(Ep.16) The Acquirers Podcast: Peter Rabover – Russian Bear, Concentrated Microcaps And Special Situations

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In this episode of The Acquirer’s Podcast Tobias chats with Peter Rabover, who is the Portfolio Manager at Artko Capital LP. Peter invests in small/micro cap companies and special situations within a concentrated portfolio. He provided some great insights into:

– Why I Have A Bear In The Background Of This Podcast

– Try To Find Companies That Can Generate 50%, But Only Lose 10% If You’re Wrong

– How Can Investors Find Opportunities In The Small & Micro-Cap Universe

– When And How To Hedge Your Portfolio

– Investor Biases Can Cause You To Miss Some Of The Best Opportunities

– How Big Should You Size Your Portfolio At Inception

– Micro-Cap Investing Is Like Quasi Private Equity Investing Which Provides Significant ‘Early’ Investment Opportunities

– You Have To Get Used To 5% Swings In The Micro-Cap Universe

– Why I Run Ultra-Marathons

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Full Transcript

Tobias Carlisle: Hi, I’m Tobias Carlisle, this is The Acquirer’s Podcast. My special guest today is Peter Rabover, he’s @Artkocapital on Twitter and the locked Russian bear account. We’re going to talk to him about that Russian bear over his shoulder right now.

Speaker 2: Tobias Carlisle is the founder and principal of Acquirers Funds. For regulatory reasons he will not discuss any of the Acquirers Funds on this podcast. All opinions expressed by podcast participants are solely their own and do not reflect the opinions of Acquirers Funds or affiliates. For more information, visit acquiresfunds.com.

Peter Rabover: Well, I don’t know if it’s the Russian bear, but it is a bear outfit. I thought it’d be pretty funny to put out for the podcast in the background.

Tobias Carlisle: So where’d you get the bear?

Peter Rabover: No, honestly it’s a company, it’s called Griz Coat. It’s like 200 bucks.

Tobias Carlisle: It’s a coat?

Peter Rabover: It’s a coat, yeah, with a header, maybe there’s a special … I’ll put it on at the end of the podcast or put the hat on, but it’s been great. Like you’re an adult, you’re in your late 30s and you can still get away with something as funny as that, and so I love it.

Tobias Carlisle: So you’re a value investor. I always say value captures a very broad swathe of different styles. How do you characterize your own investment strategy?

Peter Rabover: You know, and I think you saw that I did a thread on my art go count the other day on what old school value is verse what new school value is. But I think for me, value kind of represents two things, not losing money or having a low probability of losing money and just having better risk reward ratios than the market. There’s plenty of companies out there that can generate probably 50% over the next 10 years but can I find the companies that can generate 50%, sorry, not 10 years, like five years, but only lose 10% if I’m wrong. So I’m looking for those risk rewards because I know I’m fallible, everybody is fallible, and so I want to minimize my mistakes and to get a pretty good reward for taking the risks on that I do.

Tobias Carlisle: So where are you focused for the most part in terms of capitalization?

Peter Rabover: I’m a specialized, I guess very concentrated micro cap fund with a pretty small capacity and the majority of our portfolio companies that will take 10% positions in. I think our top 80% is comprised of, I want to say like nine companies. Our weighted or market caps are on average is about $150 million, and we have companies in there that are 20 to 50, and the biggest ones over a billion, but it was 400 million when I invested in it.

Tobias Carlisle: You’re sort of, you’re focused in, that’s like a nano cap to small cap for the most part.

Peter Rabover: Yeah.

Tobias Carlisle: And you’re not only holding the equity, you invest, you’ll look at the options and you look at the debt. So can you talk a little bit about both of those two processes?

Peter Rabover: Yeah. I mean, I try to stay away from debt and micro-caps actually, I find micro cap managers or nano-cap managers are even more human than the rest of us. They don’t have HBS degrees or anything like that and a lot of them are just unexperienced with debt, or managing the capital structure. So I actually try to stay away from those guys. But on that note though, there are a lot of capital structures that offer interesting risk rewards and there’s a lot of warrants out there, either recaps or Specs. And I know people hate Specs, we can talk about that a little bit, but occasional post-bankruptcy warrants, or rights offerings.

Peter Rabover: There’s a lot of things where if you stay small, our intention is to stay in around $50 million in AUM as a fund. Longterm is to hunt in those spaces where we can take the liquidity risk on and not necessarily, in a way we have a locker up at our phone, so that’s probably where I look at that. But I have a call after this with a CEO of an $8 million company who’s doing a $2 million rights offering. So that’s the market space I fish in.

Tobias Carlisle: So let’s talk about Specs for a little bit. Spec is a special purpose acquisition company and you’re presumably you’re looking at these things when they’re going to return the capital or when they’re going to do a deal. What’s your approach to them?

Peter Rabover: A lot of them come to market where there’s probably kind of three things that I can think of that they all have in common. They come to market with somewhat low multiples for people to be enticed. Sometimes they are deservedly so, and they will come with leverage, because that’s just the private equities way of going public before paying off the debt. And that’s probably, that should be a red flag right there. And a lot of them will come with some sort of warrants attached because the blank checks back nature of the transactions. And so, having looked at this for about, they’re relatively new, maybe like five years, and follow them, a lot of them are garbage.

