Caro-Kann Capital LLC
October 2020 / Investor Presentation / IB Marketplace / Private & Confidential
Caro-Kann Strategy
• Caro-Kann is a chess opening against the king’s pawn opening.
• A strong position and pawn structure make Caro-Kann Defense more solid and robust than
many alternatives while creating a strong likelihood of Black winning.
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Executive Summary
• Caro-Kann Capital aims to generate highly attractive returns by investing predominantly in
the small-cap space by conducting in-depth award wining research.
• Cumulative return from inception on March 1, 2020 = 235%+ after fees compared to ~32%
returned by Russell 2000; thus, beating Russell 2000 by more than 200%.
• Annualized return since inception = 24%+.
• Beating Russell 2000 in 2017, 2018, 2019, and 2020 (as of September 30, 2020) after fees.
• Sortino ratio of 2.04 vs. 0.41 for Russell 2000 (using MAR of 1%).*
• Historical low correlation to the broad market: ~0.62 to Russell 2000 (as of Sept 30, 2020).
• Investment opportunities fall into two categories
✓ #1: Special situations
✓ #2: Compounders (i.e., attractively priced high-quality businesses with a long growth
runway).
• Long-biased with generally 90% to 100% net exposure.
• Disciplined risk management through position sizing at inception and throughout the
holding period.
• Current AUM = ~$30M .
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Caro-Kann Capital Fund LP Performance since Inception
Jan
Feb
2015
Mar
(0.18%)
Apr
May
(0.05%) (0.42%)
June
July
Aug
Sept
(0.75%) (1.52%) (4.64%) (2.33%)
Oct
Nov
1.29%
1.63%
Dec
Annual
(1.35%) (8.16%)
2016
(6.52%)
(2.24%)
5.98%
0.58%
(2.22%)
1.69%
4.71%
0.78%
1.51%
(2.66%)
0.18%
7.04%
8.31%
2017
1.17%
0.59%
2.90%
0.05%
(0.24%)
1.63%
2.87%
0.68%
2.23%
3.40%
0.84%
2.43%
20.11%
2018
1.68%
0.41%
2.69%
(0.17%)
5.29%
8.88%
2.65%
2019
2.49%
(0.41%)
1.39%
4.00%
(5.57%)
9.14%
(0.96%)
1.54%
8.12%
2020
5.11%
(4.40%) (19.21%) 30.58%
18.09%
35.03%
3.56%
15.68%
9.16%
(1.02%) (1.69%) (6.25%) (9.62%) (10.33%) (8.94%)
Cumulative
8.57%
3.30%
3.19%
39.58%
121.05%
235.72%
* Net returns (i.e., returns after all fees and expenses).
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We Invest in Off the Beaten Path Securities
We want to fish in a pond with lots of fish and very few fishermen – i.e., we want to find niches
of the market with little competition.
We rarely invest in large and mega cap companies because it is a very competitive endeavor.
Every major investment bank publishes research reports and large investment funds analyze
those companies rigorously. Competition kills returns.
We take the opposite approach and generally invest in companies with up to $2B market cap
because this niche of the market has substantially less competition:
• Major investment banks do not publish research on these companies.
• They are too small for large funds to invest in.
• They are not in major indices. Hence, they are very difficult for individual investors to
obtain exposure to.
This allows us to develop an analytical edge through comprehensive and thorough research and
due diligence. With our quality research process we can find mispriced securities with very
attractive risk-reward ratio.
As a result, the portfolio has a fairly low correlation with the broad market (~0.63).
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We Search for Special Situations and Compounders
We tend to generate ideas in two areas:
• #1: Special situations. They are very often mispriced and are subject to forced selling.
Holding period is usually between 6 and 18 months. Some examples:
✓ Spin offs.
✓ High growth business segment hidden by a larger struggling segment.
✓ Sum of the parts.
• #2: Compounding machines. They benefit from expanding competitive advantage
that allows them to grow for a long time and sustain very high returns on capital.
Holding period is usually two years or longer. Examples include:
✓ Platform businesses with network effect.
✓ Flywheel business models.
• We generally avoid biopharmaceutical, pharmaceutical, and commodity industries due
to increased risks (e.g., FDA approvals, cyclicality of commodity prices).
