STAGE 3 Risk

“High net worth person” means:-
  • (a) an individual whose net worth is at least CI$800,000 or its equivalent in any other currency; or
  • (b)any person that has total assets of not less than CI$4,000,000 or its equivalent in any other currency.
“Sophisticated person” means a person:-
  • (a) regulated by the Authority;
  • (b) regulated by a recognised overseas Authority;
  • (c) any of whose securities are listed on a recognised securities exchange; or
  • (d) who:-
    • (i) by virtue of knowledge and experience in financial and business matters is reasonably to be regarded as capable of evaluating the merits of a proposed transaction; and
    • (ii) participates in a transaction with a value or in monetary amounts of at least CI$80,000 or its equivalent in any other currency, in the case of each single transaction.

STAGE 3 is to look at the risk of investing in the business. Risk can manifest itself in many respects. We avoid firms with high financial leverage where interest is not covered by a wide margin from operating earnings. We also usually look for an even higher level of interest coverage where businesses also have high operating leverage, i.e. high fixed costs that result in large swings in profitability on much smaller changes in sales. Businesses with either long-term contracts or relatively stable demand for their products and services tend to have higher visibility in earnings. We prefer to invest in such businesses as they are easier to value using our appraisal approach. Over the years, we have developed a number of biases based on experience of what works.

• We like to back managers whose reputation is more important to them than how much money they make. One way of demonstrating this is for the manager of a fund to cap the fund’s size, or for the senior management to become wealthy alongside shareholders by being paid relatively low salaries but being large shareholders in they company they manage.

• Conversely, we dislike extravagant option compensation schemes. Our favourite investments are investment holding companies trading at large discounts to NAV which are heavily owned or controlled by the person or family that chairs it, where there is a long-term track record of the dominant shareholder compounding NAV over many years at rates significantly higher than stock market index returns, while treating all shareholders equally.

• We screen for buying by company insiders, spin-offs, and search for opportunities using various quantitative valuation parameters that have historically generated profitable investment opportunities. Likewise, we shy away from companies with large insider selling or which sell at high multiples of normalised earnings or premiums to NAV in the case of asset-based investments.