Sohra Peak Capital Partners Q4 2023 Letter To Partners

Dear Partners and Friends,

Our partnership recorded a gain of +13.5% net of all fees, expenses, and allocations for the quarter ending December 31, 2023. Over the same period, the S&P 500 recorded a gain of +11.7% including dividends.

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The below table highlights the partnership’s key portfolio composition metrics as of December 31, 2023:

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Our partnership delivered a gain of +82.0% net of all fees, expenses, and allocations for the full year 2023. This year’s returns were unusually strong. While the laws of probability would suggest that we are unlikely to repeat annual returns of this magnitude ever again, I am nonetheless happy to share this update and to have created meaningful economic value for our partners.

Our performance this year was driven by strong collective share price appreciation across many of our core holdings. Auto Partner and Mader Group (OTCPK:MADGF) shares each appreciated by +90-95%, and Duratec Limited and American Coastal Insurance Corporation (ACIC) each saw their share prices increase multiple-fold. Although we had a collection of “winners” and “losers” among the remainder of our portfolio, our holdings were generally most concentrated in what became our biggest winners.

During a recent call with one of our investors, I was asked if I was surprised by our partnership’s returns this year. My answer was that I was not surprised that any of our individual holdings had appreciated by as much as they did given our views on price and intrinsic value. Rather, if anything, I would not have expected to have as many as four of our core holdings appreciate by close to +100% or greater in a single year.

In my experience, an investor can stack the odds of success in their favor by making sound investments, but even if you are correct in your thesis, predicting exactly when those companies’ share prices will converge with intrinsic value is closer to unknowable. I certainly did not know, at least. By understanding this and focusing on what is knowable, we continue to remain committed to our investment process, finding the best investment opportunities available to us, and over time letting the chips fall where they may.

While I often have reasonable conviction as to our eventual collection of those chips, I have far lower conviction as to the timing of when those chips may be collected. Accordingly, in our pursuit of exceptional long-term returns, if we do in fact achieve our goal of delivering returns anywhere in the realm of “exceptional,” I hope to remind you that our returns are highly likely to be volatile. We will inevitably experience bad years as well as good years. What is important to us is appreciating that we must endure the bad years in order to reap the rewards of the good years, and compounding our partners’ capital at the highest rate of return that we responsibly can. We endeavor to build upon our early results in the years to come.

Our portfolio today is composed of holdings which we are content with, including several newer companies we have not yet mentioned but are excited to eventually discuss. We are happy with our current portfolio. Worth mentioning, our top 5 holdings concentration of 74.5% at year-end was somewhat higher than usual. This was in part the result of sizable incoming investor subscriptions to the partnership for the period beginning January 1, 2024. Because we were anticipating these subscriptions, rather than re-allocate capital to meet our desired portfolio weights, we allowed these subscriptions to be received by the fund first. As of January 1, our top 5 holdings concentration was significantly reduced.

For prospective partners wishing to learn more, we are currently open to new introductions. Our partnership has seen a significant increase in investor interest in recent months. While we will continue to be selective in accepting the right partners, fortunately most prospective partners we have met have been terrific in many respects and aligned with our long-term objective.

I have also recently given a great deal of thought to our partnership’s long-term capacity for assets under management. At some point, we intend to stop accepting new capital. At the moment, we are open to accepting an additional $30 million in new subscriptions. Preserving the quality of our partners remains our top business priority, and we look forward to meeting future prospective partners.

As always, I would like to extend a thank you to all of our outstanding limited partners, including those of you who have recently joined our partnership, for your steadfast commitment and trust.

Not Letting “Good Enough” Get in the Way of “Perfect”

In our Q4 letter a year ago under a section titled Our Competitive Edge, we discussed the key high-level elements that we seek in our ideal portfolio company: a high quality business operated by a high quality management team, a demonstrated history of growing revenues and profits, an opportunity to continue organically compounding profits over a long horizon, and an attractive price relative to intrinsic value.

The below matrix, although imperfectly plotting three axes on a two-dimensional visual, illustrates our ideal portfolio company along these three variables of quality, growth, and present free cash flow yield:

In that same letter, I also examined the scarcity of public companies that exist with all three such elements intact, and the corners of the market where we usually hunt for these businesses and occasionally find them:

There are generally two types of situations in our experience where a quality company with durable, rapidly growing profits can be purchased at absolute bargain prices. The first situation is a company that is deeply out of favor, or in some cases outright hated, for the wrong reasons, where developing a correct contrarian view can provide the opportunity to purchase a great company at a giveaway price. The second situation is a company that can be bought at an absolute bargain price for the simple reason that it has not yet been widely discovered by the investing world.

