Adam Gault
Expensive Companions & Associates,
For the fourth quarter 2023, Ace River Capital Companions, L.P. (the “Fund”) returned -10.40%. Over the identical interval, the S&P 500 (SPX) and Russel 2000 (RTY) Indexes returned 10.8% and 5.2%, respectively.
Technique
My objective is to keep up a concentrated portfolio of small and micro-cap firms with distinctive benefits and development potential inside their respective industries. The goal is to carry them for the long run. Discovering such firms requires vital effort and time. Because of the shortage of appropriate alternatives, constraints on time and assets, and alternative prices, I’ll take substantial positions within the firms that meet my standards and cross my danger/reward evaluation. I don’t subscribe to vast diversification and solely analysis and comply with a restricted variety of firms deeply. I can’t spend a lot time on an organization if I’m unwilling to take a considerable place and have the conviction so as to add to that place on weak point. This strategy requires lots of analysis and endurance. There will likely be lengthy durations of inactivity with few trades, and I’ll not often maintain greater than 5 firms at a time. This technique accepts short-term volatility in pursuit of upper, long-term, tax-efficient returns.
Prime Place
The fund’s high place is RCI Hospitality (RICK). RICK is the one publicly traded proprietor of grownup nightclubs within the US. At the moment, they personal 56 golf equipment throughout 13 states and an extra 13 sports-bar eating places with the “Bombshells” idea. With few municipalities issuing new grownup leisure licenses, these companies operate as native monopolies with wonderful unit economics. With the development of two Colorado casinos underway, the lengthy runway of grownup nightclub acquisition targets, the expansion potential and spin off worth of the Bombshells idea and at last the potential upside of the “admireMe” OnlyFans sort web site, I anticipate this to stay my high place for the foreseeable future.
The latest quarter has proven identical retailer gross sales weak point within the bombshells section. M&A exercise appears to be like to be stalled by inflated 2022 revenues end result on valuation expectations for membership homeowners vs what RCI is keen to pay on a extra normalized income valuation. The CEO has initiated a value discount effort for bombshells to get it again to profitability and has been within the talks for a membership acquisition, said on the latest convention name. On this high-interest fee setting, upcoming elections and conflict exercise overseas, we are able to anticipate investor cash to stay on the sidelines close to time period, I imagine. RCI ought to make substantial buybacks over this era, and any optimistic momentum with the gaming licenses, bombshells or the admireme.com web site ought to create a pleasant tailwind sooner or later sooner or later. My thesis has not modified basically, however the worth of bombshells could also be insignificant if it continues to carry out poorly. I nonetheless really feel the corporate is properly positioned and might drive shareholder returns with no sturdy contribution from the bombshells section.
Added To Place – VOXR
Vox Royalty appears to be like to be undervalued by comparability with most different mining royalty firms. I imagine this to be a great entry level. The latest run-up of gold costs this yr ought to lead to elevated royalty income for Vox. I’ve elevated this place and can possible proceed to extend at these ranges till it turns into the second largest place within the fund. Vox appears to be like to be an awesome worth with little draw back. It has a capital mild enterprise mannequin, a big backlog of initiatives in various levels of growth to make sure income development over time and can profit from any rise in metals costs from inflation, demand, or uncertainty.
Watching – DSHK
Driveshack could possibly be at an inflection level with the completion of all costly development initiatives. I’m searching for a optimistic earnings report with its subsequent submitting, and I anticipate the inventory could reply sharply.
Thanks for studying. Please attain out for any motive.
Nicholas D’Agnillo
[email protected] | 401-499-3935
Fund Positions – In Order of Portfolio Weight
RICK, DSHK, VOXR, HZO
IMPORTANT DISCLOSURES
In Basic: This letter is for informational functions solely and is meant to supply an outline of the funding technique and efficiency of Ace River Capital Companions, L.P. The contents of this letter shouldn’t be construed as funding, authorized, tax, or different skilled recommendation.
No Supply to Buy or Promote Securities: This letter doesn’t represent a proposal to promote or a solicitation of a proposal to buy any safety or funding product. Any such supply or solicitation could solely be made by the use of supply of a confidential non-public providing memorandum.
No Tax, Authorized, Accounting or Funding Recommendation: The contents of this letter aren’t supposed to be, and shouldn’t be construed as, tax, authorized, accounting or funding recommendation. Potential buyers ought to seek the advice of with their very own advisors as to the tax, authorized, accounting or funding penalties of an funding in any product described on this letter.
Efficiency Info: The efficiency info offered on this letter relies on inside calculations and is topic to revision. Efficiency outcomes could differ relying on the timing of investments and disinvestments, in addition to different market situations.
Previous Efficiency: Previous efficiency shouldn’t be a assure of future outcomes. Several types of investments contain various levels of danger, and there will be no assurance that any particular funding will both be appropriate or worthwhile for an investor’s portfolio.
Danger of Loss: All investments contain danger and there will be no assurance that any funding technique will likely be profitable. The worth of an funding could fluctuate, and an investor could not get again the quantity invested. Modifications in financial, political or different market situations, in addition to issuer-specific occasions, could have a fabric affect on the worth of a safety or a portfolio.
Portfolio Pointers/Development: The portfolio development and funding pointers for Ace River Capital Companions, L.P. are based mostly on a proprietary funding course of that seeks to determine undervalued securities and maximize returns whereas minimizing danger. The portfolio is actively managed and could also be modified at any time with out discover to replicate adjustments in market situations or the supervisor’s evaluation of particular person safety or market prospects.
Index Efficiency: The efficiency info offered on this letter could also be in comparison with a benchmark index for functions of illustration. The benchmark index shouldn’t be supposed to symbolize the efficiency of any funding product and doesn’t replicate the bills related to the administration of an precise portfolio.
Logos, Commerce Names, Logos and Copyrights: All logos, commerce names, emblems, and copyrights referred to on this letter are the property of their respective homeowners.
Confidentiality/Distribution of the Letter: The knowledge contained on this letter has been obtained from sources believed to be dependable, however its accuracy shouldn’t be assured. This letter and its contents are confidential and supposed solely for the recipient. It might not be reproduced or redistributed with out the prior consent of Ace River Capital Companions, L.P.”
Editor’s Observe: This text discusses a number of securities that don’t commerce on a significant U.S. trade. Please pay attention to the dangers related to these shares.
