Deep Sail Capital Partners LP is officially launching to outside investors as of July 1, 2022.
Getting to this point has been a several year journey for me but it has been a long time dream of mine to launch my own fund.
My investor story really began in the summers of my youth in which I watched CNBC during the days I wasn't working. At the time I understood almost none of what the correspondents and investors said but I was mesmerized and excited by the idea of making money by being smarter and trading better than other investors. The stock market to me, was the greatest and most interesting game I had ever encountered. It required real world understanding, timely decision making, understanding your own biases, understanding the biases of others, and execution. After that I was hooked on the stock market and know I would be an investor in some capacity for the rest of my life.
Progressing on to my undergraduate degree at Purdue and later an MBA at the University of Chicago, it wasn't really clear to me that I wanted to manage a fund for other people until near the end of my MBA. I felt I had a very specific investment philosophy at the time, as it had been drilled into me at the University of Chicago around traditional value investing. Post-MBA, I wanted to test my investment acumen and apply what I had learned by launching a fund. I began running a small incubator fund with only a few friends and family investors in 2013.
After a few years of running what I would call a Graham-Dodd Value strategy, I realized there were serious flaws to this strategy. The main two flaws I noticed were the need to find new investment ideas (and be right about them) pretty regularly and tax optimization. In a value focused strategy where you attempt to buy an underpriced security and wait for it to be re-priced ( shorter the period the better), you tend to end up with lots of short term capital gains as portfolio turnover can be quite high. Whereas, if you want to defer taxes for a long time, you should buy exceptional long term businesses and hold them for many years. Additionally, if your strategy employs a longer hold period, you end up with long term capital gains, which are taxed at a lower rate than short term capital gains. More importantly, by holding for longer periods, you defer the payment of those taxes for years, which can be hugely accretive to capital appreciation. I think many investors have come to a similar realization and adjusted accordingly, even Warren Buffett.
This realization led me to change courses in mid-2016, from a Graham-Dodd Value strategy to a growth at a reasonable price (GARP) strategy. This new GARP strategy actively tries to buy and hold exceptional growing businesses for the long term, both to maximize our capital appreciation and to minimize our near-term tax liability.
We derive "our edge" from several key decisions that we made when developing the fund strategy. On top of a rigorous investment evaluation process, we have built the fund's strategy with specific choices that historically have shown the ability to outperform.
At the fund, we use our four pillars of an exceptional investment opportunity to guide our investment decisions. These four pillars are:
High quality business model
Exceptional management
Substantial long term growth prospects
Reasonable valuation
We attempt to view all investments in this frame; microcaps, quality, special situations, and short ideas. We try to own the best long-term businesses and short the worst.
Our long portfolio is broken into three key focus areas: quality, microcap, and special situations. We have had historical success investing in each of the three focus areas. We have identified the reasons why we believe those focus areas are good places for us to invest. I will get into each focus area further in later blog posts.
Our industry focus is a mix of the very best business types we have found, which are generally businesses that have historically generated high returns on capital, have stable growth trajectories, have little to no commodity price risk, and that we can understand. These industries include: software, financial services, payments, gaming, internet & eCommerce, tobacco & spirits, tower companies, medical instruments, medical diagnostics, rollups, and specialty semiconductors.
●Rollups
The fund strategy is based in the idea that we want to take every advantage that we can to compound our limited partner's capital. We try to fish in the right pond (industry focus), with the knowledge of what lures work best (4 pillars), and in a way we know we have had previous success (3 Areas of Focus: Quality, Microcap, and Special Situations). Each of these parts of our strategy is meant to give us a small advantage that when overlaid with a rigorous investment evaluation process will generate strong capital appreciation that can endure over the next 20-30 years.
Sean
Manager - Deep Sail Capital