Artko Capital LP
January 23, 2020
Investing in small/micro cap companies and special situations within a concentrated portfolio

Artko Capital 4Q 2019 Partner Letter

For the fourth calendar quarter of 2019, an average partnership interest in Artko Capital LP returned 17.6% net of fees. At the same time, investments in the most comparable market indexes—Russell 2000, Russell Microcap, and the S&P 500—were up 9.9%, 13.5%, and 9.1% respectively. For the calendar year 2019, an average partnership interest in Artko Capital LP returned 61.0% net of fees, while investments in the aforementioned market indexes were up 25.5%, 22.4%, and 31.5% respectively. Our detailed results and related footnotes are available in the table at the end of this letter. Our results this quarter came from broad portfolio contributions from Recro Pharma, Spartan Motors, Gaia, Altria and Research Solutions while a modest pullback in US Ecology warrants and Tesla puts detracted from the overall performance.

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|
P a g e
Peter Rabover
Portfolio Manager
Artko Capital LP
January
23
, 20
20
Dear Partner,
For the
fourth
calendar quarter of 201
9
, a
n average
partnership inter
est in Artko Capital LP
returned
1
7
.
6
%
net of fees. At the same time, investment
s
in the most comparable market indexes
Russell 2000,
Russell Microcap, and the S&P 500
w
ere
up
9
.
9
%,
13
.
5
%, and
9
.
1
% respective
ly.
For
the
calendar
year
201
9
, an
average
partnership
interest in Artko Capital LP returned
6
1
.
0
% net of fees, while investments
in the aforementioned market indexes were up
2
5
.
5
%,
2
2
.
4
%, and
31
.
5
%
respectively
.
Our
detailed
results
and related footnotes
are available in the table at the end of this letter.
O
ur results this qua
rter came
from
broad portfolio
contributions
from
Re
c
ro Pharma
, Spartan Motors
,
Gaia
, Altria
and Research
Solutions
while
a modest
pullback in
US Ecology
warrants
and Tesla puts
detracted from t
h
e overall
performance.
1Q19
2Q19
3Q19
4Q19
1 year
3 year
Inception
7/1/2015
Inception
Annualized
Artko LP Net
10.3%
15.7%
7.9%
17.6%
61.0%
13.3%
101.8%
16.9%
Russell 2000 Index
14.6%
2.1%
-2.4%
9.9%
25.5%
8.6%
41.7%
8.1%
Russell MicroCap Index
13.1%
0.9%
-5.5%
13.5%
22.4%
6.4%
29.6%
5.9%
S&P 500 Index
13.7%
4.3%
1.7%
9.1%
31.5%
15.3%
71.8%
12.8%
On
Finding Ideas
When your portfolio manager first moved to this country in 1991 at a ripe age of 11, from USSR
,
one of
the first
things he discovered was
that people just threw away soda cans on the ground and you could
pick them
up
and (get this!) return them for cash
! Now
of course this is
a normal American cultural concept
but for your portfolio manager coming from a
poor
and
broken
socialist society the fact that you could
actually
find “money” on the ground
in Ameri
ca
wa
s a
mind
-
blowing
concept. Thus, the first few months
living in
United States
were spent diligently making
$3 to
$
5
a day
for a few hours work
picking up and
recycling cans
:
I had my sweet spots where I
could find a dollar worth of cans in just a few minutes, but
in general
it was a grind
looking
for
the cans in
some
less than amazing places
. One glorious unforgettable
day however, I found a $20 bill on the ground and it was arguably one of the best days
of my
young
life up to
that point
. If this sounds like a
n old
Simpsons episode, allow me to assure you that it
played out just like
it,
with soda, pizza and lots of video games
(no Cats show though)
. Now
,
of
course
,
as a kid I was
sure
that this
find
was as a result of my sharp eye and an entrepreneurial
prowess but of course a big part of this find was
just
luck.
In some ways the investment management business is no different.
