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Omaha Dinner P. 3
Value Investing Oaktree Capital Management
Reception P. 4
Since the formation of Oaktree in 1995, Mr. Marks has been
Howard Marks, responsible for ensuring the firm's adherence to its core
CFA P. 6 investment philosophy; communicating closely with clients
Student concerning products and strategies; and contributing his
experience to big-picture decisions relating to investments and
Investment Ideas P. 13
corporate direction. From 1985 until 1995, Mr. Marks led the
Paul Sonkin and groups at The TCW Group, Inc. that were responsible for
Paul Johnson P. 15 investments in distressed debt, high yield bonds, and
Howard Marks convertible securities. He was also Chief Investment Officer for
Jeremy Weisstub
and Damian (Continued on page 6)
Creber, CFA P. 27
Mario Gabelli 67 and Professor Tano Meredith Trivedi with Professor Bruce
Santos, Co-Director of the Heilbrunn Greenwald
Center for Graham and Dodd Investing,
at the 2017 Omaha dinner
Volume I, Issue
Page23 Page 3
The fun starts right at registration Mario Gabelli 67 mingling with other
investors in Omaha
Mario Gabelli 67, Paul Hilal 92, and David Samra 93 Cheryl Einhorn enjoying the panel
Alexander Burnes 18, Aniket Nikumb 18, Kevin Nichols Jade Lau 18, Eunice Lee 18, and Claire Jin 19
18, Gustavo Campanha 18, and Adam Schloss 18
Tano Santos, Juliana Bogoricin 15, A group of second-year students posing with a few alumni
and Chad Tappendorf 18
Harvey
OaktreeSawikin
Capital Management
changes as the market changes, HM: Theres no way to know. and amass money for a new
as prices change. There have Theres no way to know how hedge fund? The answer is that
been factors about the market much of the active money has the compensation has been
that made actives perform unfair on average, and people
badly for the last dozen years, have caught on. I wrote a
but that doesn't mean it's going ...the one thing I memo about hedge funds in
to be that way forever. If 2004, and I said that when I
people take their money out of know about first heard about hedge funds,
active management, then active investment markets is which is probably about 1974,
managers would fire all their there were 10 hedge funds run
analysts, and then the market that there's no such by 10 geniuses. When I wrote
would not stay efficient. Then that memo in 2004, there
the necessary condition is thing as a permanent were 8,000 hedge funds, and I
satisfied for active to work. doubted they were run by
The point is, I don't think this good idea. 8,000 geniuses. They shouldn't
move is permanent, I think it's all be paid like geniuses. That's
rotational. to go to passive before the the bottom line. None of this
things I'm talking about happen. stuff is hard, only being a
Now, having said that, over the Today, 37% of the equity superior investor is hard.
last 50 years, from time to mutual fund assets are passive.
time, people put too much I would think if it got to 60% G&D: Do you think the fee
faith in investment managers. or 70%, that would change structure needs to change in
They gave them too much things. I could be wrong. accordance with some of these
money to manage and they pressures?
paid them too much to do it. I G&D: Along with the
believe the average mutual movement to passive, there HM: On equities, I don't think
fund, which has high fees and has been pricing pressure for the structure has to change,
expenses, didnt earn them, on actively managed strategies. perhaps just the absolute level.
average. Doesn't make any Do you think that some of that I mean, you could move to
sense; now, people are pressure will make its way into incentive compensation for
catching on. other asset classes? equity management, although
thats a little harder for things
One of the astute things I was HM: The general principle that like mutual funds where
taught is that on average, the people should have to add individual investors put in
average investor does average value to be highly paid should money. Right now people are
before fees, and below average be applicable to everything. putting large amounts into
after fees. Why should the Passive fund management is a private equity hoping it will
average investor, or low-value-added strategy with work. If it works, theyll
investment manager, be highly low fees. It makes sense. The probably keep their fee
paid? Doesn't make sense. thing that doesn't make sense structure. If not, there might
That idea took 40 years to sink is low-value-added strategies be a call for change.
