Examining Private Equity as an Asset Class

Examining Private Equity as an Asset Class

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Imagine an asset class with low volatility, low correlation to the public markets and higher historical returns than public equities.

The role of private equity firms provides “alternative investments” that involve the acquisition of a company, either publicly-listed or privately-held, through a combination of debt and equity.

Once a company is acquired, the private equity operators, for a sizable fee, enact strategic initiatives such as spinning of poorly performing divisions, downsizing head count and/or selling assets, with the intent of unlocking value. This can be very accretive for investors but this asset class is not without risk.

Private Equity is Illiquid

Without an active market like a stock exchange, the only values that are readily available with private equity investments are the purchase and sale prices. The daily volatility seen in publicly-traded securities is absent in private equity. Fluctuations in value exist but are not transparent to the investor. One never knows, therefore, what may be the true value of their investment.

The biggest risk of such an illiquid investment arises when the invested funds are required sooner than the expected investment time horizon. Since it isn’t a stock with an active market, investors must wait until a liquidity event occurs when the private equity investment is sold, refinanced, or publicly listed.

Since private equity investments can have a lifespan of 3–12 years, investors must prepare to be parted from their capital for a significant period of time. Tying up capital for up to a decade may make sense when the investment is made, but many things can change over that time frame.

Private Equity is less volatile than stocks but not bonds Correlation, or how asset classes perform relative to each other, is a critical driver of diversification. Owning assets that move in different directions is the core to preserving capital. Historically, in any one year, stock returns have ranged from -40% to + 45% while bond returns have ranged from -12% to +20%.

Private equity, which avoids the daily price reconciliation, as above, is often touted as a positive because it appears to help decrease correlation across asset classes.

However, while an investment may be privately held, the value can still change. You may not sell your home for many years but if your neighbors do, you will at least have a rough approximation of what value you may fetch in the market.

Shown in the table below, private equity is less volatile than stocks but not bonds.

Private equity does not have historical returns higher than public equities

Private equity supporters claim that alternative investments provide superior returns to public equities. There is an element of truth to this – short-term markets tend to be reactive to quarterly results and too impatient for strategic change.

What’s lost in the marketing, however, is that the returns are made using leverage – and lots of it. When buying a company, private equity investors routinely carry two to three times more debt than equity.

With a typical acquisition, between 60% to 80% of the purchase price is funded by debt and only 20% to 40% by equity. Because of the heavy leverage, expected returns should be significantly higher than publicly-listed stocks where the debt load is more in line to a one-to-one basis.

Looking at the data below, private equity (green bars) did outperform the public market equivalents (blue bars) until about 2005. Part of this decline was due to the sheer size of dollars allocated to private equity through the 2000s as assets under management (AUM) grew by USD $3 trillion. As more financing deals increased chasing fewer deals, purchase prices jumped and caused overall returns to drop. 

Today, more assets continue to flow into private equity investments. While some strategies may outperform, the higher competition for deals, high equity market valuations and the threat of rising interest rates make us question the future returns of alternative investments.

At Liberty, we are not against private equity. The combination of operating excellence and leverage can generate significant returns.

Our strategy, however, is to gain exposure through publicly-traded entities that exhibit private equity investment characteristics (Danaher, Thermo Fisher, Roper Technologies, etc.) without paying the hefty fees involved with alternative investments. One of the most prolific Liberty portfolio private equity-like operators is Danaher Corporation.

Danaher Corporation

Danaher designs, manufactures, and markets products and services in Life Sciences, Diagnostics and Environmental and Applied Solutions. The company began as a real estate investment trust that made its first acquisition of an industrial company in 1984. Over the next two years, 12 more acquisitions were made in the manufacturing and instrumentation space. 

Danaher recognized there were two ways to grow a business – organically (R&D and sales) and inorganically (acquisitions). While most companies tend to be good at one type of growth, Danaher excels at both.

This has allowed an accretive feedback loop to develop with existing entities organically generating free cash flow that is used to fund acquisitions. In turn, these acquisitions increase free cash flow and facilitate even more acquisitions and even greater free cash flow.

