April 2024
Dear Fellow Investors,
The Fund1 returned approximately 2% in the first quarter. Returns will vary by fund and investment class, so please check your statements for your actual returns.
Q4 2023 hedge fund letters, conferences and more
Paid to Wait
The hardest part about investing is the waiting. As Charlie Munger of Berkshire Hathaway said, “The big money is not in the buying and selling, but in the waiting.” In the short term, almost all share price gains and losses are related to changes in the multiples investors are willing to pay. Earlier this month, the March consumer price index came in at 3.48%, which was rounded up to 3.5%, which was higher than the expected 3.4%, and – BAM – multiples contract, and there is only red on my computer screen at 8:30 a.m.
Ironically, when the CPI update was posted and everything sold off, I was sitting in the audience for KKR’s investor day. Management laid out a 302-page tour de force on how they can 4X their adjusted net income per share over the next 10 years (slide 23). Given the track record of their underlying funds, the firm’s new distribution channels (high net worth and insurance), history of fundraising success, and high-net-worth individuals’ under allocation to private equity, I had the overwhelming feeling of inevitability when considering KKR’s long-term prospects. Of course, nothing is truly inevitable about the short-term direction of any share price, but KKR’s business will almost undoubtedly grow significantly in the coming years. The firm’s people, business model, products, market need, and track record all signal to me that this will be an even bigger, more profitable business in 5 years than it is today. They have compounded assets at 18% for almost a decade and a half and grown fee-related income 7X since 2010. The pieces are in place for the next phase of growth including successful existing funds, robust distribution channels, new products, and a large base of existing limited partners. The team has been building.
Reasonable people can disagree over the cadence, quantum, and the drivers of growth, but, given the base of long-duration capital that KKR is building from and the existing mountain of “dry powder” that they can call at their discretion, AUM is going up. How much? I don’t know. Will it be because of Infrastructure, Asia, Credit, Americas, Real Estate, Growth Equity or something else? I don’t know. If you are reading this letter, you are almost undoubtedly intelligent and creative. Because you are intelligent and creative, you can come up with a scenario where some combination of geopolitical events and regulatory changes impairs KKR’s growth prospects, but I also suspect this exercise involves a mental Triple Lindy of problems for which a survival includes a nuclear bunker, by which time KKR’s multiple would be the least of any of our problems. As the co-CEO said to me, “I don’t worry about the next five years – those are already baked. I worry about years six through ten.” In my book, that is public company CEO speak for growth is inevitable.
In this letter, I will walk through the portfolio through the lens of inevitability. In the short term, the multiple will determine our returns, but in the long term, it will be the business progress as reflected in revenue and earnings. Our holdings lie on a spectrum of inevitability. KKR strikes me as the most inevitable, in part because so much of the capital it manages is permanent. Not everything is KKR, but I believe that the combination of risks and rewards are compelling in aggregate. We may get lucky and get paid quickly, or we may have to suffer through some Federal Reserve noise, some election year noise, some geopolitical noise, or some economic headwinds. I think we will get paid for waiting. I think we will get paid because of the business building that is happening.
TOP 5 HOLDINGS
PAR Technology (PAR) – Let’s start with the acknowledgement that anything with the word “technology” in the name is not 100% inevitable. With that said, PAR has several “ways to win” and I think the next five years will see a compelling transformation resulting in this caterpillar coming out of the cocoon and being valued like a butterfly. PAR’s core business is POS (point of sale) for chain restaurants, which has the benefit of being a very low churn business. Losing less than 5% of locations per year, PAR’s high retention rate means that new customers and new products can drive growth. They are not just spinning their wheels to refill a leaky bucket. Stable base + new customers + new products = Good Business.
In the interest of space, I will not go through all of PAR’s tailwinds. I suggest you check out a write-up by Voss Capital (a fund we are invested in through the Partners Fund, our fund of funds), called “PAR’s Path to $80 Redux: Godot Finally Arrives” (link).
As discussed in our Q3 2023 letter (link), PAR has been growing their recurring revenue dramatically over the last five years through acquisitions and organic growth. The best way to measure their progress is on a per-share basis. Below is the chart from Q3.
As the last column alludes to, Burger King growth is coming. PAR’s systems will start rolling out in U.S. BK stores this quarter (Q2) and, over the next year and a half (absent an unforeseen event), PAR will add 7,000 new locations generating more than $20M per year in high margin recurring revenue from a single customer. As shareholders, we wait. The team works. It is contractual, the revenue should be is coming.
There is reason to believe that the new customer wins do not end with Burger King. Our Q3 letter, linked above, outlined a path to the rest of the Restaurant Brands (Burger King owner) portfolio. On the topic, PAR’s CEO has said,
“What makes us even more positive, is that we believe we’re just at the beginning of a tidal wave of large deals coming to market, which should provide for long-term sustainable growth….”