in but has been responsible for with high fees. If another
the recent exodus from active. strategy, lets say private Hedge funds may have to
Thats not to say that there equity, has high-value-add, then change their structure. Five
can't be exceptional managers, it can command high fees. years from now, people may
and that they cant be worth it. write memos saying, Isnt it
I think one of these days well So it would be an crazy that people got to keep
head that way again. oversimplification to say all the 20% of the profits in the good
fees in investment management years, and they didn't have to
G&D: Youre suggesting that are coming down. Its only for give it back in the bad years,
some of the move to passive is the ones that don't earn it. and they got remunerated
cyclical. Do you have a sense Why is so much money every year, and there was no
of where we would be in that flowing out of the hedge fund hurdle rate? The fund made
cycle? industry? Why is it so hard to 5% and the manager got 20%
start a hedge fund these days, of it. That level may not hold
(Continued on page 8)
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Harvey
OaktreeSawikin
Capital Management
up as having been reasonable. let the people who know the that many of the others have
strategies best make the done merger transactions that
Hedge funds went from being a decisions. We provide a lot of have significantly changed their
cottage industry to a big guidance as how to behave vis- profile. I dont know why they
industry around 2003-04, -vis the macro, and what did these mergers. If they did
because they did well in 2001- philosophy and approach to them for good client-centered
02. Too many people were adapt. But the portfolio business reasons, then that's
protected by the pricing. Too decisions are decentralized. fine. If they did them to please
many people got 2 and 20, in Wall Street and make the
my opinion. I think theres G&D: Has going public stock go up, I dont think that's
going to be a washing out of changed Oaktree? as good. I cant make a
that. However, in that memo judgment about what they did,
in 2004, what I said was: I HM: The only change I could because I dont know their
think in the coming years, the point to is that weve had to motivations.
average hedge fund will make hire a bunch of people to
5% or 6%, and eventually handle the administrative G&D: Youve written a lot
people will get tired of paying burden. In terms of the over the years about market
2 and 20 to make 5% or 6%. operation of the firm, I dont psychology. Any new thoughts
Guess what? Barron's did an think theres any change. these days?
article saying that over the Were still investing the same
next 10 years, the average way, were still employing the HM: Theres a chapter in my
return on hedge funds was same philosophy. What I was book, The Most Important Thing,
5.2%. It took a long time for concerned about when we that says that the most
people to realize that they went public was that the important thing is knowing
were not getting what they clients would worry about where we stand. I start the
were paying for. how we deal with the interests chapter by saying, As to the
of the unit holders versus the macro, including the level of
G&D: What is it about mutual interests of the clients. Would the market, we never know
funds that dont allow them to we have a conflict of interest? where were going, but we
have incentive fees? We got asked that a lot, and I sure as hell ought to know
felt very strongly, and I still do, where we are. Its not so hard
HM: It's complex. Number that there is no big conflict of to know where we are; the
one, I dont know if the SEC interest. question is where were going.
permits it for mutual funds.
Number two, I think it would Were a fiduciary for our I advocate a two-pronged
be challenging to compute the clients. We have to put their approach. First, you look at
incentive fee every day, when interests first. If we put their valuationsprice-earnings
retail investors go in and out. interests first every day, then ratios, yields, yield spreads,
we will succeed in the long transaction multiples, cap rates
G&D: Could you talk about run, and maximize the value of in real estateand you ask
how Oaktree structures its the units. If we put the are they high or low relative
many strategies? interests of the unit holders to history and relative to
first, and try to maximize our interest rates? You gauge the
HM: Each strategy has its own profits in the short run, then appropriateness of valuations.
process. The people who run our work on behalf of the Thats entirely quantitative.
the various strategies have clients will go to hell, and well Then, theres the qualitative.
generally been here a very long minimize the value of our How are people behaving? Are
time, and they have the units. To me theres no people euphoric or depressed?
complete confidence of me and conflict: clients first. Are they skeptical or
my partners. We do not have unquestioning? If a new fund
an overview committee. In G&D: Do you have a view on comes out, is it oversubscribed
some firms, every investment other publicly traded asset overnight, or does it go
must come to the investment managers? begging? All these kinds of
committee. We dont have things. What are they saying
that. Its decentralized, and we HM: The main difference is on TV? What are the
(Continued on page 9)
Page 9
Harvey
OaktreeSawikin
Capital Management
newspapers saying? Take the yield bonds are at their lowest G&D: Speaking of cycles, a lot
temperature of the market. yields in history, emerging of investors today havent gone
market debt is yielding still through a bear market. What
Look at the behavior around less, private equity is raising would you recommend to
us, thats the key. Warren the most money ever, Softbank these investors?