On the acquisition front, through the Danaher Business System (“DBS”), a philosophy of continuous improvement and dispersed accountably, modelled after the Japanese Kaizen, the company has created a repeatable playbook for selection, integration and growth of acquisition targets.

Acquisitions are divided into two purposes:

→ Establish the platform – Danaher enters a new segment and gains an advantage by implementing their DBS philosophy

→ Bolt-on acquisitions – a complementary business to an existing segment is added to drive economies of scale

DBS helps Danaher recognize when a division or segment should be spun off. For example, Fortive, a company specializing in Industrial Technology was spun off and publicly listed in 2016 and Envista, specializing in Dental Equipment and Consumables, was spun off and listed in 2019.

To see DBS in action on the acquisition side, Danaher, in early 2019, acquired General Electric’s biopharma division for $21.4 billion to improve its Life Sciences division.

Given that Danaher’s market capitalization was only $105 billion at the time of the purchase, this was a “bet-the-farm” acquisition that could have caused investors to flee. By then, however, Danaher had already successfully acquired over 100 companies and explained to the market that GE Biopharma was a crown jewel that would be more dangerous in the hands of a competitor.

Since the acquisition, operating cash flow has grown about 54% from $4.0 billion to $6.2 billion, while leverage has decreased $2.7 billion. Looking at the share price since the acquisition, it is clear the market appreciates Danaher’s DBS philosophy and execution.

Compared to traditional private equity investments, Danaher provides the benefits without the drawbacks. There is no illiquidity risk as 2.5 million shares trade each day. Should we ever need to sell the position, funds could be raised in short order.

As mentioned, while private equity investments give the illusion of low volatility and high returns, Danaher has done better. Since 2000, Danaher’s share price has risen 2,632%, or a compound annual return (CAGR) of 16.8%. This compares to the S&P 500 Index’s 323% return, or a CAGR of 7.0%.

We believe that investing in the right public companies that share private equity’s characteristics with neither the leverage nor the fees are a better use of client money. 

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By Brett Girard CPA, CA, CFA,

Liberty International Investment management

Sources

https://www.libertyiim.com/wp-content/uploads/2021/04/Liberty_eNews_2021Q1.pdf

https://www.libertyiim.com/

Topaz Energy Inc

Topaz Energy Inc...

Business Overview

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Strategy

Topaz is a unique royalty and infrastructure energy company focused on generating free cash flow(1) growth and paying reliable and sustainable dividends to its shareholders, through its strategic relationships including one of Canada's largest natural gas producers, Tourmaline Oil Corp. ("Tourmaline"), an investment grade senior Canadian E&P company, and leveraging industry relationships to strategically invest in additional income generating assets to provide growth. Topaz focuses on top quartile energy resources best positioned to attract capital in order to generate sustainable long-term growth and profitability.

The Company's business model is designed to provide investors with exposure to the best attributes from each of the royalty and infrastructure energy segments: (i) royalty production revenue generated from gross overriding royalty (“GORR”) production whereby the Company receives market indexed pricing (net of a 1% marketing fee) with no associated operating or capital costs and underpinned by a transparent growth outlook; (ii) processing revenue generated through its non-operated ownership interests in infrastructure assets whereby the Company has fixed take-or-pay arrangements with high-quality counterparties under long-term commercial arrangements with minimal associated operating and capital costs; (iii) other income which is generated by way of a contracted interest in third party revenue generated through fee-for-service natural gas processing contracts with no underlying facility ownership and therefore no associated operating or capital costs; (iv) modest corporate overhead costs; (v) long-term horizon before income tax would be payable; and (vi) transparent outlook to the Company's opportunistic growth prospects.

Topaz intends to use the majority of its free cash flow(1) to pay dividends to shareholders and the Company has a long-term payout ratio(1) target of 60-90%. The Company’s Board of Directors (the “Board”) has established a dividend policy pursuant to which the Company intends to pay an annual dividend in the amount of $0.80 per Common Share on a quarterly ($0.20 per share) basis, which represented a payout ratio(1) of approximately 65% for the three months ended March 31, 2021. 