… I believe our competitive edge lies in our ability to correctly identify companies that fit the second type of situation and in our willingness to be the only investors that we know of who own shares. We believe we have been able to make investments where this situation was apparent, and we also believe that these have been our best performing investments to date.

The above discussion I believe helps provide a high-level framework as to how we approach opportunity in the investment world. Through this framework, if our thesis in any given investment is correct, we believe our upside can be significant, and if we are wrong, we believe our downside is generally limited. This is also a method that we are comfortable with. We remind ourselves that there are many roads to Jerusalem; we are journeying along just one.

However, I think presenting a standalone framework misses other important aspects of the investment process that are necessary to best apply that framework, where the rubber meets the road. I often look back at my own mistakes that I have made as an investor over the years. One mistake which I have repeated often and have actively sought to correct (yet still make!), and which I believe is relevant and important to this conversation, is the mistake of letting “good enough” get in the way of “perfect” when seeking outstanding investments. The old adage advocates for not letting “perfect” get in the way of “good enough,” but in my experience, it is the inverse of this adage which provides the more cautionary tale.

If we define “perfect” here as a prospective investment which ranks highly on all three elements of quality, growth, and valuation, then we can define “good enough” as a prospective investment that compromises on one or more of those elements to varying degrees. Over time, even as I had honed my framework closer towards my idea of “perfect” today, I would still frequently find myself recommending or investing in companies which in hindsight were only “good enough.”

I think there are a handful of reasons why settling for “good enough” in the context of any investment framework can occur, and not all are necessarily bad. For one, sourcing excellent investments is difficult, and is made even more challenging under liquidity, sector, or other standard investment constraints. Depending on one’s mandate, satisficing can be the only way forward. It is also true that a portfolio of “good enough” companies can still deliver above-average returns and ultimately be good investments, even if they are not among the best possible investments available.

Commitment bias is another reason, and I would wager an underappreciated one, why an investor might select a “good enough” investment rather than discard it in lieu of finding a “perfect” one. After dozens of hours spent performing primary research, conducting calls, and building Excel models, it is easy to see how an investor might feel committed to that company as long as there is a reasonable argument to be made for its investment merits. I have certainly found myself in this scenario, particularly in my earlier years.

While there are numerous reasons why one’s portfolio may not encompass an entire collection of ideal investments, each person and their portfolio is characterized by a set of reasons specific to them. For me, recognizing my own specific set of reasons that, over the years, have led me to allow “good enough” to get in the way of “perfect,” has helped me better commit to demonstrating more patience, persistence, and discernment in my capital allocation decisions today. As a result, the correspondence between our “ideal” portfolio companies and our “actual” portfolio companies only continues to improve, in my view. We don’t have all the answers, but we attempt to improve our processes as best and as frequently as we can.

One of Buffett’s better known maxims is his analogy comparing investing to baseball, with the difference being that investing is a “no-called-strike game.” Many important investing lessons really do come back to

Buffett, with everything discussed here summed up nicely in Buffett’s words, “you don’t have to swing at everything. You can wait for your pitch.” I firmly believe we are more patient than ever in waiting for our pitch. In the long run, our partnership should be better off for it.

Administrative

Our audit and tax service provider Spicer Jeffries will be preparing the limited partner K-1 tax forms. These forms should be available to you by mid-March, and hopefully sooner.

We are exploring a new prime brokerage partner to replace our current provider Interactive Brokers. Our experience with Interactive Brokers has been nothing but positive. Given the growing size of our partnership, building and exiting positions has become an increasingly time-intensive activity for me, to the point of real opportunity cost of time that could be better spent focusing on investments. We are currently assessing our options and will report back to you should we decide to move forward with a new provider.

Closing Thoughts

Thank you for taking an interest in our latest letter. I am excited about our partnership’s future.

I remain confident that our partnership’s north star will always be to compound our capital at the highest rate of return responsibly possible. In some respects, this approach may render our partnership uninvestible by many institutional investors. That is perfectly fine by me. We will continue to accept as partners only those who understand, and who are aligned with, our objective.

If you wish to learn more about the partnership, please feel free to reach out to me directly. Our partnership currently welcomes introductions to new investors who are aligned with our philosophy and our long-term approach. Accredited Investors interested in receiving future letters can also register on our website.

I value the trust you have placed in me to invest your hard-earned capital, as the substantial majority of my own wealth is presently invested alongside yours. I look forward to writing to you again next quarter.

Most Sincerely,

Jonathan A. Cukierwar,

CFA, Manager of Sohra Peak Partnership LLC, the General Partner of Sohra Peak Capital Partners LP

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