Peter Kennan On His Philosophy To Deep Value Investing With A Corporate Finance Twist

Peter Kennan founded Black Crane Capital in 2009. At Black Crane, Peter and his team have been able to generate superior returns using a unique, corporate finance driven investment philosophy. He takes a deep value approach with an interesting corporate finance strategy to create value maximizing catalysts for his investors.

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Prior to founding Black Crane, Peter received his engineering degree and worked at BP before working in the corporate finance world at UBS. He and his company have won numerous awards over the years includingBest Asian Event Driven Fund in 2014 and Best Long-Term Performance of an Event Driven Fund in 2014.

Currently, Peter is finding opportunity in three interesting deep value investment ideas in Emeco Holdings, MMA Offshore, and Halcyon Agri. All three of the companies featured meet his stringent factors for deep value with future catalysts.

Great to have you here Peter. Before we get into the nuts and bolts, could you give us a little bit of your background and how your view of investing has evolved, if at all?

Peter Kennan: I was trained as a chemical engineer, so that’s partly where my analytical bent comes from. I had seven years with British Petroleum; then I joined a predecessor firm of UBS in Sydney in ’94. UBS was my first foray into corporate finance. At BP, I enjoyed the commercial side of the oil business — the trading and supply and logistics and the refinery economics. I was exposed to some quite complex microeconomic issues around how to set refineries up and optimal supply logistics. That was a lot of fun. The puzzle-solving aspect was not dissimilar to investing. Following that, I moved into corporate finance, working with UBS for 15 years — 10 of those in Sydney and five in Hong Kong.

When I left Australia, I was head of the Telecoms Media Sector team. In Hong Kong, I formed the Asian Industrials group for UBS.The industrial sectors at that stage were tiny in Asia. The Asia banking and equity capital markets were focused on banks, large Telcos, and the oil companies. But we knew there was huge growth potential; between 2004, when I arrived in Hong Kong, and late 2008 when I left, the industrial sectors became 50% of the street. At that point, I had 32 bankers reporting to me and I was probably the second-most senior banker at UBS. Through that period, I worked a lot with corporates both in Australia and Asia. At the time, there was a big contrast between the two markets, the Australian was a relatively mature market compared to the relatively immature, emerging Asian corporate finance markets. I could see that there was a huge pipeline of corporate finance activity that was going to unfold through Asia in the coming decades.

That’s part of the genesis of the Black Crane strategy — (1) the immature corporate finance settings, approaches, set-ups of companies; and the crystallization/realization of opportunities and knowing they would be evolving over a multi-decade-period; and (2) The recognition of deep value.

My boss at UBS was a Buffett fan from way back and went to the annual meetings. He was always talking about him, so I read quite a lot about Buffett and value investing in the late 90s (and continue to this day). I am naturally very analytical. I like understanding things to the core, so concentration was always going to be my approach. As an investor, this approach allows me to understand a small number of positions in a deep and fundamental way. Joel Greenblatt’s book, You Can Be a Stock Market Genius”, was great. He discussed how eight stocks is enough to properly diversify a portfolio. How he thought about portfolio concentration rang true with me. I’ve always admired entrepreneurs – a lot of clients I had as a banker at UBS were entrepreneurs. I enjoyed working with them, and the family offices and private equity funds related to them.When I left UBS, I had an objective — I wanted to leverage my analytical and intellectual skills and ultimately get rewarded for that by doing something entrepreneurial. Black Crane came to fruition from that seed.

The problem with being a full-time employee in a high-powered role with a bank like UBS is that it’s so exclusive, it dominates your mind. You don’t have time to explore other pursuits and do a whole lot of investing outside. My sector was half the market and I had to get the global head of corporate finance’s approval just to trade a stock in my sector. These days, I understand that UBS prohibits personal investing full stop by investment bankers.

That exclusive relationship meant I couldn’t really explore my evolution as an investor until I left UBS.And now, when I think about the amount of work I do in one situation and how much time is spent thinking about it, I know that I could never have done any meaningful investing while working 60/70 hours a week.I value family life as well, and there was little enough time for that.

After leaving UBS, I started investing in equity special situations involving companies I knew in Australia with my own capital. What became apparent to me is that in Asia there’s a lot of value around, but you need a corporate finance process or an event to realize value. There are value traps everywhere. That’s the original thinking behind the strategy. It’s evolved to incorporate activism and engagement. It’s “friendly” for the most part, but we use hostile activism as a fallback. We take significant shareholdings in companies and then basically determine the corporate finance settings that we think are optimum in consultation with the board and management.

So you’ve done it all, oil and gas to deep-value special situations and activism. What does your day kind of look like from beginning to end? Do you have any daily rituals or habits that you do that you think help keep your edge?

PK: The fund is based in Hong Kong, and my family lives in Singapore.Generally, I will spend a week in Singapore and a week in Hong Kong. Buffett said that Omaha is a safe distance from New York. I certainly like that change in routine. Hong Kong is the New York of Asia, so it’s more externally focused and where I conduct the majority of my meetings with investors and companies. I have an office at home in Singapore that is set apart from the house, and there I do a lot of research and thinking.

Having that distance from the market is important. Both Hong Kong and Singapore are great hubs, which reduces the need for me to travel frequently – sometimes travelling can be an inefficient use of my time.

The concentration in the portfolio means that my routine always starts around the portfolio, the existing positions and keeping myself up-to-date with those. I always try to look at a couple of new situations each day, just to keep a fresh idea flow coming through on a consistent basis.

The Bloomberg FA function is great for this. It used to take analysts three days to come back and report. Now it takes fifteen or twenty minutes for me to do the same work. That’s allowed me to develop the ability to understand a company’s financials very quickly. One of the things I’m cautious about is being too reliant on management engagement.

When you have a close relationship with management, it’s a positive from an investment point of view, but you can also inherit their biases. You’ve got to be careful. That’s why when I start looking at a company, I begin with the numbers. What do the numbers tell me? What’s the track record?

I speak to a range of people external to the company to get independent views. I have an extensive personal network thanks to years in banking, but given we’re opportunistic, we could be in any sector or any country. We therefore use an “expert network” to put us in contact with other sources where needed. Having that diversity of information in conjunction with management engagement enables us to get to the bottom of a situation and understand what’s going on in the company. If we don’t understand it, then we don’t invest.

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