Peter Rabover: They are not good, like, right. I think we’ve had some success but on the warrants and I think I would say the thing to keep in mind with those is, I think the recurring nature of the revenues or having some sort of value behind it, I think is what keeps the non garbage ones from the garbage ones, is one thing I can paint would think of. But, yeah.

Tobias Carlisle: When you’re looking at your Opportunity set up, I see in your presentation you divided into, you’ve got sort of three buckets, there’s an enhanced value strategy, core value and then hedges. Can you just talk us through how you think about each of those different opportunity sets or holdings?

Peter Rabover: Yeah. So look, at the heart at the heart of it, you asked me a question in the beginning and I’m an old school value in vascular, and so I want low downside probability, high upside. And that’s probably 80% of the portfolios, what I would call just core value of things where I don’t think I can lose a whole lot of money, but they probably have a lot of uncertainty embedded in them. So I want 10 of those or nine of those and in each of them, that’s been the interesting transition from large cap, mid cap when I was looking at something that had like 30% upside and think, oh yeah, that’s pretty good. And here I am just like, man, unless there’s thing has like a 200% upside or 100%, I’m saying like, I’m not interested, because for the risks that I’m taking.

Peter Rabover: So to go back, that core value portfolio, I want to have eight to 10 positions in there and I want to have all of them not be down more than 10, 20% and one or two of them to hit at two or three times. And that’s kind of what has happened in the past, what I’ve sort of seen. Our losses have been smaller on our cost basis and a lot of them haven’t performed as well as we wanted to, but you’ve had two or three home runs and that’s kind of what I think the majority of the returns are composed and I like that. And then on the enhanced portion is that, there’s just companies that … My view on this has sort of evolved a little bit.

Peter Rabover: There are two to 3% positions, maybe 1% positions, and I’m looking for like five, 10 times return, but I’m okay losing like 50% of that. And it’s almost kind of like a VC model on that one, you put in 10, 20 of those and you probably lose money on 50% of them and 80% will break even but those two or three will be your Facebooks or Ubers or something like that. That’s the mindset they’re here. They’re certainly risks but are also good opportunities. And what’s been interesting is that that section of the portfolio has sort of almost been a good minor league team for some of the things we’ve put into the core portfolio as we’ve gotten comfortable with them and realize that there’s a bigger margin of safety than I thought, or our upside was just that much better, that increased the risk reward to increase the position.

Peter Rabover: And that certainly has happened a couple of times. I think I sent you a presentation today. We could talk about this later on Research Solutions, a company we own and I’ve been buying this company over a year and a half and I think we’re over 1% of ownership of the company, even though it’s a tiny, tiny nano count, but it trades $6,000 a day. And I think it’s great … I think it could be like a 10 to 50 bagger and-

Tobias Carlisle: Well, let’s talk about it a little bit. What’s the opportunity?

Peter Rabover: Yeah, sure we can just jump into it. We can ignore the head, just think, ’cause that-

Tobias Carlisle: We’ll come back to that.

Peter Rabover: Yeah, Research Solutions is, kind of what they’re trying to do is position themselves as the Bloomberg, kind of Lexis nexus of scientific research. So basically they have two businesses and the first business is what you would call the transaction business. So they do 800 to 850,000 of just distributions of white paper. If you’re in Johnson & Johnson and you want to research a molecule, there’s 70 million papers and almost 2 million new papers written a year, like scientific papers. And so you want to search for that molecule and you got to pull up a white paper that Harvard Press has, Pub Med has or something like that and you’re going to pay 30. You’re going to pay $31 and five or six of those are going to go to the distributor which is Research Solutions. So it’s a steady business that’s kinda been declining. There’s been a general trend and I think maybe more people cheating and going to the dark web and all that stuff.

Peter Rabover: And this business is predicated on some sort of regulatory capture where people are, companies don’t want to get busted by federal copyright laws, why pay fines and be embarrassed when only you have to do is just pay $31. So I think that’s sort of going to keep this business afloat and that’s the important part because this business generates $6 million in gross profit and even now on the financials you’ll see the company has a high cost structure. Most of that cost structure is actually associated with its platforms business, which we’ll talk about. So if that doesn’t work, you can shut down that business, the platforms business and you’re just back to a company that, for a $50 million market cap has a 5 million EBIT or like a recurring cash flow EBIT that four to $5 million that can be capitalized, that can be … And the CEO has sold the similar business in the past for two times revenue.

Peter Rabover: So my point is, there’s a nice margin of safety in that transaction business that I didn’t appreciate when I got into it, but the main thing is what these guys are trying to do is call the platforms business. So basically they’re trying to be like a Bloomberg of scientific research. So when you’re a Bloomberg or a cap idea, whatever, it’s basically a lot of free information. There’s all the SCC filings, all the transcripts, presented in a very, very neat, productive way that saves you hours from hours of digging through some company’s financials for putting stuff together or figuring out who the biggest holders are. All this stuff is put together for you. And you’re still buying the white papers for $31 and then the enhanced, the really enterprise product version is, it’s more like a slack collaborative thing.