Asset Overview

Topaz’s income streams are generated primarily from Canadian natural gas which has among the lowest emissions in the world, and Topaz’s capital facilitates growth of clean Canadian natural gas. Topaz’s investment criteria is focused on high quality, long life assets, strong risk-adjusted economic returns and investments that facilitate cost-optimizing environmental performance improvements.

The Company's high-quality assets and associated income streams are comprised of:

(i) gross overriding royalty interests (“the Royalty Assets”) on approximately 3.0 million gross acres of developed and undeveloped lands from which the Company receives royalty production revenue based on the associated natural gas, crude oil and natural gas liquids production and market indexed pricing (the "Royalty Production Revenue"); and

(ii) non-operated ownership interests in four natural gas processing plants and pipeline connected water management and conservation facilities from which the Company is entitled to receive processing revenue from processing services provided to customers on a fee-for-service basis, the majority of which is subject to long-term fixed fee take-or-pay agreements (the "Processing Revenue"); and a contracted interest in a portion of third-party revenue generated from facilities owned by Tourmaline through fee-for-service agreements with third parties to which Tourmaline is a party for the processing and handling of petroleum and related operations (the "Other Income") (collectively, the "Infrastructure Assets").

The Company's dynamic and scalable business model is designed to provide investors with exposure to sustainable long-term returns:

(i) the Company’s management does not handle day to day operational decisions relating to the development of its assets, they are able to focus their resources on carrying out the Company’s growth strategy of identifying and executing on energy investment opportunities;

(ii) economic returns are focused on income streams; Topaz has limited exposure to operating and capital costs, development timing and execution;

(iii) infrastructure fixed income that provides confident return of capital;

(iv) gross royalties that capture embedded upside at no incremental cost; and

(v) innovative financing solutions of non-dilutive capital which is strongly aligned with enhancing sustainability

Background

Topaz was reorganized in November 2019 to acquire certain royalty and infrastructure ownership and revenue interests. Pursuant to an asset purchase and sale agreement dated November 14, 2019, Topaz acquired its formative assets from Tourmaline Oil Corp. for total cash and share consideration with an assigned value of $637.0 million (the “Initial Acquisition”). The assets acquired pursuant to the Initial Acquisition included: (i) a newly created gross overriding royalty interest on natural gas, crude oil, and natural gas liquids production on 100% of Tourmaline's existing developed and undeveloped lands; (ii) a nonoperated 45% jointly owned interest in two of Tourmaline's existing natural gas processing facilities, supported by newly created long-term take-or-pay commitments from Tourmaline in relation to the two facilities; and (iii) a newly created contracted interest in a portion of certain third-party revenues generated by natural gas processing and handling agreements to which Tourmaline is a party. The cash portion of the consideration for the Initial Acquisition was funded by an equity financing in November 2019 of 20.9 million Topaz common shares at a price of $10.00 per share.

On June 29, 2020 (tranche one) and July 6, 2020 (tranche two), Topaz completed a private placement of an aggregate of 13.2 million common shares of the Company for total gross proceeds of $145.3 million. On October 26, 2020 Topaz completed its initial public offering consisting of a treasury offering by the Company and a secondary offering by its majority shareholder, Tourmaline. Inclusive of the full exercise of the underwriters’ over-allotment option (on November 9, 2020), an aggregate of 20.2 million Common Shares at a price of $13.00 per Common Share were raised, for gross proceeds to the Company and Tourmaline of approximately $250.1 million and $13.0 million, respectively.

As at May 6, 2021 there were 112,607,280 Common Shares outstanding, of which Tourmaline held 51.6%. The Common Shares trade on the Toronto Stock Exchange under the symbol "TPZ".

