Stock Spin-off Investing Podcast: Derek Pilecki of Gator Capital Discusses His Approach to Investing in Financial Spin-offs

Rich Howe:       Welcome to the Stock Spinoff Investing podcast where we talk all things spinoffs. My guests and I may maintain a position in the securities that we discuss today, and this podcast is for informational purposes only and should not be relied upon as investment advice. Hi everybody and welcome to the Stock Spinoff Investing podcast. I am delighted to have Derek Pelecki of Gator Capital with me today to talk all things spinoffs. But Derek, thank you so much for joining the podcast. I would love to hear a little bit about your background. I've heard your background on a few other podcasts, but I think it would be really beneficial for the listeners to hear your background because I think it's really interesting and you have a little bit of a different background or approach to founding Gator Capital than many other managers. So would love to hear a little bit about your background and then we can get into spinoffs.

Derek Pilecki:    Yeah, that sounds great, Rich. Thanks for having me on. I'm honored to be on your podcast, so hopefully I have some insights for your listeners, but I started Gator Capital in 2008. I had the dream of starting a hedge fund back in the early nineties. I read Roger Stein's making of an American capitalist, the first real buffet biography that came out and I was like, that is so cool. We started a hedge fund in a spare bedroom. I want to do that, but I knew I couldn't do it when I was 24. So I was at Fannie Mae, the mortgage company working in asset liability management, fell in love with the stock market, decided, hey, I want to go to the buy side. I went back to business school to use business school as a transition from asset liability, fixed income oriented career to equity research.

Derek Pilecki:    And then when I came out of business school and joined the buy side, it made sense for me to cover financials. So I worked at a couple of small cap value shops that I covered the financials for them. And then a classmate of mine who I went to Chicago with at business school had joined G Sam's growth team and their bank analyst retired and they were sitting on about a billion dollars of Fannie and Freddie common equity. And so I got hired to manage those positions. I also got coverage of about half the financial sector, a lot of the balance sheet intensive financials. There was another analyst who did the capital markets or capital light financials and so on a growth team, there aren't that many balance sheet heavy companies that really fit the investment mold. So I worked for Goldman for about five years.

Derek Pilecki:    That job was in Florida, that's why I live in Florida. I moved there for the Goldman job and I used my savings while I worked at Goldman to launch Gator in 2008. So I left Goldman started, and I know a lot of people have this dream of starting their own hedge fund. I would say I'm one of the people that's closest to starting from on a shoestring that has actually made it. When I started, I was the only day one investor with a half a million dollars. It took me 15 months to get my first investor, so didn't have any outside money until October nine and even three and a half years into running it at the end of 2011, I was only managing about $5 million and I was living off savings and trading gains. And finally I've put up good years in 11, 12 and 13, finally got some momentum behind raising money in the firm.

Derek Pilecki:    So I wouldn't say I have a lot of institutional investors. I have 95 investors in my hedge fund. Most of 'em are high net worth people in family offices that I've met because I write a quarterly letter and I've just accumulated an email list of three to 4,000 people who get my quarterly letter and every quarter a few of those people rev reverse inquiry to me and say, Hey, I've got some liquidity. Can I invest in your fund? And that's how I've built up the investor base and compounding investors who give me a quarter million dollars 10 years ago and now it's eight or $900,000. That's how I've built the fund is one investor at a time.

Rich Howe:       A couple thoughts there first your email list. So I am kind of an email. I'm an investor, I'm a personal investor, I'm a newsletter provider, but my email list is probably my most valuable asset. And so kudos to you for building that email list because it's incredibly valuable. I love Twitter. I know you're on Twitter too. Everybody loves Instagram and other social media outlets, but there's nothing like having a direct relationship with your potential customer or potential subscribers. So that's super cool that you did that. What are you up to in terms of assets under management right now?

Derek Pilecki:    I think at the end of October I was at 200 million in total firm assets and in the fund there were 130 million.

