IMF

The markets are back at or close to all-time highs and selecting investments at this point is becoming quite tricky, especially for a fundamentalist and contrarian investor, like me. Also, trying to follow the macro tourists into which sector is poised to go up can prove itself a very difficult task – or, as experience shows us, equivalent to flipping a coin. But I believe I have stumbled onto something that could be a real opportunity at the moment: IMF – and I am not talking about the one led by Christine Lagarde. IMF Bentham is a litigation funding company providing funding to plaintiffs in Australia, New Zealand, Hong Kong, Singapore, United States and Canada. The name stands for Insolvency Management Fund and it is related to its initial target – insolvency-related issues. The company has its origins at the beginning of this century, did a back-door listing in Australia and it is traded now on ASX under the ticker IMF. IMF has been in the ASX top 300 companies since 2009. They simply finance litigation cases and do not provide investment advice. Up until 2015, the company used to invest its own money on the litigations it funded. This brought some idiosyncratic risk that the Board decided to diversify away from. Also, the earnings were a bit lumpy and the company was restrained by its own capital to grow. Hence, from 2016 onwards, the company changed its business plan and decided to raise funds, in which it also invests, alongside investors, to finance growth and diversify risk. So, in February 2017, the first fund, focused on the US, was launched. Soon after, in October 2017, the second fund, for the rest of the world, was launched. Today the company is already launching its 5th fund (the 4th fund is already closed and it was a success in terms of capital raising) and it is already oversubscribed. The due diligence process of the investors is still going on, but commitments have been made. Both the 4th (focused on the US) and the 5th fund (rest of the world) will be a US$500 million fund each. IMF is transacting from a risky venture to a more asset management company venture, with a little spice (it invests in its own funds 20% of the fund’s target capital raising) and still has a few investments on its balance sheet. This explains why the company holds so much cash on hand. Once fully invested, IMF has to put US$200 million of its own capital on its 4th and 5th funds, not accounting for the option they have to double the size of these funds. The funds are similar to private equity funds, with capital calls and management fees and performance fees (which varies according to the IRR). Fund 1 still needs to make commitments and Fund 2 & 3 have only 10% of capacity left. Fund 4 is already being invested and Fund 5 should close by July 2019. Funds 4 & 5 are considered to be “new generation” funds, and they charge a quarterly management fee and performance fee. Funds 4 & 5 have an option to raise another US$500 million, so after investing 75% of the proceeds of the funds, IMF will most likely exercise the option to raise series II and double the size of the funds. IMF has 50 investment managers that are litigation specialists. The cases are brought to them and these investment managers select the ones they really like. From there, they sign a non-binding term sheet which gives IMF exclusivity for 30-45 days so they can...

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End of the Year Newsletter

As usual, I would like to begin this letter thanking all our partners for the support and trust and our employees for the excellent year we had. Despite all the challenges in 2018 – perhaps the most complex year of the last 10 – L2 Capital has managed to grow and reach new heights. This year we started our first international fund, the L2 International Opportunities Fund. The goal, as the name itself already suggests, is to look for opportunities in the marketplace to deliver capital gains in the medium and long term. We always look for assets that are being traded at a value well below their intrinsic value (in the case of longs) or too high (for shorts) to make high conviction allocations. The great opportunity of the moment, according to our models, is in the uranium sector, in which we have focused and conducted a thorough due diligence. We expect strong returns on this investment and we will report every 3 months to our partners. As always, I will make my only prediction for the new year: all analysts, economists and strategists will miss the predictions for this coming year. Last year, experts predicted Brazilian GDP growth in 2018 of 2.68% and it will be at around 1.4%. The exchange rate, which was to stay at 3.32, ended the period close to 4. We will not get any specific bank or brokerage report, but according to the Focus report, which meets the median of expectations, for 2019 it is projected an inflation rate of 4.03%, dollar to 3.80 and GDP growth of 2.55%. We will follow the development in a year’s time. Once again, we managed to deliver good results in our international portfolios, our investment focus. The average portfolio rose about 8% this year – far short of what we have been delivering in recent years, but still a far superior result than most players on the market. We suffered a little towards the end of the year because of our exposure to uranium, which we will mention later. On the Brazilian side, we had an important election in 2018 with the victory of candidate Jair Bolsonaro. Among other proposals, Bolsonaro has brought a leading economist to become the Finance Ministry, and the market is awaiting major reforms, including the pension reform, which is of major importance and urgency. We will be happy if a real pension reform is approved and we believe it is of real value for the country. Without it, the debt-to-GDP ratio will explode, generating serious negative repercussions on the economy. Of course we are excited about the new government and the proposals being discussed, but we believe that the market is partially pricing this reform and we think it prudent to wait a little longer. There was some renewal in Congress, but not to the point of inspiring full confidence in the adoption of measures that are essential to fiscal rebalancing and the resumption of growth. Moreover, Brazil is part of a globalized world and risks from other places can – and normally do – reach these shores. Our decision to take the foot off the accelerator at the end of last year and start stepping lightly on the brakes proved to be right, and we were able to deliver good results on the international front. Most of the investments made this year were concentrated in the uranium sector, and despite a significant 40% increase in the price of the commodity since the lows in 2018, many stocks in which we invested rose but returned the gains at the end...

