Description

 TL:DR; side-car investing in value public software companies with the Leonard Family of CSU.TO fame at a discount to NAV (c. ~84% P/NAV today) in a busted NOL shell growing NAV quickly 

PineTree Capital, listed on the TSX as PNP.TO, is a highly illiquid, Canada listed closed end fund/investment company ($27mn market cap, trades ~$20k/day), so is only suitable for small funds or personal accounts.

All information provided below is on a "best-efforts" basis and the author makes no representations around the accuracy and validity of these facts so readers are encouraged to do thier own research before buying or selling shares in the issuer - this is not an inducement to buy or sell securities. Author may change thier mind at any time and buy/sell shares of PNP

Affiliates of Constellation Software control PNP - the company was taken over by current management in 2016. Prior to this, PNP was a CEF investing in natural resources, with a poor track record that had allowed the company to accumulate a large pile of tax-losses.  They sold the legacy investments in private/public securities thereby marking down assets, and invested the proceeds in equities of undervalued, publically listed (mostly small and micro-cap) software companies all around the world that have take out potential.  After cleaning up the legacy investments, and investing the proceeds, the company did a 1:1 rights issue in 2021 to expand the equity base of the company and allow Constellation/affiliates to increase thier stake in the business. 

 Damien Leonard, son of Mark Leonard, the CEO and controlling owner of Constellation Software, owns ~35.3% of FD/SO personally and through L6 Holdings, the family holding company, while investment professionals Peter Tolnai (well known VC exec) and Shezad Okhai (former M&A at Constellation) own 8% and 5% respectively today. 

PNP.TO has signficant tax loss carry forwards (c. $400mn CAD) which means that they will not be cash-tax-payors on their gains for years to come. 

It is hard to calculate like-for-like returns versus an index like the Nasdaq as they have been writing down old legacy investments, holding significant cash position, and investing the cash gradually over the last 3-4 years, however, the BVPS of PNP.TO seems to have kept with the Nasdaq, which is no mean feat considering the strong performance of the Nasdaq, and cash-drag + legacy investments drag faced by PNP.TO. On a like-for-like basis, PNP's investments have outperformed broader software indexes, if you adjust for the cash-drag and not include investments made by prior management team (see below for how).  

As of 9/30/2023, most of this transition has been done, and as such, 81% of the portfolio is invested today in public/private equity investments made by the new management team. The remaining 19% consists of 6% cash, 6% in a money-market ETF, and 7% in debentures issued by Constellation Software, so we will no longer face as high of a drag from cash or non productive legacy investments (fully monetized or written off) and I expect them to opportunistically deploy the remaining cash balance 

These investments are made globally, generally small to micro-cap business that are trading at sharp discounts to fair-market value, and especially private market value to a software acquirer, such as Constellation Software and management provides good disclosure in the quarterly MD&A. Investments are diversified across geography and sector

The company discloses investee companies by name once a year in its annual report, likely to avoid potential concerns about front-running, see below its most latest disclosure

 Looking at thier older investments, we see that a very large percentage of their portfolio holdings received buyout offers (Blue Prism, Paygroup, Dalet, Tungsten, AdaptIT, Basware, Crealogix, LiveVox, and MicroFocus) which explains how PNP.TO has been able to deliver returns at par with the Nasdaq despite investing in off the run global software companies, where index returns have been nowhere near as good (see below in highlights)

The question is, can they repeat this stellar performance?  The anwser is that I think so. Currently, the portfolio is invested in a concentrated portfolio of sticky software companies trading at low multiples of near term revenues and EBITDA, that seem to be well below private market values for assets of this quality. 

Current portfolio (author's est), %age of equity allocation 

- ASX:BVS, Bravura Solutions ~20%

- WSE:SGN, Syngity  ~12%

- SSNC, SS&C ~11% 

- TSX:QIS.V, Quorom Information Technology, ~9%

- TSX:TOI.V, Topicus ~8%

- XTRA:COP, Compugroup Medical, ~7%

- CDNT, Conduent, ~6.5%

- OSE:OMDA, OMDA Group, ~6%

- SPNS, Sapiens, ~5.5%

Reamining  MSD% is split between Showbie (private) and a few smaller investments (Eleco, Prontoforms, etc). 

Outside of the Constellation galaxy (TOI, and SGN), PNP's investee companies tend to be vertical market software businesses trading at low multiples of near-term sales or profits -- BVS trades at ~1.25x EV/sales for a sticky financial services software business, QIS trades at ~1.46x EV/sales for a car dealership software company, SS&C and Sapiens are trading at discounts to thier long-term valuations at ~12x P/E and ~18x P/E respectively, etc. 

PineTree also holds significant management control and influence over some of its portfolio companies - Leonard and Shezad serve on the Board of Bravura, with PNP and L6 affiliates holding ~21% of FD/SO of the issuer, and similiarly on QIS.TO (Damien on the board), PNP and L6 affiliates own ~26% of FD/SO.  PineTree is of course an affiliate of Constellation entities SGN and TOI, so nearly ~49% of equity portfolio is invested in companies where they have strong influence on management and capital allocation.  

Hence PineTree is somewhere between a passive investment company and an active owner of software assets - given the company's track record of investing in companies that get bought out, it is likely that they push management to unlock value for shareholders as soon as possible, whether that is standalone as a public company or via going private/running a sale process. 

Given PNP.TO's management's history and prowess with Constellation Software/close links, they are likely astute judges of quality in software listed businesses as well as have a good idea of what bidders might pay for such assets in a private market sale scenario, so I feel good about their ability to repeatably generate above market IRRs investing in public securities. 

Valuation 

Marking to market for moves till 12/31/2023, my sense is that BVPS for PNP.TO is $4.7-$4.80 CAD, so currently we are trading at 0.84x P/NAV on Q4 and 0.91x P/NAV on Q3 (last disclosed) .

The stock has traded at a median of ~92% of NAV over the last three years, so there is about ~9-10% upside in the near term as they disclose the latest BVPS growing 8% in Q4 2023 and discount narrows a bit. 

I see 0.8x as being a floor on valuation as management has bought back shares at those levels or below in the past 

Most Constellation entities trade at large multiples to invested capital given thier strong track record of capital allocation, so I expect that PNP.TO trades at NAV in the near term, and a premium to NAV in the medium term

A premium to NAV would provide shareholders another avenue of compounding BVPS as they could issue additional equity above BVPS, which would be accretive and grow the vehicle (better absorb the NOLs)

Assuming this trades at 1.2x P/NAV and 20% a year NAV growth, this is a 14 CAD/share stock in 5 years, or more than 3.5x the CMP of $4.0 CAD today (~28% IRR)

Catalyst

Q4 Earnings/NAV disclosure 

Discovery story

NAV/share compounding