• Appendix has case studies about one current portfolio position and two past positions.
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Portfolio Construction and Risk Management
• We avoid using leverage.
• Disciplined position sizing serves as a risk management mechanism: impact of any
single investment mistake would be limited.
✓ We generally do not make positions larger than 7% - 8% at cost.
✓ We would generally let the position run up to 12%.
• We aspire to have ~20 core positions plus smaller “starter” positions. This creates
appropriate level of diversification while allowing us to have high quality ideas with
attractive risk-reward ratio.
• We generally do not short individual securities and prefer using options on indices for
hedging purposes or hedge indices outright.
• The exposure is generally 80% to 100% net long.
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Recognition of Caro-Kann Capital’s Research
•
Barron’s, the leading U.S. financial magazine, featured our TripAdvisor analysis.
•
Artem Fokin is the ONLY person who has ever won prestigious SumZero Top Stocks Contest,
the largest stock competition for professional investors, three years in a row.
•
•
Burford Capital pitch won SumZero Top Stocks for 2019
•
TripAdvisor pitch won SumZero Top Stocks for 2018
•
CommerceHub pitch won SumZero Top Stocks for 2017
•
Detailed investment memoranda are available upon request.
Featured presenter at 2018 and 2017 MOI Global Investing Conferences:
•
Burford Capital presentation (video + slides)
•
TripAdvisor presentation (video + slides)
•
CommerceHub presentation (video + slides + transcript)
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Founder and Portfolio Manager Background - Artem Fokin
EXPERIENCE
Caro-Kann Capital LLC, Founder and Portfolio Manager (San Francisco, CA)
• Hedge fund investing in special situations and compounders
2015 – Pres.
Outrider Management LLC, Principal (San Bruno, CA)
2011 – 2014
• ~$350M distressed debt and special situations hedge fund
• Generated ideas across capital structure, represented the firm in negotiations with debtors and served on creditors’ committees
Greenberg Traurig LLP, Associate (New York, NY)
2005 – 2009
• Leading international law firm with 1,700 lawyers across U.S. Latin America, Europe, the Middle East and Asia
• Advised and structured spin-offs, bankruptcies, corporate reorganizations, and M&A
EDUCATION
Stanford Graduate School of Business, MBA (Palo Alto, CA)
• Arjay Miller Scholar (top 10% of the class)
2009 – 2011
New York University School of Law, Master of Laws (International Taxation) (New York, NY)
• Newman Award for Distinction (top two students)
2004 – 2005
Higher School of Economics, JD (Moscow, Russia)
• Presidential Scholarship (the most prestigious student award in Russia). Valedictorian.
1999 – 2004
ADVISING
University of Cambridge, Judge Business School, Advisor to the Master of Accounting Program
2018 –2020
QUALIFICATIONS
• Passed three levels of CFA exams on the first try (~7% of candidates do that). Member of the New York Bar.
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We Have Investors From Every Life Stage
Outrider Management
Founder and
portfolio manager
Stanford Graduate School of
Business
Finance professor
Classmates
Greenberg Traurig
Law firm partners
NYU School of Law
Professor
Higher School of Economics
Classmates
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Alignment of Incentives and Skin in the Game
• As Warren Buffett said “we eat our own cooking”.
• ~30% of our assets under management (“AUM”) belongs to portfolio manager’s
family which represents a very substantial part of the net worth. We have lots of
skin in the game. This is almost never the case for financial planners, financial
advisors, and investment managers.
• We win together!
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Terms
Management Fee
2%
Performance Fee
20%
Subscriptions
Monthly
Redemptions
Quarterly; 90-day notice; 1-year soft lockup
High Water Mark *
Yes
* High water mark means that an investment manager would receive a performance fee only if an account value
is higher than it has ever been.
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Independent Service Providers
U.S. Legal Counsel
Cole-Frieman & Mallon LLP
Cayman Islands Legal Counsel
Maples and Calder
Prime Broker
Interactive Brokers
Administrator
Opus Fund Services
Auditor
Spicer Jeffries
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Q&A
• Can a tax-exempt investor such as a traditional IRA or a Roth IRA invest?
✓ Yes.
• Can a foreign investor invest?
✓ Yes.