Last year
was a fantastic year for our
partnership and of course
we are
very pleased with the results
,
a big
part of which came from our usual
“can
searching”
grind
,
but we have to
,
of course
,
recognize that an element of luck was present in finding
our “$20
bill” and while
we are
very excited about it
and there will likely be pizza and video games
,
we
are
still very much
focus
ed
on the
boring
process
es
and
subsequent
results
of
continuing to
find
the “cans”
off the beaten path.
For transparency purposes, given the unusual year, we included a contribution
analysis table at the end of the letter for you to see the sources of our performance
last
year.
You
should
refer to
our
past letters for investm
ent
theses
on
our contributors last year.
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One of the questions we
often
get asked a lot is where do find our cans ... errr investment ideas.
We wish
we could tell you
that
there
is
a magic secret
sauce
process,
but the truth is there are many sources
and
they are all equally valuable to us:
The buyside world has changed significantly over the last two decades with social media and
buyside oriented idea websites becoming a more important part of the investment management
food chain.
Some of the world’s smartest
small cap
investors can
be
found on Twitter or idea
websites.
In a way
it is
a self
-
selecting
group that has embraced new ways of thinking about
investing
, research
,
and communicating.
As a result,
we have
been luc
ky enough to develop a
fantastic network of other likeminded small and microcap investors over the years whose
contribution to our idea sourcing process has gained in importance. For example, our successful
investments in 2019 in Re
c
ro Pharma (REPH) and Al
tria (MO) came as suggestions from investors
within our network
whose opinions we value and have clearly worked out well. While we
would
not
go as far as saying this network is a source of competitive advantage for us
,
it is
becom
ing
an
important part of our research process from new idea sourcing
to occasionally acting
as a
sanity
check on our investment theses.
In general, we
do not
put as much emphasis on management conversation as some of our
counterparts, but
we have
found allocating time to attend investor conferences and meeting with
some interesting management teams can be a good source of ideas. Some of our more recent
su
ccessful
additions of
State National (SNC),
NRC Group
W
arrants (now ECOLW), Spartan Motors
(SPAR)
and Research Solutions (RSSS) came from initial meetings with management at
conferences.
We are
considering allocating more of our new idea sourcing tim
e to attending more
conferences in 2020.
An old but tried and proven method for finding new ideas is screening for them. We generally like
to focus on screening for
companies with clean balance sheets, high Cash Flow Return On Assets
(CFROA) and insider b
uys or
high
insider ownership. Some of the examples of successful
investments from th
is
source have been US Geothermal (HTM), Village Supermarkets (VLGEA),
and Viad (VVI).
Other sources of new ideas have been personal experiences, such as our investment i
n Joint
Chiropractic (JYNT) as a result of
your portfolio manager’s
own back issues; revisiting old ideas
from the watchlist such as Flotek (FTK); or even our own Limited Partner suggestions such as
Sharps Compliance (SMED) or HireQuest (HQI).
Of cours
e
,
these are all
just
initial sources of ideas, of which we counted
close to a 1
0
0 in 2019, where we
spent at least a few hours
reading the financials and doing the first pass of initial due diligence.
Most of
those
do not
make the first
pass cut
-
off for not meeting the criteria we consider important for a successful
investment, some end up on
our continuously expanding
watch list, and a few end up making it
through
the research gauntlet to make it
into the portfolio.
While
we are
pretty comfortable with our sources of
finding “the cans”
we are
always on the lookout for new idea channels and research process
enhancements and look forward to continuously updating you on the ever
-
evolving process.
Core
Portfolio
Additions
Altria
(
MO
)
In what we acknowledge is a “slight deviation” from our microcap focus w
e
opportunistically
added a
9
%
Core Portfolio
posit
ion to Altria, a $95b market cap behemoth, at an
average price of $40.40 early in the
4
th
quarter.
