Kobus Louw
Dear Partners,
1 Main Capital Partners, L.P. (the “Fund”) returned 4.0% net in the third quarter, compared to 5.9% and 9.3% for the S&P 500 (SP500), (SPX) and Russell 2000 (RTY)1, respectively. Year-to-date, the Fund returned 11.3% net, compared to 22.1% and 11.2% for the SPX and RTY, respectively.
The RTY rally began early in the quarter, when inflation data came in below expectations, spurring optimism that the Fed would begin to cut interest rates as early as September. After all, small cap earnings are more sensitive than large caps to economic growth and interest rates. Additionally, small cap valuations had become unusually cheap relative to their large cap counterparts, as discussed in the Fund’s Q2’24 letter.
At the same time, the small cap rally was accompanied by increased volatility, as investors increasingly worried that the Fed waited too long to cut rates and an economic slowdown was inevitable. Of course, such a slowdown would outweigh any benefits of lower rates.
Accordingly, three of the Fund’s top five positions, which are perceived to be economically sensitive, remain down on the year and represent a drag on performance. However, I remain confident that these investments will generate attractive returns over the coming years, as market participants begin to understand and appreciate their material growth potential and cash generation.
Importantly, and as mentioned in prior letters, I continue to believe that it makes little sense to compare the Fund’s results with indices on a quarterly basis. After all, our concentration leads to higher volatility than indexes. The Fund’s long-term orientation can sometimes be at odds with maximizing short-term performance, and I will always focus on the former. We should judge returns over a multi-year period. On that basis, I am optimistic that our portfolio will continue to deliver attractive results.
Current positioning
At quarter-end, the Fund’s top five positions remained Basic-Fit (OTCPK:BSFFF), Caesars Entertainment (CZR), dentalcorp (DNTL:CA), IWG (OTCPK:IWGFF) and Limbach Holdings (LMB). Together, these holdings accounted for slightly more than 60% of capital.
New opportunistic position – ParkerVision (OTC:PRKR)
During the third quarter, the Fund initiated an opportunistic investment in ParkerVision Inc (OTC:PRKR) after the company received a highly favorable ruling from the Federal Circuity Court of Appeals in its longstanding litigation against Qualcomm Inc (QCOM).
Based on the ruling, I believe that there is a high chance that the case will go to trial in early 2025 and that PRKR should prevail. This could lead to a multi-billion-dollar award, compared to the Fund’s cost which implied a fully diluted market cap of under $50 million.
Importantly, PRKR’s infringement case is very strong and is significantly reinforced by QCOM internal emails, including one that characterizes PRKR’s technology as a “holy grail” invention and another that says that “it’s going to be very difficult for anybody to use this technique without stepping on one or more of their (PRKR’s patent) claims.”
Additionally, a multi-billion award could be significantly increased (by up to 3x) if QCOM is found to have willfully infringed PRKR patents. Given that QCOM internal emails show awareness of a key PRKR patent in this case, that it signed special NDAs and was provided tutorials and working prototypes of PRKR’s technology, the case for enhancement of damages is strong.
Lastly, there is significant upside to PRKR from its other cases against Apple (AAPL), LG, MediaTek (OTCPK:MDTTF), NXP (NXPI), Realtek, TCL (OTCPK:TCLHF), Texas Instruments (TXN) and potentially others. At least five of these cases are expected to go to trial in 2025, with the aggregate potential recoveries in the many hundreds of millions of dollars.
I allocated approximately 1.5% of the Fund’s capital to this investment at an average cost in the low 30 cent range. I believe we can make 20-50x our investment if things unfold as I expect. As with all opportunistic investments, I sized PRKR with the understanding that there is significant risk of total loss.
This opportunity was first flagged to me by Dan Lewis of GEM Partners, who has been involved for over a decade and spent significant time helping me get up to speed on the idea. With his help, I put together a more detailed write-up of the investment, which you can find here. I also highly encourage you to watch this video, created by PRKR to explain why its case is so strong.
Outlook
As mentioned earlier in the letter, investors are worried that the Fed waited too long to cut rates and that an economic slowdown is inevitable. This worry is a bit surprising to me given that we always knew the Fed was going to defer cutting until things slowed.
To repeat what I have said often in the past two years, Powell wants to be remembered as Fed Chair Volker, not Burns. The former crushed inflation while the latter let it run rampant. This means that Powell will keep rates as high as he can for as long as he can, or until we see a looming slowdown.
While economic slowdowns are never a good thing, they tend to be much more manageable when private sector leverage is low, as it is today. This is because income statements can be repaired more quickly than balance sheets in a recovery. Based on recent history, any coming recession would likely be met with lower rates and fiscal stimulus, which would lead to increased investment and consumption. Accordingly, income statements would improve, and such a recession would probably be short and shallow, with the resulting recovery swift and strong. This is in stark contrast to 2008, when private sector leverage was high, and a long period of deleveraging was required even after incomes started to recover.
Of course, federal government debt is in a more worrisome place today and fiscal deficits continue running at levels that are too high. However, with unlimited power to print and/or borrow, and no apparent willingness to reduce deficits, government spending isn’t getting cut anytime soon.
Accordingly, my base case is for private sector investment and consumption to be stimulated when the economy slows but be swiftly curtailed when it accelerates. Government spending will remain steady. Based on this view, I expect the economy to toe the line between over-expansion and recession.