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Sources

https://topazwebsite.cdn.prismic.io/topazwebsite/5a95ad41-b174-4158-9426-033dee416846_Topaz+Q1+2021+Report+-+May+6+2021+Final.pdf

https://topazenergy.ca/investors/

Altus Group Limited, Management’s Discussion & Analysis, March 31, 2021

Altus Group Limited, Management’s Discussion & Analysis,

March 31, 2021

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Cloud adoption rate is a metric that represents the percentage of the total AE user base contracted on the ARGUS Cloud platform. It includes both new AE cloud users as well as those who have migrated from our AE on‐premise software.  

Bookings is a new metric we are introducing in the first quarter of 2021 for the Altus Analytics business segment. We define Bookings as the annual contract value (“ACV”) for new sales of our recurring offerings (software, Appraisal Management solutions and data subscriptions) and the total contract value (“TCV”) for one‐time engagements (consulting, training and due diligence).

Overview of the Business  

Altus Group Limited is a leading provider of software, data solutions and independent advisory services to the global commercial real estate (“CRE”) industry. Our businesses, Altus Analytics and Commercial Real Estate Consulting (“CRE Consulting”), reflect decades of experience, a range of expertise, and technology‐enabled capabilities. Our solutions empower clients to analyze, gain insight and recognize value on their real estate investments. Headquartered in Canada, we have approximately 2,400 employees around the world, with operations in North America, Europe and Asia Pacific. Our clients include many of the world’s largest CRE industry participants. Altus Group pays a quarterly dividend of $0.15 per share and our shares are traded on the Toronto Stock Exchange (“TSX”) under the symbol AIF.

We have two reporting business segments ‐ Altus Analytics and CRE Consulting.  

Altus Analytics

Our Altus Analytics segment primarily consists of Over Time revenues, comprising software subscriptions and maintenance, and data solutions that are made available to clients through our Appraisal Management solutions and through data subscription products. A smaller portion of the segment includes non‐recurring revenues primarily from software services. Altus Analytics clients predominately consist of CRE asset and investment management firms, including large owners, managers and investors of CRE assets and funds, as well as other industry participants including service providers, brokers, appraisers, developers, financial institutions and the public sector.  

Our globally sold ARGUS software solutions are among the most recognizable in the CRE industry. Our cloud‐enabled product stack for global CRE asset and investment management comprises end‐to‐end integrated software solutions that provide visibility at the asset, portfolio and fund level to help clients enhance performance of their CRE investments. Our flagship AE software is the leading global solution for CRE valuation and portfolio management and is widely recognized as the industry property valuation standard in key CRE markets and is primarily offered on a cloud platform. AE’s suite of functionality enables organizations to manage and predict the performance of their CRE assets throughout the investment cycle supporting property valuations, investments, portfolios and budgeting. In addition to AE, we also sell other cloud‐based software solutions to address key workflows in the areas of fund modeling and forecasting, data management, development feasibility, and acquisitions. Following the April 1, 2021 acquisition of Finance Active SAS (“Finance Active”), we now also offer debt management SaaS solutions for treasury and investment management. In addition to standard technology services related to education, training and implementation, we offer strategic advisory and managed services for real estate organizations’ front‐to‐back‐office strategies, processes and technology.  

Fueled by our ARGUS software solutions, we also provide information services on a global basis through our Appraisal Management solutions and data subscription products. Our global Appraisal Management solutions combine data and analytics functionality with a managed service delivery to enable institutional real estate investors to perform quarterly performance reviews, benchmarking and attribution analysis of their portfolios. Through these offerings we provide an end‐to‐end valuation management solution for our institutional clients, providing independent oversight and expertise while leveraging our data analytics platform. We primarily offer Appraisal Management solutions in the U.S., and we are expanding into Europe and Asia Pacific. Our Appraisal Management clients primarily consist of open and closed real estate funds, including large pension funds. Altus Analytics also includes data analytics products that are sold on a subscription basis. Our Altus Data Studio provides comprehensive real estate information on the Canadian residential, office, industrial and investment markets with unique data visualization capabilities. Our Canadian data covers new homes, investment transactions and commercial market inventory in key markets, and provides intelligence on the national housing market and consumer home buying and borrowing patterns.  