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XPEL Technologies:
Trading History
XPEL Stock Price, $
$35
$30
$25
$20
Meaningfully increased position at ~$4.86 in May
2019 after a temporary slowdown in sales in
China. Took of advantage of panic caused by a
one-time issue.
Established position at ~$6.10 in
November – December 2018
$15
$10
$5
Increased
position at
~$6.30 after
strong guidance
but before
market reacted
Increased
position at ~$9
per share
during March
2020 panic
$0
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XPEL Technologies:
Investment Thesis
• Top 3 position (as of July 31, 2020)
• Provider of paint protection film (PPF) with the largest market share in the industry
(45% to 50%).
• PPF is used to protect car’s paint from wear and tear.
• XPEL has the best product in the space and has locked in many installers into
exclusivity arrangement due to its best-in-class design software.
• PPF has a long growth runway due to a low penetration of ~10% despite its very
compelling customer value proposition.
• XPEL has a strong record of execution: it has grown revenue by ~500% since 2013.
XPEL has also outcompeted the industry 800-pound gorilla – 3M.
• I expect XPEL to grow its sales for many years to come.
• Insiders own ~40% of the company and are aligned with shareholders.
• The Fund’s cost basis is ~$6.20 (as of June 31, 2020).
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BlueLinx (BXC):
What Went Wrong and What I Learned (1)
BXC Stock Price, $
$50
$45
$40
$35
$30
$25
$20
Position
established
$15
$10
Position
exited
$5
5/1/20
4/1/20
3/1/20
2/1/20
1/1/20
12/1/19
11/1/19
10/1/19
9/1/19
8/1/19
7/1/19
6/1/19
5/1/19
4/1/19
3/1/19
2/1/19
1/1/19
12/1/18
11/1/18
10/1/18
9/1/18
8/1/18
7/1/18
6/1/18
5/1/18
4/1/18
$0
Closing Price
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BlueLinx (BXC):
What Went Wrong and What I Learned (2)
• In late July 2019 when I established a position in BlueLinx at ~$21.20.
• BXC (~$200M market cap) is one of U.S. leading building products distributors.
• In early 2018 BXC completed an acquisition of Cedar Creek, a competing building
products distributor with overlapping footprint.
• The transformative acquisition gave BCX necessary scale to compete effectively.
• Expected synergies were massive and the company had already started delivering them.
• Looking at 2021 numbers, BXC was trading at ~3x free cash flow.
• I saw 3x to 5x upside.
• BXC also had excess real estate assets that it wanted to sell.
• I did not like high debt (~$650M) because I tend to stay away from highly levered
businesses.
• However, here I felt comfortable because the debt was mostly a revolver used to
finance inventory.
• In a recessionary environment, inventory would shrink, and so would the revolver.
• I was also hesitant to build my investment thesis on M&A synergies.
• However, interviews of former employees from both companies (BlueLinx and
Cedar Creek) and analysis of similar M&A transactions in the past persuaded me
that synergies are achievable.
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BlueLinx (BXC):
What Went Wrong and What I Learned (3)
• Shares went up 50%+ within a short period of time and it looked that the market was
agreeing with me.
• Given that upside was still substantial, I did not reduce the position.
• What happened next?
• In November 2019 BXC announced 3Q 2019 results that were solid.
• However, on the earnings call (which I was listening live) management explained that
pursuit of synergies led to reduced level of customer service and some customers were
unhappy. BXC would need to “reinvest” into customer experience.
• In plain English it meant that management was mistaken about synergies.
✓ Management was right that it could deliver synergies.
✓ However, management miscalculated the impact of such cost cuts on customers.
• With “reinvestment” announced, the synergies thesis was broken.
• Portfolio Actions
✓ I sold shares the same day.
✓ Instead of having a 50%+ gain, I ended up with ~15% loss.
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BlueLinx (BXC):
What Went Wrong and What I Learned (4)
• What I have learned:
• Leverage is dangerous even if it is a revolver backed by inventory.
• Delivering M&A synergies is very-very tough.
• Continuous conversations with customers could have alerted about negative
developments.
• What I did well despite negative developments:
• Robust risk management
• Given company’s leverage, I sized the position appropriately (low single digit
percentage of the portfolio).
• Strong position management discipline
• Immediately exited a position (the same day) after realizing that the synergies
thesis is broken.
