Idea Brunch with Balkar Sivia of White Falcon Capital

Balkar on launching a Buffett-inspired partnership and investing off-the-beaten-path

Welcome to Sunday’s Idea Brunch, your weekly interview series with underfollowed investors and emerging managers. 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. You can find Balkar’s letters to partners on his website and sign up to receive future letters there as well.

Balkar, thanks for doing Sunday’s Idea Brunch! Can you please tell readers a little more about your background and why you decided to launch White Falcon Capital?

Thank you for interviewing me. Idea brunch is a great idea!

I went to engineering school at the University of British Columbia. As I started working and investing my paychecks, I soon figured that my passion is actually in investing. From there, I embarked on a journey to learn everything I could about security analysis. In this process, I devoured the writings of Warren Buffett and Charlie Munger (who have become lifelong heroes) and read many other books on investing. I internalized Charlie Munger’s saying that if you want something, you should deserve it. I wanted to learn under a mentor, and with a non-traditional background, I knew I had to do something different. In 2008, I started writing and sending research reports to show my work (along with my resume) to investment management firms that I respected. I also started publishing my work publicly on a blog (I was perhaps 10 years too early in using ‘Substack’ to land a job).

Tim McElvaine, who runs McElvaine Investment Management and worked under famed value investor Peter Cundill, took interest in my work. I offered to work for free but he was too generous to allow that and offered me an investment analyst position in 2010. This was my break into the industry. Tim has a deep-value style of investing and invested in US, Canadian and Japanese equities. I learned a tremendous amount not only about fundamental analysis but also about margin inflections, hidden assets, and liquidation value.

In 2012, I secured an investment analyst position at Burgundy Asset Management in Toronto. Burgundy is a highly respected firm with $30 billion in assets under management. It prides itself on its deep research and client-first culture. Burgundy takes a long-term view and invests in quality companies with a value bias. Here, I had the opportunity to do deep dives on numerous businesses. In this endeavor, I conducted hours of research including reading industry publications, regulatory documents, meeting with management, traveling for site visits, and talking to experts. I had a wonderful time learning and growing as an investor at Burgundy. Over time, my responsibilities increased and I also had an opportunity to manage an internal portfolio after I was promoted to Vice President.

In 2021, I launched White Falcon for two reasons.

First, I wanted to paint my own painting. I increasingly had ideas and convictions that were different from the investment management industry. For example, I own securities that are conventionally defined as ‘growth’ and ‘value’. I own commodity producers as well as non-profitable tech companies. I own large and small caps. The ethos at White Falcon is to be commercial and opportunistic and maximize the return potential of the portfolio while minimizing downside risks.

Second, I wanted to launch a product with low minimums that the everyday investor could access. In Canada, I found that people with small sums of capital were not being served well by the industry. They were paying very high fees for mediocre products. I also strongly believe that index funds will not do well over the next decade and will underperform good active investors (see 1968-1982 or 2000-2008).

You own a collection of precious metals royalty companies. Can you tell readers a little about royalty companies and why you find them attractive?

I wanted to own gold as a hedge in the portfolio and figured that precious metal royalty companies are the best way to express that opinion.

Why gold?

We have had recurring crises since 1987. In each and every subsequent crisis the Fed has increased its role and interfered to stabilize the system. The consequence of this policy has been that debt in the system has increased over time.  Since 1982, bond yields have been declining with a trend of lower highs and lower lows. Every time these yields perk up, there is an ‘accident’ that forces the Fed to intervene with even more easing. In 2019, there was a repo crisis, and the Fed had to fix it with “not QE.” In March 2020, along with the market melt-down, the credit markets came to a halt. It was not until the Fed directly intervened in the corporate bond market that these companies could start rolling their paper again.

For a moment, imagine that the Fed cannot rescue the system for whatever reason. What happens to a bottom-up portfolio? I am a steward of capital for people that have spent decades accumulating this capital. The only asset that will do well in this scenario is gold. As you know, gold has no counterparty risk. Warren Buffett is a hero and he hates gold. He believes it is not productive and does not compound. I do not disagree. We see gold as currency and precious metal royalty companies do produce free cash flow and compound. I allocate 10-15% of the portfolio to royalty companies which then helps me not worry too much about macro and concentrate on bottom-up stock picking for the other 85-90% of the portfolio.

Precious metals royalty companies are businesses that lend capital to a mine in return for a royalty or stream on the precious metals produced from that mine. A royalty is usually structured as a percentage of annual production where the royalty company has no other obligation but to deposit the cheque every year. The attractive part of a royalty deal is that it is usually perpetual. This means that if the mining company spends capital to increase production from the mine, the original royalty holder gets paid on this additional output. Due to this, there is tremendous optionality to a mining royalty. Importantly, a royalty company is a better inflation hedge compared to a mining company which will have inflation in its labor and equipment costs.

