brave new world
1 December 2016
investor’s notebook by Stephen Cranston
The best dolphin watching I have done was from a dinghy which was launched off West brook beach in Kwa Zulu Natal. So when I got an invitation to go to Westbrooke I got my best swimming costume and sourced my best binoculars. Sadly there were no dolphins to be seen at the head office of Westbrooke Capital Management in Sandton.
Their offices are more like Beverly Hills (the one in California, that is) as they are based in the old home of Punch Barlow, founder of what is now Barloworld. It looks like a film set and has become a haven for alternative
investment shops, including Capricorn, which is Westbrooke’s anchor investor. All three Westbrooke funds stand out as differcntiated products.
Its special opportunities hedge fund is a rare example of a small to mid cap focused hedge fund. Its R230m Aria fund provides capital to asset backed rental businesses which have underlying contractual income streams with a rental company supporting Brutes Air Solutions, which distributes air compressors and filters. The RI85m WCH capital hospitality fund invests into the growing Capital Hotels long-stay hotel chain (think a more salubrious version of the Don apartments). Westbrooke has taken a block of rooms in two Capitals in Sandton in Katherine Street and West Road South, and one in Rosebank in Bath Avenue. Westbrooke has negotiated a guaranteed income stream from the managers.
The last two funds qualify as section 121 funds under the Income Tax Act. This is designed to offer tax incentives for investments into fledgling ventures that could stimulate the economy.
Westbrooke’s two funds account for more than 60% of the investments under section 12J in the whole country. An investment into these funds is tax deductible in the year it takes place but it must be held for at least five years.
There is very little demand even for long-only small-cap funds, so Westbrooke was quite brave to set up a small-cap hedge fund.
But fund manager Jarred Winer says there is limited equity research on these shares, which also attracts little attention from investment banks.
This is a far more activist fund than the typical long-only counterpart. It can be seen as a hedge/private equity hybrid as it claims to unlock shareholder value in what it calls the Active Portfolio, over 18 to 36 months, while its liquid portfolio looks at special situations such as a pending merger. Winer’s background is not in classical fund management but in corporate finance and financial leverage at Absa Capital. He isn’t interested in following a benchmark. He looks for event driven returns which are not linked to market movements.
The fund originated the disposal of Control Instruments to Torre, for example, as well as the sale of Amalgamated Appliances to Bidvest. And it is pushing Rolfes to reposition around higher margin speciality chemicals.
The liquid portfolio has included shares such as Altron, which is going through corporate transformation, and growth play Consolidated Infrastructure.
The fund has a 96% net exposure to the market, but it takes selected short positions. Recently it took advantage of the mismatch in price between property shares Emira and Sirius. In a year when most equity hedge funds are in the red, the fund was up 6.7% in the nine months to September and its largest loss over the past four years has been a modest 3.4%. Any investment into this fund would be a useful stocking filler for investors looking for something genuinely uncorrelated.