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January 25, 2011 Dear Limited Partner:
For the fourth quarter ended December 31, 2010, Corsair Capital was up an estimated 8.0%* net, after all fees and expenses. For 2010 as a whole, Corsair Capital returned 15.4%*, coincidently matching our compounded net annual return since inception in January 1991.
m ar ke tf
4Q10 return 2010 return Annualized since inception (1991) Total return since inception (1991)
Corsair Capital (net) 8.0% 15.4% 15.4% 1641%
* Returns are based on investments made at fund inception and using the highest possible fee schedule. Returns for investors in this or any of the Corsair funds are most accurately provided in the monthly capital statements.
In response to a weak economic outlook and data suggesting underlying inflation was trending below target levels, the Fed announced in early November plans to buy $600 billion in short and medium term Treasuries over the following eight months. Though major indices finished the first half of 2010 in negative territory, the markets greeted this second round of quantitative easing (QE2) with cheer and ended 2010 on a strong note. What are the potential consequences of QE2? Some analysts argue gold’s vault to a record $1,400 per ounce indicates low confidence in markets and weak growth in most currencies. PIMCO founder Bill Gross thinks we are in a “liquidity trap,” with interest rates and consumer demand both stuck at critically low levels, and he suggests QE2 may signal the end of a 30-year bull market in bonds. In our last quarterly letter, we highlighted the disparity between equity and fixed income valuations and the potential for stocks to adjust upwards to 13-14 times earnings, equivalent to a yield of 7-8%. While we did experience some multiple expansion in equity valuations in the fourth quarter, part of the normalization to equivalent risk-adjusted returns for stocks versus bonds came in the form of fixed income underperformance. Clearly, the longer term impacts of QE2 have yet to be discerned. Importantly, however, we don’t consider ourselves to be macro investors. As such, we are confident that we can continue to generate attractive risk-adjusted returns by employing our “bottom-up” fundamental investment strategy that has served us well through both good and bad environments over the past twenty years. Ivan Seidenberg, CEO of Verizon, recently said, “By reaching into virtually every sector of economic life, government is injecting uncertainty into the marketplace and making it harder to raise capital and create new business.” U.S. voters shared this viewpoint and handed control of the U.S. House of Representatives to Republicans in November. Partly as a result of this defeat,
This letter is not a research report or recommendation to buy or sell the securities mentioned herein. The examples herein are illustrations of ways in which Corsair Capital Management, LLC and its affiliates have examined or may examine opportunities. Corsair Capital Management, LLC and its affiliates may, at any time, buy or sell any of the securities mentioned in this letter and may change its long or short position at any time without providing any notification of such changes. It should not be assumed that any trading activities pursued in the future will be profitable and may in fact result in losses.
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S&P 500 10.8% 15.1% 9.1% 475% Russell 2000 16.3% 26.9% 10.8% 683%
We expect this gap to close as LYB continues to post superior results. Subsequent to year end. In addition to its operational and financial achievements. we expect KS to again make a large accretive acquisition in 2011. KapStone Paper & Packaging (“KS”) traded up during the quarter as the company announced strong Q3 results driven primarily by selling price increases across its paper grades.40. we believe LYB still trades at a significant discount to competitors. with many core holdings contributing. we remain very focused on the risks taken to achieve our returns. again confirming our belief the shares remain undervalued. and plans to further optimize its capital structure.30. Amid signs of economic growth. Our current portfolio reflects our consistent strategy of investing at very attractive valuations in quality enterprises run by strong. LYB held a successful investor day. CSE ended the quarter at $7. While Corsair participated in the fourth quarter’s broader move higher. and improving utilization rates. Because of the potential risks and uncertainty associated with the many stimuli and regulations recently enacted. Having emerged from bankruptcy in early 2010.m ar ke tf The Portfolio We wrote in our 2009 year end letter to investors that one of the strikingly positive features of the year was the impressive cost cutting by major corporations. buy or sell any of the securities mentioned in this letter and may change its long or short position at any time without providing any notification of such changes. The examples herein are illustrations of ways in which Corsair Capital Management.10. global imbalances continue to muddle our outlook. It should not be assumed that any trading activities pursued in the future will be profitable and may in fact result in losses. and we continue to see profits improve from further operating leverage. Results in the fourth quarter were characterized by broad positive performance. we are encouraged by The President’s more centrist economic policy. we are optimistic about the composition of the portfolio. incentivized management teams who are focused on creating