SEC - Senvest Capital

[oddballstocks]

Would anyone know what "non-controlling interests" is all about?  It looks like these interests received $11.1M last quarter while there was no dividend to regular share-holders.  Is that related to management compensation?

 

Edit:  Never mind, I think I found it. 

 

The Company consolidates the RIMA Senvest Mangement LLC, entity that serves as the investment manager of Senvest Partners and Senvest Israel Partners. The portion of the expected residual returns of the entity that does not belong to the Company is reflected as non-controlling interest on the statement offinancial position. This non-controlling interest is owned by an executive of the Company and totalled $64.8 million as at September 30, 2014 from $64.9 million as at December 31, 2013.

 

You really need to go back a few years in the annual reports.  There is the Senvest management company, the funds, and RIMA.  Last year or so the Canadian government decided that Senvest should be consolidated with their funds.  This really convoluted their financial statements.  It also 'hid' their fees paid from the funds.  Because this is now considered an intra-company event (fund paying management company).

 

 

[writser]

I was just reading the latest quarterly to verify some stuff because I believe these shares are still an attractive bet. The Senvest portfolio is up 6% or something since september and the CAD is down 3%. So according to my crappy model BVPS should be around $244 but shares are trading at $143, a 40% discount.

 

Something interesting popped up while browsing the quarterly: if you look at page 13 'currency risks' they show that they have large net liabilities in JPY ($116m) and CHF ($49m). They've had this exposure for a few quarters. Does anybody have a clue about what is going on here? At first I assumed these were hedges for equity positions but there are no corresponding 'financial assets'. I might be missing something.

 

edit: IR just shot me an e-mail: these are actual short positions. Not sure I like that but given the recent JPY move it seems to work out so far.

[biaggio]

http://online.barrons.com/articles/senvest-partners-buyers-on-bad-news-1422074408?mod=rss_barrons_this_week_magazine&mod=WSJ_Stocks_MIDDLEbarrons

 

Senvest Partners: Buyers On Bad News

 

Canadian hedge fund Senvest Partners has notched top performance by picking up out-of-favor stocks including a Greek oil company.

 

 

[yitech]

I was just reading the latest quarterly to verify some stuff because I believe these shares are still an attractive bet. The Senvest portfolio is up 6% or something since september and the CAD is down 3%. So according to my crappy model BVPS should be around $244 but shares are trading at $143, a 40% discount.

 

Something interesting popped up while browsing the quarterly: if you look at page 13 'currency risks' they show that they have large net liabilities in JPY ($116m) and CHF ($49m). They've had this exposure for a few quarters. Does anybody have a clue about what is going on here? At first I assumed these were hedges for equity positions but there are no corresponding 'financial assets'. I might be missing something.

 

edit: IR just shot me an e-mail: these are actual short positions. Not sure I like that but given the recent JPY move it seems to work out so far.

 

$49m short in CHF wasn't that bright in hindsight...

[writser]

That was horrible indeed! As far as I am concerned they shouldn't dabble into macro.

 

But it is not really material to my thesis. I am not convinced they are beating the market by a huge margin anyway (if at all) despite their track record. They seem to trade quite a bit and have a diversified portfolio, including some speculative stuff I don't like at all (for example Senomyx). Basically I consider them to be leveraged long the market (~130% as per the article above) so I expect them to outperform in good years and underperform in bad years.

 

But you can buy this beta at a nice discount, pocket management fees and they are trying to buy back shares. A tender offer at some point wouldn't surprise me. As an added bonus, maybe they deliver some alpha after all. Everything considered it is good enough for me. It can go up fast but in a crisis it probably won't do well. Size accordingly.

 

Also you can pretty much model the performance of their portfolio in real time so you can try 'trading' the discount to NAV.

[writser]

I increased my position today. Since the latest filing (9/30):

 

- According to my very crappy tracking sheet their portfolio is up roughly 14%, CAD is down 13% for a total return of roughly up 25% (consider this ballpark).

- According to their own website fund NAV has increased ~18% until January, 30 (link).

- Their latest 13F has been released (link). They bought a huge stake in Fiat and Depomed still is one of their largest positions. These names are up roughly 20% and 30% in February. My rough guess is that their portfolio is up another 5% in February.

 

Book value at the latest filing was $221. I reckon it is up roughly 20% -25% since (my assumption is that fees are roughly covering costs) so somewhere around $270. The discount to estimated NAV is almost 40%, which is large, both absolutely and when seen from a historical perspective. What am I missing?

