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Clairvest (“Clairvest”) Group Inc. (OTCPK:CVTGF, TSX:CVG:CA) is a Toronto-based private equity management firm operating since 1994. Clairvest’s shares are publicly traded on Toronto Stock Exchange. Clairvest partners with invested entrepreneurs with mid-size businesses to build strategically significant companies in the long term. Clairvest’s investment portfolio spans across dozens of industries including gaming, financial services, specialty aviation/defense services, waste management, renewable energy, and dental services. Clairvest’s strategy aims to create win-win-win situation. For investment portfolio companies, Clairvest provides capital for growth, helps strengthen the business through insightful financial reporting, broader sales channels and supplier base, talent management, enhanced technology and business processes, and outside experts. For limited partners, Clairvest creates value by identifying, evaluating, and strengthening portfolio business. For shareholders, Clairvest earns carried interests and management fees along with distributions and investment gains on its own capital.
In the past three decades, Clairvest has raised six funds with the most recent fund VI closed in 2020. Overall, Clairvest has made 59 investments and disposed 41 investments with total of $941 million capital invested and $4 billion value created.
For each of the funds, in addition to earning management fees and carried interests, Clairvest co-invests with its own capital alongside limited partners. As of December 31, 2022, Clairvest has accrued $1.23 billion for its shareholders with the remaining value going to limited partners in each of the funds closed.
So, why is Clairvest such a fantastic business to invest in?
11.6% Annual Average Return Since 1994
According to Clairvest’s balance sheet, its share capital is about $80.6 million as of December 31, 2022. Given the total shareholders’ equity at $1.23 billion, Clairvest essentially earned over 15 times of invested capital over the last 3 decades since 1994 or 11.6% annual average return. 11.6% annual average return is exceptional compared to S&P 500 Index, which returned on average of 9.48% since 1994.
For the fiscal year ended March 31, 2022, Clairvest earned $421 million in revenue including gains on investments it co-invested with limited partners, carried interests, management fees earned, dividends and other distributions. After expenses of $46 million, Clairvest earned a net profit before taxes of $375 million. After taxes, Clairvest earned a net profit of $330 million in this fiscal year. That is a whopping 78.4% profit margin. Of course, this was a fantastic fiscal year fueled by various economic stimulus. However, given how little attention Clairvest’s shares receive, its share price remained relatively flat during that period rising from $61.5/share on April 1, 2021 to $67.5/share on July 1, 2022 when Clairvest published its annual report for the fiscal year ended March 31, 2022. It is only until recently when investors start to look for value companies during this uncertain economic environment that Clairvest’s share price has started to increase a bit to $78.95/share as of April 21, 2023.
Despite the recent rise in share price, Clairvest’s market capitalization is still only $1.19 billion as of April 21, 2023 at 96% of its shareholders’ equity.
Source:
Annual Report for Fiscal Year Ended March 31, 2022
Financial Statements for Period Ended December 31, 2022
Insider Ownership
Clairvest’s insiders including board of directors, management team and employees hold collectively about 82% of its shares. This is very significant reflecting insiders’ belief on Clairvest’s business value.
Share Repurchase
While insiders already own 82% of Clairvest’s shares, Clairvest has made a new normal course issuer bid (“NCIB”) on March 6, 2023 to repurchase up to 5% of its outstanding shares. Although this may simply be a way to compensate insiders, if insiders decide to not sell shares, the shares in public float will decrease further through the NCIB.
Strong Cash Balance and Liquidity
Clairvest has a very strong cash balance. As of December 31, 2022, Clairvest has about $400 million on hand including cash and temporary investments while Clairvest only has about $40 million cash based liability including accounts payable and income taxes payable. Clairvest also generates significant cash from its business. In the three months ended December 31, 2022, Clairvest generated $53.5 million cash from its operations adding to its significant cash balance.
In addition, Clairvest maintains a $100 million revolving credit facility. As of December 31, 2022, Clairvest has not drawn any cash from the revolving credit facility.
This provides Clairvest with strong dry powder for additional acquisitions, especially in this uncertain economic environment.
Risks
Although Clairvest has proven to be quite a fantastic business for investors, there are several factors to consider when investing into Clairvest.
While having a high insider ownership demonstrates management's alignment with shareholders, this extreme high percentage of insider ownership also makes the publicly floated shares less liquid. The average daily volume of Clairvest shares traded is only about 431 shares or approximately $32,000. If you want to enter or exit a large position in Clairvest, it will take longer than usual.
In addition, as Clairvest invests in mostly private mid-size businesses that are in growth period, the quarter-to-quarter valuation can fluctuate drastically, especially during uncertain economic environment when the assumptions in valuing private businesses' future cash flows keep changing.
Conclusion
Clairvest is a successful private equity management firm based in Toronto that has been operating for almost three decades. Clairvest has a proven track record of generating high returns for its shareholders, with an exceptional annual average return of 11.6% since 1994, compared to the S&P 500 Index. Despite a fantastic fiscal year ending in March 2022, Clairvest's stock price remained relatively flat until recently. Despite its share price has started to increase due to investors looking for value companies in uncertain economic environments, with a market capitalization of only $1.19 billion, Clairvest has room to grow, making it an interesting prospect for potential investors. Clairvest's strong cash balance, liquidity, and insider ownership of about 82% of its shares further enhance this investment thesis.
Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.