Rich Howe:       Yeah, I mean I think you're just going to, the compounding is really going to get started. I wouldn't be surprised if you were managing billions looking out a couple years. I feel like once you get over that $100 million or 200 million threshold, I feel like it must open a lot of gates in terms of allocators and folks that can invest with you. So that that's very exciting. Also, before we get into spinoffs, I remember you talking about on another podcast that I enjoyed listening to getting started during the financial crisis and how crazy stressful that was. Was that just an insanely stressful experience at this point? You're investing your own money and if you lose your money, I mean you're basically living on that money. So how did you manage your emotions through that process? Really starting during the great financial crisis,

Derek Pilecki:    October of oh eight was in a very interesting time when I had leased office space, I had hired analysts and then when they bankrupted Lehman, I had to let my analyst go. I gave him two weeks severance and said, Hey, you have to move to New York and go get a job. This is not good. And I closed down the office and sat down in my home office on October 1st and I was just like, I'm going to make money today. I don't care what happens in the market, I'm going to figure out a way to make money today. And I did that every day in October of oh eight and October of oh eight, the s and p was down 16% and in my fund I was up 16%. I just had that very short-term focus orientation of I'm going to make money today. And I was doing all types of things like I was doing relative value trading of the fanny.

Derek Pilecki:    I was doing spread trading between gps and LPs that were publicly traded and it was so on the edge. I would report at lunchtime to my wife of like, oh, I'd had this great trade this morning. I made $3,500 and it was just at that level. I never want to go through that again, but I felt like my back was up against the wall and there was only one way out it was to go forward. And so it was very character building at that time, but it was a super scary time for everybody in the economy and me especially,

Rich Howe:       I remember at some point they restricted shorting, could you short stocks? At that point,

Derek Pilecki:    They restricted shorting financials, but some of the GP LP trades I was doing were MLPs, energy MLPs. And so I used the broad definition of a financial saying, the GP is like an asset manager. And so I was spread trading some of the general publicly traded general partners versus their LPs.

Rich Howe:       Got it. That's fascinating. If you had to go back and do it all over again, would you have done it the same way? I mean obviously it's worked out, but would you have done it the same way or would you have approached it a little bit differently?

Derek Pilecki:    I mean, I think if I had to do it again, I probably would've spent more time to find a family office or a seed investor to stake me with five or 10 million to start start at zero. It was a long investment to spend those three to five years to actually get some momentum behind the business because when you're managing less than five or $10 million, people look at it and say, wow, your numbers are good, but you're only managing $5 million.

Rich Howe:       That doesn't count, right?

Derek Pilecki:    That doesn't count. It's not going to

Rich Howe:       Scale up. Once you get

Derek Pilecki:    To why aren't other people giving you money? It's not going to scale. But at the same time, when I started getting a little bit of inflows, there were people who are tracking like, oh, you were up 3% this month, but I see your assets jumped by 12%. You must've gotten an inflow. So it cuts both ways, but it's really hard when it's sub 10 million to get any interest.

Rich Howe:       And then last question before we get into spinoffs, I know I keep saying last question. Where in Florida are you based?

Derek Pilecki:    I'm based in Tampa. Tampa. So the GA group that I worked for, the guys who ran that used to be part of Raymond James and they spun off in 94 and then Goldman acquired him in 97. So I moved to Tampa to work for GS a. They've since closed that office, but that's the route.

Rich Howe:       Got it. Okay.

Derek Pilecki:    The origin,

Rich Howe:       I go to Sanibel Island. We've been going there for years, so south of Tampa to fly into Fort Myers. We always went there for vacation. So it's a great spot of the country. Okay. Let's talk a little bit more about spinoffs. So it seems like every successful financial spinoff that's been a big winner it seems like you're involved with, so I would love to know what your approach is to investing in spinoffs. Do you track them all? Are you looking for any certain qualities? How do you distinguish between a spinoff that you think is pretty interesting or one that you want to avoid? Or is it like you just look at everyone and if there is an interesting situation, you'll get involved and you take advantage of the indiscriminate selling pressure that sometimes results in spinoff situations?

Derek Pilecki:    Yeah, so I would say that I look at all the financial spinoffs. I don't look at every spinoff in other industries even though I could potentially buy them, most of the financial ones have had a pretty good track record of success. They've been well set up and maybe that's because they come out so cheap because people generally hate financials and a lot of the spinoffs have been pretty ugly balance sheet spinoffs, and so they come out with seems like abnormally cheap valuations. So they've worked out and some of the valuations normalize I would say there have not been a ton of spin outs recently in the financial sector, but some of the ones I worked on 12 or 15 years ago really, really played out well.

