Greg Silberman CFA CAIA CA(SA)
February 02, 2017
Greg Silberman CFA CAIA CA(SA) @ Atlanta Capital Group
Chief Investment Officer at Atlanta Capital Group

Why Leaping Off Fun Locations Makes You a Better Investor

  

They discovered ancient Egyptian chariots here ... Hurghada, Egypt

Beneath the ocean floor, a little way offshore, submerged chariots dating back to 1446 BCE. 

Recognize that date?

Its unlikely most of us do.

It was the year of the Exodus from Egypt!

Yip, these chariots (apparently) are the selfsame that the Red Sea came crashing down on when the Egyptian army chased the departing Hebrews into the parted Sea.

But that's not why I was there.

For me it was merely a convenient LEAPING OFF point. After sailing down the Nile from Luxor to Aswan, Hurghada was the narrowest point between mainland Egypt and Sharm el Shek in the Sinai Peninsula.

1
Why
Leaping Off
Fun Locations
Makes
You
a
Better
Investor
They discovered ancient Egyptian chariots here ...
Hurghada, Egypt
Beneath the ocean floor, a little w
ay offshore, submerged chariots dating
back to 1446 BCE.
Recognize that date?
2
Its unlikely most of us do.
It was the year
of the Exodus from Egypt!
Yip, the
se
chariots
(apparently) are
the
selfsame
that the Red Sea came crashing down on when the
Egyptian army chased the departing Hebrews into
the parted Sea.
But that's not why I was there.
For me it was merely a convenient
LEAPING OFF point. After sailing down the Nile from Luxor to Aswan,
Hurghada was the narrowest point between mainland
Egypt
and Sharm el
Shek in
the S
i
nai Peninsula.
Who kn
ows, maybe it was true!
Th
e
same guidebook
also
pin
ned
the exact location of Gam
ul Musa otherwise known as Mt. Sinai
-
n
ow
a hippie
camping
spot.
Speaking of leaping off,
let’s get back to our 7 unusual lessons from 20 years of investment failures ...
P
art
1
,
which contained 4 lesso
n
s
,
can be found here
. Recall we were
using the narrative of a manager
due diligence for
Wendywood
Partners and its owner Steven Skinner (names changed to protect the
innocent
and not so innocent...)
Part deux follows:
Lesson #
5
: Your managers need to have
baitsim
Translation: baitsim is the Hebrew word for Eggs aka. Stones or B*lls
Like me,
Steven
is in the bus
iness of
handicapping managers.
–
he runs a fund of funds.
Here’s his approach ... notice it is somewhat different to your normal manager selection process:
In order to achieve
asymmetric portfolio
returns
(part
1
lesson #4)
one, by necessity, must engage
smaller more niche/opportunistic emerging managers.
His average manager size is less than $250M and they’ve generally been in the business a long time
pl
ying their unique trade.
3
Q: If they’ve been in business so long why are they sub $250m in AUM?
A: Great question padawan you’ve discovered the secret sauce
For managers that have experienced a setback or a blow up and whose numbers are bad quiz them
ince
ssantly on the matter:
What were you thinking, why?
What's a reasonable expectation for future returns
Catalyst for future returns and most important;
What did the manager do during the drawdown [
Steven
likes to see a manger NOT derisk after
the drawdown has occurred but acknowledge the mistake and ride it back up fully invested ...
ballsy]
This approach is not without its drawbacks.
Steven
has been snared by 2 frauds.
Bay Hill Opportunities
and
Sea
shore Equity Long/Short
Luckily neither was big enough to implode his fund and no gate has ever been employed.
In order to prevent any further catastrophe
he hired
Carlito Rove
@ Hedge
Protect
to do back office due
diligence. At $
20
k per manager it is money WELL spent ...
Carlito
is extremely thorough!
In addition
,
this approach to investing requires some protection from the terms of
Wendywood Partners
fund itself.
1.
one year hard lock than quarterly liquidity with
90
days’ notice
;
2.
Diversified client base of 30+ family offices and high net worth individuals with no client > $3m;
3.
Get this
--
Class A Investor has a 1% base fee and a 10% carry with a high water mark.
Class
B
Investor has a 2% base fee, a 50% hurdle r
ate, and a 5
0% carry with a high water mark
(talk about b*lls; Steven only offers such terms because he knows he can get these kind of
returns!)
4
Lesson #6: Numbers are the language of business, numbers don’t’ lie, reduce
everything to numbers however impr
ecise
The Big Binary Elephant bet at the moment is ...
The Story of
a Loan
-
to
-
Own Strategy
In the world of investing there are few strategies more predatory than loan to own.
