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Shoppers and Buddies,
Throughout the third quarter of 2025, the median account return for separate accounts managed by Greystone Capital was -3.6%, web of charges. 12 months-to-date, the median account return is +1.6% web of charges. Third quarter outcomes evaluate unfavorably to each the S&P 500 and Russell 2000 returns of +8.1% and +12.4%. As a result of consumer portfolios are invested in a concentrated approach consisting of small corporations largely exterior of the key indices, our returns ought to usually fluctuate from the returns generated from these indices.
This quarter’s letter serves as a short replace, with minimal modifications in the course of the previous few months. My schedule has been busy with analysis and journey (precisely how I desire), and I’ve been working exhausting on new concepts that I stay up for discussing publicly quickly, one in every of which has turn out to be a prime 5 place. This enterprise matches our standards of nice enterprise, glorious administration and an affordable valuation, possessing a protracted runway for compounding our capital. We’re at present elevating capital to place behind this particular concept. For these , please attain out for extra particulars.
Unfavorable efficiency this quarter was largely pushed by Sylogist and Revolutionary Meals Holdings, which declined -30% and -50% in the course of the quarter. As you’ll learn under, I imagine each declines to be extra problems with timing and sentiment versus the rest. 12 months-to-date, some portfolio administration errors on my half have additionally held us again, whereas different holdings have lagged the market, regardless of robust enterprise efficiency. I view this weak point as alternative and stay optimistic about what’s subsequent for our companies. I’m assured in our method and have added private capital to the technique, additional aligning our pursuits.
As a reminder, we have now launched our commingled funding fund, Greystone Capital Companions LP, which is now accepting subscriptions from accredited traders. As talked about, shifting ahead, we are going to now not be onboarding particular person separate account purchasers. As well as, inside 1-2 quarters, efficiency reporting in these letters will favor the fund. Remaining separate account purchasers have every day efficiency transparency as has been the case since inception, and as all the time you may attain out with any questions.
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“If we attempt to play just like the Yankees in right here, we are going to lose to the Yankees on the market.”
- Billy Beane, as portrayed by Brad Pitt in Moneyball
As , I place little weight on short-term efficiency given the restricted conclusions to attract from any 3, 6, or 9-month interval. Our diversion from the market’s outcomes is to be anticipated at occasions. We don’t make investments out there, nor can we try to mimic market efficiency. In any given yr, only a handful of companies will drive our outcomes, and generally endurance is required earlier than seeing these outcomes materialize.
The excellent news is that our corporations are backed by actual property, actual money flows, and clear stability sheets, a basis that issues way over interim worth actions. In contrast, a lot of the latest market rally, particularly in small caps, is being pushed by thematic flows and speculative urge for food. Now we have virtually no publicity to these pockets of the market. Our lack of FOMO (worry of lacking out) is in keeping with our philosophy, and I imagine it positions us nicely over time.
Regardless of what seems like straightforward cash being made, traders are taking dangers that we can not get behind, together with investing in corporations with no revenues, farcical enterprise fashions, or thrilling ‘theme’ or ‘story’ shares with little basic backing. You’d have snigger (or possibly cry) if I confirmed you the most important holdings within the Russell 2000 (IWM) and Russell 2000 Microcap (IWC) indices, up 11% and 20% YTD.
On the opposite finish of the spectrum, traders are overpaying for ‘high quality,’ a time period that’s now getting used as a alternative for important pondering and rational valuation work, bidding the market’s largest companies to valuations that suggest unattractive ahead returns with little draw back safety. Paying 35–55x free money move for mature companies interprets into low single digit free money move yields and mid-single digit ahead IRRs, if all the pieces goes completely. If multiples compress even modestly, everlasting capital impairment takes place.
Sadly, this straightforward evaluation doesn’t eradicate the sensation of alternative value. Sitting out the market’s most celebrated winners may be tough, and the subsequent a number of years may echo the final a number of. However when the cycle turns, the results are typically everlasting, not psychological. Paying excessive costs for low return streams or speculating on themes with out fundamentals has a protracted observe report of ending in precise losses, not simply the chance sort.
