Property sectors and hedge funds – more capital seeking diminishing opportunities in 2004

Kurm has increased its investments in private transactions, and has participated in a syndicate to purchase Transamerica Leasing, the world’s third largest freight container leasing business. Its erstwhile parent, Aegon, had not really focused on the business, and so it might be considered a business orphan. However, with its new “home,” and focused new owners, together with some financial engineering and growing world trade, prospects for this business look positive.

While Kurm’s increasing exposure to such private equity-type investments has increased, the investments are made on the same value type basis as investments in public markets. We are still investing with people we consider to be honest and prudent, well motivated, and above all, owner-oriented managers. The basis of the investment decision is value and we have always invested side-by-side with some of the smartest and most experienced investors.

Public market equity investments still have concentration in insurance and Telecoms. In addition, this new investment in Transamerica is not correlated to these industries. In Telecoms, certain positive signs have begun to emerge. Kurm has direct and indirect investments in fixed line networks operators, who are out of bankruptcy, and with new, well regarded managers, who are again owner-oriented.

These companies had spent an enormous amount on laying infrastructure, accumulated debt and then went bust. We are now buying them, post-bankruptcy, with very clean, almost squeaky clean, balance sheets, and with very small requirements for maintenance capital expenditure. The new managements are working hard to cut costs, and companies are gradually winning new business. There are even signs of price improvement, as recently aggressive competition seems to be diminishing.

The insurance industry is currently facing investigation by the New York State attorney general for certain practices, such as contingent commissions. This is basically an unethical way of managing inevitable conflicts of interest, when you are acting for the buyer of insurance. I am reasonably confident that people of great calibre run the companies in which Kurm has invested and so this investigation will not affect Kurm much, and may even provide buying opportunities. Indeed, the other factor to remember is that the recent spate of hurricanes has led insurance premia to improve, boosting profitability.

The investment climate in general reflects both a certain cautious optimism and a degree of nervousness. The asset classes in which investors have had the best experiences over recent years include property and hedge funds. Some analysis suggests that there are certain parallels. Both classes of assets have attracted a large amount of capital and this capital, often managed by smart and well-incentivised individuals, has been put to use looking for a set of opportunities which might be said to be fixed, or diminishing in number.

In property, for example, this has led to the satisfactory experience of capital gains. However, many investors are no longer happy with the yields being found and capital appreciation is not a certainty. In hedge funds, as talent and capital have been applied in certain sectors and to certain strategies, some of the opportunities have already been taken. In both cases, it could be said that the low-hanging fruit has been taken.  However, having said all this, there will always be opportunities for profit in these sectors, especially for those with skill and access. The prospect of rising interest rates further muddies the picture.

In every sector, patient capital, willing to take the long view, and with a focus on intrinsic value, will be able to find opportunities. Such a strategy will ultimately succeed in preserving and growing capital, as long as attention is paid to the price at which the investment is made, and the integrity of the people with whom business is conducted.