|Shares Out. (in M):||160||P/E||0.0x||0.0x|
|Market Cap (in $M):||290||P/FCF||0.0x||0.0x|
|Net Debt (in $M):||0||EBIT||0||0|
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Note: All currency converted to US Dollars
I am recommending a long in GP Investments, one of Latin America’s largest and oldest private equity firms. The current price provides an opportunity to acquire a portfolio of attractive private equity investments at a ~35% discount to net asset value, own the asset management company for free, and invest in new opportunities in an out-of-favor market alongside one of Latin America’s most experienced investment teams.
GP Investments was founded in 1993 by Jorge Paulo Lemann, Carlos Sicupira and Mercel Telles of ABInBev and 3G Capital fame and has grown to become one of Latin America’s largest private equity firms. In 2003, the current leadership team acquired control of GP from the original Founders, and between 2006 and 2008, conducted an IPO and multiple capital raises that provided GP with permanent capital to invest in its funds alongside its LP investors.
Today, GP manages $5.1bn in assets through 6 private equity funds and one real estate fund, of which $4.2bn is 3rd party capital and ~$1bn is permanent, proprietary capital. An investment in GP provides ownership in both GP’s underlying portfolio investments and ownership of the management company that receives fees for managing its various funds.
Significant and Widening Discount to Net Asset Value
The current discount to NAV is laid out below. The discount reflects poor performance in its last private equity vintage, which is due to two bad investments (already significantly discounted) and general Brazil underperformance / re-rating, as well as thin research coverage and trading liquidity. While GP’s discount to NAV has persisted for several years now, the discount has widened to its deepest levels in recent quarters (2.5x NAV in mid 2007 down to .65x today) and creates an attractive entry point for longer-term investors.
|%||Investment||Value /||% of||Invested||Txn.|
|Magnesita||7.0%||$41||$0.26||9%||$103||0.40x||Aug-07||@ Market w/ 10% illiquidity discount|
|BHG||8.3%||26||0.16||6%||41||0.63x||Jan-08||@ Market w/ 10% illiquidity discount|
|Tempo||10.4%||22||0.13||5%||19||1.16x||Jan-07||@ Market w/ 10% illiquidity discount|
|Apen||26.7%||29||0.18||7%||33||0.88x||@ Market w/ 10% illiquidity discount|
|San Antonio||22.6%||27||0.17||6%||128||0.21x||Aug-07||Post-money valuation related to debt restructuring|
|BRZ Investimentos||89.9%||18||0.11||4%||33||0.55x||Shareholder's Equity|
|Real Estate Investments||40.9%||34||0.21||8%||26||1.31x||Acquisition value, DCF|
|EBAM||33.6%||32||0.20||7%||37||0.87x||Feb-12||Acquisition value, adjusted for exchange rate|
|BR Towers||17.3%||35||0.22||8%||39||0.91x||Oct-12||Acquisition value, adjusted for exchange rate|
|Centauro||8.1%||58||0.36||13%||62||0.93x||Nov-12||Acquisition value, adjusted for exchange rate|
|Beleza Natural||14.1%||14||0.09||3%||13||1.05x||Jul-13||Acquisition value, adjusted for exchange rate|
|HoldCo Financial Investments||185||1.16||42%|
|HoldCo Assets and Liabilities||$39||$0.24||9%|
|Net Asset Value||$443||$2.77||100%|
|NAV / Share||$2.77|
|Current Price Per Share||$1.81|
|% Upside / (Downside) to Current Price||52.8%|
|% Premium / (Discount) to NAV / Share||(34.6%)|
GP’s portfolio is generally comprised of high-quality, rapidly growing businesses valued at conservative multiples.
The Company has grown revenues by 36% per annum between 2010 and 2012 and earns 27% consolidated EBITDA margins, near the top of the global hotel peer set. The company maintains a net cash position and is expected to grow EBITDA by 40% per annum between now and 2015. BHG currently trades at 6.5x consensus 2014 EBITDA. Most global hotel companies trade at double-digit EBITDA multiples and Brazil’s largest hotel company, Accor, trades at ~10x EBITDA, so BHG’s current price already embeds a significant discount to relevant comps.
