Lucerne Capital Fund Bets on Europe
Hedge fund managers Pieter Taselaar and Thijs Hovers see opportunities among European mid-cap stocks.
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Pieter Taselaar is well traveled. He was studying at Columbia business school when he learned that his father, back in Rotterdam in the Netherlands, had sold the family shipping-supply business he was being trained to run. So, after graduation, Taselaar wound up in Amsterdam instead, working for investment bank ABN, where he advised European companies on mergers and acquisitions. In 1996, the firm, now ABN Amro, shipped him back to New York to help expand its stock brokerage. His experience in valuing small and midsize takeover targets had given him a healthy skepticism for equity analysis. “People don’t do a lot of in-depth work, particularly in Europe,” he says.
His life—and his locale—changed once more, when Taselaar decided it was time to start his own firm. In 2002, appropriately enough, he named his long-short equity hedge fund Lucerne Capital Fund after the Swiss hometown of his initial investor. He based it in Greenwich, Conn., but chose to focus across the Atlantic on European stocks.
TODAY LUCERNE OVERSEES $478 MILLION in assets. In 2007 Taselaar, now 52, hired fellow Dutchman and former colleague Thijs Hovers, who had run ABN Amro’s European mid-cap equity research team and had accompanied him on a number of trans-Atlantic trips to visit European companies. Hovers, 40, later became a partner in Lucerne.
Hovers (left) and Taselaar, of top-performing Lucerne fund, see two more years of stock gains in Europe. Photo: Matthew Furman for Barron’s
The two spend a lot of their time researching balance sheets of mid-cap companies, many of which they believe suffer from poor coverage from European analysts. They like companies with strong free cash flow that might look risky, but actually command a dominant market share and strong pricing power. Lucerne won’t buy a stock unless the partners think that 30% upside is possible within a year, including dividends, based on discounted cash flow calculations.
This straightforward strategy has produced some of the best returns of any long-short equity hedge fund in the past 13 years. Since inception in 2002, the fund is up 14.8% annualized, net of fees, through Feb. 28. It has trounced its benchmark, the Stoxx Europe 600 Index, up a meager 2.1% a year during the same period. It’s also been on a roll for the three years ended Feb. 28, aided by unexpected European gains last year, delivering a 20.2% net return. Management fee: 1.5%. Performance fee: 20%. Minimum investment is $250,000.
Taselaar and Hovers don’t impose gates on withdrawals. While that’s great for investors, it didn’t help in 2008, explains Mark Anson, chief investment officer of Acadia Investment Management, the family office of Robert Bass, which invests in Lucerne. In a year when the Standard & Poor's 500 index fell 37%, investors who needed cash “used us as their ATM machine,” Taselaar recalls, forcing the fund to sell stocks it liked. Between redemptions and falling markets, Lucerne lost 43% of its assets, about 10% to 15% worse than if they had been able to hold onto stocks. Lucerne rebounded with an 87% gain in 2009.
TASELAAR AND HOVERS expect another strong year in 2015, driven by unlocked value in mid-cap stocks. Lucerne has stocked its portfolio with mid-cap companies they believe will grow faster than others on the Continent.
Some of Lucerne’s 25 long positions play the weakening euro, which has fallen by more than 20% since last May—and, Taselaar forecasts, will slip another 10% by year end. That will make European exports, particularly German cars, more competitive, he says.
Lucerne Capital Selected Holdings
Company/Ticker Industry
Braas Monier Building Group /BMSA.Germany Construction materials
Hella KGaA Hueck /HLE.Germany Car parts
Mediobanca /MB.Italy Finance
Stabilus/ STM.Germany Car parts
Tele Columbus/TC1.Germany Cable TV
Eurazeo/RF.France Private Equity
Ei Towers/EIT.Italy Cable TV towers
Note: All returns as of Feb. 28. Three-year, five-year and since-inception returns are annualized. Source: Lucerne Capital Management
Lucerne doesn’t buy large-cap car makers, but it has bought shares in German auto-parts makers such as Hella KGaA Hueck (ticker: HLE.Germany), which makes LED lighting systems. With only a couple of real competitors, Hella fits Lucerne’s pursuit of dominant market share and pricing power. It also has a free cash flow yield of about 8%. Hella is keeping pace with an annual growth rate of 20% to 25% for the automotive LED lighting industry worldwide. Taselaar and Hovers set a target price of 58 euros ($63.22) for the stock, up from its recent level of €46.
With the European Central Bank and the region’s other central banks driving interest rates down, Taselaar and Hovers expect companies and consumers to borrow and spend more. As a result, they project rising demand for new construction.
That’s why they bought shares of Braas Monier Building Group (BMSA.Germany), a German roof-tile maker. Braas also has a strong market position and has been able to withstand the pressures created by a 30-year low in European construction. The company remains profitable; its strong cash flow is equivalent to 10% of its market value, and it has a 10% free cash flow yield. The stock has 50% upside by Lucerne’s calculations.
Lower rates also mean cheaper credit for European companies to finance acquisitions. One acquirer Lucerne likes is EI Towers (EIT.Italy), which operates transmission towers for both media and mobile telephony in Italy. EI Towers has already bid €1.2 billion for a majority stake in its domestic rival RAI Way, roughly doubling EI Towers’ size. “EI Towers is in a good position to acquire,” says Hovers, because it has very little debt and a free cash flow yield of 7%.
He believes the shares can hit €80.
Lucerne is currently short about 15 companies that have major cash-flow problems, according to Taselaar.
One is Royal Imtech (IM.Netherlands), a Dutch contractor that installs electrical wiring in large public buildings. They shorted the stock, when it was trading at €9.83, and since then it has fallen to a split-adjusted €4.85. But Taselaar says he doesn’t plan to cover until the “equity value reaches zero.” To pay its creditors, Imtech has held two rights offerings, but still has about €450 million in debt, uncomfortably close to its €550 million market value.
Taselaar and Hovers still see loads of opportunities. “It will take a while for people to believe that Europe is a better market,” says Taselaar. “You could be looking at a two-year time frame.”
And lots more frequent-flier miles.