Month: July 2017

Today, I’m Going To Talk About Private Equity – TTI’s Personal Experience

Small caps, Mid caps, Large caps, Blue chips, Growth companies blah blah blah. As long as it’s listed, chances are it’d be discussed to the death somewhere.

But there are hardly any NO blog posts talking about private equity.


So let me be contrarian here. (Afterall, that’s the tagline of this blog right? Once in a while gotta be contrarian, even content also contrarian… LOL)

565) Private equity image.jpg

Aside from my holdings in public listed companies, I have a relatively modest portfolio of private equities. (For the uninitiated, PE = private companies that are not listed. They may be in the start up phase, may be in growth phase, may be mature companies etc. As long as they are unlisted, they are PE)

I haven’t previously written about the PE companies that I own because… well, I can’t say much actually. The share price of public listed companies are widely available, but somehow when you invest in PE companies, the details of your investment are shrouded in secrecy. The stake you buy, the price you invest in, leverage taken on, terms attached to the stake etc are all P&C.

Anyway, recently, this piece of news caught my attention:

It caught my attention because if you own any PE, you’d know that Razer’s story is the classic PE investor’s wet dream.

It’s how a PE investment should go. (Facebook is another example I guess, but I am no techie and don’t try to pretend to be one)

Basically in PE, you get the opportunity to buy a sizable stake in a company that’s unknown to most others, for a very modest sum, and you wish/pray/hope that it becomes the next unicorn, multiplying your investment many many MANY times over, and you ride off into the sunset with it.

(Actually, I’m talking more specifically about venture capitalism aka investing in the startup phase… but that’s PE too.)

Everyone talks about listed companies, and their ROIs and how much they hope to or have profited from buying this and selling that. But private equity is where the seeds for eye popping, world beating returns are truly placed.

Don’t believe me? As always, TTI always substantiates:

566) LHY stake.jpg

No wonder can afford to buy 38 Oxley Road at market value.

567) Hartono's stake.jpg

568) Vincent stake.jpg

To: Min Liang

ZZZZZ. Why get funding from Malaysia and Indonesia when TTI is right here in SG? I would’ve invested. $100k? $200k? $400k? I can afford that… come on, you could’ve come to me!

569) Koh Boon Hwee stake.jpg

570) Chen Family stake.jpg

OK, just from this, I can tell that Lee Hsien Yang and Koh Boon Hwee were very early investors. Like Series A stage early.

Cos Koh Boon Hwee’s $198,700 is now transformed to… $37-freaking-I cannot believe it-million. This puts even Optimus Prime to shame.

Don’t get me started on the $794 million figure.

Alright, now go compute some figures and work out what’s the ROI figures for each of those investments up there. Then try to find something in the public listed entities, and see if you can find similar results. It just doesn’t happen very often. Not even in crises.

Now, quick, make an intelligent guess. How well exactly is Razer doing for the stakes to grow that quickly? What’s Razer’s annual profit?

Many millions? That’s right…. many millions…. in LOSSES!

“Its net loss increased from US$20.4 million in 2015 to US$59.7 million last year. (2016)”

Yup. Who says you need to be profitable to make money?!

It doesn’t make sense to the simple mind of TTI, but I’ve long realized that a lot of things don’t make sense. Almost all unicorns don’t make sense to me. Your Facebooks, Snapchats, Ubers, Dropboxes etc of the world. But hey, their founders have millions of reasons to disagree with me, quite  literally.

Recently, I read a TheEdge article:

Mr Aidil Zulkefli.

This name jumped out at me.

Then I remembered.

5 years back, I was in discussions with him with a view to invest in his start up, which is really, the predecessor to his current

571) Loan garage.jpg

Boy. This guy knows his stuff. Passion emanates from him. I guess you need to have that to survive (and do well) in such a highly competitive field, with massive odds against you.

572) Patent.jpg

Obviously, I wouldn’t be able to share the investment deck or patent reports since I’ve signed a NDA.

Anyway, after a long period of discussion, and after having done my DD, eventually I didn’t pursue this any further. Simply because I didn’t understand how there’d be enough scale in a market as small as SG. Monetization is also going to be difficult with the relatively small number of lenders.

Anyhow, now I’m reading that Aidil has moved on to Indonesia, and at least from the article, it seems like he knows where he’s headed. Indonesia just seems like a much much more appropriate place for micro loans compared to SG.

Also, I read with interest that the current business model is tweaked to be rather different. For loan garage, the monetization model is via a paid membership model from the lender. Now, UangTeman IS the lender.

My guess is that he learnt from his previous experience that it’d be very difficult to get scale and most lenders would be reluctant to subscribe to his paid membership model. “So screw them. I’ll do the lending myself….”

Investing in PE is obviously quite different from your typical public companies. For starters, you’re very much at the mercy of the management team.