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Fluxo de ouro para os Estados Unidos bate recorde

Esse é realmente um acontecimento marcante e vale a pena ser mencionado. Além do mais, nenhum veículo de comunicação anunciou – por isso mesmo achamos importante fazê-lo. Para quem acompanha o mercado de ouro ou lê esse blog, o movimento do ouro é claro: Ocidente para Oriente, bem grosso modo, dos EUA para a China. Esse movimento, de certa forma, evitou q o ouro disparasse, já que temos um comprador grande e um vendedor grande. O dia que o vendedor diminuir ou parar de vender, esse mercado pode explodir. Agora, imagine se o maior vendedor também se tornar um grande comprador. Praticamente não haverá limites para onde o ouro físico pode ir e certamente não existirá metal para muita gente que chegar tarde à festa. Esse ano está sendo cheio de surpresas (Brexit, “golpe” na Turquia, impeachment no Brasil, péssimos números vindos dos EUA, alavancagem ainda maior da China, estímulos sem limite na Europa e principalmente no Japão, Estado Islâmico, guerras na fronteira da Rússia, atentados terroristas semanais na Europa, tensão no mar do sula da China, etc), mas a maior de todas, para quem acompanha o mercado de ouro, é saber que os EUA finalmente se tornaram compradores. Foi o q aconteceu em maio – nós não sentimos isso aqui no Brasil porque o dólar caiu, ou seja, tivemos um bônus para poder comprar mais metal pelo mesmo preço. O chocante dessa notícia é que esse movimento de compra dos EUA não acontecia há décadas. A Suíça exportou para os EUA 50 vezes mais ouro em maio do que na média dos meses desde 2015: A pergunta que fica é a seguinte: por quê essa mudança e ainda tão brusca? Sinceramente, não sabemos. Mas acreditamos que algo grande pode estar por trás desse acontecimento. Vamos monitorar a situação com bastante atenção e reportar assim que tivermos mais notícias. Sabemos que grandes nomes estão comprando ouro e muito ouro: George Soros, Kyle Bass, Druckenmiller, Carl Icahn, etc. Será que mais americanos estão entrando nessa? Isso certamente seria um “game changer”. Como já dissemos várias vezes, é melhor estar anos adiantado do que 1 minuto...

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Australia Trading Journal – Part 6

Since our last update, on June 5th, we kept our NCM position without selling calls, as we expected gold prices to go higher. Our expectations were confirmed and the metal price rose nearly 10% in less than a month in USD. NCM shares have risen by 28% since we bought them on May 09th. We decided to write more covered calls: Trade Sell (Call) Security: NCMGZ7 Price (AUD):1.11 Date: July 12th Strike (AUD): 26.50 Expiration date: July 28th In case of being exercised on this option, we expect to get a 36% return in less than 3 months. If the option expires worthless, we may have to analyze markets conditions to decide whether to sell more calls or to simply carry the shares, as we did last month. We will be releasing a new report as soon as we decide to do any other moves regarding this...

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First semester 2016

The first semester of 2016 was remarkably turbulent and we expect the volatility to stay high and possibly even increase by year’s end. The markets are ignoring the existing risks, simply because they are counting on price manipulation by the Central Banks (CB). Unfortunately, by holding stock prices up, the bureaucrat professors in charge of the CBs are postponing the inevitable and making the consequences even worse and perverse. The best recent example was the Brexit – it was a big surprise for the markets, made the pound sterling plunge and dragged the global stock indexes along with it. How did the CBs respond to it? They promised what they always do: more liquidity, more bond purchases and interest rate cuts. Result: the indexes bounced back and completely ignored one of the most important events of the 21st century, as if it was nothing to worry about. We are going to list the most obvious potential problems that investors are ignoring – of course, these are the known ones. There could be a “black swan”, which would make the entire situation even worse. • Countries’ leverage Countries’ indebtedness has reached very high levels as measured by Debt-to-GDP, especially in ones whose economies are stagnated or recessive, such as Japan (229%), Italy (133%) and the Eurozone (90%). The very leader of this rank, Japan, uses 41% of its tax revenue just to serve its enormous debt (bear in mind that interest rates there are zerobound). • Elections in the USA The prognosis for the American future isn’t very exciting. Besides their innumerous problems that are always brought up in this blog (ZIRP, slow growth, high unemployment rate, high asset prices, etc.), this year is an election year and the candidates aren’t exactly the best ones in our opinion. • Zero and even negative interest rates in many parts of the world. The total amount of government debt yielding negative interest rates is increasing and had reached USD11.7 trillion last month, nearly twice as much as the amount in the beginning of the year. We consider the idea of investing in a bond, holding it until maturity with the certainty of getting less money than what was initially invested as inconceivable. • Frightening corporate leverage. The corporations took advantage of the extremely low interest rate to take on a lot of debt. Instead of investing in innovation, research, development and expansion, the executive officers decided to do buybacks, busting their own bonus, but clearly putting the company in jeopardy. As soon as the money authorities are obliged by the markets to increase interest rates, the companies’ capital structure will be compromised and they will no longer be competitive. On top of that, these companies will have to issue shares to serve the debt and correct operational weaknesses, at the very moment that investors are also selling their positions, sending the stock prices further down. • Bank crisis in Europe (mainly in Italy). Italy is responsible for less than 10% of Europe’s GDP, but it is responsible for almost 1/3 of the NPL’s of the entire Euro area. The vulnerability of the European banking system is quite evident. • A possible (and probable) debasement of the Chinese currency Big investors like George Soros and Kyle Bass have already pointed out what seems to be the trade of the year: the impossibility of China to keep the Yuan pegged to the USD. Last year, when China debased its currency by a little more than 2%, the markets melt down. That makes us wonder what would happen in case of a big devaluation. •...

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