Nikada
Expensive Funding Companions,
Jackson Peak Capital’s goal is to ship engaging risk-adjusted, absolute returns. We’re striving to realize equity-like returns whereas taking much less directional market danger and having low correlation to total fairness markets.
The agency formally launched in March 2023, so Q3 2023 marked our second full quarter of funding exercise. Q3 was a robust quarter for Jackson Peak, which returned +11.8%.1 It was a troublesome quarter for total markets, however Jackson Peak’s various, long-short funding method discovered success with at the least one notable win in every bucket of the portfolio (core longs, particular conditions, and alpha shorts). Whereas a smaller contribution, the portfolio additionally benefitted from decreasing internet publicity and setting up macro hedges in anticipation of a surge in long-term rates of interest, which benefited as long-term rates of interest rose and fairness indices fell.
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Jackson Peak Capital |
Benchmark References |
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Lengthy-short |
Lengthy-short |
Lengthy-only |
Lengthy-short |
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Common Web Publicity |
Web Return |
MSCI ACWI |
HFRX Fairness Hedge Index |
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Q3 2023 |
37% |
+11.8% |
‒3.7% |
+0.2% |
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Since Inception (Mar’23 – Sep’23) |
37% |
+8.3% |
+5.8% |
+2.2% |
MARKET UPDATE
Throughout Q3, we turned extra cautious with the portfolio’s internet publicity to the market when it appeared we’d see a confluence of three issues: 1) exhaustion within the AI rally because of overcrowding, 2) sustained transfer greater in rates of interest and three) suboptimal re-opening of the IPO market. These occasions led to the market coming off its year-to-date highs as fairness danger premium started to be priced again into the market after being at traditionally low ranges.
We turned significantly centered on long-term rates of interest when the Treasury’s Quarterly Refunding Announcement (QRA) got here in greater than the market anticipated for notice and bond issuance on the finish of July. This occurred whereas nominal progress expectations elevated, and oil costs continued greater. These elements contributed to a pointy transfer greater within the 30-year Treasury yield, which rose from 4% on the time of the QRA to 4.75% by the tip of the quarter.
We proceed to be conscious of the extent of charges, significantly actual rates of interest2, because it’s our view that it’s nonetheless not broadly appreciated simply how accommodative rates of interest have been over the previous ~15 years and the potential widespread results if actual charges have been to be considerably constructive for a sustained interval. Actual rates of interest have been damaging/close to zero for almost all of the post-GFC period, serving as rocket gas for property since damaging actual charges successfully function a massively useful constructive carry commerce for anybody with debt. Nonetheless, if constructive actual charges are sustained and debt is repriced, the impact flips the opposite course with damaging carry / leverage hitting property. Lastly, greater nominal and actual charges additionally means different asset courses, reminiscent of mounted earnings, look extra engaging, which suggests the required hurdle charge for danger property is greater. All that is to say that we’re monitoring the extent of actual charges carefully to assist inform our view of the place the economic system and sure firms could also be susceptible, significantly for brief thought era. Moreover, we’re conscious of the heighted geopolitical danger globally, significantly following the current tragic occasions in Israel. Our portfolio is constructed bottom-up, on a company-by-company foundation, however we use macro consciousness to assist inform danger administration and danger urge for food.
PORTFOLIO POSITIONING
As of 9/30/2023, the portfolio’s gross and internet publicity have been 125% and 35%, respectively. The portfolio’s ten largest lengthy positions comprised 62% of gross publicity as of 9/30/2023.
Jackson Peak entered Q3 with internet publicity of 51% given the engaging alternative set we noticed for a number of names heading into earnings season and the market’s willingness to cost in a goldilocks end result for the economic system. Because the quarter progressed, we pared again internet publicity to replicate our rising concern relating to the current surge and volatility of rates of interest (significantly actual charges) for the reason that finish of July.
Whereas we stay bullish on the AI tailwind mentioned in our Q2 letter, we did trim some publicity throughout Q3 amid what felt like could possibly be a near-term peak in optimism. The entire market was crowded on one aspect of the boat with longs in excessive beta tech names simply because the broader market was starting to expertise headwinds from uncertainty surrounding the trail of rates of interest and the economic system. The portfolio retains publicity to names which have direct, “boots on the bottom” operations on this stage of the AI cycle and can look so as to add again different beneficiaries when it’s much less crowded.