[writser]

Senvest has been receiving some (mixed) attention lately. A couple of articles from the past few weeks:

 

http://bovinebear.blogspot.nl/2015/02/why-i-bought-senvest-capital.html

http://alphavulture.com/2015/03/05/senvest-invest-in-a-great-hedge-fund-at-a-big-discount/

http://seekingalpha.com/article/2999946-senvest-serial-capital-compounder-trading-at-54-percent-of-tbv-multi-year-low-with-near-term-catalysts

[randomep]

Senvest has been receiving some (mixed) attention lately. A couple of articles from the past few weeks:

 

http://bovinebear.blogspot.nl/2015/02/why-i-bought-senvest-capital.html

http://alphavulture.com/2015/03/05/senvest-invest-in-a-great-hedge-fund-at-a-big-discount/

http://seekingalpha.com/article/2999946-senvest-serial-capital-compounder-trading-at-54-percent-of-tbv-multi-year-low-with-near-term-catalysts

 

Just adding to the fire. I am emphasizing my (bovinebear) bullish position. Looking at most recent data. In Q3 2014 - when it had a loss - the company paid out only $1M in salary.  The fixed salary costs are not big and from end of Q3 to today the Senvest investment gains are huge.  I estimate that right now the TBV/shr is about CDN$330. Thanks for the seeking alpha article. I haven't had time to read it but it seems to also say the thing.

 

I often have this wet dream of going back to 1986 to buy MSFT. But when I wake up I remind myself this isn't 1986. But there are some MSFTs today in disguise. We'll know later in hindsight. But Senvest is the cheapest stock I have seen in the last year......

 

 

 

[Hielko]

Looking at quarterly data w.r.t. to employee expenses seems be pretty useless, in some quarters they are even negative (presumably when an accrued bonus is reversed). But try to answer this question: why were employee expenses more than $12 million in 2012, a year in which the fund only managed to claw back to its high water mark? Ignoring all other expenses that alone gets you to a 3.8% expense ratio (measured against average book value). Or what about this question: what was the year with the lowest salary expenses as a percentage of book value? Can you find a whole year with low costs?

[Guest Schwab711]

Looking at quarterly data w.r.t. to employee expenses seems be pretty useless, in some quarters they are even negative (presumably when an accrued bonus is reversed). But try to answer this question: why were employee expenses more than $12 million in 2012, a year in which the fund only managed to claw back to its high water mark? Ignoring all other expenses that alone gets you to a 3.8% expense ratio (measured against average book value). Or what about this question: what was the year with the lowest salary expenses as a percentage of book value? Can you find a whole year with low costs?

 

Good catch Hielko. For investors, if the "normal" discount is 65% - 70% of TBV yet the current discount is just 54% then isn't it the same discount as a stock with a normal P/E range of 11.7 - 13.0 selling for 10x? The 1.16 - 1.3 multiple really doesn't provide much upside to the actual operating results of Senvest in the long-run. What leads folks to believe Senvest can "compound" capital faster than a market index after 40% of fees is taken out (on what appears to be inflated salaries).

 

Compounded Long-run Returns = ((1 + PM) * (1 + OR)^N)) ^ (1/N)

 

N = years held

PM = Price Multiple expansion during that period

OR = Operating Returns or TBV returns (compounded) over period N

 

Then you really need PM = .3 (30%; TBV = 70% * NAV) and N <= 2 years to have any shot of outperforming Senvest itself.

[randomep]

Looking at quarterly data w.r.t. to employee expenses seems be pretty useless, in some quarters they are even negative (presumably when an accrued bonus is reversed). But try to answer this question: why were employee expenses more than $12 million in 2012, a year in which the fund only managed to claw back to its high water mark? Ignoring all other expenses that alone gets you to a 3.8% expense ratio (measured against average book value). Or what about this question: what was the year with the lowest salary expenses as a percentage of book value? Can you find a whole year with low costs?

 

Ok you have a point. We should look at annual expenses. The 2012 expense of 12M is ok today IF that is independent of size. With that assumption, the fund is probably almost 3x the size in 2012, so your 3.8% becomes less than 1.5%. Also they don't just manage funds that do what the average joe can. The main fund is long / short, that is not something I dare to employ on my own. The other fund focuses on Israel, which I found is extremely difficult and expensive to do for average joe in north america.

 

Oh and did I mention it sells for 1/2 book?

 

 

[oddballstocks]

I own it and have owned it for a few years.  I believe the discount is similar to where I purchased, except it's appreciated in the meantime.

 

A few thoughts.  They own a lot of private companies such as the Talmer Bank investment.  They purchased into them as a private company pre-IPO.  I believe this has been the case in the past as well.  It's possible to get market beating returns by participating in recaps like this.