Buffett says, The less is raising a $100 billion fund for
prudence with which others technology investments. Each HM: There's no lesson like
conduct their affairs, the of those things suggests a hot experience. You can read
greater the prudence with market, where people are about it, and you can talk to
which we must conduct our happy to trust the future. All old timers, but theres nothing
own affairs. In other words, of them together should be like living through it. The most
when other people are something that people pay important lessons in investing
carefree, we should be attention to. You cant argue are learned in the tough times.
worried. When other people that things are languishing I started in 1968, and we came
are panicked, we should turn cheap today, you have to across tough times right away,
aggressive. As an analyst, if you adjust your behavior. and I learned a lot of very
could only ask one question valuable lessons. You can read,
about pricing, I think it should and there are a lot of books.
be how much optimism is When theres a lot of For example, I read A Short
incorporated in the price. History of Financial Euphoria, by
When theres a lot of optimism in the price, John Kenneth Galbraith, and
optimism in the price, number number one theres that was very, very helpful. It
one theres not too much talks about the excesses of
further to go, and number two, not too much further psychology.
theres a lot of air that can
leave the balloon if the to go, and number G&D: Theres a lot of capital
optimism is disappointed. If in passive strategies, which are
theres no optimism, then all two, theres a lot of air driven to some degree by
the surprises will be on the computers. Do you think that
upside. You cant have less that can leave the changes how the market
than zero optimism, so we try balloon. handles risk?
to figure that out.
HM: Because every dollar that
By the time this Graham & Remember what Mark Twain goes into a truly passive fund is
Doddsville issue comes out, Ill said, History does not repeat, invested on autopilot, the fund
have put out a new memo but it does rhyme. Things are must buy the stocks that satisfy
which talks about my views on never the same from cycle to its criteria, and thats without
the state of the market. I think cycle in terms of the details. regard to value. That suggests
theres a lot of credulousness, The things you look at today to me that prices can go
and not much risk aversion, are different than the things farther in diverging from value
and I think thats a cause for you looked at 20 years ago. before they get corrected.
concern. The memo is entitled Twenty years ago, there was Think about what would
There They Go Again . . . no CNBC and no Internet. happen if 95% of the money
Again. It talks about whats The things you look at change, went into index ETFs or index
going on todaystock market and you have to stay current, funds. Who would be setting
valuations are high, VIX is at but the process, the goal, and prices? Theres something
the lowest reading in history, the principles of trying to take called price discovery, and its
and the FANGs are adored. the temperature of the market done by thoughtful buyers and
The market leaders are being doesnt change. I'll have a book sellers. The price of a security
sucked up by ETFs in a kind of out next year about cycles, and in the marketplace is set by
virtuous circle, where they go thats most of what the book buyers and sellers coming
up in price, which makes will be about, trying to together, and seeing if they can
people buy them, which makes understand where we are in find a place to transact where
them go up in price, which the cycle. the buyer thinks it has good
makes people buy them. High upside, and the seller thinks it
(Continued on page 10)
Page 10
Harvey
OaktreeSawikin
Capital Management
doesnt. Who provides that with a golden intuition or gut? I
function if all the buying are on don't know, but well see. G&D: Do you think investing
autopilot? People put their timeframes have materially
money in index funds, with the What would happen, though, if changed as a result of the
presumption that theyre there were a thousand information age?
minimizing error, but how investors in the world, and
much of your money do you they all used the same screen? HM: Well, I don't know if its
Tripp Blum 08 (left) and want to have managed in a Then prices would be set, because of the information age.
Kevin Oro-Hahn 10 at the fund where nobodys thinking since every seller and every I think a lot of it is because of
2017 Value Investing about the price of the stocks buyer is guided by the same the pressure on investors for
Reception or the weightings within the screen; that means prices performance. We used to
portfolio? would be set the way the think about holding stocks for
screen says it should be. That five years, and at the end of
The thing about investing is means the goal would be to the year, it took a week or
that the efficient market find the things that the screen two before the bookkeepers
hypothesis says that price hasnt thought of. Thats what figured out what your rate of
equals value. Active second-level thinking would be return was for the year. I may
management is about the here: thinking different from be exaggerating, but then it
assumption that price the herd, and better. became a matter of an hour,
sometimes deviates from value, then it became a matter of a
finding those deviations, and If the whole herd is directed by minute. Today, everybody has
then taking advantage of them. a screen, youve got to find their performance every
It seems to me that the fewer something that the screen second in real time, and in one
the people who are looking at hasnt thought of. I believe that of the biggest mistakes that
value, the higher the likelihood will always be possible, took place in this process, the
that price can diverge from because one important thing clients decided to put a lot of
value. But thats just a to remember is that the emphasis on short-term
hypothesis. actions of investors change the performance. It tells you
market. When all the investors nothing. In fact, if you put a
G&D: With the age of the use a given screen, that fact manager on probation because
quant, should a value investor will change the market, he had a bad quarter, if he sells
change anything about first- meaning things the screen the stocks that are down and
level, second-level, or even hasnt thought of determine buys the stocks that are up,
third-level thinking? attractiveness. you have forced him into a
poor decision. But it has
HM: Artificial intelligence is Other aspects that the screen happened, and now everybody
probably a threat to all of us. has not been set up to look for wants to know how you did
We just dont know how. I will become the determinants last quarter. Nobody says,
believe great investing is as of success. Its all kind of how did you do in the last ten
much art form as science, and I circular, and kind of zen. I years? which is what matters.
