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Value-Oriented Corsair Capital Comments on Strong Q2, 5 Key Positions

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Corsair Capital Management L.P., run by co-portfolio managers Jay Petschek and Steven Major, operates as a value-oriented, event-driven, long/short equity investment firm. The asset manager predominantly focuses on small- to mid-cap companies in the United States and Canada which are undergoing strategic or structural changes and thus have impending catalysts. The two portfolio managers have decades of experience as value investors, with their investment philosophy paying off quite handsomely over the years. Corsair Capital has generated a compounded net annual return of 12.6% since its inception in January 1991, outpacing the 9.8% mark generated by the S&P 500 Index over the same time span. Meanwhile, Corsair Capital delivered a net-of-fees return of 1.3% for the second quarter of this year, bringing the investment firm’s return for the first half of 2016 above water to 0.6%.

In a fresh quarterly letter to investors, New York-based Corsair Capital Management L.P. offered a rather interesting and unique explanation as for why U.S. equities keep going higher despite mounting economic uncertainty and a continued slump in corporate profit. The asset management firm ascribes the positive performance of U.S. equities to the low interest rate environment, stating:

“The U.S. stock market is currently trading at approximately 16x-17x next year’s earnings. This equates to an earning’s yield of approximately 6% after-tax and 8% on a pre-tax basis – a big gap to 10-year treasury bonds yielding just 1.5%. As long as investors believe that stocks will generally continue to earn what they currently do (even with zero growth), equities will seem to be mathematically quite cheap compared to bonds. Of course, just because bonds are expensive doesn’t mean investors have to invest in stocks. However, if not stocks, where will investors turn? It just seems the answer is TINA – there is no alternative – as all assets are historically expensive and stocks may prove to be the proverbial ‘best house in a lousy neighborhood.”

Without further ado, let’s have a look at several equity positions Corsair Capital discussed in its quarterly letter to investors.

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Jay Petschek - Corsair Capital

Diamond Resorts International Inc. (NYSE:DRII)

 – Shares Owned by Corsair Capital Management (as of March 31): 842,577

 – Value of Corsair Capital Management’s Holding (as of March 31): $20.48 Million

Corsair Capital Management L.P. upped its position in Diamond Resorts International Inc. (NYSE:DRII) by 574,302 shares during the first three months of 2016, ending the March quarter with 842,577 shares. The increased position was valued at $20.48 million and accounted for 2.8% of the value of the hedge fund’s equity portfolio. Diamond Resorts announced in late-February that it was working with an investment bank on strategic alternatives and in late-June, the operator of timeshare properties agreed to be bought by private equity firm Apollo Global Management LLC for approximately $2.2 billion. According to the aforementioned letter to investors, Corsair Capital “made DRII a core position after management announced it was pursuing strategic alternatives and we continued to add throughout Q2 as DRII continued to execute”. The New York-based firm run by Messrs. Petschek (pictured above) and Major believed the timeshare resort company “would be an ideal takeout candidate for either a strategic buyer or PE buyer”, thanks to “its low financial leverage and limited capex requirements”. Diamond Resorts shares are up by 16% thus far in 2016. Ken Griffin’s Citadel Advisors LLC owned 1.74 million shares of Diamond Resorts International Inc. (NYSE:DRII) at the end of March.

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Olin Corporation (NYSE:OLN)

 – Shares Owned by Corsair Capital Management (as of March 31): 1.10 Million

 – Value of Corsair Capital Management’s Holding (as of March 31): $19.06 Million

The value-oriented equity investment firm trimmed its stake in Olin Corporation (NYSE:OLN) by 26% during the first quarter to 1.10 million shares worth $19.06 million on March 31. The shares of the manufacturer of chlor alkali products gained 43% in the second quarter and are up by 20% year-to-date. Olin shares are 14% in the red in the past month however, as the company cut its second quarter and full-year guidance amid weak domestic caustic soda demand and falling chlorinated organic sales. However, Corsair Capital believes that “improving supply/demand dynamics in the chlor-alkali market will be a tailwind for OLN” and that the chemical maker “will over-deliver on synergies from its acquisition of Dow’s chlor-alkali assets”. In October 2015, Olin successfully consummated the acquisition of Dow Chemical Co (NYSE:DOW)’s U.S. chlor alkali and vinyl, global chlorinated organics, and global epoxy businesses. Seth Klarman’s Baupost Group LLC had 10.74 million shares of Olin Corporation (NYSE:OLN) among its holdings at the end of the first quarter.

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Let’s head to the second page of this article, where we will lay out Corsair Capital’s comments on three other prominent positions.

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