Opportunistic investments are investments where there is a significant discount between the price Pinehill pays to purchase it and the replacement cost or tangible book value of the investment assets. Such assets must have no risk of product obsolescence. These types of investments emphasize a balance sheet analysis, and the assets acquired typically do not have much long-term intrinsic value over what they could be reproduced as new products. This investment approach was applied from 1992 to 1997, during a severe recession in the commercial real estate market, when over 1.4 million square feet of commercial real estate was acquired at prices that were 40% to 80% discounted to replacement cost (prices of 20 cents to 60 cents on the dollar). In 1998, these investment assets were sold to a publically traded REIT at meaningful premiums to replacement cost. This same approach is applied to investing in public securities.
Pinehill’s preferred investments are made in companies with certain qualitative and financial characteristics that it seeks to own forever. These are companies that operate in industries with barriers to entry and strong long-term demographic opportunities. The individual companies must be risk-free of product or service obsolescence and enjoy some of the following characteristics: (1) scalable growth; (2) recurring income; (3) strong free cash flow generating conservative capital structures; (4) pricing power; (5) strong brand value in low price-point industries; and (6) relatively strong financial performance during recessionary periods.
Pinehill, whether investing in private or public companies, partners with management teams who are honest, talented, have a committed long-term track record with the company and a significant portion of their net worth invested in the company independent of any stock option plans. Management must have a long-term strategy towards creating shareholder value that includes creating meaningful career opportunities for its employees, serving customers with exceedingly high standards, treating vendors fairly, and providing transparency to its stakeholders through a strong governance structure. Leaders of these companies typically inculcate family-like cultures and view the business in which they operate as a mission to provide a better stake in life for others, particularly their customers and employees.