Occasionally the market gods will
give value investors
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a gift in the form of selling off
great
companies that are unpalatable to some investor classes and
gi
ving us an opportunity to buy excellent assets on the cheap. One of our favorite
things about this
business
is
the occasional
opportunities in the market to take advantage of extremely negative
short
-
term
sentiment to buy excellent
long
-
term
assets
. La
st
quarter’s Altria purchase fit perfectly into that
bucket. Earlier in our career
we
had an opportunity to work for a large cap value strategy where we
saw
firsthand
how well the reversion to the mean value investing strategy works
with companies wi
th
long public histories and high quality
consistent
earnings
and
,
in a nutshell
,
this is our main thesis on
Altria.
Altria certainly has its share of problems
including a secularly declining combustible tobacco product
market and overpaying for its Juul a
nd Cronos investments at the top of the market
. However,
the
company’s ability to continuously raise prices
to offset the volume declines
with low price elasticity
impact
and
to
consistently
grow
its
earnings per share
(EPS)
;
its regulatory
capture
moat
and oligopoly
status
all provide
a significant margin of safety at our initial purchase levels.
Additionally
the
future
diversification benefits provided by
its portfolio of non
-
combustible tobacco products, including its
investments in Juul, on!, and IQOS
,
as well as
a
broad portfolio of other “sin” investments including
its investment i
n Cronos Group, one of the largest cannabis companies in Canada
,
and a $14 billion
stake in Am
Bev
that should increase its dividend payout in 2020
,
provide
what we consider
an
additional layer to the
margin of safety
analysis
. Our purchase of the stock wa
s at a forward dividend
yield of over 8.5% which
,
in a period of ultra
-
low interest rates and all
-
time high market valuations
,
implied that the market believed that the company will face negative
EPS and dividend
per share (DPS)
growth
. This was
,
of course
,
all sentiment
and uncertainty driven as non
-
stop and conflicting panicked
headlines of various
knee jerk
regulatory actions against its Juul investment, which represented a
minor portion of its overall enterprise value, drove the stock down 30% from its 2019 high and al
most
50% from its 2017 high.
While almost anything is possible, we consider the possibility of negative earnings and dividend
growth to be improbable in the intermediate future, and it is much
more likely
,
given the
historically
predictable dyn
amics of the
domestic and global
combustible tobacco product markets and the
hedging investments in aforementioned product portfolio, that the company will continue to grow
EPS and DPS at the forecasted mid
-
single digit
growth
levels. The main reason why w
e
do not
like to
invest in large cap companies is because they generally
do not
meet our return hurdles of
double
-
digit
IRRs and the triple
-
digit absolute returns we expect out of our microcap investments
over our
expected holding periods
. We believed that even without a dividend yield re
-
rating our investment in
Altria would provide a double
-
digit IRR return based off expected dividend growth, however,
our main
thesis is tha
t
large caps are mean
reverting over time
. Altria’s 5
-
and 10
-
year historical median
dividend yields have been around 4% to 5%, and our baseline expectation is for at least 5% dividend
growth over the next five years
and an eventual re
-
rating
at
close to 6% dividend yield, ha
ndicapping
for eventually higher
relative interest
rates and more uncertainty than the last 10 years. This would
imply annualized IRRs of 20% to 40% and
we have
already been rewarded in the form of almost 26%
total returns
on this investment
in 4Q19
where we reduced
our position
slightly to
allocate capital to
other
investments
.
We are in the process of slowly adding to new, illiquid Core Portfolio investments which we will discuss
in future partner letters as we finish building
out
our positions.
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O
ther Portfolio Updates
Re
c
ro
Pharma
(
REPH
)
Continuing with the theme of
negative
sentiment gifts by market gods
,
b
y far
our biggest contributor to the performance
this past year
has been our
original 10% portfolio
investment in Recro Pharm
a,
producing over 138% returns, including the Baudax Bio
(BXRX)
spin off
,
since our purchase in the 1
st
quarter of 2019. Our original investment
at $8.00 and
at around $8.