• It proved to be the right decision as shares went down 60% after I exited.
• Mistakes are unavoidable but keeping the exposure small is a core component of
Caro-Kann investment style, portfolio and risk management.
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CommerceHub:
Private Equity Acquires Portfolio Position (1)
• CommerceHub came to public markets as a spin off in July 2016.
• Mispricing factors:
✓ Spin off dynamics
✓ Convoluted and arcane accounting for stock-based compensation
✓ Zero sellside coverage created an attractive opportunity.
• Investment Thesis:
✓ CommerceHub is the dominant SaaS dropshipping provider that has a massive
moat due to network effect and switching costs.
✓ CommerceHub would benefit from a long growth runway due to growing ecommerce and increasing penetration of dropshipping
✓ The valuation was undemanding.
• Our CommerceHub pitch won SumZero Top Stocks for 2017.
• Numerous interviews with customers, former employee, and competitors shown how
robust CommerceHub’s competive moat is.
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CommerceHub:
Private Equity Acquires Portfolio Position (2)
• We established position in November 2016 – January 2017 at less than $15.00.
• Subsequently we increased our position on a few occasions when stock market
volatility presented attractive opportunity to increase our exposure.
• In March 2018 two private equity firms (GTCR and Sycamore Partners) announced
that they will be acquiring CommerceHub at $22.75 per share.
• We exited our investment in March and April 2018.
• Return = ~43% in less than 18 months.
CommerceHub Stock Price, $
30
Position Exited
25
20
15
10
Position Established
5
4/22/18
3/22/18
2/22/18
1/22/18
12/22/17
11/22/17
10/22/17
9/22/17
8/22/17
7/22/17
6/22/17
5/22/17
4/22/17
3/22/17
2/22/17
1/22/17
12/22/16
11/22/16
10/22/16
9/22/16
8/22/16
7/22/16
0
Closing Price
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Further Inquiry
Artem Fokin, portfolio manager
artem.fokin@caro-kann-capital.com
+1-917-667-2334
www.Caro-Kann-Capital.com
Please feel free to e-mail and ask to be added to the distribution list.
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Disclaimer
This presentation does not constitute an offer to sell or a solicitation or an offer to buy any securities and may not be relied upon in
connection with any offer or sale of securities. Any such offer or solicitation may only be made by means of formal offering documents that
will be provided only to qualified offerees. This document should be read in conjunction with, and is qualified in its entirety by, information
appearing in such formal offering documents, which should be carefully reviewed prior to investing. Past performance is not necessarily
indicative or a guarantee of future results. An investment in any fund is speculative and entails substantial risks. Investors must be prepared
for the risk of loss. All performance numbers presented are for U.S. domestic taxable investors in Caro-Kann Capital Fund LP.
This communication is provided for information purposes only. In addition, because this communication is preliminary and a summary only,
it does not contain all material terms, including important conflicts disclosures and risk factors associated with an investment in a fund. This
communication in and of itself should not form the basis for any investment decision.
Caro-Kann Capital is not acting and does not purport to act in any way as an advisor or in a fiduciary capacity vis-a-vis any investor in the
funds. Therefore, it is strongly suggested that the reader seek his or her own independent advice in relation to any investment, financial,
legal, tax, accounting or regulatory issues discussed herein. The investment advisor and the fund will be newly formed entities and will have
no operating history.
Certain information contained in this document constitutes "forward-looking statements," which can be identified by the use of forwardlooking terminology such as "may", "will", "should", "expect", "anticipate", "target", "project", "estimate", "intend“, "continue" or "believe"
or the negatives thereof or other variations thereon or comparable terminology. Due to various risks and uncertainties, actual events or
results or the actual performance of the funds may differ materially from those reflected or contemplated in such forward-looking
statements and no undue reliance should be placed on these forward-looking statements, nor should the inclusion of these statements be
regarded as Caro-Kann Capital’s representation that the funds will achieve any strategy, objectives or other plans.
This communication and the material contained herein are confidential and may not be distributed in whole or in part to anyone other than
the intended recipients. By accepting receipt of this communication the recipient will be deemed to represent that they possess, either
individually or through their advisers, sufficient investment expertise to understand the risks involved in any purchase or sale of any
financial instruments discussed herein.
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