Prior to 2020, the majority of our customers had licensed our AE software products on an on‐premise basis, and had either paid on perpetual terms with ongoing maintenance, or on subscription terms. As of the start of 2020, our Altus Analytics software products have been sold only on a subscription‐based model and increasingly as cloud solutions. Our software subscription agreements vary in length between one to five years, and the subscription fee depends primarily on the number of users and the applications deployed. We enjoy industry leading retention rates for our AE software. In addition to software subscriptions, our software services are charged primarily on a time and materials basis, billed and recognized monthly as delivered. The contractual terms of our Appraisal Management agreements are generally for three years and pricing is primarily based on the number of real estate assets on our platform, adjusted for frequency of valuations and complexity of asset class. We enjoy very high contract renewal rates. Our Appraisal Management teams are also engaged from time to time to perform due diligence assignments in connection with CRE transactions. Our data products are sold on a subscription basis.

Commercial Real Estate Consulting

Our CRE Consulting segment consists of the Property Tax, and the Valuation and Cost Advisory business units. Through our various practice areas, we are well‐equipped to serve clients with an end‐to‐end solution that spans the life cycle of CRE assets ‐ from feasibility, development, acquisition, management and disposition. Our professionals possess extensive industry, market and asset‐specific knowledge that contribute to our proprietary internal databases that help drive successful client outcomes. We have long‐ standing relationships with leading CRE market participants  ‐  including owner operators, developers, financial institutions, and various CRE asset holders and investors.   

Our largest revenue contributor to CRE Consulting is our Property Tax business which operates in Canada, the U.S. and the U.K. Our team of Property Tax professionals help clients minimize the tax burden and reduce the cost of compliance. Our core real estate property tax services include assessment reviews, management and appeals, as well as in the U.S., personal property and state and local tax advisory services. The majority of our Property Tax revenues are derived on a contingency basis, representing a percentage of the savings we achieve for our clients. As such, we recognize contingency revenues when settlements are made, which in some cases could span multiple years. A smaller portion of our fees are based on a time and materials basis. Valuation services, which are predominantly provided in Canada, consist of appraisals of real estate portfolios, valuation of properties for transactional purposes, due diligence and litigation and economic consulting. Our Cost Advisory practice, offered in both the private and public sectors in Canada and Asia Pacific, provides expert services in the areas of construction feasibility studies, budgeting, cost and loan monitoring and project management. Pricing for our Valuation and Cost Advisory services is primarily based on a fixed fee or time and materials basis. Given the strength of our brand, our independence and quality of our work, we enjoy a high rate of client renewals across all of our CRE Consulting businesses

Strategy

Commercial real estate continues to see a steady rise in investment allocation by global institutions, solidifying it as an important and well‐defined asset class. Higher volumes of cross‐border transactions and institutional capital flows are adding new complexity and pressure on top of increasing risk and regulatory demands. To better cope, the CRE industry is rapidly re‐examining their digital strategies and demanding more sophisticated processes and data to drive returns. Customers are increasingly looking for interoperability across software applications, data and workflows in a manner that drives real‐time business insights. In addition, investors, regulators and the broader CRE community are demanding greater transparency on worldwide asset and portfolio performance, valuations, risk and Environmental, Social, and Governance (“ESG”) compliance, and are increasingly relying on independent expert service providers in this pursuit.  

With a global footprint, a prominent customer base, and through our Altus Analytics solutions, Property Tax and other CRE technology‐enabled offerings, Altus Group is uniquely positioned to capitalize on the opportunities presented by these trends and to drive significant value for the industry. We are at the forefront of innovation in our industry and are well equipped to help our clients navigate the complexities of the CRE market to make better informed decisions and maximize the value of their real estate assets and investments.  

Our vision is to be the leader for the valuation and management of risk for real estate assets by enhancing the decision making across the value chain through the use of technology, data, analytics and services. Over the past several years, we have positioned ourselves as a leading CRE technology and technology‐ enabled services provider through our investments in cloud technology, the integration of our software technology stack, the expansion of our products and services into Europe and the Asia Pacific region, and the digitization of our Property Tax and other service lines. We have also initiated the transition of our Altus Analytics business to a predominately recurring revenue model by moving from on‐premise software sales, sold on perpetual and subscription terms, to cloud SaaS products.

