Gator Financial Partners Q1 2025 Commentary

Gator Financial Partners commentary for the first quarter ended March 31, 2025.

Dear Gator Financial Partners:

We are pleased to provide you with Gator Financial Partners, LLC’s (the “Fund” or “GFP”) 2025 1st quarter investor letter. This letter reviews the Fund’s 2025 Q1, discusses how we are thinking about tariffs, and shares our investment thesis on Virtus Investment Partners (“Virtus” or “VRTS”).

Read more hedge fund letters here

Review of 2025 Q1 Performance

During the 1st quarter of 2025, the Fund had mixed performance. We outperformed the broader market but lagged the Financials sector benchmark. The large banks and the large insurers had a strong Q1, and we have not owned these companies in several years. We believe both the valuations and the growth rates of the largest financial companies are unattractive. We much prefer the faster growing and less expensive small- and mid-cap financial companies. But, in Q1, the stock market didn’t agree with our view. Our long positions in Societe Generale, Robinhood Markets, BNP Paribus, Barclays PLC, and Sallie Mae were the top contributors to the Fund’s performance. The largest detractors were long positions in First Citizens Bancshares, PayPal, Virtus Investment Partners, Global Payments, and UMB Financial.

Tariffs: A Risky Gambit, But Likely to Fade

We view the recent sweeping tariff proposals as an unforced policy error. While improving America’s trade positioning is a legitimate long-term objective, imposing broad-based tariffs on nearly all global imports with limited warning is an unnecessarily reckless approach.

The idea that tariffs will bring back large-scale manufacturing employment to the U.S. is misguided. American factory workers themselves do not aspire for their children or grandchildren to work in factories. Reshoring manufacturing at scale is a political talking point, not an economic reality.

That said, we believe these tariffs will ultimately be short-lived. While we have no special insight into the Trump administration’s strategy, we are relying on the stock market’s interpretation of unfolding events. The sharp sell-off on the morning of April 7th marked a peak in capitulation, in our view. The strong equity market performance over the last three weeks of April suggests investors are pricing in a less extreme path forward and may be signaling that equities have found a near-term bottom.

We continue to believe that public markets, in aggregate, often do a better job forecasting outcomes than any individual analyst or investor—particularly during periods of heightened uncertainty. Market action may be reflecting expectations for a political reversal, potentially influenced by surprising recent electoral wins by liberal parties in Canada and Australia. Some investors could be extrapolating these outcomes to project Democratic gains in the 2026 U.S. midterm elections, which could lead to a reversal of Trump-era tariffs.

As investors, we do not need to predict the precise political pathway to lower tariffs. What matters for our positioning is the judgment call: will these tariffs persist at harmful levels, or will they be rolled back? For now, our base case is that tariffs will be reduced to more sustainable levels. We will continue to challenge this assumption and remain open to new information.

In the meantime, we continue to find compelling investment opportunities within the Financials sector, where we believe valuations already discount a significant amount of macroeconomic uncertainty. One industry that presents a near-term opportunity continues to be Regional Banks. Regional Banks were one of the industries hardest hit by the Trump Liberation Day announcement. We believe top-down macro investors continue to wrongly use shorts against Regional Banks as a way to express their view of increased recession risk. There is a disconnect between the reality of the credit quality in the regional banking system and these investors’ perception of the risk. As we got into bank earnings season during late April, the bank management teams discussed the strong credit quality of the sector and the banks’ stocks price have largely recovered.

Investment Thesis on Virtus Investment Partners

We believe Virtus Investment Partners offers a compelling investment from current levels. Virtus Investment Partners is a multi-boutique traditional investment manager. The company has several investment affiliates with their own investment teams and strategies. Virtus provides centralized sales, middle- and back-office services to support these teams. Virtus has grown by using cash flow to acquire additional investment firms. It keeps the investment teams of the acquisitions in place and centralizes sales and operations. We successfully owned Virtus for the Fund several years ago.

