McIntyre Partnerships commentary for the first quarter ended March 31, 2025.
Dear Partners,
McIntyre Partnerships Returns
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Performance and Positioning Review - Q1 2025
Through Q1, McIntyre Partnerships declined approx. -17% gross and -17% net. This compares to our benchmark, the Russell 2000 Value, which declined ~-8%. The fund’s trailing five-year returns are ~44% gross and ~39% net per annum, which compares to our benchmark’s return of ~15% per annum. Since inception, the fund has returned ~15% gross and ~11% net per annum, compared to our benchmark’s return of ~5% per annum.
There were no winners of >100bps in the quarter. In the losers column, SEG, SHC, LESL, MDRX, STHO and FTRE lost 100-500bps each.
Periods of underperformance are always the most challenging part of my job. I do not mean this so much from an emotional or investment decision point of view. Those are not fun when we underperform, but after eight years managing the partnership and almost twenty years in the investment industry, I have been here before. Rather, I mean that these periods are difficult to explain to you, our partners, particularly when I cannot point to any particularly compelling reason to explain our underperformance. I will attempt a rough explanation of how I think we got here and what I think is the path forward, but ultimately, my explanation could be summarized as “we are concentrated, thus we can sometimes be volatile, but I still very much like what we own.” However, I am acutely aware that it is at moments like this that I am most reliant on your trust, and I am aware that trust is finite and must be treated with the utmost respect. Partners are always free to reach out to me directly with questions.
During the first quarter, the market broadly retrenched. At first, the selloff started due to fears of a slowdown in AI spending following the “DeepSeek moment,” and then the selling intensified as investors worried President Trump’s tariffs would cause a broad recession. Q1 was the fourth-worst quarterly performance of the Russell 2000 Value since our inception. During a broad-based market selloff, I am a fan of saying it matters less what you own so much as who owns what you own. If someone gets a margin call or a pod shop is forced to reduce its leverage, it does not matter whether the company makes bread or jewelry; it simply must be sold. Regarding our portfolio, as a concentrated fund with a focus on special situations that are often complex, these dynamics can sometimes have a significantly larger day-to-day impact than on more diverse, less controversial portfolios. Unfortunately, I do not have a great strategy for dealing with this dynamic over short periods of time. Historically, after the initial selling passes, our portfolio has rebounded as our companies report and our catalysts play out, so long as my underlying theses prove correct. I still expect this to be the case this time, and I have only made minor adjustments to our portfolio. However, I must admit I find this selloff particularly frustrating, as the performance of certain holdings are behaving contrary to how I expected them to trade in a recession.
Take, for instance, the surprising YTD divergence between SHC and GTX. From a fundamental perspective, SHC’s business is far less cyclical than GTX's. You would be hard-pressed to find someone who would seriously claim that, if they lost their job, they would skip out on emergency room visits and instead buy a new car. Given this dynamic, if at the start of the year I told you, “I think Trump’s tariffs will shock and scare everyone, and the market will crash. As a result, I’m going to double our position in the auto parts supplier which has historically had 2x beta and sell the healthcare company that has grown through every previous economic cycle for the last 20 years,” I think you would have quietly nodded and then told your friends, “Chris has lost his mind.” Yet that is precisely what happened. As of the end of April, when the Russell 2000 Value was down 12% YTD, SHC was down 16% while GTX was up 2%. One could logically ask if SHC missed earnings or had negative legal news; however, I do not think that lowering guidance by 0.5% explains such a negative reaction, and to the contrary SHC has settled ~25% of its remaining cases for a small sum so far this year. All the more contradictory, SHC and GTX are both duopoly businesses, and the other sides of their duopolies, STE and BWA, respectively, are actually behaving as I would have expected. At the end of April, STE was up 8% YTD and BWA was down 11%.
Taking a step back, it frustrates me greatly that SHC, our largest position entering the year, has not behaved as I anticipated it would in the event of a market selloff. SHC’s lower cyclical risk is a significant reason why I have been comfortable maintaining a large position, and I had hoped it would provide a degree of stability. Over time, if the US economy does enter a recession, I still expect SHC’s durable growth to eventually result in outperformance, but this investment logic cannot help in a rapid market decline. I feel similarly frustrated that the market has not rewarded SEG for its substantial net cash position, STHO for its recession-resistant ground lease portfolio, and MDRX for its mission-critical healthcare software. While my frustration is, of course, not a monetizable asset, the profits and cash of our investments are. If I am correct on the fundamentals of our investments, this should eventually be reflected in their public market valuations.
Looking forward, I do not have a strong view on whether or not the economy enters a recession, and I have no clue where the market will go. However, I do have a strong view that our portfolio is composed of idiosyncratic ideas with strong catalysts that should, over time, be less at the whims of macro forces. Further, I have an even stronger view that our significant investments have strong balance sheets and robust businesses that can survive even a very bad economic downturn. As a reminder, the last time the fund experienced a significant underperformance was 2018, and our forward three-year and five-year gross and net returns were 29%/24% and 26/21%, respectively. While the past is not a predictor of the future, I believe our portfolio has significant upside potential, and I remain focused on execution.
Portfolio Review - Exposures and Concentration
At month end, our exposures are 111% long, 9% short, and 102% net. Adjusted for our options hedges, the portfolio is approximately 94% net long. Our five largest positions are SEG, SHC, our Pool Basket (SWIM, LESL, HAYW), MDRX, and STHO, and account for roughly 80% of assets.
Portfolio Review - New Positions
Veradigm (MDRX)
Strictly speaking, MDRX is not a new position. The fund had a large gain in the stock last year, and we have maintained a small position even after exiting the bulk of our position last spring. However, as we significantly resized our position in the first quarter, I am updating our thesis. Given our previous involvement, I will keep my remarks brief.
MDRX shares fell ~50% in Q1 as a result of a failed sales process. I am typically cautious around failed deals. If no one else wanted it, why should I? However, I was not surprised the deal failed, as I have always felt a deal was unduly complicated due to MDRX’s lack of audited financials. This is precisely why I sold our position, despite positive press reports and deal math that could theoretically support a healthy takeover premium in the low-to-mid teens when the stock was $9. I do not believe those leaks, nor that math is wrong. I simply believe MDRX must get current on its financials and relist before selling the company. To that end, MDRX finished its restatement and finalized its 2022 10-K in late March, which it published along with updated results for the past two years and 2025 guidance. However, the stock is still delisted and will not be able to relist until it publishes its 2025 10-K next year. I believe the path forward is relatively straightforward: finish the audits, relist the shares in 2026, and then look to return cash to shareholders and/or sell the company if the market does not properly value it. MDRX is presently $4 with $1/sh. in net cash, $1/sh. in other investments, and should generate $0.50-$0.70/sh. in adjusted FCF in a normal year. In a deal with a strategic buyer, I believe $120MM in synergies, or 20% of sales, could be achieved. This would add another $1/sh. in FCF. Once MDRX relists, I believe this math supports a takeout over $10. If not, I am happy to indefinitely collect our ~30% FCF/EV yield on a stable, sticky healthcare software business.
Business Updates
We are making progress on our fundraising goals and anticipate closing to outside investors this summer. I plan to reopen the fund to new LPs sometime in 2026.
As always, please feel free to contact me with any questions.
Sincerely,
Chris McIntyre
(929) 399-5485