In a game of chicken an investment manager lends money to a corporation at
higher than usual rates in
exchange for a large portion of assets pledged as collateral. The manager's aim is for the company to
default on the debt and assume control of the assets!
A corporation will typically only use such usurious lending as a last res
ort when other traditional
avenues of financing are no longer
available
OR expediency makes it more attractive.
From the investment manager's perspective the ideal corporation is one in a cash burn situation (mak
ing
it necessary to come back to the well in
the future) with cash generation prospects in the near future ...
why?
Because the manager can charge a sufficiently high rate and if a restructuring takes place there is an
opportunity to grab the cash that the company could potentially be generating.
5
Hen
ce the manager prefers a late stage startup with a unique product or service protected via patent or
some other moat.
Ari Gold
is one such manager and
is a master at analyzing, structuring and executing complex
transaction during different business and m
arket cycles as evidenced by his $
2
B asset under
management since 199
6
.
Let's not kid.
The makeup of such an investor tends to be quirky to say the least. Usually not very personable,
mathematically
orientated
, a WONK.
Such a character is usually found a
mongst other similar characters which I
had a
lluded to
in
P
art
1
L
esson #3. Tyler Carson, a difficult dude and
cut from the same cloth
as Ari
was the kingpin in
introducing
Ari
to Steve!
Complex transactions necessarily contain hair. Sometimes lots of hair
.
Which is why
Ari
has been sued a number of times.
The
Wimbledon
Pension fund sued
Ari
in
a separate lending
matter
-
a case in point.
A lending strategy turned out to be a
Ponzi
scheme long after
Ari
had removed himself and clients from
the situation. Now the matter resides in the courts where creditors are aiming at
Ari’s
fund for
restitution of ill
-
gotten profits. The matter is pending.
“The confluence of perfect original lending conditions, combin
ed with patience and tremendous
execution will begin to generate
eye popping
returns”
–
Steve
n Skinner February 2011
Partners letter.
In 2006
Ari
began making loans to a number of corporations ... two in particular will feature in this
docket ...
Wendywood
joined the party in 2009 by investing in
Ari’s fund Wayward IV LP
. As of the date
of this writing this investment comprises 80% of We
ndywood Partners
.
The
L
oan
-
to
-
O
wn strategy marched through the financial crisis of 2007
-
2009 and two portfolio
companies had to endure a bankruptcy under the hands of
Wayward
.
Said companies received
post
-
bankruptcy
valuations by
external valuation agent
Du
de
and Phillips
(D&P)
in 201
3 of 3
.6X
the original debt outlay by
Wayward.
6
V
ault
ing
Wendywood
to the top of the league tables for that year. Of import here are two overriding
valuation
assumptions administered by
D&P
:
1.
A 25
% haircut for both companies as
they are considered
to be
level III
Illiquid assets;
2.
A cash flow discount rate / weighted average cost of capital of 2
8
%;
Both ‘assumptions’ applied as penalties for illiquidity, lack of cash flow and access to outside capital
--
a
full redress
of which
will result in a 10x increase in val
uation from current prices!
And t
hat’s why we joined the fray!
Our research & analysis indicates a high probability that these
companies are
going to start
spew
ing
cash ... and a follow on revaluation of the same or larger magnitude
awaits in the not too distant
future.
In part
-
3 of the series we
discuss the companies
,
our analysis
and share our final
unusual investment
Lesson #7!
Until then....may the invest
ment
winds be at your back
Greg
---
Thank you for reading my post. I reg
ularly write about private market opportunities and trends. If you
would like to read my regular posts feel free to also connect on
LinkedIn
,
Twitter
or via
Atlanta Capital
Grou
p Investment Management
.
Nothing in this article should be interpreted as a recommendation to buy any security. Please conduct
your own due diligence.
Greg Silberman is the Chief
Investment Officer of Atlanta Capital Group
Investment Management
[ACGIM]
. Atlanta Capital Group
Investment Management
specializes in creating custom private market
solutions
for RIA/Family Office clients.
7
Advisory Services offered through Atlanta Capital
Group
Investment Management
.
Main pic source:
Hurghada
Egypt
Elephant Pic
Next
get_app  Login to Download this PDF
More from Greg Silberman CFA CAIA CA(SA)