Rich Howe:       Great. Well let's get into a couple of 'em. So the first two that we're going to talk about are two that we both have invested in and we're both big winners. And then we're going to talk about two that you invested in that I missed that have been big winners for you. First one that we're going to talk about is Jackson Financial. So this was spun out I think in 2021 I believe from Prudential, which correct me if I'm wrong, I think is primarily a UK life insurance company. And the thesis here, why it was interesting was that they were spinning off this variable annuity company. Most of their shareholders were UK investors or European investors and they were spinning off this US company. So it was a natural dislocation where they were distributing the small cap to basically European investors that didn't want to own a US company.

Rich Howe:       So it ended up being an interesting situation that ended up trading very cheaply. And my thesis was kind of very, very basic. I had done some work, read the form 10 and they had said that they're going to pay a pretty big dividend. They were going to return a decent amount of capital so you could back into the implied dividend yield that Jackson looked like it was going to be trading at versus some of the other variable annuity players. I think there was Brighthouse Financial and maybe one or two others, and it looked on a price to book on a dividend yield basis very, very cheap. And I thought annuities have been around for a long time, they're probably going to continue to be around for a long time. They're not the sexiest industry in the world to be in. So my thesis was pretty basic. It was kind of like take advantage of indiscriminate selling pressure, wait for the stock to rer and then sell. But how did you view that? How did you view Jackson when it came out? Did you invest initially or did you wait a little bit before getting involved?

Derek Pilecki:    I tried to invest the day or the day after the listing opened for regularly trading. I would say my investment thesis was very similar to yours. I guess a couple extra nuances. You had this large cap UK listed life insurers spinning off a small cap insurance stock in the us. That selling pressure I thought was going to be intense. I also thought variable annuity companies are that's a tough business. And so that was keeping a lot of normal financial generalists, financial sector specialists away from the spinoff because there were a few companies that had variable annuity businesses and subsidiaries. And when you do the sum of the parts, people were applying huge discounts to those businesses because variable annuities, they have these guarantees that caught insurers during the financial crisis where they were guaranteeing downside account values. And so they had these huge downside liability risks and that the companies have since changed how they structure those guarantees.

Derek Pilecki:    But it's also opaque. You don't really know exactly what Jackson's downside guarantees are. And so I think there were a lot of people who were just like, it's coming out at 25% of tangible book value. That's kind of what we use on Voya as some of the parts is 25% on their variable annuity business. That seems fair. So I thought that the dislocation was exacerbated by the business line that it was in. I knew Jackson National had been one or two in market share during the 2000 tens for variable annuity. So I knew it was a high performing company. They had some market cachet or the insurance agents who were using them as a underwriting company like their products. So I felt good about that. And then I agree with you, I read the same thing about the projected dividend and it seemed very cheap and the fact that they were actually going to get capital returned to shareholders immediately was a big deal because the other thing with insurance companies that can happen sometimes is the capital can get trapped in the insurance subsidiary and the regulator might not let the company dividend out of the regulated entity to the holding company any money.

Derek Pilecki:    So the fact that they felt comfortable enough to say in the form 10 that they were going to pay dividends showed to me that they were comfortable they'd be able to get capital out from the regulated entity on a regular basis. So it came out cheap and I didn't really have an upside target because book value was over a hundred dollars a share. I think it was like 110 ish and I think the first trades were 26 bucks, so it was like there's lots of upside. I don't know if it'll ever get the book value, but I know 26 seems pretty cheap.

Rich Howe:       It's so interesting because the whole dividend kind of as a catalyst thesis just sounds so simplistic and when I tell people that people are like, yeah, it can't be, the market's smart, the market can figure it out, but it's just amazing that catalyst can exist and really work well. It's as simple as Jackson initiating a pretty juicy dividend, and the one reason why I liked Jackson versus Brighthouse was that Brighthouse was buying back its stock, which was good in theory, but the investors could kind of ignore it. You can't ignore an eight or a 9% dividend. There's too many investors in the US that really, really like dividends. So that's super interesting. I guess one area that I was a little concerned with or you talk about Jackson, and I don't know if people still refer to it this way, but people used to say, Hey, it's a tough business.

