Description

Fairfax India Holdings Corp – FIH.TO

For the first time in its 30 year history, Fairfax has created a new public company. Investors can buy in today at a single-digit premium to book value to have Prem Watsa and his team manage their India exposure. Watsa has compounded book value at Fairfax around 20% since inception and has a team in India that has shown similar performance on their Indian-only investments. To the extent one agrees with Watsa’s view on India (“very few countries are as exciting today as India – economic growth will be in excess of 10%”) this tailwind will help mitigate the fee structure associated with this investment.  

Investment Highlights include:

·         Strong record of Fairfax and the Portfolio Advisor

From 1985 to 2013, Fairfax has delivered average annual gains in book value of 21.3%. Additionally, Hamblin Watsa Investment Counsel Ltd, a Fairfax wholly owned investment manager, has invested in India since 2000 generating annualized returns of 20.5% versus 8.9% index returns.

·         Advantageous Structure

The permanent source of capital will allow Fairfax to take concentrated positions with the ability to do private/illiquid investments which should lead to superior returns versus the indices over time. Fairfax India plans on taking either controlling stakes in businesses or positions of “influence”. The firm will invest in at least six different firms and a majority of the investments by value will be in public-listed securities.

·         Strong network/reputation in India and proprietary deal flow:

Watsa is from India and has been investing there since 2001 when he partnered with the largest private bank in India (ICICI Bank Ltd) to create a new insurance company, ICICI Lombard. Today, ICICI Lombard is the largest non-government general insurer in India. Additionally, a few years ago, Fairfax invested in Thomas Cook, IKYA, and Sterling Resorts. Because of the deals he is seeing, Watsa decided to create an additional investment vehicle in FIH as “the opportunity in India is greater than our ability to invest alone.”  

·         Alignment of interests:

Fairfax contributed $300mm to the deal while others like Markel serve as cornerstone investors.

·         Attractive investment opportunity in India:

Last month, the World Bank predicted that India would overtake China as the fastest-growing major economy in the next two years.

Watsa believes that India will be transformed by the business-friendly government of Prime Minister Narendra Modi, who won in a landslide electoral victory last year after pledging to stamp out inflation, dismantle government bureaucracy, and drive economic development.

Some of the structural reforms in progress are highlighted below:

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Additionally, while the portfolio is unlikely to resemble anything like an index fund, India as a whole looks much closer to decent value than markets like the U.S. with the BSE trading at 16x forward earnings and market cap to GDP right below its historical mean.

Risks:

·         The major negative is the fee structure that will eat into returns (1.5% fee on AUM invested and 20% performance fee above 5% hurdle rate).

·         The total amount of $1 billion to put to work ($500mm from offering, $300mm from Fairfax, $200mm from cornerstone investors) is more than HWIC currently has under AUM.  

·         These are Subordinate Voting Shares.

·         Investments will be denominated in INR while the Company’s functional and reporting currency is the US Dollar subjecting the investor to foreign currency fluctuation risk.

Catalyst