While this may seem like a scary place for investors, it is likely the best possible outcome for risk assets over the medium term. As such, I continue to believe the best way to protect and grow the Fund’s capital is to stay the course.
As always, I continue to love what we own and am looking forward to seeing what the future has in store for us. Thank you for your support and confidence.
Sincerely,
Yaron Naymark
Footnotes
1 Performance data is presented for the Fund’s Class A Interests, and is net of any accrued incentive allocation, management fees and other applicable expenses (as disclosed in the Fund’s Confidential Private Offering Memorandum), include the reinvestment of dividends, interest and capital gains, and assume an investment from inception. Returns for month-end and year-to-date 2024 are estimated, and un-audited. For investor specific returns, please refer to your capital statements. Due to the format of data available for the time periods indicated, net returns are difficult to calculate precisely. Please see the last page for important disclosure information.
2 Performance Data is presented for the Fund’s Class A Interests, and are net of any accrued incentive allocation, management fees and other applicable expenses (as disclosed in the Fund’s Confidential Private Offering Memorandum), include the reinvestment of dividends, interest and capital gains, and assume an investment from inception. Returns for month-end and year to date 2024 are estimated, and un-audited. For investor specific returns, please refer to your capital statements. Due to the format of data available for the time periods indicated, net returns are difficult to calculate precisely. Please see the last page for important disclosure information.
IMPORTANT DISCLOSURES
In general. This disclaimer applies to this document and the verbal or written comments of any person presenting it (collectively, the ” Report”). The information contained in this Report is provided for informational purposes only and does not contain certain material information about 1 Main Capital Partners, L.P. (the ” Fund”), including important disclosures and risk factors associated with an investment in the Fund, and no representation or warranty is made concerning the completeness or accuracy of this information. To the extent that you rely on the Report in connection with an investment decision, you do so at your own risk. Certain information contained herein was obtained from or provided by third-party sources; although such information is believed to be accurate, it has not been independently verified. The information in the Report is provided to you as of the dates indicated and 1 Main Capital Management, LLC and its affiliates (collectively, the ” Manager”) do not intend to update the information after its distribution, even in the event the information becomes materially inaccurate.
No offer to purchase or sell securities. This Report does not constitute an offer to sell, or the solicitation of an offer to buy, and may not be relied upon in connection with the purchase of any security, including an interest in the Fund or any other fund managed by the Manager. Any such offer would only be made by means of such Fund’s formal private placement documents, the terms of which shall govern in all respects.
Performance Information. Unless otherwise noted, any performance numbers used in the Report are for the Fund’s Class A Interests, and are net of any accrued incentive allocation, management fees and other applicable expenses, include the reinvestment of dividends, interest and capital gains, and assume an investment from inception of such Class. As such, the performance numbers do not reflect the performance of any particular investor’s interest and you should not rely on it as a statement of your actual return.
Past performance. In all cases where historical performance is presented, please note that past performance is not a reliable indicator of future results and should not be relied upon as the basis for making an investment decision.
Risk of loss. An investment in the Fund will be highly speculative, and there can be no assurance that the Fund’s investment objective will be achieved. Investors must be prepared to bear the risk of a total loss of their invested capital.
Portfolio Guidelines/Construction. Information contained in this Report, especially as it pertains to portfolio characteristics, construction, profiles or investment strategies or objectives, reflects the Manager’s current thinking based on normal market conditions, and may be modified in response to the Manager’s perception of changing market conditions, opportunities or otherwise, in the Manager’s sole discretion, without further notice to you. Any target strategies, objectives or parameters are not projections or predictions and are presented solely for your information. No assurance is given that the Fund will achieve its investment strategies, objectives or parameters.
Index Performance. The index comparisons are provided for informational purposes only. The S&P 500 Total Return Index (SPXT) is a capitalization weighted index that is designed to measure the performance of the broad U.S. economy through changes in the aggregate market value of 500 stocks representing all major industries. There are significant differences between the Fund and the index referenced, including,
but not limited to, risk profile, liquidity, volatility and asset composition. The index reflects the reinvestment of dividends and other income, are unmanaged, and do not reflect a deduction for advisory fees. An investor may not invest directly into an index. For the foregoing and other reasons, the performance of the index may not be comparable to the Fund’s and should not be relied upon in making an investment decision with respect to the Fund.
No tax, legal, accounting or investment advice. The Report is not intended to provide, and should not be relied upon for, tax, legal, accounting or investment advice.
Logos, trade names, trademarks and copyrights. Certain logos, trade names, trademarks and/or copyrights (collectively, ” Marks”) contained herein are included for identification and informational purposes only. Such Marks may be owned by companies or persons that are not affiliated with the Manager or any the Manager managed fund and no claim is made that any such company or person has sponsored or endorsed the use of such Marks in the Report.
Confidentiality/Distribution of the Report. The information in this Report is confidential. By accepting any portion of the Report, you agree that you will treat the Report confidentially. It is intended only for the use of the person to whom it is given and the Manager expressly prohibits its redistribution without the Manager’s prior written consent. The Report is not intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution or use is contrary to law, regulation or rule.
Click to enlarge
Original Post
Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.
Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.