Peter Rabover: So this is the business, that’s the opportunity. As of right now, they have 281 subscriptions for $10,600 a piece, and the really cool thing about that was that last quarter was 10,100 on average that me end. So they got a 6% price increase from upselling the product, took from the lower version to the higher versions to their existing customers. To me that obviously spells much bigger profitability opportunity. They have 82% gross margins, but it’s more on the signal and the acceptance of the product by the customers. And they have all the major ones, like all the Pharma J&J, Gillyard, whatever, 3M.

Peter Rabover: So if you’re a chemical company, you have a research department, this is geared towards the research departments of corporations and eventually academia. Academia is probably they’re going to pay the 10,000, $11,000 subscriptions, but it’s a really, really good work flow of product. It clearly enhances group productivity within research departments. And as you said, there’s 280 descriptions out there, 280 companies that are paying 10 to $12,000 a year for this. So right now it’s a $3 million recurring revenue business at 82% gross margins. And all of that money it’s invested … The entire cost structure of the firm is right now invested in that product, the R&D, The SGNA and they’ve just … So they’ve taken it to the next step of hiring a sales team.

Peter Rabover: They finished out seven people. They have a pretty new strategy with SAS that they’ve been testing out before and so they’re wrapping. All this up to now has been with a 100 unique subscriptions for the free product a month. So that’s what they’re getting, but right now they’re getting ready to ramp up to 1000 unique subscriptions a month and see if they can convert that with their sales team. So maybe we’re going from 1520 seat additions per quarter to 50 to 100, and I think they’re kind of right on the cusp of that. So that 700,000 small and medium business market that has corporate departments, corporate R&D departments. That’s the market and I certainly don’t think that, that’s not going to be a 10% penetration thing, but at 7% penetration, sorry, 1% penetration, that’s 7,000 subscribers paying you 11,000 a month, sorry, a year. And we’re talking about something like 90 million in revenues and something like 80 million in gross profit, if I’m thinking about this.

Peter Rabover: Yeah, 80 million in revenue and 70 million in gross profit, but on an existing cost structure that just scales, and this company’s market cap is $50 million. So if they capitalize on this product which is obviously very good, their gross profits can be bigger than their market cap within a few years. So it’s very liquid, it trades like $6,000 a day. It’s very closely held, the CEO and his family own 35%. There is a family office hedge fund that’s owned by 25% of it. And like I said, you can probably get some blocks here and there, but to me this is the opportunity in this space where you can find things like this, be patient with patient capital at, add to this and could be a home run down the line. And I’ve certainly seen this play out before.

Tobias Carlisle: It sounds like an interesting opportunity, but let’s go back to, talk a little bit about the hedges that you, or how you think about hedging.

Peter Rabover: You know, honestly that’s just, and I almost want to minimize that, but I just want to say, I am a hedge fund in a way. I try not to be, I try to be more buffet type partnership. But last summer, we were getting crazy with our valuations and the vix was at like eight or $9. The premiums on the Russell 2000 index we’re almost, the insurance was kind of almost free. I think I could ensure my portfolio against like a 20% fall or for over six months for 75 basis points. And I was like, yeah, of course, why not? And so that produced 5% last quarter or in the fourth quarter of 2000. I took it off too early, I thought we were going to be done after October and clearly we weren’t, so I kind of held onto that.

Peter Rabover: But it’s literally an opportunity if I’m just, the whole focus of the firm is capital preservation. And I’ve probably been doing this for 20 years and I don’t like to be a market timer, but I think you can see some sort of extremes here and there and you know-

Tobias Carlisle: So you’re hedging when you think that the instrument is undervalued. So you see the vix at eight or nine, long run mean is 20, we haven’t been anywhere near the long run mean for a long time that you just think that’s too cheap, and there’s a chance that something happens so you get paid really well.

Peter Rabover: Yeah. Well, it was both, the mix was cheap and the-

Tobias Carlisle: The market expensive?

Peter Rabover: And the market was expensive. So I was like, yeah, it’s an opportunity to protect my investors money in, that’s sort of what happened.

Tobias Carlisle: When I was going through your investment strategy, you’re a bottom up fundamentals investor, I can hear that as you’re describing. If you also talk about tempered with an understanding of macro events. So what do you mean by that and how are you thinking about macro?

Peter Rabover: I am certainly not a macro guy, but you have to pay attention to things like interest rates, the yield curve, unemployment rate, GDP. On the other hand, the trompe tariffs, that’s been an issue. We have a company in our portfolio that I thought was … So my mistake and I guess the market’s mistake was domestically based, domestically sourced was, it’s called Spartan Motors. And they build all the UPS and FedEx and delivery trucks that you see out there, that’s them, and the fire trucks, they build fire trucks. So basically, really good opportunity for longterm delivery, delivery packages as supposed to double within the next three years. And Amazon and Walmart just went to one day. So these guys, the trucks business has gone gangbusters, but it’s a domestically sourced business in the sense of all their suppliers are, most of them are domestic.

