A closer look at our relationship with Guardian Capital.
A closer look at our relationship with Guardian Capital.
A closer look at our relationship with Guardian Capital.
A closer look at our relationship with Guardian Capital.
As long-term investors, we seek to partner with management teams that have a proven track record of successful capital allocation.
We currently own 18 high quality businesses that we believe are materially mispriced, one of which is Guardian Capital. Guardian Capital has built (largely organically) a $50B global asset management franchise, a leading managing general agent (MGA), and an investment portfolio that at September 30th was worth ~$600m (net of associated liabilities and tax). They have been disciplined allocators of capital for many years and it has long been far too cheap relative to the sum of the parts. We hoped that at some point Guardian would sell a part of its large insurance distribution network that it has been building through organic growth and acquisitions given the maturity in that market and lack of scaled competitors left to acquire.
In November, Guardian announced it would sell this business along with its investment dealer (Worldsource) to Desjardins, a transaction that came in at a slightly more favorable valuation range than we had expected. The gross proceeds that Guardian will receive ($750 million) are roughly the same as Guardian’s market capitalization at the time the deal was announced – implying you get the rest of the business for free1! As seen below, the stock price performed very well and was up approximately 35% in a day. This sort of episodic return profile is consistent with our investment philosophy whereby we look to deliver superior returns over a 5- and 10-year period and are not trying to beat the market in a quarter or a year.
Source: Bloomberg
Despite this value uplift catalyst, the remaining Guardian business is still high-quality and mispriced, meaning we will continue to hold the company in the portfolio. Not to mention it now trades at a ~$10discount to the net cash they will hold on their balance sheet when the deal closes! Not since the 1940’s or the Financial Crisis have we (or Warren Buffett) been able to buy well run business that are growing at discounts to their net cash. After the transaction, Guardian will have an asset manager with over $50B in AUM that earns over $20 million of cash flow per year and ~$45/share in cash and short term investments that we expect will be deployed into inorganic growth and returned to shareholders. We believe the business is worth ~$75/share when looking at the sum-of-the-parts.
While we cannot predict the timing of these transactions, the Canadian Smaller Companies strategy consists of many idiosyncratic opportunities that we firmly believe will compound favorably with several like the case here; having very little downside and low correlation to the economic outlook. They are selling this business for 3-4x what they invested into it over the last 10 years, a fantastic return to shareholders and we remain confident in their ability to source and execute further value creating deals in the future.
This article is prepared by Langdon Equity Partners. Content in respect of the Langdon Smaller Companies Fund (ARSN 657 901 614 (the Fund) is issued by Pinnacle Fund Services Limited ABN 29 082 494 362 AFSL 238 371 (‘PFSL’) as responsible entity of the Fund. PFSL is not licensed to provide financial product advice. It contains general information only. It is not intended as a securities recommendation or statement of opinion intended to influence a person or persons in making a decision in relation to investment. It has been prepared without taking account of any person’s objectives, financial situation or needs. Any persons relying on this information should obtain professional advice before doing so.
Past performance is for illustrative purposes only and is not indicative of future performance.
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FOR AUSTRALIAN CLIENTS:
The Product Disclosure Statement (‘PDS’) and Target Market Determination (‘TMD’) of the Fund are available via the links below. Any potential investor should consider the PDS and TMD before deciding whether to acquire, or continue to hold units in, the Fund.
Link to the Product Disclosure Statement: here
Link to the Target Market Determination: here
For historic TMD’s please contact Pinnacle Client Service Phone 1300 010 311 or Email service@pinnacleinvestment.com
FOR CANADIAN CLIENTS:
Important information about each Langdon mutual fund is contained in its prospectus, AIF, fund facts document and in its management report on fund performance. Any potential investor should review these documents prior to making any investment decision relating to such fund. You can view copies of these documents by following the links below:
Link to the Langdon Global Smaller Companies Portfolio Disclosure Documents: here
Link to the Langdon Canadian Smaller Companies Portfolio Disclosure Documents: here