shareholder value. Having ended 2010 with a de-levered balance sheet. the markets seem to have room to move higher. LLC and its affiliates have examined or may examine opportunities. LYB ended the quarter at $34. gained listing on the NYSE. The stock ended the quarter at $15. Despite overall headwinds or tailwinds. Management’s debt repurchases and announcement of a significant share repurchase plan signaled to the market CSE aims to maximize shareholder value. Our research shows a tight supply/demand relationship. While these catalysts drove LYB stock 44% higher during the fourth quarter. a dividend policy. news wires reported that CSE has hired JP Morgan to explore strategic alternatives. LLC and its affiliates may. and received numerous “buy” ratings from sell-side firms. Corsair Capital Management. CapitalSource (“CSE”) positively contributed to the portfolio as the company continued to execute on its transition from an over-leveraged REIT to a well capitalized bank. As we believe post-recession equity markets are generally driven by the direction of earnings. which give us confidence KS can realize additional price increases and higher earnings. low inventory levels. Our 2010 volatility of 11% came in sharply lower than the indices. This letter is not a research report or recommendation to buy or sell the securities mentioned herein. which in turn is driven by economic growth. some of which are listed below. however. LyondellBasell (“LYB”) continued to surpass market expectations by announcing a very strong Q3. at any time. we continued to post strong absolute returns with significantly less risk than the equity markets. We believe we are well positioned in terms of overall exposure levels and the types of business and balance sheet risk we take through our shareholdings. with the S&P 500 at 19% and the Russell 2000 at 24%. ol ly Obama announced plans to extend expiring tax cuts for all Americans. .
Thank you for your continued support and confidence. The stock ended the quarter at $17. and paying down debt. buy or sell any of the securities mentioned in this letter and may change its long or short position at any time without providing any notification of such changes. happy and prosperous 2011. we believe that CQB has mid-cycle cash earnings power of approximately $2. One company that disappointed us during the quarter was Chiquita Brands International (“CQB”). During the quarter. announced the completion of its acquisition of Hewitt. Corsair Capital Management. a transformational event that we believe will enhance AON shareholder value and create a global leader in human capital solutions. We hope you have a healthy. we expect a strong operational year ahead with production near full capacity. competitor Elkem was put up for sale by parent company Orkla. GSM also benefited from the revival of automotive production and a corresponding increased demand for aluminum. we continue to see a robust pipeline of new investment ideas.01.00 in cash EPS in the near term through improved earnings from operations and share buybacks. Recent banana supply disruptions in South America combined with competitors’ plans to reduce EU banana capacity have helped current banana supply/demand fundamentals and pricing. selling a 50% stake in an unprofitable product line (Just Fruit in a Bottle). which slipped on the proverbial banana peel in its Q3 results. the company had difficulties navigating a deteriorating banana market in Europe (despite tariff reductions which we anticipated would be beneficial). Following its scheduled maintenance in the third and fourth calendar quarter of 2010. as manufacturing and industrial activity progressed faster than expected and silicon metal and ferrosilicon prices rose. As part of the acquisition financing package. including spin-offs. AON issued 30 year senior unsecured bonds.09. LLC and its affiliates may. While frustrated with the results in Q3. It should not be assumed that any trading activities pursued in the future will be profitable and may in fact result in losses. We look forward to celebrating with you Corsair’s twenty years of successful investing at our annual meeting on March 8th at the Harvard Club. another positive contributor during the quarter. After repositioning its packaged salads business. m ar ke tf Annual Investor Meeting Sincerely. .00 and that the company could soon be in a position to return cash to shareholders through a buyback or dividend. which we believe will lead to further industry consolidation and tightening of silicon metal prices. and general special situations going through strategic change. This letter is not a research report or recommendation to buy or sell the securities mentioned herein. The attached Appendix is a write-up of a core investment. which we view as the credit market’s vote of confidence in the new company. Corsair Capital Management While the markets have certainly edged higher as we head into 2011. LLC and its affiliates have examined or may examine opportunities.02. Please feel free to call us with any questions you may have at (212) 389-8240. We continue to believe AON will be able to earn $5. AON reported strong third quarter earnings that reflected solid operational performance against a challenging global economy. post-reorganization equities. at any time. ol ly Aon Corporation (“AON”). The examples herein are illustrations of ways in which Corsair Capital Management. The stock ended the quarter at $14. The stock ended the quarter at $46.Globe Specialty Metals (“GSM”) again positively contributed to the portfolio this quarter.
