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We wanted to bring to your notice the remarkable achievements of CapGrow Special Situations Strategy.

We have maintained from day one that this is a differentiated strategy that has a unique proposition of generating higher returns, which is not offered on the street by other market players. Special situation strategy returns may not be correlated to the market returns, and hence provides the necessary diversification for the portfolio as well as higher returns.

December 23, 2020

Dear Investors,

Greetings and Happy Holidays! Hope everyone is safe and healthy in these challenging times. As we say Goodbye to 2020, this has been a tough year on many fronts, mainly driven by the scare caused by the pandemic, we would like to take this opportunity to thank all our esteemed investors for standing by us and trusting us, as our AUM continues to grow and is higher than pre Covid levels.

As you all know, we at CapGrow Capital have been investing on behalf of our clients since Nov 2018. Both our investment approaches:- CapGrow Growth and CapGrow Special Situations have done well in the recent volatile times.

We wanted to bring to your notice the remarkable achievements of CapGrow Special Situations Strategy.  We have maintained from day one that this is a differentiated strategy that has a unique proposition of generating higher returns, which is not offered on the street by other market players. Special situation strategy returns may not be correlated to the market returns, and hence provides the necessary diversification for the portfolio as well as higher returns. We are confident that we have an edge in this approach which is also reflected in our performance below:

(Performance as on 30^th Nov 2020)

*These are TWRR returns as on 30^st November 2020 of the SS strategy on an aggregate basis. Individual client performances can be different than the reported performance depending on their joining dates and AUM at different times. 2 year and Since inception (31^st October 2018) data are CAGR.

The table above clearly demonstrates that we have been able to outperform the benchmark by a meaningful margin. Even during the pandemic year, the last 6 months & 1year performance has been significantly above the benchmark. Our superior performance is noticed by the market and the media, and has been covered by leading media publications including ET, Business Standard and moneycontrol.com.

Through this communique, we try to address some of the key questions that you may have, which will help you in your decision to be a part of this journey.

1. What exactly is ‘Special Situations’ (event driven) strategy, its USP and our differentiated approach?

Special Situation Investment Approach is a strategy where we try to extract value of already announced corporate actions and events like Spin offs and demergers, tender offers like buybacks & delistings, Mergers & Acquisitions, capital structure dislocations, bankruptcies and distressed securities.  Worth mentioning that a Special situation is a one-time event that will have an impact on the stock price of the company. For e.g. A corporate event like – a demerger, is a one-time event where significant value creation is possible. Similarly, delisting is such an event where the shareholders can get a much higher value than the prevailing market price as the promoters are eager to take the company private. Also, ‘distress valuations’ is one such theme where we participate as we move in the recovery phase of businesses & economic cycles. All these situations have a catalyst that will help us realise the true value of the company.

There are lot of PMS Service providers/ MFs in the market that are offering ‘the plain vanilla growth strategy’; however, there are not many, in fact none to our knowledge, that are offering investors the access to special situation strategies which take benefit of corporate events and actions. The key USP of the strategy is to keep a track on the events and deals in the market, do a detailed fundamental analysis and then take a concentrated position in the fund. The strategy also relies on the ‘asset value’ approach. We firmly believe that the prevailing market value has to catch up to the asset value that leads to value creation.

2. Why big alpha can get generated in the Special Situation Strategy consistently over longer term?

A typical growth/plain vanilla strategy historically has given a return of 13-15% CAGR. We believe an event driven Special situation can exceed these returns comprehensively in the longer term. We acknowledge and understand that this strategy can be volatile v/s the market. However, our core philosophy of fundamental investing remains intact – we at CapGrow are always mindful of the intrinsic value, strengths of the underlying business and the management quality.

Special situations are those events where the concept of ‘value unlocking’ is involved post the announcement by the company. We get clarity on the event and wait patiently on the likely completion of the event as the timeline takes its own regular course due to various regulatory approvals. For example, prior to a demerger, looking at the consolidated picture is so confusing that investors are not able to appreciate the real value of the underlying assets in those companies. Once clarity on the demerger emerges,  a particular segment/business can get a higher multiple, in-line with other listed peers, leading to higher valuation. This is because, post the demerger capital allocation becomes clear from the company’s perspective. The sum of individual entities is much higher (not always though) than the earlier consolidated entity. Similarly, a reverse merger of holding company leads to removal of holding company discount which typically ranges from 20-70%.

As explained above, the Special situation strategy performance will not depend entirely on the market movement, but on the progress of the events and regulatory approvals. In many such cases, the prevailing market valuation is at a significant discount to the realisable value. As the events progress, the valuations catch up. This results into a massive outperformance v/s the benchmark. This is why Special Situations has the potential to generate  a ‘Big Alpha’.

We present below a comparison with Equity Multi-cap mutual funds for last 12 months. The data below clearly demonstrates the outperformance across timelines and across various MF schemes.