dont know if a computer can exaggerate by saying Every manager and every
be taught to paint a everything thats important approach has times when he,
Rembrandt, but maybe it can. about investing is she, or it is out of favor.
A computer beat the greatest counterintuitive, and
chess player. We were told everything thats obvious is In theory, an investor who
that Go, the Asian game, is not wrong. The question is, can a skillfully changes his approach
scientific, and that unique computer, a spreadsheet, a and keeps up with the
intuition prevents a computer model, a screen, be taught to demands of the marketif
from succeeding at Gobut make counterintuitive that person existedcould do
now computers beat the best judgements? I dont know. well all the time. Very few
Go players. It seems clear to Can a computer, or AI, figure people, if any, satisfy that
me that a computer could out which companies will be criteria. Most great investors
probably be programmed to best managed and which new stick to an approach through
beat the average investor. Can technologies will succeed? thick and thin, and yet every
it outperform the best investor Well see. approach goes out of favor
(Continued on page 11)
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Harvey
OaktreeSawikin
Capital Management
sometimes, which means that greatest quote in my book is HM: Well, nothings very
every investor has periods in from Charlie Munger, who attractive. Some things are less
the dog house. To be a great said, None of this is meant to unattractive than others. In the
investor, you must have an be easy, and anybody who whole world, its hard to find
approach, and you have to thinks its easy is stupid. All what we call a beta market,
stick to it, despite the times this stuff is really complex. Its that is an open, public, scale
when its not working. If the easy to talk about, but its hard market that represents a
clients look at the to implement. How do you tell bargain. Whats cheaper than
performance every six months, the ones who are good but others? Non-prime real estate
three months, month, week, unlucky, from the ones that is cheaper than prime real
then it becomes harder for the are bad? Its not easy. It takes estate. I think that private debt
judgment. Thats why I believe is cheaper than public debt.
Theres no lesson like that this whole thing can never Emerging markets are probably
be completely computerized, cheaper than the developed
experience. You can because I think exceptional world. I think that Japans
investment success requires cheaper than the United
read about it...but judgment, and I dont know if States.
AI can be taught to make those
theres nothing like
judgments. G&D: How do you look at
living through it. The emerging markets these days?
G&D: Do you have any advice
most important lessons for folks that have trouble not HM: I go to India for a day or
being able to step back from two, and I come home and
in investing are the noise, especially in an everybody says, What do you
environment where there is so think about India? This is hard
learned in the tough much scrutiny on short-term stuff, and anybody who thinks
performance? they can go to a country and
times.
after two days have a superior
manager who wants to keep HM: Number one, every insight into its future is nutty.
the account to stick to his investment manager who When I was in equity research
approach. Instead you start manages money for other in the 1970s, I started to
buying the things that have people must spend a lot of develop a very jaundiced view
gone upwe call that chasing. time on client education, and of plant visits. You go to a
You sell the things that have you have to explain to them factory, and the CEO walks
gone downwe call that the error of putting pressure you around. Is a clean plant
puking. That can't be the right on managers and acting in better than a dirty one? Is a
formula. response to short-term pretty one better than an ugly
performance. You must one? I think these are not the
Most investment management convince them to figure out things that matter, and the
clients give more money to the who the good ones are. Stay things that matter cant be
manager whos been doing with the good ones, get rid of assessed by some visit and
well. Very few have a program the bad ones, and put more looking at physical things most
of giving more money to the money with good managers of the time.
manager whos been doing who are down. Thats
poorly. Thats what you should counterintuitive and hard to G&D: But you were recently
do, though, because thats how do. It means resisting in India. Did you develop a
you buy the things that are out emotions, and it requires a view?