90
cost average was worth $18.33 by year end and an additio
nal $2.86 of realized gains
(on REPH shares
equivalent)
on our sale of
BXRX in the 4
th
quarter of 2019
,
at an average
price
of
over
$7.10. Our
original thesis that the market sentiment on the second rejection
by the FDA
of the (now) BXRX pain
management dr
ug
Meloxicam
,
that pushed the stock down to sub $
6
levels
,
completely mispriced the
incredibly lucrative Contract Development & Manufacturing Organization (CDMO) asset
.
The CDMO
was
growing at high double digits with long term contracts and 40% operating m
argins
;
with an
implied valuation of less than 4
X
EBITDA when the public and private transaction comps were all in
the 12
X
to 16
X
range.
So far this has played out better than expected with management recognizing that the market was
overly
concerned on the focus and the potential for capital misallocation on the venture
capital
-
esque
pharma side of the business at the expense of the much more valuable CDMO segment by spinning
off BXRX on the surprising news that the FDA tentatively allowed t
he appeal of the previous rejections
to go through. While we thought the
roughly ~$2.00 per REPH share
(sub
-
$5.00 per BXRX share)
carve
out may have been too generous
we also recognized our
own
limitations in being able to value the
binomial outcome
of a
singl
e drug nanocap where we have almost zero competitive advantage
relative to our purely pharmaceutical
industry
focused counterparts
.
W
e were happy to take
advantage of the higher price ($7.00+) and liquidity to exit this portion of our position
at a nice po
st
spin
-
off 40% profit.
Moving on
to
th
e
core asset, the CDMO, the company continued to fire on all cylinders in 2019
,
growing
revenues 37% and
operating income
87
% on a YTD basis through 3Q19 with more
growth
expected in the 4
th
quarter
and beyond
,
on the strength of new
customer
additions and growth from
existing clients.
For the most part
we have
kept most of our position intact other than small trims for
risk management purposes and the position remains one of our largest holdings at over 1
3% of the
portfolio.
O
ur original thesis that this best
-
in
-
class asset is for sale by a management team that is
(oddly) focused on the BXRX side of the business and is currently trading at 8X to 9X our estimate of
2020 EBITDA (which has a significant Free
Cash Flow flow through component) while transactions in
a hot M&A market are
still
in the
mid
-
teens
multiples range
is still intact
.
REPH should
continue to
generate significant returns for our partners either through organic growth
and a
multiple
re
-
rating
or an e
ventual transaction and are excited about what the future holds for this investment.
Gaia
(GAIA
)
Our
13% of portfolio
investment in GAIA has continued to be a wild ride since our original
purchase almost five years ago.
In 2019 the company shifted its focus from acquiring subscribers at
break neck
5
0%+ growth pace to a more moderated 20%+ growth rate with a focus on
prof
itability
via
higher quality, stickier subscribers of its
“alternative content” channels versus the fickle yoga
content subscribers
that admittedly have a number of free alternatives
. This transition has not gone
down well with the market, and on the surfa
ce, the fundamental results. However, we felt it was
important to separate the
short
-
term
costs of changing the strategy with the
long
-
term
fundamentals
and the future opportunities for the company. Having grown subscribers 51% in 2018
,
full of lower
quali
ty
cohorts
,
the company was faced with a “double whammy” in 2019 of having a
significant
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number
of the
201
8
cohorts discontinue their subscriptions
and
having to replace
all of
them
,
while
still
having to
add enough to grow which was a
significant
strain o
n the expense base
relative to
revenues
and cash balance.
T
he market was no
t
impressed with the shift
with the stock continuing
to drop over 50% in the first
half
of 2019.
However, our belief
is
as the 2017 and 2018 lower quality cohorts continue t
o leave the user base and
are replaced with, what our quantitative and qualitative research has shown to be, higher quality and
lower disconnect rate subscribers, that in 2020 and beyond
,
the company’s operating expense base
should stabilize and grow at significantly lower rates than the top line which should feed into
profitability and future Free Cash Flow generation.
