Davide Serra's Two Long Ideas From Sohn London Conference ~ market folly

Monday, November 26, 2012

Davide Serra's Two Long Ideas From Sohn London Conference

Continuing our series of notes from the Sohn London Investment Conference, next up is Davide Serra of Algebris Investments who presented two long ideas.

Davide Serra’s Algebris Investments hedge fund specializes in the global financial  sector. Serra founded the fund in early 2006 and the flagship Algebris Global  Fund launched in October 2006. Algebris subsequently launched the Algebris Emerging  Markets Financials Fund in January 2010, the Algebris Financial CoCo Fund in March 2011  and a UCITS version of this strategy, the Algebris Financial Credit Fund in August 2012.

Long African Development Corp (GER:AZC)

African Development Corporation is a financial services group that focuses on investments  in sub-Suharan Africa’s banking and insurance markets as well as on proprietary  investments in frontier markets. It is listed on Germany’s Frankfurt Stock Exchange and  has a Euro 70m market cap.

ADC follows an active management approach with a team of experts that provides  operational management services, investment banking expertise and merchant banking  services. Serra argued that ADC is an emerging pan-African banking group.

ADC is backed by the World Bank. Serra said that 90% of ADC’s investments are  guaranteed by the World Bank, even against the possibility of war breaking out.  He gave some valuation metrics and suggested the company was cheap trading at P/E 2x  and 1x cash.

Long Contingent Convertibles (CoCos)

Serra, who runs the Algebris CoCo fund, unsurprisingly pitched CoCos as his second idea.  According to a recent article in the FT, Serra Algebris CoCo Fund is up 45% in 2012.

CoCos are bonds issued by banks to try to stabilise their balance sheets and meet the capital requirements set by Basel III. They are a type of convertible bond that converts to  equity following certain events. Unlike normal convertible bonds they do not convert at a strike price and this can make them harder to value.

Serra warned that it is best to invest in CoCos of the systemically important financial  institutions. He mentioned that he liked CoCos from banks where governments own a lot  of the equity. He named Lloyds and Barclays in the UK and Bank of America and Citigroup  in the US.

Serra viewed CoCos as good investments as you are investing higher up the capital  structure than equity investors, the banks are back-stopped by the state and you get paid  a coupon of 8% or 9% to do so.

One of the features of the CoCo market is that there are about 400 issuers of the bonds.  Maturities are usually 4-5 years. Algebris is the largest fund dedicated to trading this  complex market.

For the rest of the hedge fund presentations from this event, head to notes from Sohn London Investment Conference.

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