Peter Rabover: But when the tariffs happened, their competitors who were buying from overseas started buying domestically and that screwed up their entire logistical chain and they have to eat some inventory and some downtime as a result because they couldn’t get the parts in time. I think that you have to pay attention to these sorts of things. And not necessarily that I’m going to say, I’m investing for like three to five years and something like, oh no, I’m going to take my position off. But I think it’s to be more mindful of the risks that you are taking on and whether you’re getting paid enough for those risks. And so that’s the opportunity there.

Tobias Carlisle: So let’s talk a little bit about how you identify opportunities. What’s your screening process or the funnel that you have to get from like identifying something through to actually putting it in a portfolio?

Peter Rabover: Yeah. It’s an interesting one ’cause I try to, the more experience you have, the more biases you have. And so I think every time I look at something, I try to come in with a good mix of yes, my experience says this is something good or, but also be open minded that I might be dismissing something that could be really, really good. I was telling somebody the story of, even as a younger investor, I’ve pitched a couple of really good things. I pitched marvel to my boss when I was 25 in 2005 and like 800 million because I think, like Thor came out and, no sorry, not Thor, iron man came out and a whole came out and this company had this entire library of characters and I was just like, man, we should buy this.

Peter Rabover: Ryan, my boss was great. Like he didn’t get it, He wasn’t in that particular space and obviously Disney bought it for like 4 billion six months later. Right. And so I want to be mindful of letting go of certain things like, right. They like to have really steady earnings and cash flows and I like that too, but I saw that opportunity and that’s the rest they didn’t want to take as for the lumpiness of the revenues, et cetera. And that was their bias. So I’m trying to figure out what my biases are. I have this great company in my portfolio called Viad and a big chunk of their business is putting on shows like the Farnsworth air show or CS and it’s an oligopoly, it’s great, but a lot of those shows are every two or three years.

Peter Rabover: So you had two years of low growth, last two years and then next year is going to hit, when all those shows are going to hit it once and that’s going be a big year, so it’s fine. That’s kinda have to you accept that. But as far as things that I look at, yeah, I like to have a clean balance sheet. I like to have some sort of margin of safety and I would say I probably focus 70, 60, 70% of my time on that, just making sure the things that are on the balance sheet are in the business are worth something. So example of a company we own like Sharps Compliance, $50 million medical waste disposal company competes with 800 pound Gorilla Stericycle. But it was worth $50 million, it had $10 million of cash and networking capital and balance sheet and it had an incinerator. There’s only like 10 incinerators in the United States, and so you’re not going to get built.

Peter Rabover: And so we’ve looked at … I spent a lot of time with my analysts looking at corps for this thing, which could have been, I think we got down to like 20 or $30 million. These guys had some routes, they cover 55% of the United States with, which usually are like one time revenues, it’s a pretty set transaction. So for $50 million you were getting $50 million worth of assets, that the market should appreciate that that’s what these are worth and a lot of opportunity if some of their business lines that they’re expanding on catch fire. And so including the drug disposal business. And so now there’s all the anti opioid stuff and you have to have a safe way of disposing of these drugs.

Peter Rabover: And these guys are installing liners, metal liners like CV’s and police stations and I think they’re up to like 4,000 now or something like that, maybe 3,800. And that’s a disposal business, you just pick this up, like always businesses become natural monopolies, and the opportunity there as far as 20, 50,000 of these liners somewhere. And if that catches, again, bigger than the kind of company’s entire market cap, but I’m getting paid on the downside. So to answer your question, the things I focus on is stability of business, quality of cash flows in it, can those assets be sold to somebody a lot of times, having come from large and mid cap backgrounds, you see what company … And I’ve done some deals and I worked in private equity a little bit in the past, so you see what companies acquired, why they acquired them and what kind of costs they can take out.

Peter Rabover: So my hidden thing for not buying companies with debt is I think that makes them much more attractive to potential takeouts. Not necessarily all of them, but on the margin, maybe one or two more of them and you just need one or two more home runs in this business to generate alpha. Something like, taken out public company costs, they all have a lot of those and that’s a fact. You have to appreciate what this company would be in private hands without at least $1 million in public company costs that most of these guys tend to have. And so, things like that.

Tobias Carlisle: So how are you sourcing ideas? Are you screening for them? Or are you going to conferences? Or are you value investors club? or what are you doing for sourcing?

Peter Rabover: I mean, I think you just kind of nailed a bunch of stuff. I certainly, I would say the biggest thing that I’ve developed over the last five years as I’ve gotten into this business and we can talk about my Twitter more in a second, but I’ve developed a really good network of people that I trust. So, even though I work by myself with one employee, a part time employee, on Twitter, I have an office full of very smart people that I talk to about all the times like, Hey, what do you think about this? What do you think about that? And you know, if somebody has a really good idea we will certainly listen to them a lot more than somebody else and sell side or something like that. And so, that’s been one.