its export license system restricts supply.00 Oct-10 $38.00 615.40 360.50 200.00 Q2 2010 $6.00 Aug-10 $37.15/share which could increase towards $. Corsair Capital Management. where pricing has skyrocketed.00 305.00 18.56/share for 2011 EPS. we believe the market is ignoring one of the only rare-earth companies that will see an immediate economic benefit from Chinese quotas and end-market demand growth.40 480. which comprise essential parts of hard disk drives. Before China recognized its own domestic need for rare earths and limited exports to ensure sufficient supply.00 900% 78. AMR sells rare earths and certain rare earth finished goods. The company expects to capitalize on the current pricing bubble by exporting the highest margin rare earths.00 29% 50. ol ly Nov-10 ! Since 2009 $50. optical lenses and various solar components.00 300.00 615. While the cost recovery tends to lag.00 27.00 6.Appendix – Neo Material Technologies (“NEM” – $8) NEM produces and processes rare earth elements widely used in smartphones.00 49.00 71% . At the time of our initial investment. and other electronics. because finished goods which use rare earths are not subject to the same quotas that govern rare earth This letter is not a research report or recommendation to buy or sell the securities mentioned herein. It should not be assumed that any trading activities pursued in the future will be profitable and may in fact result in losses.00 49.00 Q1 2010 $4.00 495.50 605.00 75.00 115. we saw numerous price increases in 2010 and expect additional increases in the future should rare earths continue their exponential rise. LLC and its affiliates may.00 m ar ke tf NEM operates in two divisions. AMR is a licensed exporter under Chinese quota laws and derives ~25% of its revenues by selling rare earths to customers outside China.00 33.40 540.00 19. the sell side projected $0.00 35. end-users are committed to using neo magnets.00 38. For example. Because substitution can be difficult and expensive. electronics.00 72.50 33.00 165% 640. this demand inelasticity has allowed Magnequench to pass higher input costs (75100%) onto customers. small electronic motors. While China has an abundance of rare earths. AMR and Magnequench. NEM’s core product offerings are at a macro inflection point supported by an undersupply of rare-earths used in developed and emerging markets.00 42.00 530.00 5. at any time.50 26.00 3.00 306% 35.00 7. As illustrated in the table below.00 3. buy or sell any of the securities mentioned in this letter and may change its long or short position at any time without providing any notification of such changes. We also recognized potential incremental contribution from other near term opportunities.00 515. The examples herein are illustrations of ways in which Corsair Capital Management. While we recognize investors have crowded into certain over-hyped rare earth stocks. LLC and its affiliates have examined or may examine opportunities. rare earth pricing has seen geometric growth.00 311% 73.00 3.00 1150% 305.20/share per quarter by the end of 2011. Magnequench processes Neodymium (periodic element # 60) into neo magnets. AMR purchases rare earth concentrate in China and separates it into purified rare earth elements through a technically complex process.00 33.00 929% 615. and we believed this understated NEM’s earnings potential given we expected a Q4 EPS of $. US $ per Kg Cerium Dysprosium Europium Lanthanum Neodymium Praseodymium Samarium Terbium 2009 $4. neodymium and other rare earths were economical and pervasively used in everyday products.00 600.50 155.
The examples herein are illustrations of ways in which Corsair Capital Management. ol ly concentrate. NEM is doubling its catalytic converter capacity in China at a time when one competitor with facilities outside of China recently announced a doubling in price of its catalytic converters. NEM’s finished goods facilities in China give the company an advantage over competitors with finished goods facilities domiciled in Europe. we believed NEM deserved at least an 11-12x multiple on 2011E EPS of ~$. buy or sell any of the securities mentioned in this letter and may change its long or short position at any time without providing any notification of such changes.70/share. At the time of our initial investment. Specifically. we believe NEM is a rare.com m ar ke tf This letter is not a research report or recommendation to buy or sell the securities mentioned herein. News from Brazil has been encouraging. It should not be assumed that any trading activities pursued in the future will be profitable and may in fact result in losses. Management believes the mine could wean the company off its dependence from China and eventually supply much of its rare earth needs. LLC and its affiliates have examined or may examine opportunities. at any time. This plus credit for their cash would create an $8-9 stock. Click here for more hedge fund letters at MarketFolly. . LLC and its affiliates may. profitable rare earth company which should benefit from tightness in the rare earth market. and we expect management to give an update on its next conference call. which could supply NEM with rare earths by late 2011.In summary. Corsair Capital Management. We now believe a further move to $15 is possible if the REE/MCP crowd discovers NEM and begins to extrapolate future growth or gives the company credit for its Brazilian mine. We also believe the market is giving NEM no credit for its strategic relationship with a Brazilian rare earth mine.
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