Our next phase of growth involves driving deeper penetration across the CRE value chain by accelerating cloud adoption, creating greater interoperability of customers’ embedded software and data applications, providing new and adjacent data and software solutions, and further integrating our existing product and service offerings to provide end‐to‐end data‐driven insights.

 

Strategic Priorities

Our 2021 strategic priorities consist of:

Accelerating the global adoption of ARGUS Cloud and increasing the proliferation of our

applications across clients’ workflows and the CRE value chain; 

 

Expanding into the CRE debt markets through a combination of organic and acquisitive initiatives; 

 

Expanding our data capabilities and developing new areas of opportunities;

 Continuing to build market leadership in Property Tax; and   

Enhancing our go‐to‐market strategies across the Company.

Our top priority is accelerating global adoption of ARGUS Cloud. We remain focused on establishing ARGUS Cloud as the foundational enterprise platform for global CRE asset and investment management, which in the long run we envision will leverage data and predictive data analytics to deliver real‐time business insights. In support of this vision, we continue our transition from high‐value point solutions to a more ubiquitous model that unifies our valuation and asset management capabilities on to a single, cloud‐ based platform that integrates numerous key workflows and enhances data‐driven insights for the CRE industry. In order to drive faster adoption, we are focused on creating a much deeper differentiation in the value proposition between our cloud and on‐premise products. Future version releases will see greater functionality developed exclusively on ARGUS Cloud, including additional application programming interfaces (“APIs”) and interoperability that facilitates enhanced workflows and collaboration.

Our early foray into the CRE debt markets validates that there is a significant opportunity for us in this market adjacency. Although we currently provide valuation and risk management solutions to some clients in the debt space, deeper capabilities are required to fully address this growing market segment. Our customers and the industry would derive significant value and be better equipped to manage risk performance from a fulsome 360‐degree view of their assets that combines equity and debt considerations. The April 1, 2021 acquisition of Finance Active, a European provider of debt management SaaS solutions for treasury and investment management, is an important step to accelerate our growth in the CRE debt market. It provides us with the immediate benefit of approaching a much larger client segment while expanding our reach across use cases and workflows. In addition, Finance Active provides us with greater cross‐sell opportunities and a strengthened footprint in Europe that we plan to leverage to further our international expansion. As part of our product roadmap, we plan to integrate Finance Active’s debt management SaaS solutions with our ARGUS Cloud platform.

A key company‐wide initiative in 2021 is to expand our data capabilities and develop new opportunities. The market for real‐time insights from data present  a substantial opportunity. Typical industry data is complex, voluminous, and unstructured. The data that is collected and generated by our various cloud solution products and by our Appraisal Management, Property Tax, and Valuations and Cost Advisory businesses is specific, timely and precise. Our opportunity lies in the ability to provide our clients with data architecture and data model solutions, enabled by ARGUS Cloud, allowing clients to aggregate data sourced from internal systems, Altus data and potentially other third‐party data providers. Such a data platform with predictive analytics and alert capabilities would enable both equity and debt stakeholders to drive investment performance and manage risk. In support of this opportunity, we have formed a dedicated team and initiated internal workstreams to establish market use cases, feasibility studies and a technology roadmap. The May 4, 2021 acquisition of certain assets of StratoDem Analytics (“StratoDemAnalytics”) (as discussed on page 11) is a core component to our long‐term data strategy, bringing valuable data science technology and talent, and accelerating our speed to market for future data analytics products.

With market leading practices in Canada, the U.K. and the U.S., our Property Tax practice is one of the largest and fastest growing property tax advisors globally. Our global Property Tax practice continues to represent an attractive growth opportunity in a consolidating industry, driven by solid market fundamentals and our strong competitive position. We will continue to invest organically and in tuck‐in acquisitions of both core tax practices and adjacencies in order to grow our market share. Additionally, we will further digitize our data and workflows to drive efficiencies, gain incremental insights, and deliver greater client value. Lastly, we are re‐organizing the tax business under a centralized leadership model with a global president and chief operating officer, in order to better align our regional tax practices under a common global model, drive best practices, and accelerate digital transformation. Our strategy is centered on strengthening this business with technology and data, and in doing so, improving the repeatability and growth of our revenues and our operating leverage.

