The Long And Short of L1 Capital's New IPO
You don’t often find a fund manager that you’ve never heard of who has delivered a 36.9% annual return. Even less often an Australian based award winning Long Short manager with $3b under management.
But staying under the radar has always been the intention of L1 Capital co-founders Mark Landau and Raphael Lamm ,who have managed a series of investment strategies for pension funds, global private banks and insurances companies since 2007.
Up until now, their client base has been almost exclusively institutional. Now for the first time, L1 Capital has opened the Long Short strategy to retail investors via the initial public offering of the L1 Long Short Fund Limited (Company), ASX code LSF. L1 Capital is looking to raise $500 million for a new listed investment company that will replicate the L1 Long Short strategy, which is currently closed to new investors. We outline some of the key features below.
Paying for Alpha
Long Short Funds in theory should deliver outperformance against a falling equity benchmark, or ‘alpha’ as they call it. For Long Short Funds, investors pay for this alpha via performance fees. This alpha is generated through the ability of the manager to manage a portfolio of long and short equity positions. For a strategy like the new L1 Long Short Fund stocks, are bought and short sold based on the fundamental filters of value and quality. Deteriorating fundamentals may represent a catalyst for a stock to be short sold.
The easiest way to understand alpha is to look at the performance of a fund in the months where the equity market has declined. The best examples can be found on a month-for-month basis in the chart below. For L1 Capital their ‘alpha’ generation numbers are extraordinary on a comparison basis, given in the 17 months the market fell, the Fund returned 40% versus the ASX200AI, which fell 44%.
Of course, technically speaking, the new L1 Long Short Fund Limited (Company) has no track record. Which means that, even though the Fund will look to replicate the Long Short strategy, this alpha generation may not be indicative of future performance.
Another interesting point about this new listed investment company (LIC) is its alignment with investors. Any good research house will always investigate the alignment of the investment team with the fund they manage. In the case of L1 Capital, the mangers are significant investors in the offer alongside investors. Furthermore, all performance fees generated are to be reinvested. Both of these alignment mechanisms will be locked up for 10 years, which shows a high degree of alignment between the investment manager and shareholders.
In the past, LICs have often had the costs of the offer deducted from the actual funds raised, so that, after costs, $1 raised might eventually be worth less than that on listing day. In the case of the L1 Long Short Fund Limited (Company), however, these costs are being funded by L1 Capital themselves, thereby reducing any potential discount on the first one of trading.
Having already secured $100 million from cornerstone investors, Seed Partnerships – the corporate advisory firm advising L1 Capital – expect very strong support for the IPO. The offer is now open to investors, and the general offer is expected to close on April 6, 2018.
For further product information on the new LIC please click here; http://www.informedinvestor.com.au/product/product-100139?v=L1
Tim McGowen is the co-founder of informedinvestor.com.au. He was previously the founder of Fortitude Capital the Hedge fund of the Year in 2008 & 2009. More recently he was a global Portfolio Manager for PM Capital.