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Marwyn Value Investors' Unique Investment Approach - Barrons.com

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PROFILE | SUNDAY, MARCH 24, 2013

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By MICHAEL SHARI

Marwyn Value Investors believes in keeping its portfolio companies close at hand. The hedge fund's play on The Walking Dead TV hit.
February Hedge Funds: Best, Worst, Biggest It would be hard to imagine a more hands-on activist hedge-fund management team than James Corsellis and Mark Watts of Marwyn Value Investors. When Corsellis and Watts consider investing in a company, they have its executives move into Marwyn's London office near Trafalgar Square and work there for a year or so, sharing everything from the reception desk to restrooms to tea service. This incubation period gives the former management consultants time to get to know the people who hopefully will make money for the roughly $300 million fund. "When we say we are very hands-on, value-based investorsmost of our companies I can actually lean out of my office and thwack with my hand," jokes Corsellis, 42. Corsellis and Watts develop investment ideas by talking to bankers about industries undergoing structural or regulatory change, like the slot-machine business in the United Kingdom that's being opened up to more competition. Or one that's getting more protection from regulators, like TV broadcasting in Canada. Then Marwyn forms a listed company (a PLC, or public limited company, in Britain) that is dedicated to a well-defined industry but starts out as an empty shell. The company is designed to acquire companies that have a track record for generating profits in that industry but are possibly too small or obscure to be on venture capitalists' radar. The incoming executives are paid partly in the PLC's stock, which uses less of Marwyn's cash and gives the group an incentive to grow quickly. Marwyn retains a noncontrolling minority stake. When the PLC's revenues grow, presumably its profits and share price do, toowhich raises Marwyn's net asset value. Eventually, Marwyn sells the stake in the PLC to a corporation in the
Enlarge Image Chris Terry for Barron's

same industry.
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Marwyn Value Investors' Unique Investment Approach - Barrons.com

Corsellis, left, and Watts have built a hybrid that creates public companies to buy other entities. Their biggest holding, Entertainment One, distributes the TV hit The Walking Dead.

After about three years of being closed to new investors, Marwyn is reopening. The minimum investment is 250,000 British pounds ($379,675), and Marwyn charges the standard 2% management fee plus 20% of performance. It's an opportune time for the fund, because cash-rich companies are beginning to buy smaller rivals again, says Colin Stone, a portfolio manager at London-based Fidelity Worldwide Investment, which manages mutual funds that buy shares of Marwyn's companies before they are sold. Marwyn has already sold five of its publicly listed companies for 91.6 million (US$139 million). The seven companies it still ownsin industries ranging from health-care software to quarry miningwill look even more tempting to U.S. corporations now that the British pound has fallen by 6.8% against the greenback since Jan. 2, notes Dan Roberts, a managing director for corporate banking at Barclays in London, which invests in the hedge fund and also finances some of Marwyn's deals. If Marwyn can capitalize on the surge in mergers and acquisitions, it has a chance to gild its recent fund-track record further. During the three years through Dec. 31, 2012, the fund was up 27.2% annualized. That was a far better showing than the 4.31% return of the benchmark Barclay Hedge Fund Index. (Barclay Hedge is not affiliated with Barclays' Bank.) Marwyn isn't immune to losses: It got thumped, falling 44.30% in the global crash of 2008. The fund grew 54.69% in 2009 and 74% in 2010. Because the fund's portfolio assets are publicly held, it can use slumps like 2008 to buy more. "If we think one of the underlying companies is just mispriced on the market, as any arbitraged hedge fund would do, we can basically buy into those companies at a value we think is attractive," says Watts, 39. So Marwyn bought 21% of the equity that it did not already own in Entertainment One (ticker: ETO.UK), a Marwyn-owned independent film and TV production company in Canada, after the stock fell 84% from September 2008 to April 2009. Subsequently, eOne's stock price nearly doubled. Corsellis and Watts, who both have B.A. degrees from King's College in London, devised Marwyn's hybrid public-private equity structure to make it easier to raise money. Institutional investors like Barclays that prefer to invest in private "limited partnerships" can participate in the Marwyn fund. So can mutual-fund companies that buy only publicly listed stocks, like Fidelity Worldwide; it "co-invests" in PLCs that Marwyn starts up. (Fidelity Worldwide also invests in a separate, closed-end clone of the Marwyn fund that trades on London's specialist fund market under the ticker MVI). And high-net-worth investors and family offices suspicious of the valuation methods of some private-equity and hedge funds can take comfort in the fact that Marwyn's investments all trade publicly, report to British regulators, and are rated by securities analysts, explains Corsellis. "We look for situations where our approach as a public-equity investor somehow gives us an advantage over a private-equity investor," he says. The risk to this long-only equity strategy, says Barclays' Roberts, is that the portfolio could get
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Marwyn Value Investors' Unique Investment Approach - Barrons.com

concentrated in one or two stocks as the hedge fund pares its roster of PLCs. T HE FUND'S BIGGEST POSIT ION, says Corsellis, is eOne. As a public company, eOne has an advantage over private-equity funds that can't make the same media acquisitions because Canadian regulations shield the TV business from direct foreign investment; eOne has used that protectionism to build a base for a global distribution company that now handles The Walking Deadone of the highest-rated TV shows in historyoutside of the U.S. Corsellis and Watts have proved that they can squeeze value out of the PLCs they create. They've been doing it since their 2005 initial public offering for Talarius, which sold slot machines to arcades in the U.K. Owned by a precursor firm to Marwyn (formed in 2006), Talarius took advantage of the U.K.'s Gambling Act of 2005, which fragmented the British slot-machine market and provided an opportunity for Talarius. When Talarius was finally sold to an Australian joint venture in January 2007, the hedge fund achieved a 170% internal rate of return. Marwyn made back its investment in the five small-cap companies that it had acquired for Talarius 10.1 times over, according to Watts. Marwyn Value Investors
Total Returns* 1-Yr MVI Barclay Hedge Fund Index Com pany Entertainm ent One Breedon Aggregates Advanced Com puter Softw are Silverdell Fulcrum Utility Services Paragon Entertainm ent 8.27 3-Yr 4.31 5-Yr 1.93 6.76% 27.20% 12.14%

"I liked what they did with that," says Fidelity's Stone, who co-invested in Talarius stock before Marwyn sold. "I have not come across anyone else who has done this [strategy] quite as effectively and systematically, with such a good batting average." Marwyn doesn't hit the jackpot every time, of course. Last October, Marwyn Management Partners (MMP.UK), a PLC that incubates smallcap companies right after they're bought, sold Praesepe, a heavily indebted gaming-machine and online-gaming company that did not reap an expected gain from the Gambling Act, at a loss of about 60%, says Watts. That contributed to a 6.76% overall loss for the fund last year. It's not easy to predict Marwyn's next move. One of its latest investments is in Germany's express-

Ticker ETO.UK

Industry TV and film distribution

BREE.UK Quarry mining ASW.UK Health-care softw are SID.UK Asbestos removal

FCRM.UK Gas-pipeline management PEL.UK Museums, theme parks

*All returns are as of 12/31/12; three- and five-year returns are annualized. Sources: Marwyn; BarclayHedge

bus business, which for the first time is allowed to carry passengers to more-distant locales. The government previously had protected its railroads by restricting buses to local routes. Marwyn recently hired veteran managers from Greyhound Lines of Dallas to start a new company. "We don't fit neatly into any of the boxes that are out there," concludes Watts. "I suspect the world will move toward this [model] as the line between private equity and hedge funds becomes more blurredas it has been for years, to be honest."

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Marwyn Value Investors' Unique Investment Approach - Barrons.com

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