Rich Howe:       Like you just said, it's a black box. Nobody really knows what's going on in there. And then I think there had been rumors, I dunno if this was true or maybe a rumor that prior to the spinoff, the spring prior to the spinoff, the former management team had resigned because they couldn't get comfortable with the numbers. Did you hear any of those rumors and how do you view a situation? I mean I guess did you view Jackson as a black box or was it something that you could kind of get your hands around or was it more of an issue of yes, it's a black box, but I'm going to size it appropriately. It's not going to be a massive position for me so that if it does blow up, it's not going to hurt the fund?

Derek Pilecki:    Yeah, so going back to your dividend comment about the simplicity of that, I think as investors you're trying to find clues of what management's view is. Sometimes they'll come out and say, we're buying the stock personally, or we're getting paid based on excess earnings above an ROIC target where you feel very aligned. And I thought the dividend was along those lines of it's simplistic, but it is giving a view of where they think value is. I think Jackson is a black box. I think the management team's done a very good job of trying to articulate the business and they've recently this year they set up an reinsurance subsidiary to mute the accounting noise. So I don't fault management at all for how much of a black box Jackson is. It's just variable insurance in general is a black box business and variable annuities on top of that is just an order of magnitude harder and degree of magnitude harder. So I did not size it small because it was a black box. I sized it normal size, but I think the margin safety was the valuation. So I felt like okay, at 25% a tangible book value, I can take a normal starting position for me is 5%. So it was a 5% position right off the bat because it was so cheap and the dislocation we've talked about.

Rich Howe:       So one question that I have is that some of my evaluation analysis with Jackson was that it looks really cheap versus its peers. So the other variable annuity players in the space, I think Equitable Holdings was that 1.5 times book Brighthouse was at 0.36 times book and I think Jackson was at 0.25 book. So I haven't done this, but one theory that I've kind of thought about is doing a payer trade where you go long, the undervalued spinoff and then short the comparable company. In this case it would've been Brighthouse and if you had done that, I think that would've worked out well. I ended up just buying Jackson. Do you ever do pair trades like that where you say, Hey, Jackson's extremely cheap or whatever company is extremely cheap versus its Pier I'm going to buy the spinoff. In short, the comparable company,

Derek Pilecki:    When Jackson came out, I did some work on Brighthouse and almost bought it alongside it. So a lot of times rather than trying to pair it off to reduce volatility, if I find something I think is absolutely a good stock pick, I'll look at its peers and think, well, can I get it really increased my exposure to that space. So kind of like I bought KKR in 2010 when it moved, its listing from Amsterdam to the US and then I was like, oh, well I like KKR so much, let's look at Carlisle because it just came public and Blackstone. And so rather than trying to pick which one's the best, I find something that's absolutely interesting. I'll look at it as peers to try to increase the exposure. They probably all will work. It is just my thought process. I'm not trying to reduce volatility, I'm trying to make money.

Rich Howe:       That makes complete sense. What percentage of your book is, I'm not a big hedge fund guy, so I don't know, but what percentage of your portfolio is long versus short generally?

Derek Pilecki:    So I usually run at 130% gross long and 50 or 55% gross short. So like 75 net.

Rich Howe:       Got it. Okay. Okay.

Derek Pilecki:    It's long bias and when I look back at my returns, my shorts have made a little bit of relative return compared to the index, but all the big money is made on the long side. I mean it is so much easier on the long side for to just compound.

Rich Howe:       Okay. Let's move on to another financial spinoff that we both invested in. And this one is a microcap and I wonder if you still are able to invest in these. You're getting a little bit low, bit bigger in fund size, but the company is BBX capital and the ticker is B-B-X-I-A. And I think there's a couple different share classes. I invested in the B-B-X-I-A share class. I think when this came out, it just looked crazy cheap. I think it was trading like 50% of maybe it's cash and receivable value, but then it also had a bunch of real estate that was generating value and there was some corporate governance concerns I remember. But I just remember seeing this one and being like, oh my gosh, this is just crazy cheap and wanting to buy it. What was your thesis going into BBX

Derek Pilecki:    Capital? Yeah, so I had the advantage. I already had an existing position before they announced the spinoff.

Rich Howe:       Got it.

