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Why Leaping Off Fun Locations Makes You a Better Investor

by trusted insight posted 4years ago 210 views

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.

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.

The same guidebook also pinned the exact location of Gamul Musa otherwise known as Mt. Sinai - now a hippie camping spot.

Speaking of leaping off, let’s get back to our 7 unusual lessons from 20 years of investment failures … Part 1, which contained 4 lessons,  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…)

His average manager size is less than $250M and they’ve generally been in the business a long time plying their unique trade.

For managers that have experienced a setback or a blow up and whose numbers are bad quiz them incessantly on the matter:

In order to prevent any further catastrophe  he hired Carlito Rove @ HedgeProtect to do back office due diligence. At $20k 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.

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 resort 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 (making 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.

Hence 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 market cycles as evidenced by his $2B asset under management since 1996.

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 amongst other similar characters which I had alluded to in Part 1 Lesson #3. Tyler Carson, a difficult dude and cut from the same cloth as Ari was the kingpin in introducing Ari to Steve!

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, combined with patience and tremendous execution will begin to generate eye popping  returns” – Steven 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 Wendywood Partners.

The Loan-to-Own 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 Dude and Phillips (D&P) in 2013 of 3.6X the original debt outlay by Wayward.

Vaulting Wendywood to the top of the league tables for that year. Of import here are two overriding valuation assumptions administered by D&P:

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 valuation from current prices!

Our research & analysis indicates a high probability that these companies are going to start spewing cash … and a follow on revaluation of the same or larger magnitude awaits in the not too distant future.

Thank you for reading my post. I regularly 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 Group 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.

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