How Can Investors Find Opportunities In The Small & Micro-Cap UniverseThe Acquirer's Multiple
During his recent interview with Tobias, Peter Rabover, who is the Portfolio Manager at Artko Capital LP, discusses how investors can find opportunities in the small & micro-cap universe saying:
Tobias Carlisle: When you’re looking at your opportunity set, I see in your presentation you divided into, you’ve got sort of three buckets, there’s an enhanced value strategy, core value and then hedges. Can you just talk us through how you think about each of those different opportunity sets or holdings?
Peter Rabover: Yeah. So look, at the heart at the heart of it, you asked me a question in the beginning and I’m an old school value investor, and so I want low downside probability, high upside. And that’s probably 80% of the portfolios, what I would call just core value of things where I don’t think I can lose a whole lot of money, but they probably have a lot of uncertainty embedded in them. So I want 10 of those or nine of those and in each of them, that’s been the interesting transition from large cap, mid cap when I was looking at something that had like 30% upside and think, oh yeah, that’s pretty good. And here I am just like, man, unless there’s thing has like a 200% upside or 100%, I’m saying like, I’m not interested, because for the risks that I’m taking.
Peter Rabover: So to go back, that core value portfolio, I want to have eight to 10 positions in there and I want to have all of them not be down more than 10, 20% and one or two of them to hit at two or three times. And that’s kind of what has happened in the past, what I’ve sort of seen. Our losses have been smaller on our cost basis and a lot of them haven’t performed as well as we wanted to, but you’ve had two or three home runs and that’s kind of what I think the majority of the returns are composed and I like that. And then on the enhanced portion is that, there’s just companies that … My view on this has sort of evolved a little bit.
Peter Rabover: There are two to 3% positions, maybe 1% positions, and I’m looking for like five, 10 times return, but I’m okay losing like 50% of that. And it’s almost kind of like a VC model on that one, you put in 10, 20 of those and you probably lose money on 50% of them and 80% will break even but those two or three will be your Facebooks or Ubers or something like that. That’s the mindset they’re here. They’re certainly risks but are also good opportunities. And what’s been interesting is that that section of the portfolio has sort of almost been a good minor league team for some of the things we’ve put into the core portfolio as we’ve gotten comfortable with them and realize that there’s a bigger margin of safety than I thought, or our upside was just that much better, that increased the risk reward to increase the position.
Peter Rabover: And that certainly has happened a couple of times. I think I sent you a presentation today. We could talk about this later on Research Solutions, a company we own and I’ve been buying this company over a year and a half and I think we’re over 1% of ownership of the company, even though it’s a tiny, tiny nano count, but it trades $6,000 a day. And I think it’s great … I think it could be like a 10 to 50 bagger.
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