a giant catalyst for the shares as the fees generated offset a lot of the other fees paid to FFH? It’s probably the most popular reason I hear for avoiding FIH. I think that’s much more likely than FIH being taken private. Either way, shouldn’t either possibility be a reason to buy the stock at current levels? I’m dismissing outright the odds of an equity issue below BV.

 

Further, I find the comments around BIAL and coinvestment confusing. If we think BIAL is cheap then how did they pay a premium to buy out partners? I think it’s more likely the partners didn’t want to wait out an IPO process for liquidity and informed FIH, who responded with a bid. If you have some back up for your thesis, please share. You may be right but I’m just going with what I think is more likely. If FIH was to structure this purchase through a sidecar, FFH would be an LP like any other. OMERS and any other institutional investors who participate would be the same. 
 

The share discount started in 2018. Anyone who mainly invests outside of the benchmarks will tell you that the shift to passive, quant and crypto really accelerated at that point. 5-6 years is a long time but it’s not 10 plus they did take advantage of it by buying back a giant portion of the float.
 

FIH is certainly not popular for a lot of heuristics that have nothing to do with intrinsic value. The impact of passive (ETFs) and quants (screens) especially means that stocks that the number of opportunities has increased in stocks that don’t screen well while the population of investors willing to buy them has shrunk. As Viking pointed out also liquidity isn’t great. To me that’s more about a desire for immediate liquidity which has become much more important to investors since the GFC.
 

Active investors simply have what they think are better options to meet their hurdle rate and they may very well be right. My hurdle rate is 10% which is about what FIH has compounded at before IPO fees. I get to buy that at a ~30% discount plus I think there is a good chance they have undervalued the two thirds of the portfolio that doesn’t trade. Plus there are near term catalysts to close that discount.
 

It’s the timing that is uncertain which is why active investors prefer to buy things with defined catalysts. Over the past 5 years investing without defined catalysts has meant underperforming. Anyone still doing it has learned that lesson. FIH does have catalysts but the timing is uncertain and it’s possible no one will care because no matter how positive the catalysts, it will never be a “quality” stock i.e. a stock that screens well. 
 

By the way, that might also be the case for FFH except that it’s in a major benchmark. FFH also has the benefit of analyst coverage but because its earnings are volatile it doesn’t screen well. It’s hard for sh!tcos to get multiple expansion unless they are meme stocks. The buying is coming from passive and index huggers who are price insensitive. It’s the existing shareholders that decide what FFH is worth by where they choose to sell it. That’s how multiple expansion can get out of hand like it did in the late 90s.

 

FIH doesn’t have these advantages but I think Trevor Scott turned me on to the idea that if FFH got serious multiple expansion then the FIH discount will turn into a premium. That still might happen but if BVPS growth is strong annually then I will easily beat my hurdle rate and I still get to keep all of the right tail optionality that includes a go private which I still believe has an almost zero percent chance of happening but would offer a very nice return nonetheless.

[ICUMD]

6 minutes ago, SafetyinNumbers said:

 

With respect to IDBI, why is a sidecar structure not considered a possibility? Shouldn’t that be a giant catalyst for the shares as the fees generated offset a lot of the other fees paid to FFH? It’s probably the most popular reason I hear for avoiding FIH. I think that’s much more likely than FIH being taken private. Either way, shouldn’t either possibility be a reason to buy the stock at current levels? I’m dismissing outright the odds of an equity issue below BV.

You raise lots of great points, and I'm just presenting one scenario for arguments sake.

 

I'll address your Sidecar thesis:

Fairfax India has no money now after their 200M has been earmarked to back stop IIFL, if my accounting is correct. Yet they have soon thereafter confidently placed an all cash bid for IDBI.

 

They must already have a source of money lined up.

Seems to time well with their outperformance at FFH.

 

I personally doubt that they will find investors who will foot the majority of the bill for IDBI, and then pay heafty fees to FFH for management, based on an estimated BV, while trading at depressed values on the N. Amercan market.  

 

The only investor to do so would be FFH.

Even Omers would be out.

Abu Dhabi investment fund or Siemens?  Not a chance.

Dealing with these guys on such a large purchase would be a nightmare.

 

FFH buying IDBI directly is a possibility, but then they would be going back on their word that FIH is their non insurance investment vehicle in India.

 

In any case, I could be wrong, but buying out Fairfax India to make it private is what I would do under the circumstances.  Once the Indian investment portfolio is more developed with acquisitions, option is always there to take it public again when it can act more favorably for raising capital.

 

[SafetyinNumbers]

9 minutes ago, ICUMD said:

You raise lots of great points, and I'm just presenting one scenario for arguments sake.

 

I'll address your Sidecar thesis:

Fairfax India has no money now after their 200M has been earmarked to back stop IIFL, if my accounting is correct. Yet they have soon thereafter confidently placed an all cash bid for IDBI.

 

They must already have a source of money lined up.

Seems to time well with their outperformance at FFH.

 

I personally doubt that they will find investors who will foot the majority of the bill for IDBI, and then pay heafty fees to FFH for management, based on an estimated BV, while trading at depressed values on the N. Amercan market.  

 

The only investor to do so would be FFH.

Even Omers would be out.

Abu Dhabi investment fund or Siemens?  Not a chance.

Dealing with these guys on such a large purchase would be a nightmare.

 

FFH buying IDBI directly is a possibility, but then they would be going back on their word that FIH is their non insurance investment vehicle in India.

 

In any case, I could be wrong, but buying out Fairfax India to make it private is what I would do under the circumstances.  Once the Indian investment portfolio is more developed with acquisitions, option is always there to take it public again when it can act more favorably for raising capital.

 

I’m not sure why you think fees will be hefty. It’s $6b so even if the fees are small, it’s material to FIH. Why do you frame an investment as a bill for OMERS or other parties interested in Indian bank exposure? Why do you assume they are overpaying?
 

As for funds available, they did provide a backstop LOC for IIFL but that is being refinanced via a rights issue and convertible debentures. So it’s likely they ultimately write a much smaller check. They could tap into the revolver if necessary or sell another asset.
 

They could also contribute their CSB stake which was marked at $400m at year end. This could also be done at a premium given IDBI is the much bigger entity. A $600m investment would be over $4 share for FIH plus there might be leverage in performance fees. 
 

it’s a lot of fees to pay to take private and public again with seemingly no benefit in the long term. Again, you might be right but I think the odds are extremely low.