of favor. Obviously, you have certain degree of stalwartness,
to separate the ones that are which many people dont have. HM: I have a thought on India,
good at their job but may be I have a bias. I think it has
out of favor from the ones that G&D: Is there an investing potential. It has a lot of people,
are just bad at their job. Thats strategy or industry that is it has a high birth rate, which is
not easy either. looking very attractive to you very important for creating
right now? GDP growth. It has a lot of
None of this stuff is easy. The unmet needs, it has a lot of
(Continued on page 12)
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Harvey
OaktreeSawikin
Capital Management
people who would like to get projections, and opinions, and theres a lot of randomness.
into the middle class. I believe intuition, and hunches. I always Those things make it
it has a work ethic. When I see say that to deal with the interesting. Its an intellectual
the poorest of the poor, future, you need two things. puzzle with partial information.
theyre impeccably groomed. Most people think you need The process is messy and
That impresses me. That one thing: a view of whats imprecise. To me, thats
suggests standards, aspirations. going to happen. But I think fascinating. You can have
Of course, India is famous for you really need two things: a guidelines developed over a
corruption and bureaucracy. view of whats going to career, but they sure dont
Those are the negatives, but happen, and a view of the work every day. I love it for
the question is can the former probability that youre right. that reason.
overcome the latter? I believe We should accept the fact that
so. I hope so. some of our opinions have a I think your classmates should
higher probability of being right pursue investing if theyll love
Indian equities have gone up, than others. it. Thats why you should do it.
but everything in the world has The main reason you shouldnt
gone up. I think Indian equities I wouldnt bet a lot of my do it is to make a lot of
are at full multiples, but that's money on my positive opinion money, because number one,
true everywhere. We may be on India, but Id bet some. Im money isnt everything.
at similar multiples in the no expert on predicting the Number two, I predict the
United States. I would ask you future of nations. I havent investment management
20 years from now, which will done it much in my life. As I business is not going to remain
have had higher growth, the said in my memo, Expert as remunerative for everyone
U.S. or India? If India has higher Opinion, what happens is if you as it has been in the last 35
growth, which I would bet it make a few good investments, years.
would, and can avoid the and if you exhibit some
occasional crisis that tend to intelligence, then people start My favorite quote comes from
befall emerging markets, then asking your opinion about all a British author named
my guess is that investors in kinds of things you know Christopher Morley, There's
India will have done well. nothing about. only one success: to be able to
live your life your way. I
When people ask me about G&D: There is one last believe you shouldnt let
this stuff, especially about opinion we want to ask of society determine what your
China, what I tell them is youwhat would your advice way is, and you shouldnt let
Europe and Japan are senior be to an MBA student trying to money determine what your
citizens, past their prime. The enter investment management way is. If the proposition of
U.S. is a mature adult, still today? investment management is
good, but its best decades are interesting to someone, then
behind it. The emerging HM: I think that investment they should do it, because
markets, China, probably India, management is fascinating, theyll have a great deal of fun.
are adolescents. If youve ever because its not easy; its Not everybody has the
had an adolescent in your challenging. In Fooled by intuition you need to be
house, as I have, you know Randomness, Nassim Taleb successful, to be a great
that its chaotic, volatile and talks about the difference second-level thinker. Warren
tempestuous. What did my between investing and Buffett says he tap dances to
daughters dean call it? A dentistry. Theres no work every day. But not
hormone meteor shower. randomness in dentistry, and if everybodys Warren Buffett.
you do the same things to fill a
The point is the adolescents tooth, youll be successful This business isnt a lot of fun
future is ahead of it. My gut every time. when youre not successful,
tells me that the outlook for but it sure is when you are.
China and India is positive. I Thats not true of investing.
certainly would not hold First of all, theres no magic G&D: Thank you for your
myself out as an expert, thats formula. There are no physical time.
just a hunch. We have laws at work. Number two,
Page 13
Recommendation
Madina Baikadamova 18 We are long on Spirit Aerosystems (SPR) with an end of Trading Statistics (as of 11/11/2016)
Madina is a 2nd year student
2017 price target of $72, offering 31% upside from
Share price $55.02 52 Week High $55.02
at CBS. Previously, Madina 11/11/2016s price of $55.02 and an attractive upside/
Dil. Shares O/S 127 52 Week Low $40.50
worked at Verno Capital as downside ratio of 1.4x. We believe there are 1) favorable
an equity research analyst in industry dynamics and reliable backlog demand, 2) high Market Cap $6,988 Dividend Yield 0.73%
Moscow, Russia. In summer Plus: Debt $1,097 Shares Short 8.07
2017, Madina interned at customer captivity protected by high barriers to entry and
Brandes Investment Partners. switching costs in the industry, and 3) growing profitability Less: Cash -$670 Short Interest 6.64%
from maturing 787 and A350XWB programs. All of these Enterprise Value $7,414 Days to Cover
advantages are driven by Spirits immense cultural trans-
formation.