As the statistics reveal, there is clear outperformance of CapGrow Special Situation across the timelines and across various MF schemes. The multi-cap fund of all Mutual funds are taken for comparison purposes.

3. Some recent examples:

1. A ~$1.9bn mid-cap IT stock – This trade is a great example of our specialisation where despite it being a ~13,000 Crs company, we made ~35-40% returns in just a span of 3-4 months. The delisting offered a great investment opportunity to us. We analysed the fundamental value was itself much higher than the offer price, and if we add the control premium, the book building could happen at 40-50% higher than the ruling market price. Our investment in this yielded +35% returns (realised fully) in less than 3 months.

2. A holding company in the financial space: Our team identified a non-operating holding company that has 2 key operating businesses. We realised that the subsidiaries were valued at least 2.5x of the current market cap of the holding company. The management gave enough hints in their quarterly conference calls on their intentions of bridging this gap (the gap between the value of its subsidiaries and holding company). The company wants to collapse this holding company structure altogether. Simplifying the structure will create significant value for the shareholders as holding company discount will go away. We are already up by 80% in this stock in a span of 5 months, and we continue to hold as we see room for more upside.

3. An Indian multinational conglomerate: Distressed valuation is a classic example of a special situation play. This company houses several operating financial subsidiaries like asset management company, life insurance, general insurance and NBFC.  The AMC is in the top 5 AMCs, managing around 2,60,000cr. The NBFC and HFC manage >55,000cr. We believe that the sum of individual parts is significantly higher than the consolidated value. The company was valued at 14,000 Crs when we initiated a position, since then the valuations have caught up. We believe that some sort of value creation either by a way of demerger or listing of its subsidiaries will happen in the next 12-18 months.

4. Why we strongly feel that a) there are enough opportunities available and b) Special Situation is a sustainable and scalable strategy?

We believe that the market will continue to offer opportunities whereby we will see bigger companies buying out smaller companies through M&A. We can see MNCs delisting from India, private equity will also show interest in smaller innovative companies yielding to delisting and mergers. As pointed out earlier, this strategy executes positions on the basis of detailed analysis & expectations with clear visibility of either a catalyst or an event that will help unwind value for the minority shareholders. This also includes the analysis of the promoter and the management moves, and the changes in the capital structure.

We want to reiterate to our investors here that each of our stock selection is always backed by solid fundamental reasoning, robust thought process and a keen desire to generate supernormal returns. There are so many changes taking place inside the company, that when we understand them comprehensively, it provides a sound investment opportunity.  We are early movers in these situations, we continuously monitor our investments for any unexpected turns, both for profit booking and for cutting losses. These events are available across all market caps, across economic cycles and the beauty is that they are not correlated to the market movements in the long run. In the U.S, the Special Situation or Alternative Investments are a big chunk of the total industry (roughly 28% in few trillion dollars) and lot of funds are dedicated to this segment as a step to provide a diversified bet in the overall portfolio.

5. Why investors should consider ‘CapGrow Special Situations’ while making capital allocation decision?

Our strategy has demonstrated superior performance backed by solid research & fundamental reasoning. ‘CapGrow Special Situations’ has been ranked among the top performers for the months of Jan 2020, June 2020, Nov 2020, and has outperformed the benchmark indices across different time periods.

Our research team’s quest and hunger for hidden opportunities, flexible and opportunistic nature and wide experience provides us a strategic advantage. We want to leverage this strength and expand this strategy such that it makes a valuable mark and creates wealth for all our stakeholders.

The thesis presented above and the superior portfolio performance demonstrate the strength of our research process as well as our niche in exploiting these opportunities that are available in the market across economic cycles. Comprehending the event and then waiting patiently for the events to unfold is the core of generating superior returns. This event based strategy is not new to us, we have been investing within this framework for over a decade. Time and again we have created wealth for our investors and generated supernormal returns. 

We strongly recommend our existing investors as well as potential clients to diversify their investments and take advantage of this strategy by allocating some portion of their wealth (~25/30% of their equity exposure) to this ‘Special Situations’ strategy. We will be honoured to welcome both existing and new investors to allocate and be a part of this journey of wealth creation.

Happy to answer any queries you may have. Once again, stay safe and blessed!

Happy 2021!

Yours,

(Arun Malhotra)

Chief Investment Officer

Annexures –

Link:–

Jan 2020 - https://economictimes.indiatimes.com/markets/stocks/news/special-situations-helped-this-pms-hit-the-jackpot-in-jan-heres-how/articleshow/74111127.cms

June 2020 - https://www.moneycontrol.com/news/business/markets/making-money-for-wealthy-24-stocks-from-top-5-pms-schemes-outperformed-nifty-in-june-5545621.html

Nov 2020 - https://pmsbazaar.com/Blogs/PMS-investors-continue-to-mint-money-as-top-strategies-clock-25-to-30-percent-gain-in-Nov-20-nearly-all-beat-benchmarks