 

The company has become much harder to dig through once they were forced to consolidate their funds into their own financials.

 

My investment was based on the idea that as an investor you own a part of the management company and the management company has invested in some of the funds.  An investor gets to participate in a hedge fund at a lower fee level compared to a partner in the fund.  If this was at 1x TBV I wouldn't be looking, but the discount makes it attractive.

 

A side note, I really like their annual reports and letters.  They're printed on very nice heavyweight paper and they're a good read.

[Hielko]

Looking at quarterly data w.r.t. to employee expenses seems be pretty useless, in some quarters they are even negative (presumably when an accrued bonus is reversed). But try to answer this question: why were employee expenses more than $12 million in 2012, a year in which the fund only managed to claw back to its high water mark? Ignoring all other expenses that alone gets you to a 3.8% expense ratio (measured against average book value). Or what about this question: what was the year with the lowest salary expenses as a percentage of book value? Can you find a whole year with low costs?

 

Ok you have a point. We should look at annual expenses. The 2012 expense of 12M is ok today IF that is independent of size. With that assumption, the fund is probably almost 3x the size in 2012, so your 3.8% becomes less than 1.5%. Also they don't just manage funds that do what the average joe can. The main fund is long / short, that is not something I dare to employ on my own. The other fund focuses on Israel, which I found is extremely difficult and expensive to do for average joe in north america.

 

Oh and did I mention it sells for 1/2 book?

Assuming that salary expenses don't increase based on size is pretty optimistic. Think about it, what has happened historically? Just look at a couple of older reports, and you'll see that a couple of years ago, when they were smaller expenses were also a lot lower. So why would there now suddenly be an inflection point?

 

In addition to this some salary expenses are clearly based on size since the CEO has bonuses that are expressed as a percentage of book value. We don't know how other employees get paid, but given the business a structure where they get for example bonuses based on how much money they made for the firm in absolute term wouldn't be too uncommon. Or perhaps a bonus pool based on the profitability of the firm.

 

And yes, the fact that it sells at 1/2 book is nice. But perhaps it should sell at that level given the expense level, or even lower... I looked at this because I really wanted this to be a good idea, but when you pay fees like this they do need to be investment geniuses in order for this stock to be worth book value (or more).

[Hielko]

My investment was based on the idea that as an investor you own a part of the management company and the management company has invested in some of the funds.  An investor gets to participate in a hedge fund at a lower fee level compared to a partner in the fund.  If this was at 1x TBV I wouldn't be looking, but the discount makes it attractive.

This hasn't been true so far historically. As an owner of the management company you pay all operating expenses of the management company, including the large salary expenses, while you only earn a little bit on outside AUM because they don't have a lot of outside capital and the company only gets 60% of those fees.

[frommi]

My investment was based on the idea that as an investor you own a part of the management company and the management company has invested in some of the funds.  An investor gets to participate in a hedge fund at a lower fee level compared to a partner in the fund.  If this was at 1x TBV I wouldn't be looking, but the discount makes it attractive.

This hasn't been true so far historically. As an owner of the management company you pay all operating expenses of the management company, including the large salary expenses, while you only earn a little bit on outside AUM because they don't have a lot of outside capital and the company only gets 60% of those fees.

 

With the current numbers the TER of a senvest stock owner equals around ~3.5% when they just get market returns (that is around the employee bonus of 3.5% of net income, the transaction and other costs are covered with the fund fees on outside capital). The fair multiple under that scenario is 65% of bookvalue and that matches pretty much where it has traded in the past. But you are ignoring that they are value investors with a bit of leverage, so that their actual returns are better than market returns and that they are raising and compounding outside capital that will lower the expense ratio over time. You can`t look in the past for this because in the past they had no meaningful outside capital. With the current compensation structure their fair multiple will never be >100% of book, but its surely no problem to see 75-80% as fair value in the future. At the current point the discount is around 20% to fair value at 65% of book and while waiting for that discount to close the value compounds at above average percentages.

 

 

[Hielko]

How do you calculate that 3.5% number?

[frommi]

How do you calculate that 3.5% number?

 

I built a little spreadsheet with all expenses and the fees they get at different percentage returns.

 

https://docs.google.com/spreadsheets/d/1XssxA7pBxDetjh-9lScL5Z97eipZvnOeHBi1ReRZ9uo/edit?usp=sharing

 

 

[Two Coins and Widow]

As some of you may already know, the largest chunk of the book value lies in Senvest International LLC. SEC posted the scanned copy of the 2014 annual report on Friday (yesterday).

