corsair capital 2q2012 letter

7/31/2019 Corsair Capital 2Q2012 Letter

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2/6CorsairCapitalManagement,LLC|350MadisonAvenue,9 thFloor|NewYork,NY10017|212.389.8240

Conversely, the yield on German 10-year bonds is at a record low, approximately 1.2%. Per a

recent Fortune magazine article, investors used to ULVN-IUHH returns in the bond market, are now

in a new world, where UHWXUQ-IUHH risk is more the norm. Investors face the conundrum of

incurring absolute losses (i.e., paying a small negative yield to get their money back) in holding 2-

year or shorter maturity paper from Finland, Austria, Germany, Denmark and Switzerland, while

likely risking even higher real losses (after adjusting for inflation) in holding similar debt issued by

the U.S., the U.K. and Canada.

Investors everywhere are searching to obtain a decent return. However, with the memory of 2008

and last summer in mind, very few wish to take on any market risk at the moment. As Jim Grant of

*UDQWV Interest Rate Observer points out, this is the first time in 12 years that pension managers

are putting more money into fixed income securities than equities (41.4% vs 38.1%), whereas, just

a few years ago they were putting twice as much into equities (60.3%) than in bonds(29.3%). Investors remain clearly worried and are acting as if we are in a FRQWDLQHGGHSUHVVLRQ

as the Jerome Levy Forecasting Center describes it, a world with sluggish worldwide economies

and huge policy stimuli.

Looking forward, investors are also seemingly bracing themselves for a bruising presidential

election campaign. The UKHWRULF from either side is likely to be somewhat nasty and

divisive. Furthermore, no matter which side wins, the long-term solutions to the over-borrowing

and over-spending we have incurred (not to mention how to make improvements in our education,

infrastructure, defense and healthcare) will be difficult to find and to implement. Nevertheless, weheed the words of Warren Buffett, and realize that for equity investors SHVVLPLVP is your friend,

euphoria the enemy.

Portfolio Update

As compared to the past few quarters, our holdings had few significant moves during the second

quarter. In general, most of our investments faded a bit along with the equity markets.

Innophos Holdings ,3+6 last mentioned in our year-end 2011 letter, was our largest positive

contributor with its move from $50.12 to $56.46. IPHS continued to meet earnings expectations

and is on track to generate close to $5.00 per share in cash earnings in 2012. We continue to

believe this specialty ingredient/additive company is worth 15x earnings given the quality of its

business model and clean balance sheet. The company just announced another accretive

acquisition and we believe management will continue to allocate capital in a shareholder friendly

manner.

This letter is not a research report or recommendation to buy or sell the securities mentioned herein. The examples herein are illustrations of ways in

which Corsair and its affiliates have examined or may examine opportunities. Additionally such examples do not represent Corsair &DSLWDOV entire

portfolio and in the aggregate may represent only a small percentage of Corsair&DSLWDOV portfolio holdings. Corsair and its affiliates may, at any time,

buy or sell any of the securities mentioned in this letter and may change its long or short position at any time without providing any notification of suchchanges. It should not be assumed that any trading activities pursued either nor or in the future will be profitable. Such activities may in fact result in

losses.



Six Flags 6,; also mentioned in our year-end 2011 letter, was our second largest positive

contributor, climbing from $46.77 to $54.18. SIX came out of bankruptcy in 2010 and continues

to successfully execute on its business plan as formulated by its management team which took thehelm in August 2010. The company has been returning cash to shareholders via both stock

buybacks and dividends (they recently raised their dividend from $0.06 to $0.60 per quarter which

represented a 5+% annual dividend yield). Lastly, SIX is exploring the sale of its minority

ownership in Dick Clark Productions which is expected to generate another $1.00 $2.00 per

share of cash.

