Idea Brunch with Brian Finn of Findell Capital

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

Brian is currently the chief investment officer of Findell Capital Management, a long/short small-cap focused equity fund he founded in July 2019. Before launching Findell Capital, Brian was a managing director at MAK Capital and an analyst at Force Capital and Glencore.

Since July 2019, Findell Capital has returned 141% net of all fees, compared to 21% for the Russell 2000. Findell launched with $14mm and manages $75mm today.

Idea Brunch interviews are published on the first and third Sunday of every month. Our next interview comes out on Sunday, May 7 and our last two interviews were “Idea Brunch with Aaron Sallen of Merion Road Capital Management” and “Idea Brunch with John Maxfield on Bank Investing.”

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

I didn’t do two years of banking and then PE and then hedge funds. For better or for worse, I have had a more varied upbringing in the investment world.

After college, I worked on a prop desk at Deutsche Bank trading mortgage derivatives. I joined in June of 2007 just as the mortgage world exploded.

I left in 2009 and went to Columbia Business School. Afterward, I ended up in Switzerland at Glencore in one of their commodity groups where I was analyzing potential acquisitions.

In 2012, the commodity world was also on the verge of blowing up and so I got back to New York and formally entered the long/short equity space. I worked first at a fund called Force Capital for 2 years and then MAK Capital for five years.

MAK was run by a guy named Mike Kaufman, who had quietly put together one of the best hedge fund records around. He was a wonderful guy to work for and gave his analysts freedom to find their niche. While we focused a lot on shorting, I found that there were opportunities within dislocated small caps and started building out a track record in a managed account.

The approach worked and when the time was right, I took that managed account and converted it into a limited partnership in 2019 and took on outside capital.

What differentiates you from the numerous other equity investors with a small-cap bent? Why do you think you’ve been able to meaningfully outperform since your launch four years ago?

Nothing is fixed in the market — except one thing and that is human nature. More specifically our human nature has hardwired us to make decisions in predictably wrong ways.

That basic truth is something that I think about a lot as an investor.

It started when I was an undergrad. I found myself trading a PA and making decisions that seemed rather arbitrary.

Trying to better understand my own psychology and the markets, I started doing research for a Harvard Business School doctoral student named Brandon Adams. This research led to us co-authoring a book called The Story of Behavioral Finance (2006), where we outlined the academic research to date on the different behavioral biases at play when it comes to investing.

Since we published, the field of behavioral finance has exploded in the cultural zeitgeist with Lewis’ The Undoing Project (2016) and Kahneman’s Thinking, Fast and Slow (2011). But while more people are aware of these biases, that hasn’t stopped them from existing.

I think to be a good investor generally, you have to be aware of the fact that the market is still ruled by humans who fall prey to their own rules of thumb.

Investors will assume something to be true because it has been true in the recent past (e.g., recency bias). They will not incorporate new information (e.g., anchoring bias) or will let a loud but fundamentally unimportant headline distort perception (e.g., representativeness bias).

These biases create dislocations in price, which is where you can find skewed risk-rewards.

Small caps happen to be a great area to look at in this respect because they are already underfollowed and haven’t been combed over by algos and tend to have a lot of retail investors.

How does this process work for your fund?

We generally start with a dislocation — so looking for a behavioral or technical factor that creates some sort of mispricing. On the technical side, that could be a litigation or a corporate action or just a complicated story or product.

When a situation is complicated with lots of seemingly important variables you have to have a distillation process. We ask and try to answer the same basic questions for every stock. The goal is to see if we can identify the one to two key investing factors or KIFs that we think will drive the end outcome.

What you want is an outcome that can be determined by being able to successfully answer one or two questions. If you put all of your diligence into those one or two key questions you can actually develop an edge.

If you are in a situation where 50 things can decide the outcome or the KIF is an exogenous macro variable, then you can never develop an edge and differentiated view.

You recently disclosed a ~4% stake in Oportun Financial (NASDAQ: OPRT) and released a letter to the board calling for sweeping changes at the company including new management and cost cuts. Why is Oportun Financial a compelling investment opportunity?

We haven’t done any activism, but we did do our first activist letter the other week in Oportun (NASDAQ: OPRT — $128 million). That should say something about how painfully obvious the situation is there.

OPRT has an amazing business where they provide short-term loans to underbanked folks.

Someone who has a job but can’t get access to credit because they don’t have a bank or borrowing history can go to Oportun and get a small loan of $1-5k. They typically pay it back within two years and that starts the process of building a credit score.

This is a great business — you have a bunch of high-interest rate short duration loans with highly incentivized borrowers trying to build their credit scores.

The problem is that CEO Raul Vazquez mistook this small specialty lender to be a fintech company. He wasted a bunch of money on nonsensical acquisitions and ballooned the corporate overhead.

There really is nothing to show for these acquisitions or any of these additional operating expenditures — except some write-downs and a bloated cost structure.

You can see this clearly when you compare OPRT to their rival One Main Financial (NYSE: OMF).

OPRT is down 90% since its IPO in 2019 while OMF has returned 50%. OPRT’s opex per loan was under $400 in 2016 and today it is over $1,000 while OMF’s opex per loan has stayed flat.

It is not a mystery as to how all these cost ratios got screwed up.

Since 2019, OPRT almost doubled its corporate headcount from 513 to 875 — while its competitors have been shedding. These middle managers cost them 3 to 10X more than their retail employees who actually generate and service the loans.  

You can go on their website and look at their 27-person executive team and see for yourself how many have overlapping roles. Do you really need three different heads of human resources?

It calls to mind the Teldar Paper quote from the movie Wall Street:

“Teldar Paper has 33 different vice presidents each earning over 200 thousand dollars a year. Now, I have spent the last two months analyzing what all these guys do, and I still can't figure it out.”

I don’t know how this Frankenstein got built — probably some combination of a sleepy board and an ambitious CEO who wanted to do everything – but it has to be dismantled. Either the board fires the CEO or the CEO reverses all of his asinine hiring decisions.  

The good news is that when they do act, this is a company that could easily generate $3 a share in earnings and be worth +$20 versus sub $4 today.

Mark Zuckerberg was called to account by an activist for his costly pivot to the metaverse. He listened and reacted and the stock has doubled. Would hope that Raul has the intelligence and humility to do the same.

If he doesn’t, he will eventually be fired. To date, we have spoken to over 25% of the outstanding float and there is strong support for our letter.

What is another interesting idea on your radar now?

Another name that we like is Liquidia (LQDA — $437 million).

LQDA has been involved in patent litigation that has prevented them from bringing their product — a dry powder inhaler for treating Pulmonary Arterial Hypertension (PAH) called Yutrepia to market. The big gorilla in the PAH space, United Therapeutics (NASDAQ: UTHR), sued LQDA in order to delay their launch.