Our Baby Steps

We have recently formed a HoldCo (CL1 Partners Ltd) registered in the AFSA in Astana. CL1 Partners will invest in local SMEs in Kazakhstan (controlling and minority stakes) as well as global public equities. I thought it would be good to still post on Substack for 1) finding other investors in our names who we can connect with and 2) have a “database” of our thoughts and progress so that future hires can quickly catch up on our approach and style.

My thesis is pretty simple. Although there is a consensus in Kazakhstan that local management is poor, I believe that this has produced a meaningful opportunity set for fairly intelligent investors to exploit rock-bottom valuations in niche, competitively-advantaged companies. And as we see when we talk to companies, there are plenty of good managers here who simply need someone to occasionally course-correct them and serve as a 3P advisor on strategy, back-office, and other elements of the business.

Our target is simple — over time we aim to achieve 30-40% IRRs in local currency (tenge) without leverage or excessive risk. We believe we can achieve these IRRs by buying industry-leading companies at mid-single digit valuations, intelligently running a public equities book, and over time leveraging our IRR base with SPVs and funds.

We already see, and are in talks with, companies where our thesis is working out. For instance, a few months ago we were in talks to acquire 49% of a leading vet practice growing over 100% y/y at effectively ~6x FCF. Unfortunately, the deal fell through as the seller said they were not ready emotionally to sell their business (we also think we overpraised him a little). We are also in talks to acquire a controlling stake in a company that has 10xd their revenue in 3 years, is doing 30% in net income margins, and has a growing base of blue-chip clients at effectively 4-5x net income. Both companies have good management and we believe we can add meaningful value to the latter through several initiatives.

That’s not to say that every company we open up is a strong buy. I estimate we have looked at over 100 companies by now. Most have either mediocre management, too high of a valuation, or OK business quality. While other competing investors (as far as I know there aren’t any) might have been forced to buy something by now, we also have the luxury of looking at virtually any publicly traded stock out there. In other words, we don’t have to do any private deals if we don’t want to.

Our public equities book is long-only, and the single underlying factor among all holdings is a management team we feel very strongly about. Our portfolio includes Meli, Nu, Sys-Dat, Theon, EZCORP, Patria, Dick’s, MBB, and, of course, Kaspi (among others). Kaspi is a never-sell for me. We don’t own it in size, but I’d be incredibly surprised if Lomtadze does not build a business that is meaningfully more valuable over time. I expect our public equities book to deliver decent results over time, as well as delivering a return stream in USD instead of KZT. We are currently looking into Australia’s financial advisor networks, which I think is pretty interesting, and we began building a position in one of the larger players in the space.

We are still in the process of building out our public and private holdings, but once complete I think we are going to have a very strong case for meaningful long-term compounding at very attractive IRRs. We don’t have client capital or mandates. We have an incredibly flexible legal structure where we are essentially allowed to do more or less anything we want (and think makes sense). We have a nice hedge — local SMEs are unlikely to be meaningfully correlated to our public equites book. What Trump does in the US has little impact on a small vet practice in Kazakhstan.

My #1 priority now and in the future is to build the best team possible. I am very fortunate to have made a very happy first hire with Anuar who has been doing an excellent job, is hardworking, and I expect will be a very good investor in a pretty short period of time. Anuar has began looking at public equities to both gain exposure to the types of quality companies out there and to get an idea of how we diligence stuff. I do think there is a lack of good investment talent here and so I believe I can build meaningful advantages for CL1 through hiring intelligent and constantly-curious people and training them in what I think a good investment process looks like (which is very much based on Foxhaven and Michael Ritinski, who has been a wonderful mentor and I cannot thank him enough).

I think we have a very long runway with SMEs through organic reinvestment, bolt-ons, and new acquisitions. We have an essentially infinite runway with public equities. Our overheads are fairly low relative to our NAV now and will continue declining meaningfully in the future as I expect we’re going to have a team of no more than 7 people (excluding back-office functions).

We look forward to sharing our journey and the myriad of challenges we are certain to face operating in this part of the world.