We’ve been centered on including extra particular state of affairs publicity over the previous few months.[2] We expect the panorama of alternatives over the following 3 to six months on this bucket of the portfolio is engaging, and it additionally occurs to align with our view throughout Q3 to scale back beta to the market. Jackson Peak participated within the Microsoft/Activision arbitrage (mentioned additional within the subsequent part), and this win towards the FTC and international regulators pushes the thesis ahead that weak anti-trust circumstances will proceed to be introduced ahead because of politics and the prospect of reaching marginal victories, even when the offers finally undergo. For traders, this might trigger the continued presence of enormous merger arbitrage spreads because of considerations of a delay by regulators or a long-shot regulator victory regardless of the deserves of the circumstances pointing in favor of the defendants (companies). The implication for Jackson Peak is that we’re following the anti-trust circumstances of the massive spreads carefully and on the lookout for a gap to swing exhausting at engaging danger/reward positions when the info and timing of the circumstances align, as we did with Activision.
The case that’s top-of-mind in This fall/Q1 is JetBlue/Spirit Airways (SAVE) vs. DOJ. We will likely be following the trial carefully because it progresses in October and November. Submit-Q3, we acquired a place in SAVE calls in late October after they plummeted in worth post-earnings and within the days main as much as the trial.[3] Relying on our learn of how the trial progresses, we’ll scale the place up (it’s a subscale place at the moment) or down. This arb is a decrease likelihood than the Activision deal (notice: it’s a horizontal merger in any case, not a vertical merger), however we predict the market is mispricing the potential probability of success. The numerous unfold outcomes ready with substantial constructive anticipated worth in our view, significantly when structured by way of choices and place measurement managed judiciously.
A place that we scaled up post-9/30/2023 that we’re enthusiastic about is Endeavor (EDR). We’ve been following the enterprise over the previous 12 months and took part within the Endeavor/WWE merger arb. Endeavor is a holding firm comprised of media (UFC, WWE, PBR, EuroLeague), expertise illustration, occasions/media rights and sports activities betting property. Endeavor has been chronically undervalued as a public firm, probably as a result of low cost utilized for complexity referring to the holding firm. In October, the corporate introduced it was commencing a evaluation of strategic alternate options to maximise worth for shareholders. Later the identical day, the personal fairness agency Silver Lake, who controls roughly 71% of the voting energy of Endeavor, introduced they have been working towards a proposal to take Endeavor personal. It is our perception that an opportunistic acquisition by Silver Lake is the more than likely end result as they’ll purchase an undervalued asset that they know nicely that’s not being appreciated within the public market and act as a non-public firm to appreciate worth for his or her traders. What makes this an thrilling alternative for Jackson Peak is the draw back safety supplied by a reputable potential takeout bid on an already undervalued enterprise and the near-term upside if the strategic alternate options course of unfolds as we predict it may – combining the facets of a basic lengthy and event-driven funding into one.
On the quick aspect of the portfolio, some themes[4] we’ve been centered on are:
- COVID over-earners: over-earned because of one-off elements that stay within the means of imply reverting whereas their valuations nonetheless suggest normalized earnings which can be too elevated
- Leveraged cyclicals: an excessive amount of leverage for cyclical/discretionary enterprise, usually with floating charge debt
- Housing gridlock: mortgage charges > 7.5% whereas bulk of housing inventory locked in charges at ~3% has potential to maintain a lid on transaction quantity and cloud the outlook much like final fall/winter
- Disrupted: firms which can be being disrupted (or doubtlessly disrupted sooner or later) by rising know-how, reminiscent of synthetic intelligence or GLP-1 weight reduction medication
- Time’s up: speculative IPOs from 2020-2022 that should not have product/market match and are working out of liquidity runway
PERFORMANCE ATTRIBUTION
The biggest drivers of efficiency (contributors and detractors) throughout the quarter are famous within the desk under.
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Prime 3 Portfolio Contributors |
Prime 3 Portfolio Detractors |
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Lengthy: Vertiv Holdings (VRT) +328 bps |
Lengthy: Endeavor (EDR) -66bps |
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Lengthy and bullish choices: Nvidia (NVDA) +320bps |
Quick: Hayward Holdings (HAYW) -56bps |
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Activision (ATVI) arbitrage +284bps |
Lengthy: Enzo Biochem (ENZ) -52bps |
For the contributors, the portfolio had a robust quarter with a notable win in every of the three buckets of the portfolio.
