Gator Capital H2 2014: Municipal Bond Insurers in Run-offVW Staff
This is Gator Financial Partners, LLC’s (the “Fund”) second half 2014 investor letter. In this letter, we will briefly review the Fund’s investment performance for 2014, review the investment thesis for some of our larger portfolio themes and holdings, and update you about the Fund’s current net exposure and positioning by sub-sector.
Gator Capital Management: Review of 2014 Performance
Gator Financial Partners had disappointing investment performance in the second half of 2014 with a net loss of 6.04%, essentially giving back the gains from the first half of 2014. The broad market and the Financials sector were up. There were four main drivers of the Fund’s performance during the second half of 2014: 1) GSE preferred shares declined in September and October due to an adverse court ruling, 2) the Fund’s position in Syncora declined 13% reversing some of the gains from the first half of the year, 3) the Fund’s position in Zions Bancorporation warrants declined, and 4) the Fund’s short positions in REITs and its index hedge rose during the period.
Gator Capital Management: Review Major Contributors in 2014
In this section, we review the top contributors and detractors from our performance in 2014. Performance in 2014 was characterized as much by the lack of movement in our portfolio as it was by winners and losers. Several positions had gains in the first half of the year and slowly gave-up the gains through the second half of the year. As an example, our position in Ambac opened the year at $24.20, reached a high of $35 in early March, and ended the year at $24.50.
Gator Capital Management: Portfolio Positioning for 2015
In the following sections, we review several of our major portfolio positions as we enter 2015.
Gator Capital Management: Alternative Asset Managers
We own positions in several alternative asset management companies. We group alternative asset managers into two categories: traditional private equity firms and managers of publicly-traded vehicles such as Business Development Companies (BDCs), Mortgage Real Estate Investment Trusts (mREITs), and Collaterized Loan Obligations (CLOs).
We believe traditional private equity firms are undervalued by the market in three ways. First, we believe the market assigns almost no value to the growth of their businesses when they are actually taking share within the asset management universe. Next, the market is not willing to pay for the potential operating leverage from expansion into adjacent asset management businesses like real estate private equity, distressed credit, and private equity in Europe and Asia. Lastly, the market is valuing their incentive fees at very low multiples when each company has a long history of growing their incentive fee income. We own KKR, Blackstone, and Carlyle Group.
In 2014, we started positions in several companies representing a new type of alternative asset manager. These asset managers manage alternative assets in publicly-traded structures such as BDCs, mREITs or CLOs. We like these businesses because they tend to manage either permanent capital in the form of a publicly-traded company or long-duration capital in the case of CLOs. These asset managers usually manage a small amount of assets on a relative basis, so they have ample room for growth in assets under management (AUM). The market is conservatively valuing these companies at or below 10x earnings as compared to traditional asset managers at 15x earnings. We can envision a scenario where the market re-rates these companies to a premium multiple over traditional asset managers due to their more stable (or permanent) AUM and their higher potential for growth due to their current AUM. Companies we own in this sector are Bimini Capital (ticker: BMNM), CIFC Corp. (ticker: CIFC), and Fifth Street Asset Management (ticker: FSAM).
Gator Capital Management: Municipal Bond Insurers in Run-off
We continue to hold sizable positions in both Ambac and Syncora. We believe both companies will be worth a multiple of their current stock prices as their legacy guaranty exposures run-off. We wrote about Ambac in 2013 and still believe the stock is worth a multiple of its current stock price. Ambac is seeking to recover losses from issuers of RMBS that Ambac guaranteed. We think it is possible that Ambac may recover more money than currently contemplated in its balance sheet from settlements with Bank of America and JP Morgan. Ambac also has a large net operating loss carry forward (NOL) position that could make it an acquirer of a business in an effort to monetize the NOL value. While AMBC’s stock price was flat in 2014, the board recently replaced the CEO with an interim CEO. We think with the change in leadership, the company may be able to move at a faster pace to realize the value we see in Ambac’s assets.
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