As far as I know, there are minimal rules when it comes to disclosures. To put it crudely, there are a million and 1 ways that the guys asking you for money can screw you up, if they choose to. Any protective covenants should be discussed BEFORE you sign anything. After that, just take it that you have donated your investment away.

All the stuff that you see in the movies where complex deals are concluded on a gentleman’s handshake……. yea. That’s why they are in the movies.

In reality, if it’s not in black and white, it doesn’t exist.

If we’re talking about the start up stages, a lot of times, you’re really betting on the jockey, not the horse. At this stage, you don’t really have much to work on. Everything is airy fairy.

The figures don’t even need to be massaged to look good. They are just…. created. Invented. There are no PEs, PBs, FCFs, EBITDAs etc etc to look at.

It’s kinda like love. You get attracted by the appearance (story) first. It’s only after a period of being involved, then you’d realize if this is the one for you. Only difference is that now, you’re asked to marry right off the bat before you can be involved. Much tougher.

The good news is that thus far, my PE portfolio hasn’t been too bad actually. I have had zero blow ups thus far, and all are doing fairly ok. 1 of which is in the pre-IPO stage, and will likely be listed here sometime in 2019/2020.

(But since my stake is in 1 of the many numerous subsidiaries of the entire entity… no, I’m not going to do a Chen Min Liang)

Oh, 1 more thing when it comes to PE.

And this is really my personal opinion: Steer way clear of F&B businesses.

I say this because personally, it seems like every Tom Dick Harry wants to be an entrepreneur these days and the F&B just seems like the most common thing to get into. The odds are heavily stacked against you.

So my personal golden rule is that if it’s F&B, I don’t even want to consider it. No chance.

It can be the next Lo and Behold Group and it’s fine with me, I’d still give it a miss.

Alright, to end off this post, I’d just include an interesting pic:

573) PE share certificate

Yup. An actual, physical share certificate.

Don’t ask me why this business chose the share certificate route. I have no idea.

Everything else is all electronic, via cdp share scrips these days. The funny thing is, each time the share base gets enlarged with other investors, I get more share certificates issued to me, so I actually have a couple of these filed up.

I’d have thought they are relics.

Ah well, something interesting to own. How many people have seen an actual share certificate these days, much less own one?!

A Unique Arbitrage Situation + Results From Options Strategy (3rd Month)

June was a really tough month work wise, so updates have been few in between. I’ve only just realized how busy I was, when my lunch buddy noted that I’ve only had 2 weekday lunches the entire month, and had to work through all the other lunches.

Anyway, busy is good. I love busy. Time passes quickly when one is busy.

Speaking of which, I’ve also been busy on the options front. Busy fighting fires that is.

Over the past month, Valeant’s share price shot up rapidly.

560) Valeant returns.jpg

Unfortunately, I sold a bunch of call options just prior to the rapid increase, and those got exercised. The good news part is that I took quick remedy actions, and sold several put options, and since the share price has continued rising unabated, all of the options have expired or are expiring, while I’m keeping the fat premiums (Fat because the volatility has been just cazy here!)

As a continuation of previous results (Geo Vs GEAR! + Options Update), here’s the most recent month’s activities:

561) Options activity July 2017.jpg

562) Options activity July 2017 II.jpg

Total cashflow received from 16/06/2017 – 14/07/2017: US$13,404.41

wow. I never expected it to be so consistent thus far. It’s curious, because every contract is different, with different premiums and stuff. Yet on a monthly basis, the total CFs attained has been rather consistent:

Total cashflow received from 12/04/2017 – 12/05/2017: US$13,657.25

Total cashflow received from 13/05/2017 – 13/06/2017: US$13,911.82

Total cashflow received from 16/06/2017 – 14/07/2017: US$13,404.41

Anyway, what’s significant in the past month, is divestments in my positions in WFC and EWZ.

Both positions were built up in prior months mostly via the exercising of sold put options, and partially by direct purchases. I would classify both as deep value, opportunistic purchases.

The WFC stake was bought after the WFC accounts scandal, which claimed its CEO John Stumpf’s job. Having had prior experience with WFC, I was fairly comfortable building up a sizable stake in the midst of all the controversy. Anyway, I’d be happy selling options on both sides, both puts and calls. As it turned out, the share price has recovered much faster than I expected.

EWZ was also bought on the back of the Brazilian political scandal. I sought an ETF in this case, as I didn’t have the time to analyze any specific Brazilian company. In any case, I figured that’d be the safest. Since then, the share price has rallied somewhat, and I’ve pocketed both the premiums, as well as the capital appreciation.

I’d add that the total divestment gains of approximately $6.8k USD are NOT part of the CFs tabulation above. The CFs specifically only includes nett premiums from options activities.

The total CFs received is still a tad below that of last month’s, but I’m definitely pleased.

What’s important is a repeatable, successful process. As long as it’s fairly repeatable, I can see how it’d work out to be very favorable in the long run. It’d also give me confidence to increase my allocation.