Derek Pilecki:    And so I owned the BBX capital, the timeshare company, and the parts that you just mentioned as a combined company. I originally got, I was aware of VVX capital during pre-financial crisis when they had the bank and then they had the home building operation and I didn't own any at the first few years of the hedge fund, but then when they announced they were selling the bank to bb and t and they were trying to offload the preferred stock to the remaining entity rather than paying it off as part of the bank sale, I bought a position in the preferred stock and there were some activists that got involved and that forced the management team to make good on the preferred stock. So that was a nice win. And then I continued to follow the story and at some point it got so cheap, I bought the common and I owned the common for years, and then they announced the spinoff.

Derek Pilecki:    And then when I thought the spinoff was a great idea, and then I was shocked when the B-B-X-I-A that you mentioned started trading at two and a half dollars or $2 and 75 cents when I thought networking capital was $20. And so I increased my weighting to that side. The other side, the parent company that spun off the BBX capital has worked out too. It was a timeshare business and they eventually sold themselves. And so both sides worked out. I know a and Lavan has some sort of reputation. I kind of disagree if I just go by his shareholder positive actions in the last 15 years, I thought he's been very shareholder friendly. He does regular tender offers. The spinoff was positive for both sides. I know he has a control position. I know he had an issue with the SEC back when he owned the bank.

Derek Pilecki:    I thought that I kind of disagreed with the SEC going after him. I thought it was a pretty minor thing that I'm not remembering exactly, but from what I do remember, he said something on a conference call and they went after him and I thought what he said on the conference call was innocuous and that it dragged on for years and I just did not think that was worth the SEC's time to go after him. So I don't have that view that I know is out there of him. I think I just look at his actions and I feel like he's done a good job for shareholders. Now I still own B-B-X-I-A trades for seven and a half dollars and it's $20 networking capital. Usually they announce a tender offer towards the end of each calendar year. If you look at the last few calendar years, I'm expecting them to do something this winter. I don't know exactly what they'll do, but is been pretty regular about that. And I have confidence that they'll maximize the value of the entity at some point.

Rich Howe:       And it seems like he's, when I own the stock, I'm out of the stock now. But it seems like they would do buy, basically buy back. So they'd say, Hey, we're going to buy it at a big discount to book value, but it's going to be at a 10% premium to the stock price. Is that kind of what they've done historically on a yearly basis?

Derek Pilecki:    Yeah, so I mean, I think it's good for shareholders who want to exit. It gives them some liquidity and it's good for shareholders who want to remain because they buy back a bunch of stock at a discount to book value. So it creates book value I think it works out for, and you don't have to participate if you think you don't like the price they're offering. So I think it's a good solution.

Rich Howe:       And then one other thing that I was shocked at with BBX capital, and this is the case I think with some microcap spinoffs, is you don't have to wait for indiscriminate selling pressure. Just the initial price might be so low. I don't think there really was much selling pressure with BB X capital. It just so happened that the price that cleared was like $2 and 50 cents and it just looked incredibly cheap. But that's really interesting that you mentioned, that jogged my memory that just how cheap that stock started at,

Derek Pilecki:    It was amazing. I guess a lot of people really just wanted to own timeshare business. So on that spin, they just wanted to exit this collection of assets. I mean, it's a little bit of a mishmash assets. I mean, they have the real estate holdings, they have the it's sugar business, they have the windows and doors business. So it is not a perfect collection of assets. I just think that the value of it is much higher than the current stock price.

Rich Howe:       Yeah, that makes complete sense. One question that I forgot to ask with Jackson is, I guess what's the thesis today? So I bought it when it sold off at 25. I sold at the beginning of this past year around 50, made over a hundred percent including dividends, which was great. I was very happy about it. But I also thought, hey, this is a black box. You never know when something's going to blow up, but the stock's at a hundred right now and you still own it. So how were you able to develop the conviction to hang onto it? And what is the thesis today? I assume it's trading a lot closer to book value today.

Derek Pilecki:    Yeah, yeah. We all love to say we're fundamental investors. Before I worked for Goldman, I worked for a small value firm in Rochester, New York called Clover Capital and Clover. I joined them in 2001 and they had just joined or they had just gone through the growth versus value markets of the late nineties where in the internet bubble, all the growth stocks ripped and all the value stocks went nowhere. And they had a lot of clients who were telling their idiots for not investing in tech. And so they kind of had this come to Jesus moment about let's relook at our investment process. And they were great stock breakers, they were really good, but they kind of came to this moment of we're value investors. We buy too early and we sell too early. So what can we do to our process to improve our timing of entry and exit?

