BACIT Limited BACT
January 12, 2014 - 6:18pm EST by
heffer504
2014 2015
Price: 118.50 EPS nm nm
Shares Out. (in M): 381 P/E nm nm
Market Cap (in M): 451 P/FCF nm nm
Net Debt (in M): 750 EBIT 0 0
TEV: 750 TEV/EBIT nm nm

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Description

Bacit is a closed end fund that invests in other hedge funds.  As such, it should be thought of as a fund-of-funds.  Since funds-of-funds seem to be in secular decline, you would think that this would trade at a discount to NAV.  Instead, it trades at ~ 3% premium.  So, this is a bad investment, right?
 
Actually, I think this is a very interesting way to invest in hedge funds, and as such should trade at a meaningful premium to NAV.
 
BACIT stands for Battle Against Cancer Investment Trust.  It was set up to further a noble purpose, and its underlying managers have bought into this purpose, and agreed to manage money for the Trust on a fee-free basis. 
 
 
 
Here is the description from the website:
 

BACIT invests through BACIT Investments LP Incorporated, a Guernsey limited partnership (the ‘‘Limited Partnership’’) which makes investments and hold assets in a manner consistent with BACIT’s investment policy. The general partner of the Limited Partnership is BACIT GP Limited, a wholly-owned Guernsey incorporated subsidiary of the Company. BACIT is the sole limited partner of the Limited Partnership.

BACIT’s investment objective is to deliver superior returns from investments in leading long-only and alternative investment funds across multiple asset classes.

BACIT only invests where the relevant investment manager provides investment capacity on a ‘‘gross return’’ basis, meaning that BACIT and its subsidiaries (the “Group”) do not bear the impact of management or performance fees on its investments. This may be achieved by the relevant manager or fund agreeing not to charge management or performance fees, by rebating or donating back to the Group any management or performance fees charged or otherwise arranging for the Group to be compensated so as effectively to increase its investment return on the relevant investment by the amount of any such fees.

The composition of the Group’s investment portfolio will vary over time in terms of its investment in asset classes, strategies, managers and funds but BACIT intends to be invested in at least 15 distinct investment funds or managed account strategies at any time.

BACIT also intends to invest up to one per cent. per annum of NAV to acquire interests in drug development and medical innovation projects undertaken by the Institute of Cancer Research (“ICR”) or its subsidiaries in the field of cancer research and therapeutics which have the potential for commercial development and application.

BACIT will make an annual charitable donation, paid in arrears, of one per cent. of NAV, half of which will be donated to the ICR and half of which will be donated to the BACIT Foundation (registered charity number 1149202). The BACIT Foundation (net of the BACIT Foundation’s running expenses) will grant those funds to charities named in a list of charities proposed annually by the BACIT Foundation (including the ICR) in proportions determined each year by investors in BACIT. The list of charities will be sent to shareholders at or around the same time as BACIT’s annual report is dispatched in each year.

 

So, the fund charges 1% which it donates to charity, "invests" another 1% in cancer therapeutics, and otherwise does not charge management or performance fees.  It is unclear whether the drug development will ever be commercialized, so let's assume it is a 2% management fee.  It had a return in the low teens for last year, which is roughly respectable.  If we accept that fund-of-funds trade at NAV (since there is $500B invested at par in these vehicles), then where should this trade?

 

One could argue that, if fees were equal, it should trade at a premium since it is fully liquid and can be sold instantly, instead of a fund-of-funds interest which generally has significant liquidity issues.  Let's assume this away for now also.

 

All else equal, say a collection of funds returns 7.5% (net) per year-- i.e., an institutional investor's hurdle.  this would be around 11% before fees.  A fund-of-funds of this collection of funds would return probably 6.5% (at best).  This same collection of funds will return 9% under the Bacit structure.  As such, the NAV premium to equilibrate the long-term appreciation would be 38%.

 

Clearly there is should be some non-infinite horizon, though.  So, let's figure out the equivalent return assuming you hold the fund for 10 years, and sell it at par at the end of the holding period (I believe this is very conservative, since it should never trade at par).  Under the same 7.5% assumption, the price you would be willing to pay is an 18% premium (I am discounting the 2.5% excess return stream at a 6.5% discount rate for 10 years).  I think this 18% premium is the LEAST that one should be willing to pay for this instrument.

 

Plus, you're helping to cure cancer-- Bonus!

 

I do not hold a position of employment, directorship, or consultancy with the issuer.
Neither I nor others I advise hold a material investment in the issuer's securities.

