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January 23, 2012
Dear Limited Partner:
For the fourth quarter ended December 31, 2011, Corsair Capital was up an estimated
6.3%* net, after all fees and expenses, bringing our 2011 performance to -3.7%. Since
inception in January 1991, Corsair Capital`s compounded net annual return is 14.4%.
* Returns are based on investments made at fund inception and are calculated using the highest possible fee schedule. Returns for
investors in these or any of the Corsair funds are most accurately provided in the monthly capital statements.
The markets rallied as fear subsided in the fourth quarter. This is not to say that there is
now significantly less uncertainty in the world nor are there far less things to be fearful
about. Rather, it is an indication of how, at the end of the third quarter, prices in the
equity markets had over-discounted for the worst of possible outcomes, while things
seemed to be 'only bad at the time. In fact, the markets rallied literally from the day
we sent out our third quarter letter about investor fear and the possible over-discounting
of bad news, recording most of the quarter`s gain in just the following three weeks. This
relationship between stock market valuations and the macro-environment was perhaps
more succinctly summed up by veteran investment strategist, Joe Rosenberg, in an early
December Barron`s interview -- 'you can`t have both good news and cheap stock
prices.
In any case, the equity markets moved up sharply in the fourth quarter and we are glad to
have at least participated in the rally. Overall, however, 2011 was a very frustrating year
for individual stock pickers like ourselves. Correlations between stocks and most asset
classes were near record highs, seemingly subject to the whims of investors choosing
either to put 'risk on or to take 'risk off. For the year, Corsair fell somewhere
between our two benchmark indices of the Standard and Poor`s 500 and the Russell 2000
(while our more fully concentrated/invested Select Fund declined somewhat more.)
Interestingly, despite our significant outperformance of these two indices since our
This letter is not a research report or recommendation to buy or sell the securities mentioned herein. The examples herein are illustrations
of ways in which Corsair Capital Management, LLC and its affiliates have examined or may examine opportunities. Corsair Capital
Management, LLC and its affiliates may, at any time, buy or sell any of the securities mentioned in this letter and may change its long or
short position at any time without providing any notification of such changes. It should not be assumed that any trading activities pursued
in the future will be profitable and may in fact result in losses.
Corsair Capital (net) S&P 500 Russell 2000
4Q11 return 6.3% 11.8% 15.5%
YTD return -3.7% 2.1% -4.2%
Annualized since inception (1991) 14.4% 8.8% 10.1%
Total return since inception (1991) 1576% 487% 650%
This letter brought to you via MarketFolly.com
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inception 21 years ago, we have only outperformed both in a single year one-third of the
time. Thus, some years favor large capitalization corporations and some years favor
smaller ones. Meanwhile, Corsair continues to focus on companies going through
strategic change regardless of their size.
The current investing environment continues to be dominated by Europe and the
decisions by European leaders regarding refinancing their debt, getting their deficits
under control, properly capitalizing their banks and figuring how to bailout their
weakest member nations. None of these problems have easy answers and despite the
recent agreement calling for more 'Iiscal integration, specific solutions seem
lacking. Of course, at the end of the day, convincing the Germans that they should work
harder and longer to pay for Greek retirements is a definite hard sell. Thus, the
European Central Bank (the 'ECB) seems to have kicked the can down the road with
their Long Term Refinancing Operation which gives European banks access to financing
by pledging formerly non-acceptable collateral (what the Financial Times calls
quantitative easing ECB style). Not exactly a 'euro-phoric solution (and some analysts
think actually risks making the ultimate problems worse), but seemingly buys the
financial system some more time for now.
In the context of Europe`s perceived problems, the United States is a relative safe haven
and investors have flown to the safety of U.S bonds. In turn, U.S. interest rates are near
record lows (including sub 2.0% rates on the 10-year bond and sub 3.0% on the 30-year
bond) which is helping to keep mortgage rates low (buoying the moribund housing
market) and driving investors to dividend paying stocks. Meanwhile, the U.S. has also
seen a couple of signs of improvement in our economy. In late December, weekly first-
time unemployment claims dropped to 264,000 the lowest level since April 2008 and
existing home sales increased for the third month in a row. Additionally, per Citigroup`s
CEO, Vikram Pandit, banks are finally starting to see a pickup in loan demand, thus
giving some optimistic sign posts to investors.
Portfolio Update
Not too surprisingly, most of our biggest gainers in the quarter were some of our largest
losers in the third quarter. Lyondell Basell Industries ('LYB) made good on its promise
to maximize its capital structure by paying a special dividend of $4.50 per share and
once again reported better than expected earnings. Insiders, led by their lead leveraged
buyout sponsor, Apollo Group, took advantage of the stock`s dip by buying over
This letter is not a research report or recommendation to buy or sell the securities mentioned herein. The examples herein are illustrations
of ways in which Corsair Capital Management, LLC and its affiliates have examined or may examine opportunities. Corsair Capital
Management, LLC and its affiliates may, at any time, buy or sell any of the securities mentioned in this letter and may change its long or
short position at any time without providing any notification of such changes. It should not be assumed that any trading activities pursued
in the future will be profitable and may in fact result in losses.
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4,000,000 shares in the past few months. Lastly, the company highlighted new growth
projects of over $500MM in EDBITDA.
Neo-Material Technologies ('NEM) announced record third quarter net income (in
fact, more than it had reported in any previous full year) and was recently re-awarded
its full share of the 2012 rare earth quotas by the Chinese Ministry of Commerce. We
continue to believe the company has normalized earnings power of at least $1.00/share
(they are over-earning now), has at least $1.00/share of net cash and has at least a
couple of high potential mining projects in the works. At 12x normalized earnings plus
its cash and the potential from the mining projects, we think the company is worth
$15+. NEM also bought back stock during the quarter.
Six Flags ('SIX) the amusement park operator again found favor with investors. The
company reported solid earnings despite the poor weather in a couple of its key
markets and is on track to achieve its goal of $350MM of EDBITDA this year. SIX
announced a new earnings/EBITDA target of $450MM by 2015, refinanced its debt on
very attractive terms and announced a new $250MM stock buyback plan.
Innophos Holdings ('IPHS) rallied nicely as it reported a solid quarter of earnings and
announced an accretive tuck-in acquisition. We believe the company continues to be
on track to achieve cash earnings of $5.00 per share in 2012, while ending the year
with no debt. The company currently pays a quarterly dividend at an annualized rate of
$1.00 per share and has indicated it will increase this as it continues to execute on its
earnings targets. The company trades at under 10x our cash estimate for 2012 and we
continue to believe it is worth 15x given the quality of its business model and clean
balance sheet.
Annual Investor Meeting
We look forward to seeing you at our annual meeting on March 6
th
at the Harvard Club.
Thank you for your continued support and confidence. As usual, please see the attached
Appendix for a write-up of a core investment. Please feel free to call us with any
questions you may have at (212) 389-8240.
Sincerely,
Corsair Capital Management
This letter is not a research report or recommendation to buy or sell the securities mentioned herein. The examples herein are illustrations
of ways in which Corsair Capital Management, LLC and its affiliates have examined or may examine opportunities. Corsair Capital
Management, LLC and its affiliates may, at any time, buy or sell any of the securities mentioned in this letter and may change its long or
short position at any time without providing any notification of such changes. It should not be assumed that any trading activities pursued
in the future will be profitable and may in fact result in losses.
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