Some People Like to Fish, I Like to Invest

Partner's Fund (fund of funds)

• Came about as a request from partners
• Historically superior returns have been generated by small managers
• Doesn't make sense as a standalone business, but is a source of good ideas (including ideas for the main fund), and serves partners who e.g. are at max allocation in Greenhaven Road but want something else that is "Greenhaven Road-esque"

Criteria for Partner's Fund

• Investment committee of one
• Concentrated holdings
• Reasonable AUM
• Original thinking
• Significant personal investment
• Mindset where getting rich is not the point
• Currently c. 12 managers (March 2020)

Investing philosophy

• Do what works...30-40 year vehicle...times will change and need to adapt
• Advantages: can be selective (broad mandate), long time horizon, able to evolve definition of value over time
• Trying to create an ecosystem to give himself unique advantages: Partners Fund, Chuck Royce, LP base (many are investors)
• Craftsman mentality: put together portfolio while taking different sets (types) of risk
• Doesn't make the ask or follow-up. Marketing is all inbound...self-selecting people who come in because they are philosophically aligned (e.g. not a smooth 8% but a bumpy 12% CAGR)
• Want partners to know what they own and why they own it, hence semi-lengthy partner letters
• Don't want to invest in the 50th-best idea (hence concentration)...typically around 15 positions..."if we're right we're rewarded, if we're wrong we survive"

Portfolio criteria

• Two groups
• Group 1: High quality companies for 5+ year holdings (c. 50% of portfolio)
• High insider ownership; often indication of good capital allocation
• Recurring revenue
• Operating leverage / expanding margins
• Risks: product, market, team, execution (from PE world)
• Group 2: Special situations (c. 50% of portfolio)
• Generally about half the fund is sub-$1B businesses
• People build businesses; if you can't trust the financials stay away
• Tough to say "I would never do this"...determined by risk/reward equation (potential zero but high enough upside, reasonably sized, can provide good expected return

"Who has a great track record that is down the most? Can be a good hunting ground."

From Q4 2019 letter (written for investors)

• "What we don't own" e.g. nothing in the SP500
• The next double after a year of multiple expansion (e.g. AAPL) is much, much harder
• In each letter, go into the top 5 holdings
• KKR — the bet is that KKR will continue to raise money to earn mgmt + incentive fees
• Occasionally go into SPACs
• Historical returns on SPACs are negative
• Can buy rights security e.g. that have value if the deal closes (looks like merger arbitrage)
• Had a deal where company would pay fund above market to hold shares and sit through three earnings calls
• "You don't hold this anywhere else"
• $PAR = jockey bet
• Focuses on partnership aspect of partnership — e.g. bring in CEOs to meet partners

Other notes

• Operating a business is more stressful than investing
• De-risking starting a fund: had savings, wife's income, marketable track record
• Most difficult part of job: delivering bad news to investors. Reporting quarterly takes out some of the noise. The right investors are a huge asset.
• Investing experience that most impacted career: in GFC rules changed over a weekend (from can short bank stocks to can't — SEC). Two investors as 90% of total had very short-term liquidity capability, therefore couldn't play long ball. So at Greenhaven Road has 3-year lockup.
• Advice for new investors: don't do it unless you love it; only risk money you can afford to lose (no leverage); be concentrated; be long-term; you can't borrow someone else's conviction...you gotta do the work

Connect to:

• Greenhaven Road website — investor letter section (and sign up)
• Consume a lot of Twitter but don't Tweet much