We have
already
begun to see that transition in
the form of lowe
r operating expenses from $20mm+ a quarter in 2018 to a more stable
~
$15mm
a
quarter throughout 2019 while growing revenues
and gross profits
at
25% to 30%
growth
rate
s
, aided
by price increases
,
which should continue to flow through in 2020. We expect
that 2020 will be a Free
Cash Flow positive year, with the real cash flow generating power of the business model beginning to
show in the 2
nd
half of 2020.
Gaia continues to be a source of controversy within the investment community with many people
bei
ng turned off by the
aforementioned
cash flow burn
, the c
ontent
,
and management’s shift in
strategy. However, we believe it is important to separate personal and emotional views on topics like
Gaia’s
content
from recognizing a relatively large under
-
served
global market clamoring for its content
and
the
like
-
minded community
.
While change in strategy is never a pleasant experience to go
through as a buyside investor, much like ourselves, recognizing
in the first few
years
of our
partnership’s
existence
tha
t our product is not suitable for a
substantial
part of the institutional
investment market and is m
uch more
popular with
High Net Worth individuals
and small family offices
and changing our own marketing strategy
as a result
, we
ca
nnot
help but empathize with Gaia
management team
’s
recognition that a change was needed to have a path to sustainable profitability
rather than continuously
and
blindly throwing marketing dollars on lower quality customers. As a
result of our conviction in the name
,
despite the 50% price
drop in the first half of the year, Gaia was
a source of realized and unrealized profits for us in 2019 as
we have
added and reduced (due to
portfolio risk management)
to and from
our positioning
,
as the stock traded from below $6.00 per
share to ove
r $9.00 twice in 2019. Loosely defined we believe the stock market offers
patient long
-
term oriented
value investors opportunities to take advantage of extreme negative sentiment,
misunderstood fundamentals
,
and stock specific factors
such as liquidity
,
t
o make outsized returns.
While
it is
rare to find all three, in addition to the aforementioned sentiment and fundamental factors,
Gaia’s significantly high short interest relative to its stock float and daily liquidity should provide
additional optiona
lity for outsized returns for our partnership in 2020
and beyond
as management
continues to execute on its new strategy
with an expected shift in fundamentals and sentiment
leading to significant short seller covering.
Research Solutions (
RSSS
)
Our investment in Research Solutions continued to fire on all cylinders in
the fourth quarter and 2019 by appreciating 47% on the strength of growth in its Platforms segment
and an announcement on its partnership with Evidence Partners. In November 201
9
,
the company
announced a strategic partnership with Evidence Partners, a Canadian provider of systematic peer
review software via its Distiller SR
product
. A systematic peer review is essentially a review of most
current
academic research (that is conveniently distributed by the Research Solutions Transactions
segment) on various scientific topics and is usually a regulatory
requirement
for various organiza
tions.
The two platforms are complimentary, not competitive, and
early
on
the partnership can take on
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many forms, from customer list swaps and increased
T
ransaction
segment
revenue starting in 2020,
to an eventual merger serving the corporate and aca
demic scientific research community with an
integrated suite of
top notch
software and published products.
On the
financials
side Research Solutions continued to deliver with what appear
s
to be a stabilized
and finally growing Transactions segment, and a
45% y/y growth in Platforms revenues with 320
platform deployments and a $3.5mm Annualized Recurring Revenue at an 82.4% gross profit margin.
The management team seems to have zeroed in on the most effective selling techniques and with a
blue
-
chip custome
r list we would be surprised if we
did not
begin to
see an acceleration in the top
line growth rate. We expect 2020 to be an initial profitability year for the company with 2021 and
beyond becoming significant Free Cash Flow generation years when we
expect the company to re
-
rate to its high double
-
digit operating profit multiples of its Information Services peers. While the
company’s fundamentals are doing great and there is a decently positive sentiment in the stock, its
liquidity is the real issue,
that despite being a 260% return stock since our initial purchase, has kept
the stock under the radar. We believe 2020 will be the year when the company gets uplisted to Nasdaq
and with close to a $100mm market cap should get the notice of Wall Street.
