Description

Summary: -

Senvest Capital trades at a 34% of discount to (my conservative estimate of year-end) NAV. Since 2001, BVPS has compounded at 19.06% through 2017. With its main fund down -17.22% ytd, the shares of Senvest (the parent company) are also down -22.96% ytd. At this price, investors are getting an opportunity to invest in a vehicle that has compounded book value at 19+% at a discount. I believe that once performance of the main fund recovers, so will the shares of Senvest.

Business Description/Industry Backdrop: -

Senvest Capital is a publicly traded investment vehicle that invests in several hedge funds, real estate as well as privately held companies.

The company was initially incorporated as “Sensormatic Electronics Canada Limited” in November 1968 as the exclusive licensee of Sensormatics Corporation by Victor Mashaal. In December 1990, the company sold part of this business. In April 1991, the company changed its name to “Senvest Capital Inc.” and subsequently sold the remaining Sensormatics business back to Sensormatics. Since changing its name, Senvest has been active in investing (through subsidiaries) in several ventures including: real estate in the United States and Argentina, as well as public and private businesses outside Canada.

In 1997, Senvest (as well as friends and family of the founder, Victor Mashaal) seeded Victor’s son Richard with $5.8 million to start up a hedge fund. Through the end of 2014, the fund had posted an annual return of 20.7% using a value strategy. Since then, like most value investors, the fund’s returns seem to have deteriorated. YTD through November 2018, the fund was down -17.22%. Assuming this is the return through 2018, the previous 4 year CAGR is -0.28% and annual returns since inception (to 2018) should be around 16.6%.

Subsequent to their main fund, Senvest has also started several smaller funds: “Senvest Israel Partners Masters Fund” which focuses on companies having a connection with Israel; and “Senvest Cyprus Recovery Investment Fund” which has focused on the finding opportunities emerging from the Cyprus Financial Crisis.

Senvest consolidates all its investments into the operating company. The parent company’s book value has compounded at 19.06% from 2001 through 2017.  Senvest’s BVPS has compounded at 10.9% for the last 4 years through 2018 (assuming their BVPS deteriorates at the same rate as their main fund through 2018 … see two paragraphs above for comparison)

Richard Mashaal is the GP of the funds. Senvest invests its own money in the funds, as well as provides sub-advisory services, in exchange for 60% of the GP’s economics.

Management Compensation: -

1. There are no options outstanding currently, and none have been issued since 2005. Senvests repurchases its own stock from time to time. In August 2018, the company announced another stock repurchase of about 70k shares (about 2.59% of total shares outstanding). Since 2010 (through 2018 Q3), shares have declined by 4.45%. Although this does not amount to much, given the fact that Senvest is itself is an investor in its funds, I believe that this is a way for management to communicate that its funds as well as the parent company are undervalued.

1. Victor Mashaal owns about 43% of shares outstanding. And Richard owns about 9.7%. With this level of ownership, their interests seem to be aligned with outside shareholders. Their salaries don’t seem to be excessive. Victor and Richard’s base salaries are a small component of their total compensation which includes a performance bonus. 3.5% of the bonus is derived from the Company’s pre-tax comprehensive income (which should be a function of prorated management and GP incentive fees). The remaining 3.5% is derived from the same comprehensive income pool, but importantly based upon “the return realized by the Company on its investment portfolios compared to the return realized by a basket of indices comprised of the S&P 500, the Nasdaq Composite Index and the Russell 2000”. The Company return must exceed the basket return by 35% for a full 3.5% allocation. I believe this is a tough hurdle to overcome. Their proxy states, when comparing their compensation to total revenue, - “Historically in the financial sector, this percentage has ranged between 30% and 40%. In the case of the Company, for the financial year ended December 31, 2017, the ratio of employment benefits and share-based compensation to total revenue and investment gains was approximately 11%”. I am not an expert on hedge fund compensation, but this seems fair to me, considering their track record so far.

Key Issues: -

Senvest’s main fund is down -17.22% through November 2018. Senvest Capital’s BVPS was $361.14 at the end of Q3 2018. If we assume similar results (I assumed -20%) through the end of 2018, at today’s price of $192, Senvest is trading at a discount to NAV of about 34%.

Note that, the returns of the main fund and the parent Senvest are not exactly correlated, but I have assumed so for the sake of conservatism. When compared to BVPS at the end of Q3 2018, Senvest is trading at a discount of 47%.

One can make the argument that for a company with this kind of track record, there should be no discount. Indeed, Pershing Square’s Q3 2014 letter states - “Companies which have earned mid- to high-teen returns on equity over this same period also trade at substantial premiums to book value. Doing the same screen for average ROEs of 15% to 20% yields 380 companies with a median market cap of $6.1 billion that trade at a median price to book ratio of 2.7 times.” I understand that given Pershing Square’s subsequent performance, this is a bad example.

Senvest seems to have always traded at a discount to NAV. I attribute this to their small market cap, float (Victor and Richard Mashaal together own more than 50% of their shares) and Canadian listing. I believe that we are in a correction so any bounce back in Senvest’s fund’s results should be positive for the stock, and one does not have to depend upon a compression in the NAV discount to get a decent IRR. Their performance since inception seems to indicate skill and with assets under management of about $1.57 billion in their main funds (ie not too big), they should be able to generate decent results in the future.

There is also a possibility of further upside. VIC members are aware of the leverage inherent in most money management businesses. As their outside AUM increases, this should show up in Senvest’s economic interest in the GPs of the funds. The assets under management of their main funds have grown from $331 million in 2012 to $1.57 billion in 2017. This can also be seen in the “liability for redeemable units” line item on their balance sheet (their funds are consolidated in their FS) which represents the units in the funds that are not owned by Senvest. This line item has grown from $190.28 million in 2012 to $876 million in 2017. Actual amount of fixed costs are hard to determine here, and they seem to have gone up because Senvest has been investing in their operations and people. This might be because they are interested in raising more capital from outside sources. I am not counting on this, but it is good to have that optionality.

Risks: -

1. Senvest runs a leveraged portfolio and a significant market downturn will demolish the shares.

2. There is key man risk here. Both Mashaals control the company and outside shareholders seem to be at their mercy. However, I am not aware of any self dealing by the management so far.

3. They seem to be in capital raising mode. Can that decrease returns in the future? Perhaps, but at $1.57 billion in AUM, the fund still seems small enough (to me) to deliver decent returns in the future.

Catalyst

Performance in their main fund.