When allocating capital, my job is to keep away from the precise losses, by weighing the sturdiness and fundamentals of a enterprise towards the worth we’re being requested to pay. Our bar is about excessive on this regard, eliminating most potential investments, and once I take a look at our portfolio, I see a number of companies that might double or triple inside a 3–5-year interval, implying 15-25% IRRs or higher, with robust draw back safety. I received’t be appropriate in each resolution, however ours is a place of energy in comparison with the remainder of the market. As our companies proceed to develop their intrinsic worth and compound earnings and free money move, the danger we’re taking with our invested capital is falling.
In a market like this, I’m grateful for the independence to allocate capital primarily based on fundamentals moderately than trend. Intervals like this have traditionally meant underperformance for disciplined, value-conscious traders, particularly these centered on smaller, cash-generative companies like ours. However the every day scorecard issues far lower than the trajectory of the businesses we personal. Making an attempt to reflect immediately’s market would push us towards speculative themes or absolutely priced high quality. We’ll proceed to function the place the chances are higher…within the area of interest corners of the market the place inefficiencies persist and costs overstate danger.
Portfolio Commentary
As of the tip of the quarter, our prime 5 positions consisted of Pure Useful resource Companions, KITS Eyecare, APi Group, Medical Services Corp. and an undisclosed firm. Our prime six holdings signify 75% of capital. Our This fall and yr finish letter is usually reserved for discussing prime 5 positions extra in depth.
Throughout the quarter, we bought out of our place in Bel Fuse to allocate to larger ahead IRR alternatives, because the inventory exceeded our estimate of intrinsic worth.
Sylogist (OTCPK:SYZLF)
Shares of Sylogist declined considerably following lower than stellar Q2 outcomes and a lowered FY25 outlook that got here as surprising. This was in direct opposition to administration’s bullishness following Q1 outcomes and after years of robust enterprise execution. Most of the near-term points are timing associated versus structural or aggressive points, however some extra hiccups have been revealed in Q2 that modified my estimate of the ahead return profile and danger/reward.
Because of this, I lowered our place as I now not really feel Sylogist meets the requirement for a prime 5 holding, the place it’s been for over three years. All will not be misplaced for the enterprise, which is why we have now not exited utterly, and I imagine there’s nonetheless a path to a really constructive return shifting ahead, however my conviction stage and in comparison with the danger/rewards elsewhere in our portfolio necessitated motion on my half. I’d like to present it a while earlier than discussing my reasoning in additional element and can be monitoring our place intently in the course of the subsequent few quarters.
Revolutionary Meals Holdings (OTCQB:IVFH)
We began this yr with IVFH as a prime 5 place, and with the good thing about hindsight, ought to have taken extra income above $2.00/share because the valuation grew to become fairly stretched. Now we have formally spherical tripped most of our funding, which has disillusioned each from a enterprise perspective and share worth perspective. Like Sylogist, I imagine there’s a pretty straightforward path to a constructive final result inside the subsequent few quarters. The Board agrees, and in the course of the quarter, instituted a administration change, which ought to show a web constructive, as IVFH will now redirect assets to their core specialty meals enterprise. If administration’s efforts on this space return stability and/or development to the drop-ship enterprise, traditionally a 20% grower, there’s important upside to immediately’s worth.
Latest Developments
We proceed to welcome considerate, like-minded traders into the fund, and I’ve been inspired by latest conversations with potential companions. We even hosted some in-person guests at our modest West Chester HQ. It stays a superb time to allocate to our technique, and I all the time get pleasure from connecting with traders who share our long-term mindset. One of the best ways to find out whether or not Greystone is the best match is to learn via the 21 quarterly letters on our web site. Many new companions have already got. These letters are inclined to function an efficient filter for traders aligned with our affected person, basic method.
As all the time, I welcome introductions, referrals, and direct outreach from these all for studying extra. Thanks for studying and please be happy to achieve out anytime.
Disclaimer: Previous efficiency isn’t any assure of future outcomes. Investing entails dangers which purchasers needs to be ready to bear, together with however not restricted to partial or full lack of principal initially invested. Investing in small and microcap corporations may end up in extra volatility and better danger attributable to comparatively low market capitalization, extra sensitivity to financial and market situations, and extra restricted managerial and monetary assets. As well as, small corporations usually commerce in decrease quantity, making them harder to buy or promote on the desired time and worth or within the desired quantity. Please seek advice from Kind ADV Half 2 brochure for extra details about Greystone Capital Administration and its personnel.
Editor’s Observe: This text discusses a number of securities that don’t commerce on a significant U.S. trade. Please concentrate on the dangers related to these shares.