In
short, we still expect
significant return contributions to our partnership from this holding, which remains one of our largest
positions.
Market Outlook and
Portfolio
Commentary
As of last December
,
the economy had expanded for
127 months
meaning the economy avoided a
recession for the first calendar decade ever.
Buoyed by an incredibly resilient consumer, 3.5%
unemployment rate and 3% wage growth, as well as an overly accommodating Fed policy the economy
continued to grow at its 2.1% trend
rate.
The market, as measured by S&P 500, shrugged off th
e
recession
fears and the negative performance of 2018 and came roaring back 31.5% in 2019 with its valuation
continuing to move almost lock step in line with interest rates, at almost 19x forward
earnings (5.4%
earnings yield).
On the surface, the market appears to be richly valued, though not out of line relative to its average
spread vs 10 Year Treasury bond yield. The economy is on track to shrug off recession fears, and with
lower uncertai
nty on US Trade policy, it looks like we are in for another year of modest
~
2% economic
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expansion. However, the above numbers only tell half the story, as
Royce Investment Partners points
out in its analysis of the market:
Large
-
Cap (+21.7%) and mega
-
cap
(+26.1%) stocks, as represented by the Russell Top 50, have
dominated market
returns over the last 18 months, with the latter especially strong. Small
and
micro
-
caps (3.7% and
-
3.9%), on the other
hand, have lagged. The 18
-
month return spread
between mega
-
caps and micro
-
caps of nearly 30% seems extreme
And while the large caps continue to be richly valued, small and microcaps
appear
to be relatively cheaper
with Russell 2000 stocks trading at 90% of EV/EBIT valuation of its larger cap Russell 1000 counterpart.
The market leadership continues to be
guided
by lower quality
,
non earners, a factor we
maintain
is
unsustainable in the long
run. In short, while there continue to be worries about the rich valuations of the
broader
market we continue to believe that the stratification of high quality small and microcaps versus
the
larger capitalization lower quality stocks is bound to reverse
in the intermediate future. A
scenario
that we favor would be
a
catch up by small caps
versus a
more flatter return environment for the large
caps, whose returns should be driven by
mid
-
single digit
earnings growth,
as its multiple expansion is
unlikely to
continue its
hereto unstoppable march
. With our Core Portfolio’s median market cap at around
$150mm
and with 2020 being a profitability inflection year for a large number of our Core Portfolio
holdings we are feeling positive about the intermediate future.
Pa
rtnership Updates
We welcomed
two
new partner
s
to the partnership th
is quarter
,
bringing our t
otal to
4
5
at
the end of
December
.
We will be in
Miami/Palm Beach
in
mid
-
March
and would welcome any partners that would
like to catch up in person.
Additionally, the
partnersh
ip
is in the process of relocating its registration to
Colorado from California, as wel
l as updating its documents. Please stay on the look
out for communication
from us on these topics as well as our usual year end audit.
Finally, as is annual tradition
,
we will be having
our partnership dinner in
on February
10
th
,
20
20
in San Francisco.
T
he past
year’s event
s
w
ere
well
attended and very fun and we look forward to seeing all of you again
in a few weeks
. We are excited about
the continued growth in partners and assets under management and
,
as always
,
are thankful for your
business
.
Next Fund Opening
Ou
r n
ext
partnership openings will be
February
1
, 20
20
, and
March
1
, 20
20
. Please reach out for updated
offering documents and presentations at
info@artkocap
ital.com
or 415.531.269
9.