Core Elementary Longs. Vertiv (VRT) contributed 3.3% to the portfolio because the inventory gained 50% throughout the quarter, sparked by its Q2’23 earnings launch in August. VRT’s outcomes displayed important momentum because it serves the crucial position of thermal administration in AI knowledge facilities which can be quickly being constructed, as talked about in final quarter’s letter.
Particular Conditions. The Microsoft/Activision (ATVI) merger arbitrage got here to a profitable conclusion with the court docket denying the FTC’s preliminary injunction request. The deal subsequently obtained approval from the UK CMA and closed in October. The ATVI place was an instance of “staying across the hoop” of a major arb alternative. At first, the place led to a small loss in Q2 when the UK CMA initially blocked the deal in April, however we stayed near the case, analyzed the FTC trial and scaled up the ATVI place because it turned obvious FTC had a weak case, which means the likelihood of the deal going via was mispriced by the market for the reason that firms would probably discover a answer to work with the UK CMA (solely international regulator who had a problem) if the FTC misplaced.
Alpha shorts. A brief place in Leslie’s (LESL), a retailer of swimming pool provides, contributed 1.3% to the portfolio. Our view was that LESL benefitted from two extraordinary occasions, a surge in pool development throughout COVID and a spike in chlorine costs, that briefly supplied a major enhance to its enterprise, and the market was too optimistic in extrapolating these outcomes into the longer term. Moreover, the enterprise is considerably leveraged. These points got here to a head in July when the corporate preannounced Q3 outcomes that missed expectations materially, lowered ahead steerage dramatically, and introduced a CFO transition. The inventory fell 41% the next day.
For the detractors, we efficiently restricted draw back throughout the quarter with no place detracting greater than 1% from the portfolio. The portfolio’s lengthy in Endeavor detracted 66bps because the market was skeptical of the WWE’s newest media cope with USA Community, and the actor and author’s strike in Hollywood raised concern for the corporate’s illustration section. Secondly, the portfolio’s quick in Hayward Holdings detracted 56bps. This quick is pushed by a bearish outlook on a barely completely different space of the pool market described above in LESL. The inventory remained resilient in Q3, however we’re staying near this title. Lastly, Enzo Biochem was a particular state of affairs lengthy that detracted 52bps. It was present process a evaluation of strategic alternate options whereas on the identical time having draw back safety from a big internet money place. Nonetheless, occasions unfolded that indicated a sale won’t be as close to as beforehand thought (e.g. CEO change), so we determined to exit the place for now.
CLOSING
This fall is off to a robust begin for Jackson Peak, and I’m excited in regards to the alternative set for our technique. As mentioned earlier, the micro and macro panorama stays dynamic, which I imagine ought to proceed to current investable alternatives for our long-short technique that emphasizes uneven return profiles and draw back safety.
Thanks on your continued curiosity, belief, and the chance to handle a portion of your property. As at all times, when you have any questions relating to the portfolio, your account, or some other issues, please don’t hesitate to succeed in out.
Final, however not least, if you recognize of anybody who can be occupied with studying about Jackson Peak’s various funding method, please be at liberty to go alongside my contact data.