Research has a consensus price target of $9.30, implying 75% upside to the current price. Convergence to consensus would provide $0.13 of incremental NAV/share.
GP provides select financial details for its privately held investments.
Sascar earns 40%+ EBITDA margins on a revenue base that has been growing at 20%+ annually. GP’s current marks for Sascar imply a modest 6.7x trailing EBITDA multiple valuation, a significant discount to Ituran Location and Control, which also provides stolen vehicle tracking services in Brazil and trades at 8.2x LTM EBITDA. Convergence to Ituran’s multiple could provide an incremental $0.09 NAV / share.
GP ultimately expects a 2x cash-on-cash return on its investment, which could imply an incremental $0.11 NAV/share as the projects are development. 10 projects have so far been launched with 84% of average units sold.
In the most recent quarter, GP reported that the Company has doubled its net revenues, operating costs have come down and that the Company sees EBITDA improving significantly, as operations ramp up and G&A gets leveraged. EBAM is valued by GP at $94mm, which includes $34mm is net cash.
With the exception of LBR and San Antonio, which comprise 9% of NAV, GP’s portfolio is comprised of strong, growing companies at attractive absolute valuations. Valuing the private portfolio is challenging due to the lack of data, but the current stock price is still overly discounted and implies that the private portfolio should be valued at 53% of current estimates and 32% of cost. Furthermore, NAV has various sources of upside potential, as described above.
Management Company for Free: The current price provides the portfolio at a discount and ownership in the management company of one of Latin America’s largest private equity firms for free. While the asset management company is operating at a loss (opex is running slightly higher than base management fees; Company has not been earning performance fees due to performance at GPCP V), the asset manager still has meaningful value as Latin America’s premier private equity franchise. GP has the largest private equity track record in the region, extensive transactional experience, and a strong professional network within the Brazilian business community. Replicating this institutional credibility and investment infrastructure in an undeveloped market is difficult. Returns in its latest vintage have been subpar but the Company has an attractive long-term track record and a respected reputation. GP continues to incubate new funds and grow third-party assets under management.
Accretive Share Buybacks: GP initiated a share buyback program in 2Q10 and has reduced its share count from 170mm diluted shares outstanding in 2Q10 to 160mm in the latest quarter. While the level of buybacks is not dramatic, GP’s choice to continue repurchasing shares, when management sees opportunities to deploy capital at 25% IRRs, highlights the stock’s attractive valuation.
Experienced Investment Team with “Skin in the Game”: GP has a deep bench of investment talent that collectively owns 28% of the Company and is well aligned with shareholders. 88% of GP’s Managing Directors and Directors have operating experience as either former CEOs or former CFOs/Directors of operating companies. 69% hold Engineering degrees, many from top US and Brazilian universities. 81% of the senior professionals are between 30-to-44 years old and nearly all have been with the firm for over 4 years, many rising up from within the firm’s Associates ranks.
While returns from the latest vintages have been lackluster, the firm’s extended track record is still strong.
In my downside case, I have GP converging to an adjusted NAV that assumes a full write-off of LBR and San-Antonio, and a 40% discount on all other private-held investments. This implies a $1.90 price target, or 5% upside.
In my base case, I assume convergence to current NAV of $2.77 per share, which provides 53% upside.
In my upside case, I assume convergence to an adjusted NAV as follows, which provides 98% upside.
|Current NAV / Sh.||$2.77|
|Magnesita||0.14||To analyst consensus price target|
|BHG||0.13||To analyst consensus price target|
|Apen||0.17||To current NAV|
|Sascar||0.09||@ Ituran EV / EBITDA|
|BR Towers||0.20||@ 13.0x EBITDA|
|RE Investments||0.11||@ 2.0x MOIC|
|PF NAV / sh.||$3.60|
|% Upside / (Downside)||98.4%|
I don’t place a “holdco” discount on this portfolio as I believe the current discount is cyclical rather than structural (GP once traded at 2-3x NAV) and does not include any value for the asset manager.
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