Peter Rabover: I liked screening. I like, sometimes I’ll just pick up a few 10ks from randomly and read them. Micro-caps are, they’re smaller, they’re less complicated. If you’re a micro-cap and your complicated, I don’t want to probably have any part of this, so you can go through a lot of these. You have value investors club subzero, they’re all pretty decent, just reading stuff is probably interesting. And I’ve certainly gotten a bunch of ideas from sitting down at a conference and realizing this, I think one of our more successful investments a few years ago was a company called State National Companies. Spoiler alert, it got acquired by Markel. So that’s kind of a stamp of approval, pretty decent stamp of approval, but it was literally, I heard them at a conference and there was three people in the room and then they kind of said two or three things that perked my ears up. And I was like, oh yeah, I know what this is actually a pretty good deal. And so-

Tobias Carlisle: What did they say that you liked?

Peter Rabover: I think so, they had like two businesses. One was, they basically had an aerated balance sheet that they rented out to alternative investment players like hedge funds or just smaller independent brokers that that didn’t want to do it. And one of their big clients was Nefiller. Nefiller is very big weather cat fund, which also got acquired by Markel. And one of my LP’s is apartment portfolio manager in Nefiller, so I’m very familiar with their business. So I knew that was a good get like if Nefiller partner with these guys, that’s something. And then the other part was they had a car insurance business, but it was only through credit unions for car loans basically. Like if you got a car loan and your insurance lapses, your credit union forspies that insurance for you. And guess what? That’s not very competitive.

Peter Rabover: So I think they had combined ratios of like 86, sorry, 82, 84 or something like that, it was crazy like right there. And even Geico had 12 or 13 or something, their car insurance margins were unreal, like Ryan. So that popped up and right away and that’s just my experience having worked in large cap and mid cap and doing some deals. Like I said, those are the experience that you bring to the table to identify things. So that was something like that. So that’s an example.

Tobias Carlisle: So how do you think about risk management? And as part of risk management, I’m interested in how you construct a portfolio, how you size your positions at inception, whether you trim as they go up and how something sort of exits the portfolio.

Peter Rabover: I’m pretty focused on risk management, so I don’t know if you happened to catch my last letter, I kind of talked about the Valliant pharmaceutical problem, the original problem, which was, a lot of people labeled as a big giant fraud that dropped 95%. But I remember it as an investor when I add 2009, I convinced my boss to put it into our portfolio at five bucks a share and it ran up to 250. Right. And at the same time value act and the Sequoia Fund got into it as well. And how they approach that verse my old firm hung capital management approach, that was a two different ways. So every time it ran up to 6% of their portfolio, they sold it back down to 4%. They weren’t a very concentrated fund. And whereas sequoia and Value Act, they held onto the company until it became 35% of the portfolio.

Peter Rabover: So when it dropped 95%, that was a really bad year. And so that’s not to say anything, and so my fun was a long only management fee thing and those value act or their hedge funds, they’re collecting premiums. And so for them you gotta … So to me, I’m trying to find balance on the risk management. On the core, on a very semi quantitative things, I try to look at where the portfolio risk reward ratios are and whether there’s something skews them or not.

Peter Rabover: So a good example of the value problem was, we had a company called Joint Chiropractic. Great company, good business model. We got in at like five, six bucks to 18, 19 today and we’ve sort of sold out of it at this point. But what do you do when you have a 10% position that triples. So I strongly trim it and I do it at, once it gets to 15% of the portfolio, I try to take it down three or 4%, and then with joy at the end, I ran all the numbers. Even in my best case scenario, it’s probably like a $35 stock in a few years, which is great, it’s a double from here, but I think it can drop 50% from here. It’s kind of frothy, and so that risk reward ratio of two to one isn’t very good. [crosstalk 00:33:15]

Tobias Carlisle: The ticker on joint is JY and T, and I’ve seen that chart, it’s gone vertical over the last few weeks.

Peter Rabover: Yeah, no, look, it’s been, I’ll take it. And like I said, I was in it for a few years ago, and again, it’s like one of those things where I had experience with doing some franchise stuff, both as in public and in the private side. And I know what the free cashflow opportunities are and I also had a back issue, so I certainly appreciated what they were doing. Yeah, and I think the market is appreciating it as well, but I will comment that. Unfortunately they may be a victim of their own success because basically they’re doing a subscription only model without insurance and then without having to deal with a secretary and all the mailings and back and forth and you get the money up front.

Peter Rabover: And I think the industry was kind of like, one of these guys do any role blah, but these guys are putting up amazing numbers. Like right there, 50 or same store sales are like 18% still. You can get break even on this a franchise at six months. Now that’s unheard of when the franchising business and then credit to the CEO that he did, he kind of righted the ship. But I think when you’re putting up those kinds of things and in a very non very competitive space, it doesn’t take a whole lot of people to come in and roll up more franchise clinics, rebrand them and stuff like that. So look, I’m not saying that’s going to happen, but it’s a risk that wasn’t there before and it certainly decreases the … You handicap your odds accordingly of competition risk, which wasn’t there before.

Tobias Carlisle: So how big would you size at inception for something, what’s your maximum size in getting inception?