 

http://www.sec.gov/Archives/edgar/data/1069673/999999999715002763/9999999997-15-002763-index.htm

 

Senvest International’s ROE in 2014 was 19.21%, a few percentages below Senvest Partner’s return of 22.4%.

 

Senvest International and Senvest Partners have same manager Richard M and seem to have similar portfolio compositions but different. The returns from these two entities occasionally produced quite different results.

 

For this reason, technically speaking, projecting the current book value based on the monthly performance of Senvest Partners without knowing how Senvest Internatioanl’s performance may not be accurate and could be materially wrong.

 

Understanding the composition of TER is very complicated. Basically, according to my calculation, the shareholders bear the operating costs, excluding base salaries for all employees, and 3.5 to 7% of EBT. In 2011 when there was no performance fee nor bonus paid, the management fee collected from the outside capital was greater than the employee benefit expense. TER is usually high because of high bonus with high performance. I am fine with that. The only issue is that unlike Senvest Partners, there is no water mark at the company level. As long as EBT is positive, the bonus pool will be funded regardless of the past performance. This is why 2012, 2009 TER was high. Well… CEOs of ordinary corporations are getting paid richly when their firms are losing years in a row.

 

On my posting, I covered basic overview of the company structure / comparison of historical performances between BVPS, Senvest International, and Senvest Partners  / historical TERs

 

https://twocoinsandwidow.wordpress.com/2015/03/21/senvest-capital/

 

[Hielko]

Thanks for the work you put into the post.

 

But it seems you fail to account for the fact that the company needs to pay 40% of the management fees to the CEO. For example in 2012 total management fees were indeed $2.7 million, but only $1.6 million was attributable to Senvest shareholders. That should have a major effect on your calculated TERs.

[Two Coins and Widow]

Thanks for the work you put into the post.

 

But it seems you fail to account for the fact that the company needs to pay 40% of the management fees to the CEO. For example in 2012 total management fees were indeed $2.7 million, but only $1.6 million was attributable to Senvest shareholders. That should have a major effect on your calculated TERs.

 

Thanks Hielko,

 

I noted on my posting; Until 2012, the company recorded 100% of the fees as “Management fees” as part of the revenues and expensed 40% as part of “Employee benefit expense.” Yes, MGT Fee includes that 40% (In my calculation, I multiplied SFM Fee (12% of MGT Fee) by 100/12, which was in line with MGT Fee the company reported). The operating costs include that 40% as well. Therefore, i think it is correct to deduct 100% of MGT Fee from the operating costs.

[Hielko]

The other 40% is not recorded as employee benefit expenses, but as part of income attributable to minority interests. So it's not reflected in the costs of your table. This is the result of the fact that Senvest fully consolidates the results of RIMA, but only owns 60%. From the 2013 Annual Report:

 

The Company consolidates the RIMA Senvest Mangement

LLC, entity that serves as the investment manager of Senvest

Partners and Senvest Israel Partners. The portion of the

expected residual returns of the entity that does not belong

to the Company is reflected as non-controlling interest on

the statement of financial position. This non-controlling

interest is owned by an executive of the Company and

totalled $64.9 million as at December 31, 2013 from $27.4

million as at December 31, 2012.

The equity in RIMA is the result of management and performance fees earned in previous years that are reinvested in the funds.

[frommi]

The other 40% is not recorded as employee benefit expenses, but as part of income attributable to minority interests. So it's not reflected in the costs of your table. This is the result of the fact that Senvest fully consolidates the results of RIMA, but only owns 60%. From the 2013 Annual Report:

 

The Company consolidates the RIMA Senvest Mangement

LLC, entity that serves as the investment manager of Senvest

Partners and Senvest Israel Partners. The portion of the

expected residual returns of the entity that does not belong

to the Company is reflected as non-controlling interest on

the statement of financial position. This non-controlling

interest is owned by an executive of the Company and

totalled $64.9 million as at December 31, 2013 from $27.4

million as at December 31, 2012.

The equity in RIMA is the result of management and performance fees earned in previous years that are reinvested in the funds.

 

Thats your interpretation but the numbers don`t match up. By my calculation for 2013 the 40% are part of employee expenses and this statement from Senvest doesn`t really negate that.

 

2013:

190 million CAD outside capital

38 million CAD fees = RM 40% = 15 million

 

243 million CAD net income (*0.07) = ~17 million bonus pool

base payment is around 1.2-1.4 million per quarter = ~5 million

 

Employee expenses in 2013 were 39 million CAD, i can`t see where this big number should come from when the 40% are not included.