Sincerely,
Patrick O’Brien
Footnotes1Jackson Peak Capital returns referenced in these supplies are internet of all charges and bills. Shoppers ought to at all times verify their particular person statements for returns, which can range because of time of onboarding and different elements. 2Nominal rate of interest much less the speed of inflation. Observe: the MSCI ACWI is an ETF that tracks the MSCI All Nation World Index, designed to trace broad international equity-market efficiency (3,000 firms from 23 developed international locations and 25 rising markets). As an index with broad fairness publicity throughout geographies/market caps and a generally used benchmark for long-only fairness funds, we notice it above as a reference level. Observe: the HFRX Fairness Hedge Index is an index that maintains positions each lengthy and quick in primarily fairness and fairness spinoff securities. Given Jackson Peak’s long-short technique, we notice it above as a reference level for our returns. [2]Observe: particular conditions is one in every of three buckets of the portfolio alongside core basic longs and alpha shorts. Elementary longs comprise a bigger % of gross publicity than particular conditions on the lengthy aspect of the portfolio. [3]Possible because of perceived decrease break worth if the deal falls via and the absence of a pre-trial settlement that some speculated would happen. [4]Particular firm names of shorts not publicly disclosed in letters, however please attain out if you want to debate in additional element the businesses within the portfolio that align with the themes talked about. About Jackson Peak CapitalJackson Peak is an alternate funding agency that manages a single, concentrated, lengthy / quick fairness portfolio. The agency’s goal is to ship engaging risk-adjusted, absolute returns. We’re striving to realize equity-like returns whereas taking much less directional market danger and having low correlation to total fairness markets. Jackson Peak’s technique goals to provide returns from buying high-quality, usually missed firms under their intrinsic worth and promoting quick firms which can be competitively challenged and overvalued with deteriorating enterprise fundamentals. We observe a value-oriented, research-driven method that’s centered on uncovering uneven danger/reward alternatives. Appendix 1. Glossary of phrasesDefinitionsLengthy Publicity: market worth of lengthy positions / complete portfolio worth Quick Publicity: market worth of quick positions / complete portfolio worth Web Publicity: Lengthy Publicity – Quick Publicity Gross Publicity: Lengthy Publicity + Quick Publicity Disclaimer:The data introduced is for dialogue and academic functions solely and isn’t supposed to make a suggestion or solicitation for the sale or buy of any particular securities, investments, or funding methods. Investments contain danger and, except in any other case acknowledged, should not assured. You should definitely first seek the advice of with a professional monetary adviser and/or tax skilled earlier than implementing any technique mentioned herein. Whereas Jackson Peak Capital (Jackson Peak) believes all data herein is from dependable sources, no illustration or guarantee will be made with respect to its completeness or accuracy. Any projections, market outlooks, or estimates in these supplies are forward-looking statements and are primarily based upon inner evaluation and sure assumptions, which replicate the views of Jackson Peak and shouldn’t be construed to be indicative of precise occasions that can happen. As such, the knowledge might change sooner or later ought to any of the financial or market situations Jackson Peak used to base its assumptions change. The outline of funding methods in these supplies is meant to be a abstract and shouldn’t be thought of an exhaustive and full description of the potential funding methods utilized by Jackson Peak mentioned herein. Assorted funding methods could also be added or subtracted from Jackson Peak in accordance with associated Funding Advisory Contracts by Jackson Peak in its sole and absolute discretion. Any particular safety or funding examples in these supplies are supposed to function examples of Jackson Peak’s funding course of solely. There is no such thing as a assurance that Jackson Peak will make any investments with the identical or related traits as any investments introduced. Jackson Peak might purchase, promote, promote quick, cowl, change the type of its funding, or fully exit from its funding in its portfolio holdings at any time for any or no purpose. Jackson Peak hereby disclaims any responsibility to offer updates or adjustments to the analyses contained herein together with, with out limitation, the way or sort of any Jackson Peak funding. The investments are introduced for dialogue functions solely. The reader shouldn’t assume that any investments recognized have been or will likely be worthwhile or that any funding suggestions or funding choices we make sooner or later will likely be worthwhile. Any index or benchmark comparisons herein are supplied for informational functions solely and shouldn’t be used as the premise for investing resolution. You shouldn’t depend on these supplies as the premise upon which to make an funding resolution. There will be no assurance that funding goals will likely be achieved. Shoppers have to be ready to bear the danger of a lack of their funding. Previous efficiency shouldn’t be indicative of future outcomes. Efficiency metrics herein reference these below Jackson Peak’s customary charge association and symbolize these managed in line with Jackson Peak’s lengthy/quick technique for these above the agency’s account minimal measurement. Outcomes might range for shoppers relying on timing and different elements, and all shoppers ought to check with their very own statements. All efficiency figures are unaudited and are topic to vary. Supply knowledge for Jackson Peak Capital Returns and the MSCI ACWI is Interactive Brokers. Supply knowledge for the HFRX Fairness Hedge Index is the index printed by HFR on its web site. |
Editor’s Observe: The abstract bullets for this text have been chosen by Looking for Alpha editors.
Editor’s Observe: This text covers a number of microcap shares. Please concentrate on the dangers related to these shares.