Business Description
Spirit Aerosystems is a leading independent manufacturer of commercial aerostructures for OEMs. Aerostruc-
tures are typically major components of airframes and include the fuselage, nacelle, wing flaps, and slats. Spirit
has long-term, exclusive contracts with Boeing that cover every Boeing commercial aircraft currently in pro-
Sowan Cha 18 duction. Last year, Boeing accounted for 84% of Spirits total revenue while Airbus accounted for 12%.
Sowan is a 2nd year student
at CBS. Previously, she was a
Investment Thesis
Senior Financial Analyst at 1) Favorable industry dynamics and reliable backlog demand
Vince and an Investment Spirit is operating in a market backed by favorable industry dynamics and reliable backlog demand. Global air
Banking Analyst at Citi. In
traffic is expected to grow at a 4.9% CAGR through 2035 and projected to double by 2030.
summer 2017, Sowan in-
terned at Evercore ISI.
Jean Cui 18
As of December 2015, Boeing and Airbus combined backlog totaled $47B. Net fleet demand is expected to
double from 22K aircraft by 2035. Additionally, 17K current aircraft will need to be replaced by 2035, increas-
ing SPRs potential market. That implies visibility of deliveries of 10+ years for Airbus and 8+ years for Boeing
at current production rates.
Demand for civil aircraft remains solid (the International Air Transport Association sees ~5% CAGR) driven
Claudine Fernandez 18 by above average traffic growth and increased airline demand for new aircraft. Airline backlog cancellation
Claudine is a 2nd year stu-
rates and deferral activity have remained within historical averages and below peak cancellation rates of 10%
dent at CBS. Previously, she seen during the 2008 financial crisis.
worked as a Strategy and
Corporate Development 2) High customer captivity protected by high barriers to entry & switching costs in the industry
Analyst at Voya Financial and In addition to strong guaranteed demand from backlog, Spirit enjoys high customer captivity. The company
as an Investment Banking
Analyst at RBC. In summer has supply contracts for most of its products for the full lifespan of an aircraft program. Spirit is also currently
2017, she interned as an the exclusive supplier under many of its contracts with Boeing and Airbus.
Equity Research Associate at
Jefferies.
**Editors note: SPR originally presented in November 2016 at a share price of $55.72 with a
target of $72, representing 31% upside**
Page 14
In our multiples analysis, we use the 10-year historical average as our assumption for one-year forward P/E (13.5x) and EV/EBITDA
(7.2x) multiples and derive end of 2017 target prices of $67.40 and $62.60, respectively. Our base case DCF valuation implies 14.4x
one year forward P/E and 8.2x one year forward EV/EBITDA. We believe the DCF method reflects recent structural changes which
justify target multiples 7% and 14% higher than historical averages. Our DCF method projections are still on the conservative side
recent acquisitions in the sector involved far higher EV/EBITDA multiples.
Key Risks and Mitigants
1) High customer concentration: Spirit is the exclusive supplier for most of its programs and the industry has high barriers to
entry and high switching costs, mitigating the risk from high customer concentration. 2) Execution of new and maturing pro-
grams: Spirit has a conservative number of maturing programs, with two key maturing programs only one year away from generat-
ing positive cash flows. Additionally, Spirit has over 85 years of industry expertise with an emphasis on innovation in product devel-
opment and manufacturing. 3) Cyclicality and sensitivity to commercial airline profitability: Spirits contracts with Boeing
and Airbus are long-term arrangements. 78% of Spirits backlog is either pre-production or has been in production for less than 15
years and will be not affected by short-term cyclicality. Furthermore, historical backlog cancellations have been minimal even in
times of financial crisis. 4) Rising pricing pressure from key clients as competition escalates: Spirits strong management
team, negotiating power, and proprietary manufacturing processes, combined with the lack of direct substitutes for Spirits products,
protects the company from rising pricing pressure.