Finally, we will align and enhance our go‐to‐market strategies across our businesses. By leveraging investments we have made in core platforms such as Salesforce, we will re‐tool and scale our sales organization to better address the market opportunities in North America and Europe. We will evolve our customer success and drive deeper marketing programs to strengthen business development and sales initiatives. Our focus on account planning will better position us to identify our clients’ enterprise needs, enabling us to provide them with an enterprise solution of our various offerings, rather than taking a single point selling approach. We believe this will drive higher client value and customer satisfaction, which in turn will result in higher, recurring revenue streams.

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Source

https://www.altusgroup.com/wp-content/uploads/2021/05/Shareholders-report-Q1-2021.pdf

 

https://www.altusgroup.com/company/investor-relations

James Telfser on BNN-Bloomberg’s Market Call, June 9, 2021

 James Telfser on BNN-Bloomberg’s Market Call, June 9, 2021

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Market Outlook

As we look to the second half of the year, we continue to see a well-balanced market that is set to favour equities over many other asset classes, especially traditional fixed income. Inflation is the current mesmerizing worry, and one, which we believe, will stabilize as the strong post-pandemic acceleration in growth levels off.  We are beginning to favour growth over cyclicals, as we believe the strong rally in commodities may pause, which will bode well for sectors that have struggled so far in 2021.

At Aventine, we tend to focus on idiosyncratic factors given our passion for individual stock selection and we continue to see a gradual improvement in confidence resulting in higher spending, and an inevitable release of pent-up consumer demand. While there is always a risk that expectations have gotten too high, after Q1-21 earnings season, we remain much more confident in our portfolio construction and look forward to the resulting impact of higher medium term economic growth. 

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Top Picks

Trisura Group (TSU TSX)

Trisura Group is a holding company consisting of three segments: Trisura Canada - a specialty insurer, Trisura U.S. – a fronting insurer that cedes almost all premiums to reinsurers except for a small part that it retains on its books, and Trisura International - a reinsurer that recently resumed underwriting. The company was spun out from Brookfield Asset Management in 2017 and has grown impressively into a highly profitable specialty insurance group. The most impressive growth continues to be from Trisura U.S. where management has found a niche opportunity in the fronting market. Furthermore, the more traditional Canadian operations have been recording better-than-expected revenue growth and underwriting profitability. We believe the company continues to have staggering growth potential, and the next leg will be debt funded thereby significantly reducing cost of capital and increasing shareholder returns.

AirBoss of America (BOS TSX)

Airboss, a diversified rubber compounding business, has undergone a dramatic transformation recently and we believe their best days are still ahead.  The management team have made some astute capital allocation decisions by focusing on fostering relationships in the defense market through their acquisition of CSI in early 2020.  The balance sheet has improved substantially (currently debt-free), free cash flow has increased, and most importantly, their bid universe has multiplied.  While the shares have responded well to new contract wins, we still see them as dramatically undervalued, especially when compared to the peer group.  Airboss has many near-term catalysts and with the market cap hovering around $1 billion, we believe a re-rating may be imminent.

Sangoma Technologies (STC TSX)           

As the unified communications market has evolved, Sangoma has been active in M&A and adapting internally in order to remain a top player.  Their recurring revenue base has increased substantially along with their cloud presence. They have achieved all of this without sacrificing their industry leading financial metrics.  Sangoma recently completed the acquisition of Star2Star, their largest transaction to date, to further solidify their market position. While the market is taking its time digesting the news of this deal, we believe that the next few quarters will demonstrate the added benefits of scale and will help close Sangoma’s large peer-group valuation discount.  The management team clearly agrees as they have been buying this recent dip in the share price as well.

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James Telfser, Partner and Portfolio Manager at Aventine Investment Counsel