Derek Pilecki:    And so they just started doing some light technicals of we like the stock, but the chart looks ugly. Let's wait for it to form a base before we get involved. Or we like the stock, it's hit our fair value, but it's got, let's wait to get out of the stock and see where the market will take it. And so I think my view of Jackson right now is, yeah, it's fairly valued, but it's got momentum. So how high is the market going to take it? I mean, it got to 113 last week before ever pour downgraded it. We will see is it possible the market's going to mark this up to 150% of tangible book, and so then it gets $160 valuation or stock price. I don't know. I'm just letting, I'm just respecting the price is a indicator of what other investors think. So, and price has been going higher, so I'm just kind of hanging on to the momentum a little bit.

Rich Howe:       Makes complete sense. Do you do that? Do you typically follow that approach when you're looking to buy stock? I mean with a spinoff, sometimes you don't. Obviously you're not going to follow that approach because what's driving the indiscriminate selling pressure? So even though the stock looks horrible, that's a great buying opportunity. But if you're buying a stock that isn't subject to indiscriminate selling pressure, are you going to generally wait until it forms a base and conversely try to let your winners run if possible?

Derek Pilecki:    I try. I mean, I try. I'm not perfect. My natural inclination is to mean reversion and things that are down I want to buy and things that are up I want to sell. That's my natural inclination. But I try not to buy ugly charts. And I guess the other thing I try to do from a risk management standpoint is I buy a stock if it goes down. I am not one of the people who's like, I want my stocks to get cheaper so I can buy more. I don't do that. I just think of that as risk management. It's a mistake. It's down. I'm not going to compound it by buying it down. So I try to do it. I'm not perfect about it. Sometimes things are just so cheap or so I need to buy them. But I just sold one of the bank stocks this week that had a lot of momentum and I'm just like, it's fair value. So I'm not a hundred percent perfect. I just try to overlay that a little bit. My process

Rich Howe:       Makes complete sense. So I studied behavioral finance in college. I wrote my thesis on behavioral finance, and it's just the classic bias where you want to sell your winners and you want to hang onto your losers, and to the extent that you can incorporate some sort of rule that helps you mitigate that inherent bias is probably going to be helpful. That's really interesting. Okay, so let's talk about two other spinoffs that I didn't get involved with, but you did. And so Virtus Investment Partners, which I believe was a 2009 spinoff from the Phoenix companies, and I had never heard of the Phoenix companies, so I'd love for you to walk through that situation and explain what you saw and how it worked out.

Derek Pilecki:    So this one, I missed the initial trade. So the trade, I think it was spun off in early March oh nine, right near the absolute bottom. And I think the first trades were like six bucks, maybe it traded down to four. I didn't get involved until August of that year. So a full five months after the spinoff happened, I was just looking around, finally got around to, there was so much to do in oh nine, I just hadn't looked at it. And then I started, I guess I was reading their second quarter earnings release. It was their first full quarter as a public company and that they had a deferred tax asset when Phoenix had acquired a bunch of money managers and put 'em together in this multi-manager boutique. And they had never been able to turn it profitable. And so they finally just spun it off.

Derek Pilecki:    It was had some of the classic indications of spinoff, like management team controlling its own cash flow. So it's a money manager, so it's generating cash, and they were going to use cash to buy additional money managers. They were focused, they had skin in the game. So they were very focused on costs and right sizing the operations and making the story better for outside investors. And they also had this deferred tax asset because when you buy Money Manager, they structured them as asset purchases rather than stock purchases, and it created this huge tax asset that they could amortize. So they weren't going to pay taxes for years. They weren't going to pay cash taxes for years because they're going to amortize this instead of Goodwill. It was this asset they could depreciate. And so the value of the tax asset was like $20 a share. And I was just like, what? The tax asset's $20 and the stock's at 16 and it's profitable and they're getting inflows. And even though it's tripled already since the spin, it's a buy. And so I bought it at $16 in August of oh nine and the thing, they got inflows made a couple acquisitions, and by 2014, five years later it was up at 250. It was, I didn't sell it two 50. It ran into an issue and I sold it lower, but it was just a rocket ship coming out of the financial crisis.