To buttress this statement, PAR this month announced Wendy’s as a customer for their Punchh loyalty product, likely contributing another $6M per year in recurring revenue starting this year.
Over the next several years, new products will contribute to growth. In 2024, we will begin to see the contribution of Table Service, a POS for table service restaurants. PAR already announced that Hooters, a 300-unit chain, is a customer, and I believe that the company is deep in the running to win a 1,200+ unit table service chain that is named after a city in upstate New York. PAR will also get growth from their recently launched online ordering offering (MENU) that almost every new customer is taking. They also continue to sell their payments solution into their base of customers. Again, there are a lot of irons in the fire and a lot of ways to win.
PAR has been our largest position for a while now for all the reasons laid out above, but the beauty of good teams is that they can surprise to the upside. In March, PAR announced two acquisitions, Stuzo and TASK. Both accretive and both EBITDA positive, the acquisitions provide additional scale for PAR, accelerate profitability, add new markets, and add new customers. Each one of those factors – scale, profitability, new markets, and new customers – matters individually, but together they can create a lollapalooza. The market’s reaction so far has been a big fat yawn. It is a lot to process. Let me just provide the elevator pitch for each acquisition.
Stuzo is the leading loyalty app for convenience stores. They have had zero customer churn historically, are profitable, and have been growing quickly. In the very near term, PAR can improve the Stuzo business by layering in payments functionality. PAR’s Punchh loyalty offering formerly competed with Stuzo. By combining forces, the pricing environment can only get better. In the longer term, there is a real opportunity for PAR to build/adapt their POS for convenience stores. They are growing their opportunity while accelerating profitability by purchasing this Rule of 40 company.
Q4 2023 hedge fund letters, conferences and more
Their second announced acquisition, TASK, is an Australia-based company that similarly sells POS and loyalty. TASK will be PAR’s foothold internationally. As you may remember, while PAR won all of Burger King domestic, they did not win international, which has more units, because PAR did not havean international product. This TASK acquisition is a major step in the direction of being able to compete in those markets and serve existing customers. TASK also comes with two very interesting customers, Starbucks and McDonald’s. McDonald’s, an international loyalty program customer, also invested in TASK, owning 16%. Task was largely bootstrapped by its current CEO, Daniel Houden, who is rolling his equity into PAR and staying on. TASK is a product-led company that did not have a dedicated salesperson until two years ago. They did not win McDonald’s or Starbucks through an advanced go-to-market strategy, they won on product and support. It will be interesting to see what happens when you layer in PAR’s hardware and sales resources. TASK is a fast[1]growing, EBITDA-positive company with a stellar customer list that massively advances PAR’s international presence, which PAR’s customers (Burger King and others) have been begging for. Does TASK show up in PAR’s last quarter numbers? No. Unfortunately, because of Australian laws, the acquisition will not even close until the third quarter this year and it will not show up in sell side projections for months. PAR’s share price is down since the deal was announced. On some level I get it, the deal has not closed yet. but I believe that this has the potential to be a monster when it is fully reflected in the share price.
We started discussing PAR with a pretty chart of ARR per share that ended in 2023. Looking forward and layering in the two acquisitions, the portion of Burger King that will come online in 2024, plus Wendy’s loyalty purchase, and other expected growth, I expect year-end ARR per share to be approximately $8.30 or over 8X larger than when CEO Savneet Singh took over just over 5 years ago. PAR will be entering 2025 with a lot of momentum, including $10M+ of contracted but not yet installed Burger King recurring revenue, a growing online ordering business, table service business, international business, and that tidal wave of RFPs that could yield some new customers. I expect 2025 ARR/Share to be $10+.
All of this business progress is great and exactly what we want to see from the companies we are invested in, but if the multiple continues to contract, we may lose money. The market has treated cash-generating software companies very differently than cash-burning software companies. I believe PAR completes the transition this year to becoming cash-flow positive. Below is a chart comparing cash-flow-positive software companies to cash-burning companies (first red dotted column).
Will PAR really get the full 10.9X revenue multiple implied by the chart above? Probably not. PAR will also not screen well to computers until it divests of its legacy government business, but it is highly likely that PAR looks very different both operationally and financially entering 2025 than it did entering 2023 or 2024.
This is a business getting stronger with every passing day. Its momentum is showing up in the ARR/share, customer wins, and product launches. PAR will end the year with nearly $300M in recurring revenue, opportunities in new markets, new customers, new products, and a non-zero chance of “running the table.” But to benefit, Mr. Market is saying that we have to wait. The future is bright and the PAR team is busting their ass for us.
See the full report here.
