Q1 2023 Investor Audibles: Alluvial Capital, Greenhaven Road, & 1 Main Capital

Episode Summary

Executive Summary: The transcript is a compilation of investor letters from multiple value-oriented managers, centered on finding durable, undervalued businesses and special situations amid a volatile macro backdrop. Across the letters, the recurring themes are business durability, balance-sheet strength, management integrity, and patient capital allocation. The managers highlight selective buying in banks, industrials, software, and special situations, while warning against value traps, weak management, and businesses lacking long-term resilience.

Main Topics: Durability as the core investing framework (Priority: 5/5): Scott Miller frames investing as a relay race where short-, medium-, and long-term fundamentals all need to 'carry their weight.' He emphasizes low churn, strong balance sheets, secular tailwinds, product-cycle dynamics, and operating leverage as markers of durable compounding businesses. Finding undervalued, quality small-cap businesses (Priority: 5/5): Dave Waters emphasizes that Alluvial owns overlooked small-cap companies trading well below intrinsic value, including Canadian industrials, banks, telecom infrastructure, and Polish microcaps. He repeatedly contrasts strong fundamentals with muted market recognition. Banking crisis and regional bank outlook (Priority: 5/5): Both Alluvial and broader market commentary address the 2023 banking turmoil. The letters argue that some portfolio banks are insulated by strong capital and permanent Treasury capital, while regional banks face the toughest structural outlook versus megabanks and community banks. Special situations and event-driven returns (Priority: 4/5): The letters describe multiple special situations: liquidations, takeovers, REIT listings, and recapitalizations. These are treated as asymmetric opportunities where mispricings can correct quickly through corporate actions rather than long operating growth. Management quality, capital allocation, and trust (Priority: 4/5): Several investments are framed around whether management has urgency, integrity, and shareholder alignment. GEE Group is sold due to broken promises, while other positions are favored because management is buying back shares, converting business models, or pursuing value-creating acquisitions. Long-duration compounding businesses in niche sectors (Priority: 4/5): The managers favor niche operators with sticky customers and essential products, including PAR Technology, Celebrite, API Group, Burford Capital, Dental Corp, and Limbach. The common thread is mission-critical products or services with limited competition and recurring demand. Macro caution without abandoning equities (Priority: 3/5): The letters acknowledge recession risk, higher rates, and pressure on lending and multiples, but argue that waiting for an ideal buying opportunity is impractical. Instead, they remain largely invested because many holdings already discount a lot of bad news and may benefit from time and volatility.

Key Arguments: Intrinsic value remains far above market prices in many small-cap and niche holdings, creating a large gap between trading value and business value. Durability matters more than cheapness alone; a low multiple can be a trap if the underlying business is deteriorating or management is untrustworthy. Regional banks face a structurally difficult future because they lack both the scale of megabanks and the intimacy/loyalty advantages of community banks. Strong balance sheets and sticky revenues make several portfolio companies resilient even in recession scenarios. Event-driven and liquidation situations can produce attractive IRRs quickly because market price dislocations are temporary or corporate actions force realization of value. Product mix shifts, recurring revenue, and cross-selling can turn mediocre businesses into durable compounders, as argued for PAR, Limbach, and Barnes & Noble Education. Management alignment is a decisive variable: capital returns, buybacks, strategic reviews, and honest communication improve investment outcomes, while empty promises justify exits. Patience is central; time often benefits neglected businesses as operations improve and the market eventually re-rates them.

Data Points: Alluvial Fund Q1 2023 return: 3.6% - Dave Waters says the fund rose 3.6% in Q1 2023. Russell 2000 Q1 2023 return: 2.7% - Benchmark comparison in Alluvial letter. Russell MicroCap Index Q1 2023 return: -2.8% - Benchmark comparison in Alluvial letter. Hammond Power valuation: Below 10x trailing earnings; 7x EBIT - Canadian transformer manufacturer described as cheap despite strong demand. Hammond Power capex plan: $40 million - Planned investment to expand production capacity. Regional bank index Q1 move: -25% - Alluvial notes the SP regional bank index fell sharply during the banking crisis. P10 AUM: $21.2 billion - P10 reported assets under management, up 23% year-over-year. P10 share repurchases: 1.6% of shares outstanding - P10 repurchased stock in the fourth quarter. Unidata valuation reference: 7x 2025 normalized free cash flow - Alluvial argues the Italian broadband operator is undervalued. EcoCorp operating income (trailing year three years ago): $12.3 million - Historical comparison when EcoCorp was previously discussed. EcoCorp operating income (year ended Feb. 28, 2023): $28 million - Shows growth in EcoCorp’s business. TIm takeover premium: 28% - Polish holding received a takeover offer, prompting a sale. Skytop Lodge ownership: Just over 2% - Alluvial purchased a small stake in the resort company. Skytop valuation basis: Less than 6x normalized earnings and cash flows - Investment entry valuation. Autonomy liquidation recovery: 11 cents per share initial distribution on 11.6-cent cost - Liquidating biotech position produced near-full early recovery. Scio Gene Therapies liquidation: 38 to 42 cents per share expected; up to 9 cents more possible - Another liquidation scenario with high realized recovery. Peakstone Realty Trust NAV: $67 per share - Self-calculated NAV cited before trading dislocation. Peakstone trading low: $8 per share - Shares fell dramatically on first day of public trading. Greenhaven Road Q1 2023 return: Approximately 17% - Scott Miller reports strong quarterly performance. PAR Technology cash: Over $100 million - Balance sheet strength highlighted. PAR ARR growth expectation: Roughly 30% - Expected for the foreseeable future. Celebrite gross margin: North of 80% - Digital forensics software company description. Celebrite net revenue retention: 125% or higher - Demonstrates strong customer expansion. Limbach operating mix shift: ODR now ~50% of revenues and 65% of gross profits - Transition to higher-margin owner-direct work. Dental Corp scale: 1,800+ dentists; 2 million active patients; 500 locations - Canadian dental services platform size. Dental practice acquisition economics: 6-8x EBITDA for typical practices; 8-10x for larger acquisitions - Roll-up model economics. One Main Capital Q1 2023 return: 12.2% net - Fund performance versus benchmarks. One Main inception annualized return: 20.2% net - Since February 2018 inception. One Main capital compounding example: $1 million -> $2.6 million - Illustrative growth since inception after fees.

Pivotal Quotes: "Each of those periods can carry their weight." — Scott Miller: Describing his 'relay' framework for evaluating short-, medium-, and long-term investment durability. "There is no shortage of market opportunities out there, and I will continue doing my utmost to identify the best of them for us. As always, our focus remains on the ignored, the overlooked, and the misunderstood." — Dave Waters: Closing Alluvial Capital letter and summarizing the firm’s investment style. "When I look in the mirror, I don't see a bull or a bear. Instead, I see an avid collector of minority ownership interests in businesses." — Yuriy Neymark: Explaining why One Main Capital stays invested despite macro fears.

Implications: The letters suggest that in volatile markets, superior returns may come from patience, balance-sheet safety, and business quality rather than macro calls. For investors, the lesson is to seek mispriced durable compounding businesses and special situations, while avoiding structural losers and weak management.