Peter Rabover: I haven’t been afraid to go down to start off with 10% right away but usually it’s about I’ll do six to eight and then I’ll just keep adding on. But sometimes I just can’t I’m a small fund we’re 5 million right now. Probably going to be eight, nine by year end. My goal is to get the 50 and so even at 5 million I’m, I’m getting to where I get to … I don’t want to be an inside a filler. I don’t want to get about 5% and that’s why I sort of limited the size of their portfolio to 50 million, where I could take a 10% position in a micro-cap that’s where I wouldn’t trigger a 5% filing, something like that. And so yeah that’s to answer your question, it’s 10%. So.

Tobias Carlisle: So when you your event driven investments, how are you thinking about event driven investments and can give us some examples of situations that you’ve put on and how they’ve worked on?

Peter Rabover: I think event is kind of like a little swirl and event could be like for me for like join the event was just delivering really, really good numbers, like write consistently. But I think what I would say is there’s a lot of the old school buffet type of investing where you could just buy a coupon clipper, like a company that you could buy for like five times cash flow and every year you hold them for five years and boom, like even if it decreases half in value and it pays out in dividends you’ve made a 50% return. So you didn’t really care what happened. As long as the results were there, you didn’t care about the stock price appreciating as much.

Peter Rabover: Whereas I think my experience over the years, it’s shown you can probably have a lot of value companies that will stay value companies for her really long time, like writing a lot longer than you care to. So I, you know, I certainly not always right on this, but I’m looking for a potential sale, a consolidation I tried to look at all of my companies as are they more valuable in somebody else’s hands? And if the answer’s yes, that’s probably something like that. And Look, I’ve certainly again, that has an insider, but I’ve certainly put some investment bankers and touch with management and some of my companies that I thought could benefit from those introductions. So I don’t know if that’s, I hope-

Tobias Carlisle: What about some examples of [inaudible 00:38:12] joint is you’re looking at just growth in the underlying business executing, but what about something that’s more of a traditional special situation where the transactions announced or whatever’s announced.

Peter Rabover: So here’s an example I’ve held and I may sound like a broken record because I’ve had this for four years, but it’s provided for 150% return since then. So it’s a company called VR like right. And so via, it is they were the last of the 90s conglomerates in the 80s, conglomerate. So they owned like Grey hound, money gram like right dial soap. They owned all these brands over the years and they’ve obviously made this decision to divest. And so now they own these two companies that are leftover and one’s called GS Global Entertainment [inaudible 00:39:10] … And so basically like I said, they an oligopoly and there’s another big one called Freeman. And you know, those two companies are essentially host all of the events, like the Farnsworth airshow show, Ces, corporate events, Mary Kay conference, something like that whatever you do, those are the events.

Peter Rabover: And look, it’s not a sexy business but it provides 10, 11% return on capital. And so it’s above its cost of capital and it grows pretty decent clip of three to 4%, same store sales every year. So and they’ve been adding higher margin and Ciliary business like audio, video, so that booths there, even though our margins pretty well actually. So that’s one business I kinda like it.

Peter Rabover: The other one that’s great, it’s called Pursuit and that’s a hotel lodging business and attraction business and they own all the lodges like in Banff, national park and Jasper, et cetera, but they also own a bunch of natural monopolies like the one mile glacier water or that quarter mile relay she’ll walk or the Banff Gondola.

Peter Rabover: And those was a great, like they cost you $20 million and they give you six, $7 million. Like it’s like there again, small businesses can have some really good opportunities, but still it’s a crazy business cause it has like 38, 39% EBITDA margins on it’s that income. And it should be a retarders aren’t as good now because of the tax law. So it doesn’t need to be read. But Vail trades at which is, has lower margins and Bayer or sorry, a lower margins in the pursuit trades at 13, 14 times EBITDA like right at some crazy number. VR as a whole company trades at seven so those two businesses need to be separated. There’s huge value to be unlocked and so in the past of the CEO has said they’re gonna once pursuit gets to 250 million in revenues and that’s probably next year unless there’s acquisitions happen sooner than they will consider spinning it out.

Peter Rabover: So there has to meet its cost of capital. But I actually think now, because pursuit is going so well and then they have something I want to talk about that in the second called the flyover asset, that it’s kind of a hidden asset. I think they might sell GES and I, and look guides, the CFO certainly open, open into it and the board’s open to it, the CEO and the chairman role as is broken out, it’s very good corporate governance and I think they have a strategic plan and they’re very fully aware that there’s a way to unlock value there and they can do it.

Peter Rabover: It’s a very low leverage firm, so that pursued business doesn’t have any debt. Most of the rates are kind of lodging companies, there’s a recapitalization potentially as well. Yeah, I think the company is like one times you’d be done. So it’s private equity dream, a private equity firm, it’s just the right size. It’s like 1.2 billion probably be 2 billion buyout if somebody decided to do it. So to me it’s got great businesses, it’s cheap, it’s a compounder. And then there’s a event on the horizon and a really good CEO that I really respect, and free cash flow in businesses, kind of oligopolistic. So I’ll hold that all day, even though it’s produced like 15, 20% returns a year, but it’s up 150 and I think it can go up another 100 from here. And so, why not? Those are perfect opportunities that I’d love to find more of.

