Arquitos Capital commentary for the first quarter ended March 31, 2025.
Dear Partner:
Arquitos returned 13.8% net of fees in the first quarter of 2025. Please see page four for more detailed performance information.
We have had several positive developments in the portfolio after the close of the quarter despite overall market turmoil. We are up an estimated 30% on the year through the date of this letter.
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In my last letter, I wrote that I was as confident as I have ever been in the potential for our top four positions to perform exceptionally well in 2025. I am even more confident today even with the chaos in the overall markets. Each of the positions are uncorrelated to the general markets and have company-specific reasons that underpin my optimism. In fact, for three of the four positions, the catalyst to value realization has already occurred and while their shares have appreciated, there is much more to go to get anywhere close to fair value.
I will generally leave the commentary on tariffs to others other than to say that the ultimate impact is unknown given the constantly changing statements, policies, exemptions, and pauses. What is known, though, is that even with the delay in worldwide implementation, there will be serious supply chain consequences over the next few quarters.
I have read and listened to nearly one hundred earnings calls over the past six weeks from companies across a wide range of industries. Many of these companies increased their inventories in Q4 and the beginning of Q1 in anticipation of disruptions. Taken as a whole, many have now paused shipments from China specifically, and also from other countries. This includes finished products, components, and raw material inputs.
Because these companies have built up inventory, the consequence of these tariff polices won’t fully take effect until that inventory is burned off. Once that happens, we will likely see severe supply chain disruptions that may rival what happened during COVID. In the meantime, most of these companies have already begun to raise end-market prices. If their end-markets are consumers, this inflation will show soon. If the end-markets are businesses, these costs will work their way through the system and hit consumers later this year.
As investors, we only react to public policies, we don’t make them. We have to play the hand that we are dealt. Obviously the scenario above is extremely bearish for the economy and markets in general, but this will also likely create some extremely attractive opportunities for those of us who are focused on special situations. Volatility is our friend.
Portfolio Holdings
Below is a look at our largest holdings.
ENDI Corp (ENDI)
ENDI shares rose from $11.43 at the end of 2024 to $12.70 at the end of Q1. They currently trade for $15.25. As a reminder, I serve on the board of the company. My comments below rely on public information. They are my own opinions and do not reflect the views of the company.
The company reported outstanding 2024 results at the end of March. AUM increased by 87% to $3.4 billion at the end of 2024 compared to the end of 2023. Subsequently, AUM has increased by an additional $400 million through March 31, 2025. Revenue increased by 68% to $14.6 million year over year. Adjusted EBITDA increased to $6.5 million from $2.1 million compared to the year before.
More importantly, the company entered into a value-unlocking transaction with its CrossingBridge subsidiary in early April. They effectively sold 25% of CrossingBridge for approximately $26 million. This values the overall subsidiary at $104 million. If you add the parent company net assets to this, it values ENDI itself near $22 per share. Obviously future growth, even at a fraction of last year’s growth, will cause that per share value to continue to increase. At the current price, we have plenty of room to go before shares are in the ballpark of fair value.
Finch Therapeutics (FNCH)
Finch is the legal special situation that I described last quarter. We are waiting for the post trial decision from the judge where she will determine an ongoing royalty rate and determine whether enhanced damages will be awarded. I was hopeful that the post-trial hearing and the judge’s decision would come by the end of Q1 2025. Unfortunately, it looks like that timeline was optimistic.
On the positive side, the judge has rejected the request from the counterparty to reconsider the jury decision. This reduces the risk of a downside surprise and sets the minimum award level. The per share value is between $25 and $75 depending on the post-trial decision. Finch shares rose from $11.30 at the end of 2024 to $14.35 at the end of Q1.
Nam Tai Property (NTPIF)
Nam Tai management gained full control of the company in December 2024 after a multiyear struggle. The company has recently reported three important and positive items.
In February, Nam Tai closed on its first commercial bank financing since obtaining full control of the company. This loan totaled RMB 110 million, or approximately $15 million. In March, they closed on an additional financing for RMB 700 million, or approximately $96 million. These proceeds will allow the company to restart their construction projects and refinance existing debt.
Finally, also in March, Nam Tai sold a non-core property for RMB 225 million, or approximately $31 million. This piece of property was sold above its appraisal value. I mentioned in the last investor letter that a colleague of mine on the ground in China looked at comps for each of Nam Tai’s projects late last year and got a valuation of $32 per share. This sale above its estimated value is an extremely encouraging sign that the appraisal values we received are reasonable.
Nam Tai shares rose from $4.75 at the end of the year to $5.73 at the end of Q1. Given the recent property sale, new loans, and encouraging progress, I am optimistic that the large gap between Nam Tai’s fair value and its market price will begin to close this year.
Liquidia Therapeutics (LQDA)
The long saga at Liquidia is nearly over. The FDA is set to finally approve Liquidia’s PHA and PH-ILD inhaler product, Yutrepia. The FDA has set a Prescription Drug User Fee Act (PDUFA) goal date of May 24, 2025.
We are much more optimistic that approval around this date will occur because the FDA has been extremely responsive to the company since the change in administration. For example, the FDA promptly responded to the company’s required New Drug Application resubmission in May, approving it weeks before it was expected. Liquidia has no other impediments to launch and are not materially affected by tariffs or other potential supply chain issues.
Liquidia shares ended 2024 at $11.76 per share. They closed Q1 at $14.75.
Thank you again for your commitment to Arquitos. I will be at the Berkshire Hathaway annual shareholder meeting in Omaha on May 1 to May 4. If you happen to be around, please let me know. I would love to catch up in person. In light of my optimism regarding our largest holdings, I am re-opening the fund to new and additional investments. Please let me know if you are interested. We accept contributions monthly.
Best regards,
Steven Kiel