We own a basket of royalty companies in the White Falcon portfolio. We own larger royalty companies such as Franco Nevada (NYSE: FNV — $28.1 billion) and Wheaton Precious Metals (NYSE: WPM — $19.1 billion) but also mid-small caps such as Triple Flag Precious Metals (Toronto: TFPM — CAD$2.72 billion) and Nomad Royalty (NYSE: NSR — $507 million).

You have a pretty diverse portfolio – ranging from a commodity producer to a large IT services provider. How are you able to come up with off-the-beaten-path ideas in an industry with so much groupthink?

Yes. That is the ethos of White Falcon. We like the diversity of return streams. People forget that when Buffett had his partnership he divided the portfolio between ‘Generals’, ‘Controls’, and ‘Workouts’. All three categories had different catalysts and timetables for returns. I believe this is an important insight into managing a portfolio.

We own compounders, we own value stocks (including some deep value stocks) and we also own long-duration stocks.  We find no contradiction in this. We look at each situation opportunistically. We understand ROIC but we also understand capital cycles.

In all this, valuation discipline is extremely important as we have to recognize that what we buy and the price at which we buy it are the only two factors we control.

The IT company you reference is EPAM Systems (NYSE: EPAM — $17.3 billion). EPAM is a high-quality IT services provider with a majority of its workforce based in Ukraine, Belarus, and Russia. We bought it after Russia invaded Ukraine and there was fear that this would permanently impair EPAM’s business. I have worked in software development and have analyzed IT services companies in the past. Our key insight was that, while there are risks, the pendulum has swung too much to the downside (detailed report in Q1 2022 letter). Given the risks, we bought a small position at $205 per share and averaged up as the thesis was de-risked. Many enterprises are still just catching up in terms of the technology stack and good IT services firms have a long runway. EPAM is now a top 5 position in the portfolio and we believe it can compound in the high-teens from here.

On the other end of the spectrum, we have owned Teck Resources (NYSE: TECK — $22.8 billion) since the inception of the firm. The mining industry overall has been through a very tough time over the last 10 years. The industry has been starved of capital. Teck has a portfolio of copper, met coal, and zinc assets and has a big mine (QB2) coming up in Chile. When we looked at the company the big CapEx cycle was in the rear-view mirror and management had publicly stated that their priority will be to return capital to shareholders once QB2 comes online. We figured that the risk-reward is favorable given the improving fundamentals and depressed valuation and initiated a position.

What are some interesting ideas on your radar now?

Tim McElvaine taught me to look at situations where people are selling for reasons other than fundamentals. Hedge funds and retail have been selling long-duration or high-growth stocks and we have been spending a lot of time here.

We recently initiated a position in Nu Holdings (NYSE: NU — $16.9 billion), a neo-bank based in Brazil. Banks are a very different niche in terms of security analysis and I have had a history of investing in financial institutions in emerging markets. (For example, we wrote about HDFC Bank in our Q4 2021 letter.) Nu reminds me of another Indian financial company called Bajaj Finance. The ethos of these businesses is to lend to a credit-starved population leveraging data and analytics without the burden of OpEx-heavy investments such as branches. A bank that has cost-to-serve advantages will gain market share as it can lend at lower yields and still make the same ROE as a traditional bank.

Brazil is a notoriously difficult place to do business and it is remarkable what David Velez and the team have built at Nu Bank. Over this decade, Brazil has been in one crisis or another. Nu Bank now has one-third of Brazil’s population as customers acquired at a very low cost and the work hereon is to maintain healthy NPLs while increasing revenue per client. They are also expanding in Mexico and Columbia which have similar financial inclusion opportunities as Brazil.

We see a lot of investors look at Nu as a fintech and value it on EV/S or other such metrics. We believe this is wrong. It will use its balance sheet for credit card and personal loans while all other products will be provided on a marketplace model with Nu earning a fee. It is important to understand that the model has tremendous operating leverage and will produce substantial earnings in a few years. By our calculations, it is currently trading at 12x 2025 earnings.

The other company where we have recently initiated a position is CopperLeaf Technologies (Toronto: CPLF — CAD$456 million). CopperLeaf is a small software company that sells asset management and business analytics software to utilities such as electric utilities, water infrastructure, and oil and gas among others.

Customers in those verticals adopt Copperleaf’s products to perform predictive analytics, performance modeling, portfolio optimization, budgeting, plan approvals, and scenario analysis. Its major competitor is PowerPlan, which is owned by Roper Technologies.