Tobias Carlisle: So, you said before you … Did you start in private equity or you spent some time in private equity? Can you talk a little bit about your time in private equity and how that helps you in your investment.

Peter Rabover: Yeah. Like it’s, I don’t want to oversell my time in private equity. I will say I started out my career as an auditor for US Steel for about two years. And during that time I just got to be part of a lot of deal teams and I got to see what the opportunities are there. And just from the due diligence side which I didn’t particularly enjoy working at US Steel, but I thought that was kind of an interesting experience. I went to Serbia for six months and got to work on some potential deals there and some due diligence stuff there. And we nationalize the US Steelers or the Serbian Steelers assets as well that we bought out from the government. And I was sharing an office with our general counsel, so I got to hear like a lot of stuff there, and then when I was, I would say not private equity experience, but I was a mid cap in 2000s and pretty much everything in mid cap and the mid 2000s got bought out.

Peter Rabover: I think one year out of our 30 portfolio, we had like eight companies get bought out. It was something like a crazy number. So you got to see all those and obviously just fall on the market. And then in business school, I got to work for a shell firm that’s owned by Goldman and they were consolidating an industry. And I’d rather, that it’s kind of private for public podcast, but I probably got to work on six, seven, 20 to $50 million deals that summer and really, really down to the nitty gritty and just got to see how much value you can extract from a Turkian acquisition. And so, it kind of made me much more interested in the micro-cap space in some ways. Like I said, knowing why to potential acquirer could look for is interesting. Then the last four or five years, on the side as a consulting gig, I’ve certainly helped on some transactions as well more, and that’s been interesting.

Tobias Carlisle: That’s one of the attractive things about micro-cap investing, even public micro-cap investing is sort of quasi private equity. It’s like, or quasi VC too that you can get there very early opportunities.

Peter Rabover: And it’s interesting ’cause like I said, I asked my master’s for three to five year lockups, there’s a fee schedule and I think for a lot of people that’s unpalatable. They’re like, you’re an equity manager and it had dairy you. But I think the smarter people get and then it’s on private equity type of investment and that’s kind of, that’s the opportunity side near it. It sucks because there’s a lot more kind of like unnecessary volatility, but not necessarily volatility in the business results. But you can, a private equity firm will, or a VC firm will go and, they’ll go to their accountants at year end is like, here’s what we think, here’s our DCF, this is what our value is. And the accountants will be like, okay, we’re going to charge you 20,000 more dollars to value level three as a level three asset and there’ll be yes, great, we’ll do it.

Peter Rabover: Then they all sign off on it and everybody’s hands are shaking and the investors get that statement that says their value went up. Great for me, and so I can have that exact same company in my portfolio, like brand the exact same company in my portfolio. And then the last day of the year, somebody decides to trade 100 chairs at the last five minutes on a 10% of bid ask spread. And I get the report at same company being down 10%. So it’s frustrating because they’re kind of misleading results. I can certainly say that the SP500 is probably fairly valued in a market efficiency basis within the five points snapshot. But whereas my stuff certainly much more like longterm, more efficient. And so that’s you know-

Tobias Carlisle: It’s a double edge sword, right?

Peter Rabover: Yeah.

Tobias Carlisle: It creates the opportunity for you to trade in and out, but then you’re also subject to it once you’re in it.

Peter Rabover: Yeah. I mean I got, you asked me a question earlier like do I trim stuff, on a joint, something like that. Yeah, I’ll trim it and I’m not big enough but like a third of my portfolio is probably, I own like months worth of daily volume so I can’t like. And so that research solutions company I told you about it, it actually held up pretty well in October, in November. But my portfolio went up and down like this, so it’s like it went from 10% of the portfolio to like 14% of the portfolio or something like this. Without the price, it could change it. And I’m like, well, I’m not going to sell it because of that, that’s stupid.

Tobias Carlisle: You sometimes have to get used to that 5% swings in the micro-cap stuff and that’s just the difference between the bid and the ask.

Peter Rabover: Yeah. I’m much better about it now but I came from large cat world, MCAT world. And I think it just takes a little bit of getting used to having those minus one, 2% days or up one, 2% days and just be like, hey man, that’s normal, that’s what you gotta do. And I’m much more used to it now like I’m less worried on something like that, but you’re right, it’s the opportunities.

Tobias Carlisle: So how do you feel about the opportunity set in a micro-cap world for value guys at the moment? Do you think that it’s expensive? Or do you think that there’s still lots of opportunities around?

Peter Rabover: I mean, if you look at my presentation on the returns page, I have the SNP500 returns and the micro-cap returns on there. And I think like the spread is, since I started something crazy, I think micro-caps are like 5%, the SNP500 is like 11 or 12% a year. And they have under, and I think people probably, I guess I don’t view value versus growth, how people do it on the quantitative metrics and I don’t think those indexes capture that as well. I think anything that’s showing growth is going to get bit up and the old school stuff is not there. I believe the markets are mean reverting and either the micro-caps are gonna shoot up or SNP’s good returns are going to come down. Something is going to happen and probably the next five, 10 years, but I don’t know in the short term. So I’m very excited about the opportunity set.