Catalyst

recent merger of share classes in the last few weeks has increased liquidity, and there should be more interest in the vehicle over time
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    Description

    Bacit is a closed end fund that invests in other hedge funds.  As such, it should be thought of as a fund-of-funds.  Since funds-of-funds seem to be in secular decline, you would think that this would trade at a discount to NAV.  Instead, it trades at ~ 3% premium.  So, this is a bad investment, right?
     
    Actually, I think this is a very interesting way to invest in hedge funds, and as such should trade at a meaningful premium to NAV.
     
    BACIT stands for Battle Against Cancer Investment Trust.  It was set up to further a noble purpose, and its underlying managers have bought into this purpose, and agreed to manage money for the Trust on a fee-free basis. 
     
     
     
    Here is the description from the website:
     

    BACIT invests through BACIT Investments LP Incorporated, a Guernsey limited partnership (the ‘‘Limited Partnership’’) which makes investments and hold assets in a manner consistent with BACIT’s investment policy. The general partner of the Limited Partnership is BACIT GP Limited, a wholly-owned Guernsey incorporated subsidiary of the Company. BACIT is the sole limited partner of the Limited Partnership.

    BACIT’s investment objective is to deliver superior returns from investments in leading long-only and alternative investment funds across multiple asset classes.

    BACIT only invests where the relevant investment manager provides investment capacity on a ‘‘gross return’’ basis, meaning that BACIT and its subsidiaries (the “Group”) do not bear the impact of management or performance fees on its investments. This may be achieved by the relevant manager or fund agreeing not to charge management or performance fees, by rebating or donating back to the Group any management or performance fees charged or otherwise arranging for the Group to be compensated so as effectively to increase its investment return on the relevant investment by the amount of any such fees.

    The composition of the Group’s investment portfolio will vary over time in terms of its investment in asset classes, strategies, managers and funds but BACIT intends to be invested in at least 15 distinct investment funds or managed account strategies at any time.

    BACIT also intends to invest up to one per cent. per annum of NAV to acquire interests in drug development and medical innovation projects undertaken by the Institute of Cancer Research (“ICR”) or its subsidiaries in the field of cancer research and therapeutics which have the potential for commercial development and application.

    BACIT will make an annual charitable donation, paid in arrears, of one per cent. of NAV, half of which will be donated to the ICR and half of which will be donated to the BACIT Foundation (registered charity number 1149202). The BACIT Foundation (net of the BACIT Foundation’s running expenses) will grant those funds to charities named in a list of charities proposed annually by the BACIT Foundation (including the ICR) in proportions determined each year by investors in BACIT. The list of charities will be sent to shareholders at or around the same time as BACIT’s annual report is dispatched in each year.

     

    So, the fund charges 1% which it donates to charity, "invests" another 1% in cancer therapeutics, and otherwise does not charge management or performance fees.  It is unclear whether the drug development will ever be commercialized, so let's assume it is a 2% management fee.  It had a return in the low teens for last year, which is roughly respectable.  If we accept that fund-of-funds trade at NAV (since there is $500B invested at par in these vehicles), then where should this trade?

     

    One could argue that, if fees were equal, it should trade at a premium since it is fully liquid and can be sold instantly, instead of a fund-of-funds interest which generally has significant liquidity issues.  Let's assume this away for now also.

     

    All else equal, say a collection of funds returns 7.5% (net) per year-- i.e., an institutional investor's hurdle.  this would be around 11% before fees.  A fund-of-funds of this collection of funds would return probably 6.5% (at best).  This same collection of funds will return 9% under the Bacit structure.  As such, the NAV premium to equilibrate the long-term appreciation would be 38%.

     

    Clearly there is should be some non-infinite horizon, though.  So, let's figure out the equivalent return assuming you hold the fund for 10 years, and sell it at par at the end of the holding period (I believe this is very conservative, since it should never trade at par).  Under the same 7.5% assumption, the price you would be willing to pay is an 18% premium (I am discounting the 2.5% excess return stream at a 6.5% discount rate for 10 years).  I think this 18% premium is the LEAST that one should be willing to pay for this instrument.

     

    Plus, you're helping to cure cancer-- Bonus!

     

    I do not hold a position of employment, directorship, or consultancy with the issuer.
    Neither I nor others I advise hold a material investment in the issuer's securities.

    Catalyst

    recent merger of share classes in the last few weeks has increased liquidity, and there should be more interest in the vehicle over time

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