Page 15
MBA from Columbia Schools Executive MBA Paul Johnson (PJ): Weve
Business School and a BA program as well as the known each other for a long
in Economics from Adelphi 2017 Columbia Business time. We met in 1994; Paul
University. For 16 years, Schools Deans Prize for was my student, then he was
Sonkin was an adjunct Teaching Excellence. He my Teaching Assistant for a
professor at Columbia received the Gabelli while, before he started
Business School, where he School of Business teaching his own class in 1996.
taught courses on security graduate-level Deans Then in 1997, we co-taught
analysis and value Award for Faculty the Value Investing class during
investing. For over 10 Excellence in 2017. Bruce Greenwalds sabbatical.
Paul Sonkin 95 years, he was a member of Johnson was a contributing Weve been personal and
the Executive Advisory annotator to The Most professional friends for more
Board of The Heilbrunn Important Thing than 20 years. We started the
Center for Graham & Illuminated, by Howard collaboration on the book four
Dodd Investing at Marks, co-author of the years ago, at the Heilbrunn
Columbia Business School. history of value investing Centers Graham & Dodd
Sonkin has extensive in Columbia Business Breakfast in fact. After that
corporate governance School: A Century of Ideas, breakfast, we were just
experience having sat on and co-author of The chatting and catching up, and
six public company boards Gorilla Game, Picking Paul said he was writing a
and is the co-author of Winners in High Technology. book. I responded, Yeah, Ive
Value Investing: From He has an MBA in Finance always wanted to write a book,
Graham to Buffett and from the Executive but I know it will take too
Paul Johnson Beyond (2001). Program at the Wharton much time and energy. I then
School of the University of asked, What is the name of
Paul Johnson has been an Pennsylvania and a BA in your book? And he said, The
investment professional for Economics from the Perfect Pitch.
more than 35 years and University of California,
currently runs Nicusa Berkeley. I thought that was funny,
Investment Advisors. because I had always wanted
Previously, he was a top- Due to increasing to write a book called, The
ranked sell-side analyst, a frustration from not having Perfect Investment. Paul
hedge-fund manager, and a good book to assign to suggested that we should work
an investment banker. As a their students, they co- together, which I initially
portfolio manager, he authored Pitch the Perfect thought was a crazy idea.
invested in virtually all Investment. In their book, However, we started emailing
sectors of the economy which was released by John back-and-forth that morning,
and has participated in Wiley & Co. in September, after we returned to our
more than 50 venture they give the reader the offices, and quickly discovered
capital investments during tools to decipher a that our two books were
his career. Johnson has portfolio managers opposite sides of the same
taught 40 semester-long schema. These tools will coin. Before long, we had
graduate business school help in selecting a security agreed to write Pitch the Perfect
courses on securities to pitch that captures the Investment, which we decided
analysis and value investing audiences attention, in would be a combination of our
to more than 2,000 determining whether a two books. Although I didnt
students at Columbia genuine mispricing exists, fully understand what Paul
Business School and the and in showing how to meant when he first said that
Gabelli School of Business, generate a true edge. the pitch is the architecture
Fordham University. He of the research process, I
received the Commitment Graham & Doddsville learned to appreciate his
to Excellence award in (G&D): How did you two first insight over time while
both 2016 and 2017 from meet and come up with the working on the book. Paul
the graduating class of idea for a book? argued that if you cant pitch
Columbia Business the idea successfully, then you
(Continued on page 16)
Page 16
Damian Creber is the tremendous amount about School and its renowned Value
Head of Research & Co- professionalism and Investing Program brought me
Managing Partner at Aryeh preparation. I took that to my to New York, where I was
Capital Management. Mr. next role in private equity at fortunate to connect with and
Creber was most recently Oak Hill Capital, where I work for Jeffrey Altman at Owl
a Senior Analyst at Owl learned about depth of Creek.
Creek Asset Management. diligence.
Prior to that, he was in the Similar to Jeremy, each stop in
private equity group at My public-markets career my career has been a
Onex Partners and in the began in 2005 when I joined formidable learning experience.
