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Alternative Market Briefing

Europe is a very fertile ground for this event-driven hedge fund

Thursday, August 11, 2022

amb
James Rasteh
B. G., Opalesque Geneva for New Managers:

The STOXX Europe 600 index is down 50% YTD, and that may mean a good time to invest. "European stocks have sold off this year as concerns from hawkish central banks and soaring inflation to the fear of a recession sent investors fleeing," reported Bloomberg in late June.

Now is an even better time for active investing in European companies, James Rasteh, who manages a European-focused, event-driven strategy, tells Opalesque.

"Since the passage of MiFID, the amount of research conducted by investment banks on European publicly listed companies has declined dramatically. In addition, European markets are trading at near all-time low valuations against other developed markets. Given the confluence of these and other considerations, we have found that our investment process, which can be active when necessary and which delves very deeply into the operations of our invested companies (we work with leading industry executives to conduct our due diligence process) has been and we expect will remain quite fruitful for our investors. I believe that investing should entail active engagement with the management teams and boards of one's invested companies - otherwise, one is just a trader or speculator."

The fund

The Coast Capital Engaged Fund was launched in January 2019 and invests in both private and public equities. The fund was up 15% YTD at the end of June 2022, compared with the MSCI Europe Index which then had lost 22% YTD, and the HFRI Event-Driven index which was down 8%. The fund has annualised 33.6% since inception.

The managers look for and invest in companies which are leaders in profitable and growing industries, but which trade at important discounts to fair value or peers' valuations despite imminent events to release value back to investors, Rasteh explains. "Candidates that meet our investment criteria are usually very esoteric in nature and show low correlation to overall markets in the medium and long term. Our active engagement helps determine the timing of value creation at our invested companies - which has helped us generate uncorrelated, positive performance even in declining markets."

The managers invest with an 'owner's' mentality to operationally improve and create value over the long term and build concentrated portfolios of 8-12 core investments, with an average holding period of two to three years.

The strategy pursues a private equity style investment process and seeks to lead operational and ESG improvements at its invested companies.

Investing in in profitable and growing industries

"Europe has been and remains very fertile ground for our fund given low valuations and market inefficiencies due to MiFID regulations," Rasteh wrote in his July letter to investors. "The recent sell-off has made our target market much more attractive than North American markets. Our new investment candidates offer much higher, uncorrelated returns than we might expect from similar US investments. Furthermore, our target companies have strong and growing cashflows with minimal leverage making them attractive companies to own for public equity investors and PE firms alike."

In 2021, the fund invested in Blue Prism, a provider of robotic process automation software, while it was listed in the junior UK AIM stock exchange at a 90% discount to lower-quality US peers. Coast publicly led opposition to a low-ball bid, attracted new acquirers, and catalysed a bidding war. The firm was acquired by SS&C at a 55% premium to Coast's entry price within three months.

The recent sell-off in select technology stocks has created some world-class opportunities for Coast. After their engagement with Blue Prism, the firm started to look for similar deeply under-valued technology businesses.

"One of the investments we are most enthusiastic about concerns a company which provides the only software globally to facilitate the migration and automation of very big data sets to the cloud," Rasteh explained. "Theirs is becoming a big business very quickly: global data generation is growing exponentially at 30%+ CAGR led by the Internet of Things and increasing digitization, and cloud-based data services are expected reach a total market size of $250bn by 2026."

James Rasteh founded Coast Capital LLC in 2017. He was formerly a PM at JANA Partners and the founder of Investcorp-White Eagle Fund. The firm is headquartered in New York and manages $230m in AuM. Coast also runs a gold mining sector fund.

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