Rich Howe:       Amazing. It's fun to hear and to invest in names like that because a lot of the times spinoffs are the ugly stepchild where it's like the variable annuity business that's spun off, that ran into trouble during the great financial crisis or the coal commodity company that spun off from Anglo-American. But it's nice when you get a situation like that where it's like the asset management business is a terrific business with Pause, really good operating leverage and good margins and good growth potential. So it's fun to be able to buy a company like that, a growth company at a value price.

Derek Pilecki:    There is the quality of the business is so much higher than what you normally see in spinoffs. Yep.

Rich Howe:       So how did you value that one? So it was profit, were you just like, Hey, it's profitable, it has a tax asset worth $20 per share, it has inflows, I'm buying this thing, or what is it? Was it

Derek Pilecki:    Basically I felt like I was getting the investment manager for free, so I was just like, it just didn't make, the valuation didn't make sense. And I also thought people didn't really do the work on the tax asset. I felt like that was a little bit of a hidden asset. And so I was like, oh, it's a new company. Everybody's been distracted by the market, the financial crisis, they're not really paying attention to this. It's a hidden asset. I'm sure that the average financial investor hasn't uncovered this yet. So I just felt like it was an undiscovered, undiscovered gem. It was one of those things. So we just talked about letting winners run. That was one of those names where when I bought it at 16, I never thought that it would get those levels. It continued to work. They kept putting up good quarters and I was like, this is working. I'm not going to sell it. It kept going. And so that was an example of letting winners run, just really, really worked.

Rich Howe:       One name, that story reminds me of P 10 Holdings. Have you looked at that name or come across that name?

Derek Pilecki:    No, I have not.

Rich Howe:       Tickers px. And it's a similar story where they basically have used, they've used equity and other creative earnouts to basically buy other asset managers and they have a bunch of NOL, so they're not going to be paying taxes. I'm sure they're using a similar strategy to what Virtus Investment Partners did. Another big winner for you I think was Voya Financial. So that was a spinoff. I think that was a 2013 spinoff from ING. I'd love for you to walk through the investment case there and what you saw and how it worked out.

Derek Pilecki:    Yeah, this is a case of a horse seller.

Derek Pilecki:    ING got bailed out by the Dutch government during the financial crisis, and one of the conditions of their bailout was they had to divest themselves of Voya because Voya was a US-based life insurance company, and the Dutch government didn't want ING to have any US operation. So ING did an IPO of the stock, and I think I forget whether it was 40 or 50% of the market cap. They did an IPO and it came out at $19, 19 point a half dollars a share and book value was in the mid to high thirties. So the IPO was at 50% of book value and it was profitable and it was had a US based management. The CFO was the former sell side analyst at Deutsche Bank, who I had met a few times. I thought he was a totally reasonable person. Watched the Net Road Show was like, okay, 50% of book value for seller I'm buying.

Derek Pilecki:    And when there was no IPO pop, I didn't get an allocation on the IPO and I just put in an order in at the IPO price and got filled the first day. And so nobody was interested in it. And the thing worked, of course, focused management, typical spinoff story focus management, some easy fixes compared to the foreign ownership, the way they ran things and some of the things they spent money on just right sized all that had equity compensation tied to, or compensation tied to results of the US subsidiary. That was the whole company and they performed well. And so it was just recognizing fourth seller, ING probably didn't want to sell the business, but because of the terms of their bailout from the Dutch government, they had to sell. So that was the,

Rich Howe:       And why wasn't anybody else interested? So usually I look for in Joel Greenblatt, I'm sure you've read, you can be a stock market genius. He says IPOs are generally more reviewed. They're bankers that are paid to go out and sell an IPO, whereas a spinoff, it's distributed to the shareholders of the parent company. Whether or not you want to receive it or not, you're going to get shares in the spinoff. And so IPOs, or at least the theory is are a little bit more efficiently priced. But why do you think people were not interested or weren't exactly interested in bidding the IPO price up?

Derek Pilecki:    I think it was a decent sized business and they were only selling 40 to 50% of it. So you knew ING was going to come to market with the rest of the shares, so it was going to be like an overhang on the stock.

Rich Howe:       I see.