Jeremy Weisstub Leveraged Finance Group Perry Capital after earning my Onex taught me the
at RBC Capital Markets. MBA at Stanford. At Perry, I importance of a world-class
Mr. Creber holds an MBA learned about probabilistic investment process and the
(Deans Honors and thinking as well as how to be power of strong culture and
Distinction) from opportunistic across the capital retaining good talent. At Owl
Columbia Business School, structure. When I moved to Creek, I observed Jeffs
a Bachelor of Commerce Redwood Capital, I was able to remarkable ability to get to the
from the University of augment my experience in heart of an idea, pull out the
Toronto, and is a CFA distressed investing by training relevant information, and
Charterholder. under one of the great understand the path forward,
distressed investors, Jonathan regardless of whether that idea
Graham & Doddsville Kolatch, who instilled in me is in equity or credit, long or
(G&D): Can you tell us how the confidence to know how short. Jeff has a tremendous
Damian Creber 16 you got to this point in your to take advantage of large track record and I believe he is
careers, and what inspired you market dislocations. At unique in the way that he has
to launch Aryeh Capital? Redwood, I was also given a trafficked across the capital
platform to develop and structure with great success
Jeremy Weisstub (JW): fundraise for a targeted fund, over a long period of time.
Above all, Damian and I are at the Redwood Loan
this point because we had the Opportunity Fund. JW: Aryeh Capital was
good fortune of having great inspired by a long-standing
mentors. We apprenticed My most recent experience dream to build an investment
under extraordinary talents at was with Greenlight Capital, firm of my own in Toronto.
our previous firms and we where I worked with David With all the experience I had
absorbed what made them Einhorn for over six years. picked up, it was time, and
successful investors and Learning from David pushed when I met Damian, I knew I
leaders. my knowledge of the equities had found a partner who
business to the next level, and shared my vision. As we got to
My background is CanadianI we had a great run together, know each other, it became
was born and raised in with particular success in out- clear to me that Damian was a
Toronto. My interest in the of-favor situations such as CIT truly special talent, and was
markets and in economics Group, Delphi, General someone I wanted to build my
came early, inspired by my Motors, and Sprint. business alongside.
grandfather who was with the
Bank of Canada. I decided to Damian Creber (DC): Like G&D: How exactly did you
work for a stock brokerage for Jeremy, I was born and raised two meet?
a year between high school in Canada. I studied business at
and college to test my interest, the University of Toronto and JW: There arent many
and it stuck. I studied then started my career in Canadians in the New York
economics at Yale and then investment banking at RBC hedge fund community, so we
joined Blackstone in 1998, Capital Markets, where I all tend to know each other. I
when it was still a boutique focused mainly on the credit had a sense that Damian was
firm. Blackstone exuded a business, before moving to someone who could be a real
culture of excellence that was Onex to work in private partner, a sounding board for
unmatched, and I learned a equity. Columbia Business all investments, and provide
(Continued on page 28)
Page 28
DC: The original business was [contractors] work, G&D: Whats Terminixs
actually the franchise business you cant get lower pricing power like?
going back to 1947 as a moth-
proofing company founded by costs, and you cant DC: These are recurring
Marion Wade. Over time, revenue businesses. For
ServiceMaster bought up a offer the price that example, imagine turning off
bunch of different businesses, your pest control services as a
including Terminix, some of you do. restaurant in downtown
which made sense together but contractors are responsible for Manhattanits just not an
mostly it was just a holding the actual logistics. At option. So the businesses have
company for services Terminix, the people who real pricing power. It is a
businesses. Clayton, Dubilier & show up to fight termites are relatively low-cost product but
Rice (CD&R) took the whole employees, and SERV handles one with an extremely high
company private in 2006, at the logistics. There is cost of failure, and such
which point the largest theoretically some cross-sell businesses can exhibit pricing
segment within ServiceMaster opportunity over time, but we power. SERV has taken
was TruGreen, a lawn care havent really seen that somewhere between low and
business. The TruGreen happen, and we think thats mid-single digit percentage
business was very cyclicalit why management recently price increases per year for a
was effectively a luxury to have decided these businesses made very long time, but theyve
someone come over and mow more sense as separate been smart in that theyve
a lawnso that unit got hit entities. never gouged their customers.
hard when the business cycle
turned in 2009. CD&R then G&D: Hurricanes have been G&D: Are you concerned
carved out TruGreen, and particularly punishing in the about the debt?
took the remaining business U.S. this season. How would
public, and thats how you that affect SERVs franchise DC: Right now, SERV has ~4x
ended up with the SERV segments, including leverage, which some people
portfolio that youve got today. ServiceMasters disaster may balk at. But its all long-
restoration business? And how term debt, as the company
(Continued on page 35)
Page 35
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