During his recent interview with Tobias, Steven Kiel of Arquitos Capital discusses how S1 and S3 filings provide a great source for investment opportunities. Here’s an excerpt from the interview:
Q4 2019 hedge fund letters, conferences and more
Tobias Carlisle: Well, let’s go back to Arquitos, how are you finding your ideas there? You say you don’t screen, so what’s the process for generating ideas?
Steven Kiel: So, I always believed in primary sources, so my background is as a recovering lawyer, join the club, you’re a member as well.
Tobias Carlisle: Yeah.
Steven Kiel: We’re not alone. And so, we’re not averse to glancing through… you might need to cut that.
Tobias Carlisle: Steve’s logo just fell off the wall.
Steven Kiel: We’ll go back to the question there. Hopefully it’s not an omen.
Tobias Carlisle: It’s not portentous.
Steven Kiel: Yeah, how the market’s doing today. No, so my background was as a recovering attorney, and so we are not averse to reading through several hundred page documents, it’s not just the 10-Ks, but it also might be an employment agreement, and things like that, that are essentially SEC filings.
Steven Kiel: And so, that’s where I go, I go to the primary sources, I have a number of SEC alerts set up. When you think about an S-1 filing or an S-3 filing, I love those, we get five, seven, 10 of those a day, obviously don’t read through each one of them but I at least glance through and set aside some of the more interesting ones. And so, that’s a great place to look, looking through employment agreements, I’m looking through different key terms, such as contingent value rights, rights offerings, tender offers, and occasionally I’ll come across something interesting and you follow that lead.
Tobias Carlisle: What was your area of practice as a lawyer?
Steven Kiel: So I did a lot of government investigations and some things like that, some MNA, more on the HSR side, second requests and things like that. And I actually am still a lawyer in the army reserves, about 20 years in, a defense attorney is a little bit different than the private practice.
Steven Kiel: But, when I was practicing, this was 2007, eight, nine period, there were a number of companies where you really see behind the scenes. When you’re doing some sort of government investigation, you’re reading emails and different background information on the leadership of public companies oftentimes, and it gave me an appreciation for how little the public actually knows about what goes on behind the scenes.
Steven Kiel: And when you think about this idea of alignment of interest; I mean we all want alignment of interest with the investments, [inaudible 00:26:48] passive investors primarily, and so you’d have to be able to trust the decision making of the public company, but you’re just not going to know nearly as much as you think you know. Whatever you think you know it’s 10% of what is actually going on behind the scenes.
Steven Kiel: And being a lawyer and reading that type of stuff gave you even more of an appreciation to make sure that you truly have the alignment of interest. So, you do have insider ownership, you do have good capital allocation decisions made, and there’s not a very many companies out there like that, which is why you have to concentrate.
Tobias Carlisle: So, your primary area of search is the S-1s, S-3s, which are the security issuance, and your contingent value rights and things like that, so you’re looking for that transitional period?
Steven Kiel: Yeah. And I’ve found a number of different things through the years. I mean, I’ve been investment in 2012 with a bankrupt ice company, for example there’s some equity stub value coming out of that. Had a great investment in 2015, 16, 17, Intrawest Resorts, which was a company owned by a Fortress fund, where they did a huge tender offer and then ended up getting sold.
Steven Kiel: So, that type of, it depends on each situation, but you’re really looking for something that’s company specific, that has less risk and less variables outside of the company, and really something specific as to what’s going on where management has control over the situation that can control the variables.
Tobias Carlisle: Right. So, are there many S-1, are there a great deal coming through?
Steven Kiel: Yeah. You know, and I think there have been, but they, I think over time are, especially as… Give it the next couple of years, I’m actually excited about more corporate restructuring, especially with larger companies. The first four, five, six years of the fund I had invested some smaller companies obviously, we talk about Enterprise Diversified, a very small company, but I also owned obviously the Bank of America TARP Warrants, I owned Philips 66 spin-off. I had some larger companies; Iron Mountain went through a conversion into a real estate investment trust, and that an opportunity, I think it was 2014 time period. And so, those are some larger companies.
Steven Kiel: And then as the markets have reacted in the way that they have the last few years, those types of obvious opportunities start to go away, and there’s not as many company specific corporate restructurings. But as we get a correction, as we get more turbulence in the market, I think that’ll provide more mid-cap and large-cap company introspection, which would create some opportunities for me to look at.
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