Derek Pilecki:    I think, I forget whether it was 2011 or 2012 when it came. And so the market wasn't extremely robust. They had a variable annuity business too, and people back then were ascribing zero value to a variable annuity business. But they also had an asset manager in there and they had a nice retirement 401k business, which there's a limited number of 401k businesses in the us and they had one of 'em. So that's a nice business. There aren't new 4 0 1 ks being created by big companies. Every big company has a 401k, so you kind have the people who have the big 401k businesses are kind of entrenched there. So that's another good business that Voya had. But these things happen. I also think part of it's financials, right? Financial, so many generalists, PMs lost money in financials during the financial crisis. I think there's a lot of people who are just like, I'd never want to invest in another financial again.

Rich Howe:       Do you think that's still the case? So the scars are still there?

Derek Pilecki:    I definitely do.

Rich Howe:       You do?

Derek Pilecki:    Definitely. Yeah. I think the scars are going to be there for the rest of those careers.

Rich Howe:       Yes, you bring up the overhang and that is, it's funny, Jackson had the same issue because I think Prudential spun off initially maybe 80% of it, but I think they had retained maybe 20% or they had retained something. So I got to go back and look to see if that represents a good opportunity because on the one hand you think, oh, I don't want to get ahead of this selling or the secondary that we know is coming from the parent company. But at the same time, maybe that priced in with regards to the initial IPO or the initial spinoff. So I'll have to look at that.

Derek Pilecki:    I would say on the overhangs, I generally think of overhangs as non-events. I know the market likes to talk about that. Are they going to bring it public? Are they going to bring their shares to market? I generally think that the market resolves overhangs pretty efficiently. I never see something trade down just because of an overhang. So when people raise that as a negative against the story, I kind of discount that. And I think that's overplayed by the mark

Rich Howe:       And clearly it was with Voya. Are there any other spinoffs on your radar, upcoming spinoffs that you think look interesting? You said that there really haven't been that many of late, but I'm curious if there's any upcoming spinoffs or maybe spinoffs that happened in the past that still look interesting today.

Derek Pilecki:    I mean, I guess one other one that I didn't mention to you we could have talked about was Primerica. If Citigroup had to IPO or they didn't have to, but they iPod Primerica in 2010. And Primerica is a pretty interesting life insurance business because really a sales and marketing business. And so they don't take much life insurance risk. They sell life insurance policies, but they reinsure almost all their life insurance risks. So they just earned their commissions off the policies and it got sold to the public at a very cheap price. It had a nice one day pop, but you could buy it aftermarket, and it was a very high quality business that it was just a figment of the financial crisis. Citigroup needed capital and that was one of the standalone businesses they could IPO off. And so that was just back from that time period of opportunities out of the financial crisis where companies needed to raise capital or IPO.

Derek Pilecki:    Similarly, pre-financial crisis, Morgan Stanley sold off MSCI. And so I think there's times where financial companies have very valuable businesses within themselves and they IPO it. And even though it might not be a straight spinoff, it can still be a great opportunity for investor, even if it's an IPO and fairly priced MSCI came out had a pop, was more highly valued than Morgan Stanley, but it's been a great stock for years and years. And so I think when you think about that, when you see IPOs of a big financial conglomerates, IPOing, the subsidiary, some of those are really worth looking at.

Rich Howe:       And especially because MSCI is really like a data company, it's not like a balance sheet financial you would traditionally think about.

Derek Pilecki:    Exactly. I mean, Morgan Stanley was trading at tangible book or 1.5 times tangible book and MSCI has no book value, nor should it, right? And so it was undervalued within the Morgan Stanley franchise circa 2007.

Rich Howe:       That's amazing. Okay. One of the takeaways from this conversation is do not rule out IPOs because it seems like, especially in the financial space, when a financial is IPOing one of its subsidiaries, instead of doing a strict spinoff, it could be an interesting opportunity. Awesome. Well, Derek, please share with the audience where folks can learn more about you and about Gator Capital.

Derek Pilecki:    Yeah, so if you go to our website, gator capital.com, you can sign up for our quarterly letter. We send it out four times a year. We won't spam you or you can follow me on Twitter. My handle is Gator capital. So Rich, thanks so much for having me on. I hope our conversation was useful for your listeners.

Rich Howe:       Yeah, Derek, this was really fun. Thanks for taking some time out of your day, and I hope you have continued success. And maybe next time we'll talk, we talk, you'll be up to a billion in assets under management and rising from there. So congrats on all the success and best wishes for continued success.

Derek Pilecki:    Thanks again.