Alphyn Capital Management, an investment management firm, published its fourth-quarter 2020 Investor Letter – a copy of which can be downloaded here. A net return of 17.2% was recorded by the fund for the Q4 of 2020, above its S&P 500 benchmark that returned 11.7%. You can view the fund’s top 10 holdings to have a peek at their top bets for 2021.
Alphyn Capital Management, in their Q4 2020 Investor Letter said that they placed a new position in a Special Purpose Acquisition Company, Oaktree Acquisition Corp. II (NYSE: OACB), because of the its merger with Hims and Hers Ltd, a rising telehealth company. Oaktree Acquisition Corp. II is a blank check company that currently has a $322.5 million market cap. For the past month, OACB delivered a -0.88% return and settled at $10.32 per share at the closing of January 27th.
Here is what Alphyn Capital Management has to say about Oaktree Acquisition Corp. II in their investor letter:
“Our new position is in Oaktree Acquisition Corp, a Special Purpose Acquisition Company (SPAC). We invested in OAC after it announced its intention to purchase Hims and Hers Ltd. a fast growing telehealth company. SPACs raise money from investors, following which they have a set window (typically 2 years) within which they must complete an acquisition of a private company or dissolve and return funds to investors. Investors’ funds are held in trust earning interest. When the SPAC announces it has found a target, investors are given the option to redeem their shares for the trust value of their initial investment, plus accumulated interest. I chose to invest in OAC given the quality of Oaktree as a sponsor with high integrity and significant resources to execute the deal, my perception of the quality of the target, and our entry price of approximately $10.35/share, which is a fraction above the cash secured trust price of $10/share. This was a lower risk opportunity with the potential for significant returns.
Oaktree have elegantly summarized the investment merits: “Our thesis is underpinned by three key points. Number one – Hims and Hers has a unique, hard to replicate, and highly-scalable platform with a massive opportunity set in front of it. Number two – we have achieved an attractive transaction structure with an exceptional management team and leading institutional shareholders who are rolling virtually all of their stock, forging strong alignment for future value creation. Number three – we think it’s a compelling entry point at more than a 50% discount to its closest public peers despite boasting similar or better growth profile and margin structure than those peers.”
Hims lets patients set up virtual appointments with licensed doctors for conditions such as hair loss (a $3bn market), erectile disfunction (a $4bn market), anxiety & depression (a $14bn market), and dermatology (a $44bn market). These conditions are often stigmatized, and frequently treated with repeat ongoing prescriptions, such as Viagra or a generic equivalent. They are therefore attractive markets for Hims as patients prefer the relative anonymity of remote consultations, and prescriptions generate recurring high margin revenue. Furthermore, the markets are large, providing Hims very long runways for growth. The company states that as the patient base grows and gets older, there is scope to grow into adjacent markets such as primary care, sleep, fertility, diabetes, and cholesterol.
Hims targets the millennial age group with high quality branding and marketing. This has encouraged word-ofmouth referrals, resulting in an attractive 3x 3-year LTV-to-CAC return ratio. The company has achieved strong “product-market fit,” with a high NPS score of 65, and rapid revenue growth. Founded in 2017, Hims generated $1m in sales in its first week of operation and has grown annual revenue from $27m in 2018, to $83m in 2019, with run-rate revenue of over $160m for 2020 (based on Q3 annualized numbers). This is a compound annual growth rate of over 140%. Revenues grew 91% in Q3 2020 with attractive gross margins of 76% (selling generic prescription medications is a good business). The company is forecasting EBITDA break even by 2022, assuming 30% per year revenue growth (a big haircut to their historic growth).
Hims has built a robust platform to support this future growth and to provide a high standard of care to patients, using algorithms and processes to verify patient information, link patients with credentialed doctors, and provide continuity of care with personalized follow-ups. To counter the risk of abuse of the system and what some might call “restaurant-menu medicine,” the company has built processes into the system to ensure doctors comply with evidence-based clinical guidelines.
Finally, Hims has a high quality team. For example, Andrew Dudam, founder and CEO, is a serial entrepreneur and early stage investor who previously co-founded Atomic, a $600m VC fund with backing from Peter Thiel. Dr Pat Carroll, Chief Medical Officer, was former Group Vice President/Chief Medical Officer at Walgreens where he oversaw the retail clinic business unit as well as clinical programs and health system alliance. Lynne Chou O’Keefe, new board member, is an experienced life sciences VC (founder of Define Ventures, former partner in the life sciences group at Kleiner Perkins, former telehealth company Livongo board member), and David Wells, also a new board member, was former CFO at Netflix and provides strong consumer internet experience.
While I recognize the potential for the company (it is clear from hearing him speak that founder and CEO Andrew Dudam believes there is scope to grow a $20bn brand similar to public competitor Teladoc), Hims is obviously an earlier stage company valued at a relatively high multiple of sales. Moreover, the telehealth space is still emerging, with the likes of Amazon showing keen interest, which presents some risk.
Furthermore, general SPAC dynamics could impact the value of our shares (through no fault of Oaktree or Hims). SPACs raised $83bn in gross proceeds from 248 IPOs, and there is undoubtedly some frothiness in this part of the market. Many SPACs, often backed by high profile “celebrity” investors and sports personalities, have had their share prices run up ahead of any deal announcement. Some have purchased target companies at aggressive valuations. Lastly, SPACs in aggregate have had a poor post-merger share price performance record. The reasons for this are numerous. For example, SPACs’ limited window within which to close a deal can set up poor incentives to rush to buy a sub-optimal company. Sponsors typically receive a 20% promote and warrants which dilute public shareholders. Several hedge funds have adopted a practice of redeeming shares to generate low risk returns on cash, while keeping warrants as a “free option” should the post-acquisition entity perform well in the stock market, which can result in the need to raise additional capital to complete the deal, diluting remaining shareholders.
Given the above, I feel it important to take a defensive approach to the investment. Having secured an attractive entry point, I will be ready to stop out aggressively to preserve capital and/or profits.”
OACB delivered a -0.10% return YTD. Our calculations show that Oaktree Acquisition Corp. II (NYSE: OACB) does not belong in our list of the 30 most popular stocks among hedge funds.
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