Idea Brunch with Andrew Martin of Fairlight Capital

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

Andrew is currently the CEO of Fairlight Capital, an alternative investment manager based in Greenwich, Connecticut. Before launching Fairlight in 2019, Andrew had 20 years of institutional investment management experience, including time at a hedge fund in London and the asset management arm of AIG in the US. Fairlight’s investor letters are available on its website and they are active @Fairlight_Cap on Twitter.

Thanks for doing Sunday’s Idea Brunch! Can you please tell readers a little more about your background, your responsibilities at Fairlight, and why you decided to launch a fund?

Prior to launching Fairlight, I spent 20 years working across a variety of financial institutions, banks, and hedge funds, starting off as a quant and then moving to portfolio management and risk management. In my role as CEO, I am responsible for the day-to-day operations of the firm, portfolio oversight, as well as fundraising and investor relations.

Fairlight Alpha Fund, a long/short equity fund, was launched at the beginning of 2019 because our experience and expertise give us a significant edge in identifying and investing in companies that are undervalued by the market. This is due to our deep understanding of the underlying companies we invest in and our willingness to take on and manage more liquidity risk than other funds.

We are also willing to take on more reputational risk than other managers. This means we are willing to go against the crowd and invest in companies and situations that many fund managers may not want to because the risks of being wrong are too high. For most managers, it is better to be wrong with the crowd than correct all by yourself. For example, when investors are fleeing Hong Kong markets, we are rolling up our sleeves and going to work analyzing stocks in this market. It can be very difficult for managers to separate the noise from the signal, and we work hard to insulate our process from the short-term sentiment and news cycle. If you tell us this region, sector, or group of stocks that are unpopular we want to go there to find one or two stocks that are severely mispriced. We are looking for the baby thrown out with the bathwater.

In your 2021 investor letter, you write that you have reviewed “all South East Asian listed stocks up to $1 billion valuation.” You’ve also talked about finding value in OTC-listed securities and your desire to go off the beaten path. How are you able to look at so many companies? What are you looking for?

That’s right. In South-East Asia, we currently look at the listed companies in Singapore, Hong Kong, and other major economies. There is a lot of economic progress being made in the South Asian, Southeast Asian, and East Asian regions. To ignore this region of the world seems very unwise. But we also want to invest in markets that have well-developed legal and regulatory frameworks.

We progressively filter each business and dive deeper into the analysis at each pass. When we look at these companies, we want to be able to understand the business model and the accounting. Second, we want to understand the business environment, competition, and addressable market for the business. So, we’re looking for companies that we think are undervalued and companies that we think have a durable competitive advantage. It’s a very simple framework. If you turn over thousands of rocks across the globe you will quite likely find some hidden gems.

How has investing in South East Asia gone for you? What are the necessary ingredients for success in investing in that market? How does it differ from the U.S.?

There was a very interesting article published by Putnam Investments (“Why now is the time to consider international small caps”) that talked about relative valuations in different size companies and US companies versus non-US. They found that we are at a historically low relative valuation for non-US micro-cap companies at this point versus US small or large cap. This is what we have found from the bottom up as well.

We didn’t set out to invest outside the US, but recent market overperformance in 2019-2021 pushed us in that direction. Some of that has started to reverse this year with US markets entering a bear market, whereas Singapore has held up pretty well.

The other interesting point is that there is a large dispersion in valuation in the non-US markets at the moment and so the Asian region is a rich area for stock pickers to search through because the valuations vary so much due to a less developed institutional investment industry in the region.

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

We think there are many community banks in the USA that are cheap, especially the banks that are recipients of preferred capital from the U.S. Treasury. This investment has been very well analyzed by Dirtcheap Stocks.

One specific idea we like is Azeus Systems Holdings (Singapore: BBW — S$230 million), a Hong Kong-based IT, consulting, and business services company. We feel it is still cheap given the long runway it has for the business, the change in focus on the Products division, and the current valuation given future growth as well as the very large contract it won earlier in the year with the Hong Kong government. It operates out of Hong Kong and is Singapore listed, but sells its products and services over the entire globe. The two most important products are Convene (board management software) and Convene AGM (virtual shareholder meeting software). These sit within the Products segment of the business which is growing rapidly, requires very little capital to expand, and has very high gross margins (now north of 70%).

The business throws off a lot of cash with the main problem for the business being what to do with that cash! It’s exactly the kind of business we look for at Fairlight, with a compelling valuation, growing revenue, low business input costs, and cash building up on the balance sheet. Much of this cash is now being returned to shareholders with a growing dividend (the full-year dividend this year was S$0.29 or around 3.8%).