Aperam $3$0 written up in the appendix to our 2011 year-end letter, was our largest

negative holding, having declined from 13.88 to 10.36. A spin-off from steel company giant

ArcelorMittal, APAM basically gave up the gains it had recorded for us in the first quarter of the

year. A slowing world economy and, in particular, a drop in nickel prices hurt demand for itsstainless steel products. We continue to believe APAM is very cheap on any normalized earnings

basis and is particularly cheap compared to its closest competitors Acerinox and Outokumpu.

TNS, Inc. 716 mentioned as a positive contributor in our last letter, likewise gave up its first

quarter gains, as it traded down from $21.73 to $17.94. TNS continues to expect core earnings of

$2.50 per share in 2012 (excluding start-up losses from its Cequint subsidiary). We saw no

particularly negative news during the second quarter. However, a weakening euro will affect their

earnings and the rollout of their NameID cellular product seems a bit behind

schedule. Nevertheless, we believe the FRPSDQ\V shares to be quite undervalued at less than 8times core earnings and see potential for the new cellular products to add significant additional

value.

Thank you for your continued support and confidence. See the attached Appendix for a write-up of

a current core investment. Please feel free to call us with any questions you may have at 212-389-

8240.

Sincerely,

Corsair Capital Management, LLC





losses.

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AppendixDigitalGlobe '*, - $14.22 )

DigitalGlobe '*, a leading US satellite imaging company, provides customers with real-timeand archived images from three satellites. Originally founded in 1993 with the first U.S.

commercial license to gather high-resolution digital imagery of the earth, DGI has built an enviable

(and we think underappreciated) position in the still-nascent commercial imaging industry. Near-

term uncertainty has created an attractive opportunity to gain exposure to a high-quality business

with multiple earnings drivers, a solid balance sheet and a management team focused on creating

shareholder value. We see the potential, within the next two to three years, for DGI to generate

$2/share of EPS and fetch a $30/share valuation.

While DGI has a diverse customer base, the National Geo-Spatial Agency 1*$ the primaryU.S. government procurement agency for geo-spacial information, contributes about 50% of DGI

revenue. In mid-February, DGI and its main competitor, GeoEye *(2



research confirms Jeff played an integral role in ,+6V growth, which gives us confidence in his

leadership and the ability to grow shareholder value for DGI. Over time, we expect Jeff to use the

traditional arsenal of value creators dividends, share repurchases and disciplined M&A andprove DGI correctly rejected *(2


6/6Corsair Capital Management LLC | 350Madison Avenue 9 th Floor | New York NY 10017 | 212 389 8240

IMPORTANT DISCLOSURES

An investment in any Corsair fund is speculative and involves a high degree of risk. Pastperformance is not necessarily indicative of future results. There can be no assurances that any

Corsair fund will continue to have a similar return on invested capital because, among other

reasons, there may be differences in economic and market conditions, regulatory and political

climate, portfolio size, investment opportunities, expenses and structure.

References to benchmarks are for illustrative purposes only. Comparisons to benchmarks have

limitations because characteristics of such benchmarks, such as level of volatility and position

concentration, among other things, may differ from those of the applicable Corsair fund. The

Corsair funds do not attempt to track a benchmark.

The information in this letter is as of the date set forth on the cover page hereto and is subject to

change without notice. The delivery of this letter at any time does not imply that the information

or opinions contained herein are correct at any time subsequent to the date set forth on the cover

page hereto.

Any forward-looking statements included in this letter represent the subjective views of the

portfolio managers of Corsair, including the future performance of the market generally and

portfolio companies specifically, based on assumptions that may or may not prove to be correct.

There can be no assurance that these views are accurate or will be realized, and nothingcontained here is, or should be relied on as, a promise as to the future performance or condition

of any Corsair fund, any portfolio company or the market generally. Industry experts and the

portfolio companies themselves may disagree with these views and/or assumptions.

Certain information contained herein has been obtained by Corsair from third parties. While

Corsair believes that such sources are reliable, it cannot guarantee the accuracy of any such

information and does not represent that such information is accurate or complete.





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corsair capital 2q2012 letter

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