The year has been marked by a remarkable gain in net asset value.
The latter is exceptional by nature, as it relates to the steep appreciation of our energy holdings from the all-times lows they touched during the pandemic.
With respect to transactions, 2022 saw us arbitraging two positions—one large, one small—and commit new funds to a third investment. The first arbitrage concerns the sale of our shareholding in Molson Coors Beverage Company with a respectable gain. The proceeds were redirected towards the acquisition of shares in Topicus.
Operating from the Netherlands and partially spun out from Mark Leonard’s Constellation Software, which retains oversight and a controlling stake, Topicus intends to replicate its parent company’s extraordinarily successful approach to M&A within the European vertical market software sector—a fragmented landscape with scores of hidden champions and less private equity money chasing acquisitions.
It got a tremendous start as an independent listed entity, doubling in market value in a matter of weeks—the cult-following of its parent certainly helping—before being punished with the rest of the technology sector during the second half of 2022. We took advantage of the setback to build our position in one single trade. The sale of our shares in Molson Coors was purely driven by the opportunity we saw in Topicus, which we deemed vastly superior, even at a valuation multiple above forty times cash earnings.
A quintessential defensive investment, Molson Coors remains in our view the safest option among other brewers in the western world. Peers such as Heineken, Carlsberg or AB InBev have all made bold bets on emerging markets in Russia, Asia and Africa, where we believe that growth prospects come at the expense of significant risks.
Although we like its domestic focus, Molson Coors is nonetheless dealing with a structurally challenged market, defined by declining volumes, ferocious competition, capped pricing power and poor reinvestment dynamics. As such, even though it was an extremely attractive investment at eight times earnings, it became a second-rate opportunity once its valuation multiple reached fourteen times earnings—as it occurred when we arbitraged our shares for Topicus’.
Shortly after the close of the fiscal period, we also divested our tiny shareholding in a Houston-based biotechnology company we won’t name, earning an equally tiny profit on this investment we had held for only a few months. The reason of the sale, frankly speaking, is that those shares were purchased out of a mistake.
To our surprise, the field of cancer research appears to be at least as fraud-laden as our own turf of market and corporate finance. In this respect, we progressively developed considerable reservations about the integrity of the company’s R&D. On top of these concerns came the radical alteration of our viewpoint on the company’s controlling shareholder, whose civil and political demeanors left us circumspect—to speak in euphemisms.
The proceeds of the sale were redirected towards the acquisition of shares in Los Angeles-based Daily Journal Corporation. Presided by Berkshire Hathaway’s vice-chairman Charlie Munger, Daily Journal had a legacy business, a portfolio of marketable securities and real estate properties that covered virtually its entire valuation at the time of our investment, leaving just a modest multiple on its burgeoning information technology business serving courts in the United States, Canada and Australia.
Finally, last summer saw us initiating a new investment in Belgium-based Tessenderlo Chemie. Turned around by superb entrepreneur Luc Tack, Tessenderlo sports entrenched competitive positions in each of its subsidiaries and has plenty of leeway to grow in both Europe and North America, yet it remains chronically undervalued on both an earning power and sum-of-the-parts basis.
A non-negligible part of the appeal here is the ongoing reorganization of Mr. Tack’s crossed shareholdings in Tessenderlo and Picanol. While there were doubts previously regarding where his loyalty went, the new structure resulting from the merger of the two vehicles he controls creates better transparency and alignement. We had been following Tessenderlo’s progress for years and were waiting precisely for this catalyst to initiate an investment.
We expect that the quoted value of our energy holdings will continue to cool off in 2023, and are currently contemplating several investment opportunities in the battered biotech sector, where scores of promising ventures are being traded at giant discounts to their net working capital value.