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Appendix
A
: Performance Statistics Table
Artko LP Gross
Artko LP Net
Russell 2000 Index
Russell MicroCap
Index
S&P 500 Index
YTD
71.5%
61.0%
25.5%
22.4%
31.5%
1 Year
71.5%
61.0%
25.5%
22.4%
31.5%
3 Year
17.5%
13.2%
8.6%
6.3%
15.3%
Inception 7/1/2015
146.7%
101.8%
41.7%
29.6%
71.8%
Inception Annualized
22.2%
16.9%
8.1%
5.9%
12.8%
Monthly Average
1.8%
1.4%
0.8%
0.6%
1.1%
Monthly St Deviation
5.1%
4.6%
4.7%
5.0%
3.5%
Correlation w Net
-
1.00
0.78
0.75
0.71
Appendix
B
:
2019
Gross
Performance
Attribution
Analysis
Ticker
Company
Contribution
Portfolio
REPH
Recro Pharma
13.4%
Core
SPAR
Spartan Motors
10.4%
Core
JYNT
Joint Chiropractic
8.4%
Core
NRCG/ECOL Warrants
US Ecology
7.0%
Enhanced
SKY
Skyline Champion
6.3%
Core
EEI
Ecology & Environment
4.8%
Core
RSSS
Research Solutions
4.6%
Core
USAT
USA Technologies
3.6%
Enhanced
VVI
Viad
3.3%
Core
HQI
Command Center
2.8%
Core
MO
Altria
2.3%
Core
GAIA
Gaia
2.0%
Core
Rest of Portfolio
2.6%
Total (Gross Returns)
71.5%
9
|
P a g e
Legal Disclosure
The Partnership’s performance is based on
operations during a period of general market growth and
extraordinary market volatility during part of the period, and is not necessarily indicative of results the
Partnership may achieve in the future. In addition, the results are based on the periods as
a whole, but
results for individual months or quarters within each period have been more favorable or less favorable
than the average, as the case may be. The foregoing data have been prepared by the General Partner and
have not been compiled, reviewed or
audited by an independent accountant and non
-
year end results
are subject to adjustment.
The results portrayed are for an investor since inception in the Partnership and the results reflect the
reinvestment of dividends and other earnings and the deductio
n of costs, the management fees charged
to the Partnership and a pro forma reduction of the General Partner’s special profit allocation, if
applicable. The General Partner believes that the comparison of Partnership performance to any single
market index i
s inappropriate. The Partnership’s portfolio may contain options and other derivative
securities, fixed income investments, may include short sales of securities and margin trading and is not
as diversified as the indices, shown. The Standard & Poor's 500
Index contains 500 industrial,
transportation, utility and financial companies and is generally representative of the large capitalization
US stock market. The Russell 2000 Index is comprised of the smallest 2000 companies in the Russell 3000
Index and is
generally representative of the small capitalization U.S. stock market. The Russell Microcap
Index is comprised of the smallest 1,000 securities in the Russell 2000 Index plus the next 1,000 securities
(traded on national exchanges). The Russell Microcap i
s generally representative of the microcap segment
of the U.S. stock market. All of the indices are unmanaged, market weighted and reflect the reinvestment
of dividends. Due to the differences among the Partnership’s portfolio and the performance of the eq
uity
market indices shown above, however, the General Partner cautions potential investors that no such
index is directly comparable to the investment strategy of the Partnership.
While the General Partner believes that to date the Partnership has been ma
naged with an investment
philosophy and methodology similar to that described in the Partnership’s Offering Circular and to that
which will be used to manage the Partnership in the future, future investments will be made under
different economic conditions
and in different securities. Further, the performance discussed herein does
not reflect the General Partner’s performance in all different economic cycles. It should not be assumed
that investors will experience returns in the future, if any, comparable t
o those discussed above. The
information given above is historic and should not be taken as any indication of future performance. It
should not be assumed that recommendations made in the future will be profitable, or will equal, the
performance of the sec
urities discussed in this material. Upon request, the General Partner will provide
to you a list of all the recommendations made by it within the past year.
This document is not intended as and does not constitute an offer to sell any securities to any pe
rson or
a solicitation of any person of any offer to purchase any securities. Such an offer or solicitation can only
be made by the confidential Offering Circular of the Partnership. This information omits most of the
information material to a decision whe
ther to invest in the Partnership. No person should rely on any
information in this document, but should rely exclusively on the Offering Circular in considering whether
to invest in the Partnership.
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