Mon, Oct 25, 2021
A A A
Welcome Guest
Free Trial RSS
Get FREE trial access to our award winning publications
Alternative Market Briefing

Spotting red flags in equity investments, a lesson learned

Wednesday, May 19, 2021

amb
Mark Walker
B. G., Opalesque Geneva for New Managers:

London-based Tollymore Investment Partners is a private partnership that invests in a small number of publicly listed businesses. After returning 224% net in the last five years, the manager has learned a thing or two about potential red flags in investments and how to deal with them.

Tollymore compounds partners' capital over the long term by investing in a concentrated portfolio of undervalued high-quality businesses. The firm's philosophy is patience and independent thought. It partners with investors who think like business owners rather than traders.

Tollymore's long-only global equity strategy, which manages $25m, has annualised 26.7% (net) since May 2016, after returning 77% in 2020. As of April, it is up 3.3% YTD.

The founder and managing partner, Mark Walker, previously worked at Seven Pillars Capital Management, RWC, and Goldman Sachs.

The firm was created "as an effort to create value for long-term minded individuals, family offices, endowments and foundations," Walker said in an earlier Opalesque TV interview. "It is an attempt to create value for those investors with very long-term, potentially perpetual investment problems that they are trying to solve."

Red flags

"Just as I believe that multiple small insights can compound to form a defensible business, so too can multiple small fractures compound to unravel a company's investment merits," Walker says in a Q1 communication to investors seen by Opalesque.

He goes on to list several red flags he should have been aware of in a 2017 investment in Wonderful Sky, a financial PR services business based in Hong Kong, and reflects in the following post mortem: "As the potential value of the company dwindled, upside remained largely unchanged: a classic value trap. I was far too slow to incorporate new information into my appraisal of the company's equity prospects. I collected red flag after red flag, painfully contorting the narrative to justify our continued, and in some instances, increased, ownership. It should have been quite clear to a reasonable observer that business quality had been misanalysed and was deteriorating. Despite espousing the value of intellectual honesty, our ownership of Wonderful Sky was awfully dishonest. I was seduced by extreme cheapness: the company's bizarre capital structure meant that even modest equity declines had extreme implications for business value, resulting in negative enterprise value in the order of hundreds of millions of Hong Kong dollars. In the giddiness of finding this valuation 'anomaly' I lost sight of the core principles of Tollymore's investment philosophy."

Walker has been swifter in recent times to exit investments failing to demonstrate positive fundamental business progress. He offers the following lessons learned from Wonderful Sky, his only significant dollar error, and other investment mistakes:


1. be less willing to give the benefit of the doubt to management when aggregate economics are not at least directionally supporting unit economics;

2. do not pay to average into businesses with temporary problems, funded by businesses earning the right to be larger portions of the portfolio;

3. be careful when fragmented supply consolidates, and the impact that might have on the utility of aggregation;

4. do not get too close to management, a relationship which may muddy the objective assessment of business prospects; and

5.do not be hamstrung by the label of long-term investor - cutting losses is consistent with maximizing long-term value of a group of companies.

Related articles:

04.Jun.2020 Opalesque Exclusive: Long term investor, Tollymore, generates 20% returns p.a. since inception
19.Mar.2020 Other Voices: Taking a long-term investment view is the only way to navigate this period
20.Feb.2020 Opalesque TV: Where patient capital is a clear behavioural edge


Next webinar:

Small Managers - Big Alpha - Episode 2

With larger quantities of capital chasing the same alpha strategies and continuing to erode alpha, savvy investors are turning to smaller and/or emerging managers as they look for alternative sources of return. Opalesque presents a carefully screened panel of investment managers worth taking a look at.

With:
- Robert Zuccaro, Target QR Strategies
- Mukhtader Mohammed, Arbritrium Capital Partners
- Craig Reeves, Prestige Capital Management
- Mark O. Witten, Portal Asset Management

When: Tuesday, June 22th at 10:30 am ET
Free registration: www.opalesque.com/webinar/

You can access the replay of Small Managers - Big Alpha Episode 1 under the same link.

Today's Exclusives Today's Other Voices More Exclusives
Previous Opalesque Exclusives                                  
More Other Voices
Previous Other Voices                                               
Access Alternative Market Briefing

 



  • Top Forwarded
  • Top Tracked
  • Top Searched
  1. SPACs: Is the SPAC boom fizzling out?, SPAC merger mania: Companies that went public via blank-check merger in Q3, SPAC marketing heavily curtailed in House Democrats' draft bill[more]

    Is the SPAC boom fizzling out? From Crunch Base: SPACs may be fizzling out. Since February 2021, when the SPAC (special-purpose acquisition company) craze was booming, a market selloff has wiped out about $75 billion of the value of companies that went public using SPACs, according to

  2. Institutional Investors: Vanderbilt University endowment records 57.1% return for fiscal year, MIT endowment logs 55.5% return for latest fiscal year, AP1 re-tenders $720m emerging markets small-cap mandate, Harvard, world's wealthiest university, sees endowment soar to $53.2bn, San Francisco shifts passive equity mandate to active BlackRock ESG strategy[more]

    Vanderbilt University endowment records 57.1% return for fiscal year From PIonline.com: Vanderbilt University's endowment returned a net 57.1% in the fiscal year ended June 30, according to a financial report on the Nashville, Tenn.-based university. The report did not provide benchma

  3. New Launches: Massar Capital launches new global discretionary strategy, White Oak closes latest direct lending fund at $1.3bn, Aterian replicates speedy fundraise to collect $830m in nine weeks, Sofinnova holds $548m final close for Capital X, Multicoin Capital targets $250m for third crypto VC fund, Tobam launches French bitcoin and blockchain fund[more]

    Massar Capital launches new global discretionary strategy Massar Capital Management has launched a new discretionary macro hedge fund strategy which aims to capitalize on directional trading opportunities across a broad set of global markets. The Massar Macro Directional is the N

  4. How Viking Global became the hedge-fund industry's hottest launch pad[more]

    From Business Insider: Since Dan Sundheim's massively successful launch of D1 Capital in 2018, there have been six more spinoffs from Viking Global that have collectively raised billions - and at least one more is in the works. Among them: Grant Wonders, 31, who launched Voyager Global this ye

  5. SPACs: After early investors flee SPAC deals, day traders rush in, PE-backed electric car maker Polestar worth $20bn in US SPAC deal, Europe's IPO market roars back to life but where are the SPACs?[more]

    After early investors flee SPAC deals, day traders rush in From WSJ: Day traders are targeting some companies that recently closed SPAC mergers, reinvigorating some of the meme-stock excitement that helped make such deals popular early in the year. The latest special-purpose-acquis