Our investment thesis is below:

1. High-Quality Business Due to Recurring Revenue and High Free Cash Flow - Virtus Investment Partners boasts a high-quality business model underpinned by recurring revenue streams and elevated free cash flow. The firm's strategic focus on asset management ensures steady income through management fees, which are largely predictable and stable. This recurring revenue is a testament to the company's robust client relationships and consistent performance, providing a strong foundation for continued growth. Furthermore, high free cash flow enables Virtus to reinvest in its business, pursue acquisitions, and return capital to shareholders, enhancing overall value.
2. Low Valuation on Price to Earnings and EV/EBITDA Basis - VRTS has an attractive valuation. It trades for 6.5x price-to-earnings (P/E) and a shockingly low 3.0x on Enterprise Value to Earnings Before Interest, Taxes, Depreciation, and Amortization (EV/EBITDA) basis. VRTS has a strong balance sheet that matches the strong cash flow profile of the business. The company only has $100 million of net debt, which is about 0.3x EBITDA. In addition, VRTS carries a portfolio of seed investments in start-up funds and products valued at $140M. It recycles this seed capital into incubating new funds and products as existing seed investments payoff or fail. Virtus also has about $140M in CLO equity investments. These investments are made as its advisors form new CLOs. We subtract the seed investments and the CLO equity investments from Enterprise Value when we quote the 3.0x EV/EBITDA multiple. One could argue that seed investments and CLO equity investments are necessary to run the business. If we excluded these two items from Enterprise Value because they are necessary to run the business, we still calculate a very low 4.0x EV/EBITDA multiple. Virtus trades at a lower multiple compared to its peers.
3. Low Debt Levels Provide Management Flexibility - The firm's prudent approach to debt management further strengthens its investment appeal. Virtus Investment Partners maintains low debt levels, which afford management significant flexibility to act on M&A or share repurchase opportunities. This conservative financial stance mitigates risk and enhances the firm's ability to sustain operations during economic downturns.
4. Potential for Earnings Accretive Acquisition - Virtus Investment Partners is well-positioned to pursue earnings accretive acquisitions. The firm's strong balance sheet and free cash flow provide the necessary capital to acquire additional investment management capabilities. Multiples for privately held investment management businesses are inexpensive. Virtus has a strong platform and history of integrating acquisitions to realize synergies and create value.
5. Consistent Dividends and Stock Repurchases – VRTS management has been consistent in returning capital to shareholders through dividends and stock repurchases. VRTS stock currently yields 5.6%. Stock repurchases further enhance shareholder value by reducing outstanding shares and increasing earnings per share (EPS). In Q1, VRTS management repurchased about 2% of the stock and signaled that they would be more aggressive given the stock price decline from early March. We would encourage management to consider increasing leverage by 1.0x EBITDA and repurchase 30% of the shares.

There are risks to our investment thesis on Virtus:

1. Challenged Flows Due to Active Management Out of Favor - Despite its strengths, Virtus Investment Partners faces challenges in asset flows, primarily due to the growing trend towards passive management. Active management has fallen out of favor with some investors, who prefer the lower fees and perceived simplicity of passive strategies. This shift poses a headwind for Virtus, potentially impacting on its ability to attract and retain assets. The firm must navigate this evolving landscape by demonstrating the value of active management and differentiating its offerings through superior performance and client service.
2. Some Past Acquisitions May Not Have Paid Off - Virtus's acquisition strategy, while generally successful, has not been without its missteps. Some past acquisitions have not delivered the anticipated returns. These underperforming acquisitions can weigh on financial results and erode investor confidence.
3. Waiting for Flows to Improve or Management to Take Action - Virtus Investment Partners is at a crossroads, awaiting improvement in asset flows or action from management to make an acquisition or materially increase share repurchases. This state of waiting creates uncertainty and requires patience from investors.

In summary, Virtus Investment Partners presents a compelling investment case with a robust business model, attractive valuation, low debt levels, and a clear commitment to shareholder returns. However, the firm must navigate challenges related to asset flows and past acquisitions. Investors should weigh these strengths and weaknesses carefully, considering Virtus's potential for growth and the strategic actions needed to address its current hurdles. With prudent management and strategic execution, Virtus Investment Partners could deliver substantial value to its shareholders over the long term.

Portfolio Analysis

Largest Positions

Below are the Fund’s five largest common equity long positions. All data is as of March 31, 2025.

Long

• Robinhood Markets Inc.
• First Citizens Bancshares
• SLM Corp
• Virtus Investment Partners
• UMB Financial Corp.

Sub-sector Weightings

Below is a table showing the Fund’s positioning within the Financials sector as of March 31, 2025.

The Fund’s gross exposure is 198.05%, and its net exposure is 57.61%. From this table, we exclude fixedincome instruments such as preferred stock. Preferred stock positions account for an additional 15.12% of the portfolio.

Conclusion

Thank you for entrusting us with a portion of your wealth. We are grateful to you, our investors, who believe in and trust our strategy. On a personal level, Derek Pilecki, the Fund's Portfolio Manager, continues to invest more than 80% of his liquid net worth in the Fund.

As always, we welcome the opportunity to speak with you and discuss the Fund.

Sincerely,

Gator Capital Management, LLC