Really enjoyed this one as Africa is a part of the world I find a little out of my comfort zone as an investor (which is where value usually lies!).
The one thing I'm curious about is currency risk and assumptions. The return case leans on book compounding at 10-15%, and a lot of the growth framing (the 4-5% GDP figure, the rising consumer class) is in local terms. Historically, the gap between strong local African growth and disappointing hard-currency returns has come down mostly to currency depreciation. How much FX drag is baked into your book-compounding assumption, and how far do the hard-currency-revenue criteria protect USD book value through a cycle of local depreciation?
That’s a great question and obviously hard to quantify. One thing I’d correct is that gdp is local, but also real. Since exchange rate differentials should match inflation differentials over time, that means gdp is effectively in hard currency but only over the long term. More importantly, by picking companies with hard currency revenues and/or diversified revenues, Helios can reduce the risk. In addition, they aim to find companies that can outgrow their host economies, which provides an extra buffer. And finally, these things are cyclical. EM currencies were quite expensive in 2010-15. Since then the dollar has been king. EM currencies are much cheaper today.
Putting all of this together, I see it as more of an opportunity than a risk.
BTW the 15% bvps growth target is management’s, not mine, but I’ll ask them if there is an assumed currency drag built into it.
That's a really good question. They invested for value in mostly old-economy businesses with weak moats, which the parent (Fairfax) does well in more developed markets, but a lot of the businesses turned out to be broken rather than just cheap. I think they had the wrong people making decisions, but I also think they had the wrong strategy for frontier markets. These aren't deep capital markets where cheap stocks mean-revert predictably. I think the opportunity is in growth companies with good unit economics and long runways in immature economies. So I much prefer Helios' approach.
I love the article. My main issue is, we cannot calculate the portfolio of investments unlike FIH which I track every Q. - without knowing the portfolio, how do we know if there is hidden value such as BIAL? Can you also touch upon share repurchases, when a company is trading at a 50% discount, that’s very accretive! What is management doing to close the gap?
FIH trades at nearly 1x last reported BVPS. Even if you double BVPS to allow for the undervaluation of BIAL, you get to the same 50% discount that HFP trades at. So I would argue the "hidden" value at HFP is the discount, while at FIH it is BIAL. And there may be additional hidden value at HFP if one of the holdings is a home run.
More broadly, while you can track the current value of the listed stocks at FIH, without doing a lot of valuation work on each one you can't tell what they will be worth in the future. So unless you're going to do that work, I'd say you are in the same position - it is just that with FIH you have to trust the market to set today's valuations, whereas with HFP you have to trust HFP to do so (with implicit validation from their third party investors).
Finally, FIH should always trade at a discount because it is a heavy fee payor. HFP, on the other hand, will likely trade at a premium (to TBV, at least) if Helios becomes profitable, because it will be a net fee taker.
On buybacks, yes they would be accretive, but they would reduce an already small float. Also, I think there is an even better use for that capital: helping Helios grow into a diversified alternative asset manager by seeding new funds. So I have no issue with the lack of buybacks.
What I do find frustrating, and should have mentioned in the piece, is the lack of investor relations effort. There's very little disclosure beyond the legal minimum, they don't answer emails, they don't do quarterly calls, etc. But this is also part of the opportunity: a little effort here could move the share price quite quickly. Here's hoping.
I haven’t found good disclosure but funds I, II, and III raised $2.3bn and have exited $4.7bn so far. So absolute returns have been fine but covid delayed the bulk of those exits so the IRRs won’t have been good. Fund IV is doing much better, 23% IRR, but that’s unrealized.
Really enjoyed this one as Africa is a part of the world I find a little out of my comfort zone as an investor (which is where value usually lies!).
The one thing I'm curious about is currency risk and assumptions. The return case leans on book compounding at 10-15%, and a lot of the growth framing (the 4-5% GDP figure, the rising consumer class) is in local terms. Historically, the gap between strong local African growth and disappointing hard-currency returns has come down mostly to currency depreciation. How much FX drag is baked into your book-compounding assumption, and how far do the hard-currency-revenue criteria protect USD book value through a cycle of local depreciation?
That’s a great question and obviously hard to quantify. One thing I’d correct is that gdp is local, but also real. Since exchange rate differentials should match inflation differentials over time, that means gdp is effectively in hard currency but only over the long term. More importantly, by picking companies with hard currency revenues and/or diversified revenues, Helios can reduce the risk. In addition, they aim to find companies that can outgrow their host economies, which provides an extra buffer. And finally, these things are cyclical. EM currencies were quite expensive in 2010-15. Since then the dollar has been king. EM currencies are much cheaper today.
Putting all of this together, I see it as more of an opportunity than a risk.
BTW the 15% bvps growth target is management’s, not mine, but I’ll ask them if there is an assumed currency drag built into it.
Africa is an exciting opportunity, I’m happy to benefit by way of FFH.TO
Entirely fair, and I have a big position in FFH, but HFPC is tiny for them now and I decided I wanted more exposure.
I did similar for India with FIH.U
Wonderful work here, this is a complex situation and you explained everything in a very clear way, thank you so much man!!
Incredible work
Thanks! That’s incredibly kind.
Why did the initial Fairfax African venture fail?
That's a really good question. They invested for value in mostly old-economy businesses with weak moats, which the parent (Fairfax) does well in more developed markets, but a lot of the businesses turned out to be broken rather than just cheap. I think they had the wrong people making decisions, but I also think they had the wrong strategy for frontier markets. These aren't deep capital markets where cheap stocks mean-revert predictably. I think the opportunity is in growth companies with good unit economics and long runways in immature economies. So I much prefer Helios' approach.
I love the article. My main issue is, we cannot calculate the portfolio of investments unlike FIH which I track every Q. - without knowing the portfolio, how do we know if there is hidden value such as BIAL? Can you also touch upon share repurchases, when a company is trading at a 50% discount, that’s very accretive! What is management doing to close the gap?
Great questions.
FIH trades at nearly 1x last reported BVPS. Even if you double BVPS to allow for the undervaluation of BIAL, you get to the same 50% discount that HFP trades at. So I would argue the "hidden" value at HFP is the discount, while at FIH it is BIAL. And there may be additional hidden value at HFP if one of the holdings is a home run.
More broadly, while you can track the current value of the listed stocks at FIH, without doing a lot of valuation work on each one you can't tell what they will be worth in the future. So unless you're going to do that work, I'd say you are in the same position - it is just that with FIH you have to trust the market to set today's valuations, whereas with HFP you have to trust HFP to do so (with implicit validation from their third party investors).
Finally, FIH should always trade at a discount because it is a heavy fee payor. HFP, on the other hand, will likely trade at a premium (to TBV, at least) if Helios becomes profitable, because it will be a net fee taker.
On buybacks, yes they would be accretive, but they would reduce an already small float. Also, I think there is an even better use for that capital: helping Helios grow into a diversified alternative asset manager by seeding new funds. So I have no issue with the lack of buybacks.
What I do find frustrating, and should have mentioned in the piece, is the lack of investor relations effort. There's very little disclosure beyond the legal minimum, they don't answer emails, they don't do quarterly calls, etc. But this is also part of the opportunity: a little effort here could move the share price quite quickly. Here's hoping.
You know I’ll be doing the work :) what is HFP long term track record?
I haven’t found good disclosure but funds I, II, and III raised $2.3bn and have exited $4.7bn so far. So absolute returns have been fine but covid delayed the bulk of those exits so the IRRs won’t have been good. Fund IV is doing much better, 23% IRR, but that’s unrealized.