Idea Brunch #2 with Balkar Sivia of White Falcon Capital

Welcome to Sunday’s Idea Brunch, your interview series with great off-the-beaten-path investors. We are very excited to interview Balkar Sivia!

Balkar is the founder and portfolio manager of White Falcon Capital, a Toronto-based partnership he launched in November 2021. Before starting White Falcon, Balkar worked as a Vice President and Investment Analyst at Burgundy Asset Management in Toronto and as an Investment Analyst at McElvaine Investment Management in Vancouver. Balkar has an undergraduate degree in electrical engineering but found his calling in security analysis. Balkar was previously featured on Idea Brunch in June 2022.

Balkar, thanks for doing Sunday’s Idea Brunch again! Can you please tell readers a little more about your background, White Falcon Capital, and how things have been going in the last two years?

Thanks for having me on again, Edwin. I also must admit that I look forward to reading Idea Brunch every week and that I've gotten a couple of actionable ideas from this newsletter. Thank you for putting it all together.

I have 15 years of investment experience and I believe in deeply understanding the key drivers of the business to gain conviction. I am a value investor but my approach doesn't revolve around seeking low current valuations. Instead, our focus lies in identifying opportunities with low expectations compared to their potential future performance. We look for mispricings – the market can misprice business quality, long-term business prospects, the durability of earnings growth, sustainability of cash flows, or the forthcoming inflection in a business.

White Falcon is a long-only investment partnership that I founded in November 2021. We follow the Buffett partnership model and charge no management fees and have a 15% performance fee with a high watermark. 

Looking back at the last two years, a couple of things stand out:

First, we could not imagine that, only a few months after our launch, we’d be able to buy so many high-growing quality businesses at dislocated prices. We were able to upgrade the quality and valuations of the portfolio significantly during the 2022 bear market. This bore fruit in 2023 when we had a good year on a relative and absolute basis. As an example, we talked about Nu Holdings (NU) in our last interview and that stock has done remarkably well.

Second, when we launched, a lot of capital commitments did not come through, so we started with friends and family capital (I had to re-read the story of the Chinese farmer!). However, we were able to attract some HNW individuals and a large family office in 2022 when markets were starting to get volatile. This helped us deploy a lot of capital at very opportunistic valuations across the portfolio. In hindsight, it was a good thing that we did not launch with higher AUM! It is always satisfying when the clients — we call them our partners — have a good experience.

Can you please tell readers a little more about your investment process at White Falcon? For example, how do you size positions? What’s your average holding period?

We would describe the strategy as unconstrained and opportunistic. The ethos of White Falcon is not to be in a ‘box’. We divide the portfolio between Compounders, Value Today (including special situations) and Value Tomorrow (dislocated growth) and the relative weights in each bucket are opportunity dependent. In each category, we demand that the business be of high quality and underwrite when we can see a double in the stock price in 3-5 years.

As an example, in 2022, we were deploying capital into Value Tomorrow companies and buying dislocated growth stocks. Today, we are recycling capital into small and mid-cap stocks where we find valuations to be much more reasonable.

We manage a ~ 20 stock portfolio where the top 5 positions are 7-8% each, then we have a bunch of 4-5% positions, and a tail of 1-3% positions. This is what helps me sleep best at night! Our motto is to be concentrated enough to matter but diversified enough to survive. Time is more important than returns when it comes to compounding.

In June 2022, you pitched Nu Holdings (NYSE: NU) as your top idea. Since then, the stock has increased ~150% from ~$3.50/share to over $9.00/share. What went right with Nu Holdings and where do you think the stock goes from here?

Yes, this one has worked out well! Our thesis was based on our confidence in the business model and management. We had seen the business model work in Russia and India and everything we read about David Valez and the team made us more and more confident in their capabilities to execute this business model. Since we pitched Nu, the business has beaten expectations on client growth, revenue growth, and margin expansion.

I profiled Nu Holdings and wrote a 14-page investment thesis in our FY 2023 letter and your readers are welcome to read it. We believe the stock has more upside. We also believe this one has successfully transitioned from the ‘value tomorrow’ to the ‘compounder’ category within the White Falcon portfolio.

Another successful investment for White Falcon was Rover Group (NASDAQ: ROVR), a beaten-down pet care services company that went public via SPAC. The company is up ~200% in the last twelve months and Blackstone recently offered to acquire the company at a sizeable premium! Why drew you to Rover?

Rover is a two-sided marketplace that connects pet parents with pet care providers who offer overnight services, including boarding and in-home pet sitting, as well as daytime services, including doggy daycare, dog walking, and drop-in visits. The marketplace has more than 500,000 pet care providers across North America and Europe.

Rover (ROVR) provides an interesting case study that aptly showcases the evolving nature of value investing. Our average cost on Rover was about $4.3 per share and we featured Rover in our Q3 2023 letter when it was trading at $6.5 per share. In November 2023, Blackstone made a cash offer for Rover at $11 per share. However, at that time, from a headline perspective, Rover did not screen well as a value stock as it was trading at 19x EV/EBITDA and 60x P/E. 

We argued in our report that Rover is underearning and the headline valuation metrics are therefore not appropriate. We believed, by looking at other scaled marketplace businesses, that Rover had the potential to achieve 30%+ adj. EBITDA margins (vs. 10% reported). In an environment where businesses are directing investments through the income statement, the lesson from Rover is that value investors must extend their analysis beyond the surface-level reported numbers and delve into the genuine earning potential of a business. 

What are two or three other interesting ideas on your radar now?

Absolutely, let’s talk about three ideas.