Please refer to Important Disclosure Information at the end of this research note.
There is no “free lunch.” Consider the Platform thesis, a distortion in investor behavior enabled by Quantitative Easing (“easy money”), cheap debt, and low stock market volatility over the last four years.
The Platform thesis, popular among hedge fund managers, is as follows: A company owing to some perceived advantage (a superior management team, lower tax regime, economies of scale) embarks on a roll-up campaign buying up other companies large and small, funding the acquisitions with “cheap” debt and over-priced equity.
The valuation math is non-trivial and often requires a spreadsheet. Importantly, the “flywheel” effect of buying other companies with debt and equity, then issuing more debt (and selling more shares) to buy even bigger companies can translate into enormous “blue-sky” price targets for the acquiring company. The often cited risk to the thesis is that of rising rates driving up the cost of debt. The Platform thesis is both elegant and complex and therefore intellectually appealing to otherwise smart money managers.
The Platform investment thesis tends to work spectacularly at least initially … before failing in equally dramatic fashion as the following charts demonstrate.
What’s troubling is that the Platform bubble burst was not accompanied by a rise in interest rates.
Important Disclosure Information
Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Burr Capital LLC), or any non-investment related content, made reference to directly or indirectly in this research will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this research serves as the receipt of, or as a substitute for, personalized investment advice from Burr Capital LLC. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Burr Capital LLC is neither a law firm nor a certified public accounting firm and no portion of the research content should be construed as legal or accounting advice. A copy of Burr Capital LLC’s current written disclosure statement discussing our advisory services and fees is available for review upon request.