Peter Rabover: And then the market’s drop in the fourth quarter of last year. I think micro-caps dropped like 23, 24%. And SNP was kind of right in there as well, since then the SNP’s rallied to new highs the a few weeks ago, and the micro-caps are still 20% or like 17% below their September highs. So there’s an opportunity there. So I’m certainly excited. I think if my stocks were high, all of their 52 week highs, I think I’d have like a 100% year or something or six years in here, like right now. So I’ve taken some lumps, but I think we’re doing pretty well, again, on the volatility and the … You just have to get used to it, I think that it’s part of the game.

Tobias Carlisle: It’s tough being compared to the SNP500 because it’s the best performed asset, if you can call it an asset in the entire world. So everything else looks[crosstalk 00:51:13]

Peter Rabover: Wow,[crosstalk 00:51:16] It’s such a different animal from what I do but if you’re a public markets investor, you have to compare it against something. I try to put Russell 2000, Russell micro-cap and the SNP500, so you can sort of see the range of things. I think my only correlation basis, I’m more correlated with micro-caps and Russell 2000 and the SNP500.

Tobias Carlisle: Is there a micro cap index?

Peter Rabover: Yeah. Wow, so that’s, sorry, we should have-

Tobias Carlisle: 5,000 or something like that?

Peter Rabover: No, there’s called the Russell micro-cap index.

Tobias Carlisle: The micro-cap, what are the characteristics of the micro-cap index?

Peter Rabover: I mean, I think it’s got like three, or I think it’s got like three or 400 companies and it’s, I think they’re about averages like 180, 190 million companies. I mean, a lot of these indexes will have a lot of public venture companies, a lot of Bio-pharma, a lot of tech that are, and I just don’t touch a lot of that stuff. And so there’s … But the more important than is, the reason I created the partnership is because I wanted to create and non-indexable product. I think almost every investor should be invested in the equity markets, but active managers don’t really do that well on a longterm scale against their benchmarks. It’s like I could’ve been a hedge fund manager, but the coke, I came from two great funds, private equity, pay me doing 20, and I’m going to do a billion dollar fund. And I think I’ve had a couple of opportunities for that, but I want to sit across the table from an investor and justify my fees.

Peter Rabover: And I think that’s where the opportunity is in that space. And so I think like 80% of my companies are not in any index, it’s just hard to, they’re just not liquid enough. They’re just not going to meet index standards that I think there’s the opportunity where I’m looking at. And I think even the micro-cap indexes could be wrong, but it was Barron’s article a couple of years ago, but I think the ETFs versus the indexes are, they underperform the index as pretty, pretty bigly because of that liquidity spread. And yes, I use the word bigly. I’m trying to go below where things can be indexed like Ryan, so like those warrants are nano caps and things like that.

Tobias Carlisle: I saw that you’re an ultra marathoner?

Peter Rabover: Yeah, I’ve kind of taken a break. I got injured about a year and a half ago, but I’ve, I run like 50 ultra marathons, did a 100 mile race and it’s pretty fun. You know it’s, I’m hoping to get back to it this year.

Tobias Carlisle: How long does a 100 mile race take?

Peter Rabover: Well look, I’m slower than a herd of turtles running through peanut butter’s, it took me 29 hours. A winner of that race would probably take like 15, 16, like right. And the cutoff for that race I think was like 32 hours or something like that.

Tobias Carlisle: Marathon is not Enough?

Peter Rabover: Yeah. I mean, ultra marathons are different animal, they’re off road, and I did an iron man. I did a lot of triathlons and I did road marathons and and I also try to work on Wall Street. And you just kind of realize that you just don’t fit in with a type A personalities that tend to do those races and the ultra marathon people that are much more laid back, you’re in the woods at night. You’re out there for a hundred miles, you’re going to chill out. You’re not going to care about your, 10 seconds splits, you’re going to care about having you to attrition, make sure your maps out there and you got your gear and everything like that.

Peter Rabover: And so it’s a much more comprehensive adventure than just three to four hours on a road in a city. And I think as a result, you kinda get less intense people and more, kind of people that you get in the micro-cap value world rather than the Wall Street hedge fund in the world. So maybe it’s my end, that cheesy analogy, that’s kind of how have you, so-

Tobias Carlisle: Peter, we’re coming up on time now, folks want to get in contact with you, what’s the best way to do that?

Peter Rabover: So Peter @artkocapital.com is probably the best email. And I try to answer as many as I can, but sometimes whenever I publish my letter, I’ll get like 20 or 30 emails and I apologize in advance that that I can’t get to everybody. And the same thing on Twitter, I’ll get like 30 messages on Twitter and I’m like, I’m sorry I can’t answer all of them, but I will try.

Tobias Carlisle: What’s your Twitter account? So it’s Artko Capitol, A-R-T-K-O, it’s just a funny account. I get to make fun of Eli Musk and Tesla and still stick to my micro-caps and just kind of, and it’s a good way to stay abreast with the market. Hey man, thank you for your time, this was fun. I appreciate your questions.

Peter Rabover: Peter Rabover, thank you very much.

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