I’ve also been building up positions in an arbitrage situation:

CenturyLink’s acquisition of Level 3 Communications.

Some background here: CenturyLink is a telecommunications company in the US, probably similar to Singtel. It is the 3rd largest in the US, behind AT&T as well as Verizon.

CenturyLink has a presence throughout US, but is strongest in the west coast, as well as the states in the middle. It also operates data centres in Europe and Asia Pacific markets.

Late last year, CenturyLink announced their intention to acquire Level 3 Communications. Well, although it’s an acquisition, in essence, it’s actually a merger of sorts, since equity of CenturyLink will feature in the purchase of Level 3.

Recently, the acquisition has achieved approval from all remaining states, so the deal is definitely going through.

There are 2 major, clear benefits to this merger:

  1. Synergies. The 2 companies clearly are quite different and have complementary businesses. Level 3 has an extensive fibre network that’s currently underutilized. CenturyLink on the other hand, would suddenly have access to an additional 200,000 miles of fibre optic networks, and can cross sell services to their much larger customer base, with better connectivity and better access. Level 3 Communications also have a much larger global presence that CenturyLink can tap upon. Particularly so in Latin America and EMEA.
  2. Tax! Having spent the cash in prior years to build the extensive network, Level 3 Communications have a gigantic amount of tax losses that the combined enterprise can utilize to offset future taxes. How significant is this tax benefit? Very significant apparantly! Level 3 has nearly $10bil worth of net operating losses in it’s books, waiting to be utilized to offset future taxes. To put things in perspective, CenturyLink’s net operating income in the 3 years prior are between $2.3bil to $2.6bil

563) CenturyLink's financials.jpg

This also means that post-merger, the future CFs for the company will be significantly increased (since they have tax credits for the next few years) The company has already indicated that they’d use less than $2bil worth of operating losses as tax credits, so the combined entity will likely pay next to  nothing on taxes for the next 5 years.

Seeing that the tax expense for 2016 was $394mil… this means that the company will have at least $400mil extra cold hard cash than prior years, since it wouldn’t have to pay this amount as taxes.

So where’s the arbitrage in this?

The deal is fairly complex. (It has to be, otherwise it’d be priced 100% correctly all the time)

CenturyLink will buy Level 3 Communications for $26.50 per share, and give 1.4286 CenturyLink shares for each Level 3 Communications share.

The deal is expected to close fairly soon, before the end of the year.

Now, at the time of writing this, Level 3 Communications share price is now $58.12

CenturyLink’s share price is around $23.

For each Level 3 Communications share, shareholders stand to receive the equivalent of $59.36 worth of “value”

Whereas Level 3’s share price has been fairly constant, CenturyLink’s has fluctuated fairly significantly of late, hence there has been arbitrage opportunities to acquire Level 3 shares at a discount to what the deal would entail.

Of course, it all depends on the ultimate share price of the combined entity.

So, how am I building my long position?

I currently have sold multiple in the money put options on both Level 3 Communications, as well as CenturyLink. These are likely to be exercised. Simultaneously, I have also sold far out of the money call options on all positions that I’ve built, as well as those that would likely be built upon assignment of the put options.

This, IMO, is the best way with the lowest risk and highest chances of success. The premiums I’ve received on both call and put options are significant, and if everything goes as planned, I’d have significantly reduced my purchase price of the combined entity CenturyLink.

As an added sweetener, CenturyLink pays a hefty dividend. The company has already committed to maintaining their dividend of $2.16.

That works out to be a yield of 9.4%!

And since dividends are paid quarterly, technically it’s slightly higher since I can utilize the cash. With my options strategies, time is of an essence. I’ve only allocated a relatively small portion of my portfolio, and yet I’m already seeing the effects of time whilst using such a strategy.

In the long run, this difference may well work out to be worth several tens of thousands of dollars every month!

Now, seeing that CenturyLink’s CF will not only be maintained, but IMPROVED significantly post-merger, there’s no reason why the dividends cannot be maintained. At 9.4% yield…. I think that’s a significant buffer.

Long time readers of SG TTI would also understand how much emphasis I place on CFs. That is a true barometer of the success of the business in the long run. (In the short run though, earnings is what makes headline news)

I am keeping an eye on the other operating metrics of the company though. As of FY17Q1, financials deteriorated slightly, with earnings coming in at $163mil, vs $236mil for FY16Q1.

Core revenue also dropped, offset only partially by a corresponding drop in operating expenses.

In short, it’s not all rosy, as the operating metrics seem to have gotten weaker.

564) CenturyLink FY17Q1.jpg

Post-merger, I’ll be monitoring to see that the management team executes on their state synergistic goals. I’ll probably continue selling call options on my positions, although I haven’t quite decided on the exact strategy i.e. what strike price options do I sell and how close, relative to the share price.

Since the dividends are significant, ex-dates will also play a significant role in determining the premiums of the option contracts.

Alright, that’s it for this post.

As always, good luck hunting!