 

 

[Two Coins and Widow]

The other 40% is not recorded as employee benefit expenses, but as part of income attributable to minority interests. So it's not reflected in the costs of your table. This is the result of the fact that Senvest fully consolidates the results of RIMA, but only owns 60%. From the 2013 Annual Report:

 

The Company consolidates the RIMA Senvest Mangement

LLC, entity that serves as the investment manager of Senvest

Partners and Senvest Israel Partners. The portion of the

expected residual returns of the entity that does not belong

to the Company is reflected as non-controlling interest on

the statement of financial position. This non-controlling

interest is owned by an executive of the Company and

totalled $64.9 million as at December 31, 2013 from $27.4

million as at December 31, 2012.

The equity in RIMA is the result of management and performance fees earned in previous years that are reinvested in the funds.

 

Management Compensation according to Proxy 2013

 

Sixty percent of such Annual Fee is in turn paid by the SE to the Company as a sub-advisor fee (the “Sub-Advisor Fee”) for services rendered by the Company in its capacity as a sub-advisor to the two investment funds. The 40% of the Annual Fee that is retained by the SE after payment of the Sub-Advisor Fee is reported as remuneration to Mr. Mashaal. The Company consolidates the results of the SE in its consolidated financial statements.

 

Therefore, the remuneration to Richard should be also consolidated. Meaning, if SE reports this amount as remuneration (meaning “costs”), this costs should be consolidated.

 

Here is the calculation (Proxy)

 

Victor + Richard + Frank + George

2013 6.4 +21.4 (0.34 Base + 12 (40%) + 9 (From 7% EBT)) + 1.3 + 2.3 = 31.40 versus Reported Total Compensation 43.2

2012 2.5 + 4.5 + 0.7 + 1.0 = 8.7 versus Reported Total Compensation 12.5

2011 0.38 + 1.4 + 0.28 + 0.28 = 2.34 versus Reported Total Compensation 2.45

 

It seems the the reunumeration (40%) is already in the total compensation?

 

Also, if the company consolidated 100% of Fee (matching principle), that 40% gotta be expensed somewhere on the income statement. I know similar discussion went on at the comment section at Alpha Vulture (link below). As the blogger claims, it could be part of income attributable to non-controlling interests. I disregarded initially because of my understanding of proxy material quoted above and that the compensation costs seemed to include that 40%.

 

http://alphavulture.com/2015/03/05/senvest-invest-in-a-great-hedge-fund-at-a-big-discount/

 

I will check with IR next week.

 

[Hielko]

The 40% of the Annual Fee that is retained by the SE after payment of the Sub-Advisor Fee is reported as remuneration to Mr. Mashaal.

I think that they are only talking here about how remuneration is reported in the proxy statement, not how it is classified in the financial statements. And I think that your example actually shows that the 40% fee is not part of total reported compensation, because in 2011: how can other employees get paid if the delta between management compensation and total compensation is just $100,000?

 

And about the accounting treatment: it makes sense that these costs show up in income attributable to minority interests. There are basically two ways to pay the 40% fees to the CEO.

 

1. Company owns 100% of RIMA, and has a contractual relationship that entitles the CEO to 40% of management fees. In this case the fees would show up as employee expenses on the income statement.

 

2. The company owns 60% of RIMA, and the CEO owns the other 40%. Because of that ownership he has a claim on 40% of the management fees, and these would show up as income attributable to minority interests.

 

But since we know that the company only partially owns RIMA - we know for a fact that there is a large income attributable minority interests component! - you know that we are probably looking at option #2 (with some creativity I guess you could structure something that mixes these options, but that would seem to be pretty pointless to me).

[Two Coins and Widow]

Update:

 

Following information was confirmed with IR on March 23, 2015.

 

RIMA is 100% owned by Richard Mashaal. Actually, when I went back to the annual reports in 1990's, I discovered that it mentioned the entity (which is RIMA) was wholly owned by the executive. Also, the current agreement (12% to SFM, 48% to Senvest Capital, and 40% to Richard) can be modified in any given year. At one point in the past, it was 80% to SFM.

 

Please note that 40% of RIMA MGT Fee paid to Richard Mashaal was reported as part of Non-controlling interest on the income statement. NCI reflect the current year fees and the change in the valuation of the reinvested fees. Therefore actual total operating costs would be the reported op cost + 40% of Fee.

 

It seems that the bonuses for non-executive employees are also significant in good years.

 

I revised some texts on my initial posting with strikethrough and two tables. TER using year end BV increased accordingly by 0.5 to 2 percentage points (depends on performance).

 

Thanks Hielko for your input!