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Shoppers and Pals,
Throughout the third quarter of 2025, the median account return for separate accounts managed by Greystone Capital was -3.6%, internet of charges. Yr-to-date, the median account return is +1.6% internet 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 firms principally outdoors of the most important indices, our returns ought to sometimes range from the returns generated from these indices.
This quarter’s letter serves as a quick replace, with minimal adjustments in the course of the previous few months. My schedule has been busy with analysis and journey (precisely how I favor), and I’ve been working onerous on new concepts that I sit up for discussing publicly quickly, certainly one of which has turn into a prime 5 place. This enterprise matches our standards of nice enterprise, glorious administration and an inexpensive valuation, possessing an extended runway for compounding our capital. We’re at the moment elevating capital to place behind this particular concept. For these , please attain out for extra particulars.
Unfavourable efficiency this quarter was largely pushed by Sylogist and Progressive Meals Holdings, which declined -30% and -50% in the course of the quarter. As you’ll learn beneath, I imagine each declines to be extra problems with timing and sentiment versus anything. Yr-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 spot as alternative and stay optimistic about what’s subsequent for our companies. I’m assured in our strategy and have added private capital to the technique, additional aligning our pursuits.
As a reminder, now we have launched our commingled funding fund, Greystone Capital Companions LP, which is now accepting subscriptions from accredited traders. As talked about, transferring 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 day by day efficiency transparency as has been the case since inception, and as all the time you’ll be able to 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 will we try to mimic market efficiency. In any given 12 months, 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 firms are backed by actual property, actual money flows, and clear steadiness sheets, a basis that issues excess of interim worth actions. In contrast, a lot of the current market rally, particularly in small caps, is being pushed by thematic flows and speculative urge for food. We have now virtually no publicity to these pockets of the market. Our lack of FOMO (concern of lacking out) is according to our philosophy, and I imagine it positions us effectively 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 firms with no revenues, farcical enterprise fashions, or thrilling ‘theme’ or ‘story’ shares with little basic backing. You’d have an excellent snicker (or perhaps an excellent cry) if I confirmed you the biggest 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 substitute for essential 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 stream for mature companies interprets into low single digit free money stream yields and mid-single digit ahead IRRs, if every thing goes completely. If multiples compress even modestly, everlasting capital impairment takes place.
Sadly, this easy evaluation doesn’t get rid of the sensation of alternative value. Sitting out the market’s most celebrated winners will be tough, and the subsequent a number of years might echo the final a number of. However when the cycle turns, the implications are usually everlasting, not psychological. Paying excessive costs for low return streams or speculating on themes with out fundamentals has an extended observe file of ending in precise losses, not simply the chance form.
When allocating capital, my job is to keep away from the precise losses, by weighing the sturdiness and fundamentals of a enterprise towards the value 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 would double or triple inside a 3–5-year interval, implying 15-25% IRRs or higher, with robust draw back safety. I received’t be right in each determination, 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 stream, 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 quite than vogue. Intervals like this have traditionally meant underperformance for disciplined, value-conscious traders, particularly these targeted on smaller, cash-generative companies like ours. However the day by day scorecard issues far lower than the trajectory of the businesses we personal. Attempting to reflect at this time’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 threat.
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 autumn and 12 months finish letter is often reserved for discussing prime 5 positions extra in depth.
Throughout the quarter, we bought out of our place in Bel Fuse to allocate to increased 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 diminished 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 threat/reward.
Because of this, I diminished 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 shouldn’t be misplaced for the enterprise, which is why now we have not exited utterly, and I imagine there may be nonetheless a path to a really optimistic return transferring ahead, however my conviction degree 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 shall be monitoring our place intently in the course of the subsequent few quarters.
Progressive Meals Holdings (OTCQB:IVFH)
We began this 12 months 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. We have now 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 optimistic end result throughout the subsequent few quarters. The Board agrees, and in the course of the quarter, instituted a administration change, which ought to show a internet optimistic, as IVFH will now redirect sources 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 may be important upside to at this time’s worth.
Latest Developments
We proceed to welcome considerate, like-minded traders into the fund, and I’ve been inspired by current 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. The easiest way to find out whether or not Greystone is the suitable match is to learn by the 21 quarterly letters on our web site. Many new companions have already got. These letters are likely to function an efficient filter for traders aligned with our affected person, basic strategy.
As all the time, I welcome introductions, referrals, and direct outreach from these serious about studying extra. Thanks for studying and please be at liberty to succeed in out anytime.
Disclaimer: Previous efficiency is not any assure of future outcomes. Investing entails dangers which purchasers must be ready to bear, together with however not restricted to partial or full lack of principal initially invested. Investing in small and microcap firms may end up in extra volatility and better threat because of comparatively low market capitalization, extra sensitivity to financial and market circumstances, and extra restricted managerial and monetary sources. As well as, small firms sometimes commerce in decrease quantity, making them tougher to buy or promote on the desired time and worth or within the desired quantity. Please confer with Type ADV Half 2 brochure for extra details about Greystone Capital Administration and its personnel.
Editor’s Notice: This text discusses a number of securities that don’t commerce on a significant U.S. trade. Please pay attention to the dangers related to these shares.
