Quick follow-up on FTRE. I took a quick look at their 10K, I was hoping they'd segment their end market (pharma, biotetch, etc.). I'm assuming majority of their business comes from pharma vs biotech. I remember during 2022-2023, biotechs were particularly hit hard, funding had dried up. Lots of these companies trading below cash. It doesnt look like FTRE has any concentration risk as it relates to biotech exposure but curious your thoughts here.
They break out the end-customer exposures in the investor day presentation and on some of the quarterly calls. It's close to 50:50 pharma:biotech, which means they over-index to pharma customers, since only ~1/3rd of all the industry R&D is pharma. This is actually a bad thing and not a good thing.
Yes after the interest rate hiking cycle, capital markets froze. Everything from private equity, venture cap, and companies dependent on external funding suffered, and global investment banking fees fell. All this is recovering now as monetary policy loosens in most major economies, particularly the US. 1H24 biotech funding already surpassed all of 2023. ICON and others comment on it on their quarterly calls. Also, in the industry, royalty agreements are becoming more common, and this often fills the funding hole. Guys like pitchbook and dealogic don't count this in their funding data. Basically there are holding corps and investment funds that provide capital in exchange for royalties on future sales.
The whole industry slowed down in the last 9 months and most of the CEOs didn't see it coming. Many of them have missed guidance so they'd all been revising down, with the stocks going along with it. Even Medpace's CEO just said something like they've been trying to call a bottom for 9 months and it hasn't happened yet.
My view's this slowdown's temporary -- I've seen so many of these situations at this point -- and is a big chunk of why the opportunity exists in the first place. Now that funding is recovering, this eventually flows to more clinical trials once the biotech segment starts allocating that capital, which takes who knows, 0.5-2 years.
My report will also be in an upcoming post. Most of this is will be there!
I'd say my Brookfield and KKR positions I'm most convicted in the outcomes. I just have a ton of evidence, all the way down to client surveys, the size of the markets they can do deals in, the amount of client capital out there that they can take on, what their investment processes are and how they source & filter deals, why they can do deals that others can't (hence why they can earn excess returns for clients for a very long time, even at scale), and why at this point it would take 20 years to replicate their business model and value proposition, etc. Next would be the banks where I know a bunch about the industry, and the industry has almost zero rate of change.
Citi's business, if you have a peek at the report, shows how banks are an incredibly slow-changing industry with very sticky clients, and so I think I can see far out on the horizon for what the industry and the business model will look like in 3, 5, 10 years.
Ally's kind of an abnormal bank but I know their underwriting history and process, I know why they can source better loans than other banks, and I know why the big banks can't come down into their niche used vehicle lending market.
DaVita's business model and industry-leading value proposition also can't be replicated at this point, except by Fresenius who isn't quite as good. DaVita's problem is that at some point in the future there will be some new kind of substitute form of care or something and their business will become obsolete within a decade or so after that, and that's always left me a bit concerned with ever having a huge position like we do with Brookfield.
GM has 1-3 threats facing it long term but the truck franchise isn't going to be unseated by any competitive issue for many years. At worst people will no longer want the product form factor, which would in turn upset the competitive structure in the pick-up truck business.
Certainly Fortrea I have the least conviction in. If I just look at the volume of what I know and how well I think I know it, it's not as high as my other positions. But it was still a better use of some capital at the time compared to buying more of what I already owned.
There's always the trade off between certainty vs. what the upside/downside is.
Quick follow-up on FTRE. I took a quick look at their 10K, I was hoping they'd segment their end market (pharma, biotetch, etc.). I'm assuming majority of their business comes from pharma vs biotech. I remember during 2022-2023, biotechs were particularly hit hard, funding had dried up. Lots of these companies trading below cash. It doesnt look like FTRE has any concentration risk as it relates to biotech exposure but curious your thoughts here.
They break out the end-customer exposures in the investor day presentation and on some of the quarterly calls. It's close to 50:50 pharma:biotech, which means they over-index to pharma customers, since only ~1/3rd of all the industry R&D is pharma. This is actually a bad thing and not a good thing.
Yes after the interest rate hiking cycle, capital markets froze. Everything from private equity, venture cap, and companies dependent on external funding suffered, and global investment banking fees fell. All this is recovering now as monetary policy loosens in most major economies, particularly the US. 1H24 biotech funding already surpassed all of 2023. ICON and others comment on it on their quarterly calls. Also, in the industry, royalty agreements are becoming more common, and this often fills the funding hole. Guys like pitchbook and dealogic don't count this in their funding data. Basically there are holding corps and investment funds that provide capital in exchange for royalties on future sales.
The whole industry slowed down in the last 9 months and most of the CEOs didn't see it coming. Many of them have missed guidance so they'd all been revising down, with the stocks going along with it. Even Medpace's CEO just said something like they've been trying to call a bottom for 9 months and it hasn't happened yet.
My view's this slowdown's temporary -- I've seen so many of these situations at this point -- and is a big chunk of why the opportunity exists in the first place. Now that funding is recovering, this eventually flows to more clinical trials once the biotech segment starts allocating that capital, which takes who knows, 0.5-2 years.
My report will also be in an upcoming post. Most of this is will be there!
Haha, you're on it! Looking forward to the next report.
It's also great to see Starboard and Corvex in the mix (albeit Starboard underwater since buying last year)
Excellent read Chris!
Excellent write up. How would you rank your current portfolio from top to lowest conviction? I believe you mentioned BN as your top
I'd say my Brookfield and KKR positions I'm most convicted in the outcomes. I just have a ton of evidence, all the way down to client surveys, the size of the markets they can do deals in, the amount of client capital out there that they can take on, what their investment processes are and how they source & filter deals, why they can do deals that others can't (hence why they can earn excess returns for clients for a very long time, even at scale), and why at this point it would take 20 years to replicate their business model and value proposition, etc. Next would be the banks where I know a bunch about the industry, and the industry has almost zero rate of change.
Citi's business, if you have a peek at the report, shows how banks are an incredibly slow-changing industry with very sticky clients, and so I think I can see far out on the horizon for what the industry and the business model will look like in 3, 5, 10 years.
Ally's kind of an abnormal bank but I know their underwriting history and process, I know why they can source better loans than other banks, and I know why the big banks can't come down into their niche used vehicle lending market.
DaVita's business model and industry-leading value proposition also can't be replicated at this point, except by Fresenius who isn't quite as good. DaVita's problem is that at some point in the future there will be some new kind of substitute form of care or something and their business will become obsolete within a decade or so after that, and that's always left me a bit concerned with ever having a huge position like we do with Brookfield.
GM has 1-3 threats facing it long term but the truck franchise isn't going to be unseated by any competitive issue for many years. At worst people will no longer want the product form factor, which would in turn upset the competitive structure in the pick-up truck business.
Certainly Fortrea I have the least conviction in. If I just look at the volume of what I know and how well I think I know it, it's not as high as my other positions. But it was still a better use of some capital at the time compared to buying more of what I already owned.
There's always the trade off between certainty vs. what the upside/downside is.
Hopefully that makes sense :)
Thank you, super helpful.