Fundamental Investing and Corporate Events in Europe Opportunistic, selective and uncorrelated alpha


Kaveh Sheibani, Co-Founder, Lexcor Capital LLP, London


have surpassed this target and are up double digits in the first eight months of 2022.


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The strategy does not easily fit into a standard bucket because it combines long/short equity with hard catalyst event-driven investing, synthesizing the two partners’ more than four decades of experience. Their personal approach is based on tried and tested common sense principles and builds on their multicultural and multilingual backgrounds. Sheibani left Iran in 1978 and has lived and worked in the US, France and UK, while Gourdain is half French, half Greek and educated in France. Sheibani speaks Italian, French, English and Farsi while Gourdain speaks Greek, French, German and English. The partners have formed a strong bond and Sheibani was at one stage invested with the long/ short equity fund Montrica, where Gourdain worked. Gourdain was latterly head of research for Europe at TPG Axon after it acquired Montrica.


Sheibani co-founded and was co-CIO of the event driven fund Pendragon, which spun out of Salomon Brothers, which had been acquired by Citigroup at the time. At Salomon Brothers he believes they were one of the only prop trading team that worked on a co-portfolio management model running one book. This approach continues. The pair co-founded Lexcor in 2017, with a co-portfolio management structure where the duo get on well, intensely debate ideas and agree on all positions. This process guards against prejudices and behavioural biases such as confirmation bias. Lexcor is supported by three analysts, a marketing person, and Marble Bar for its infrastructure.


Fundamental criteria combined with catalysts The long book, focused on 12-15 positions typically sized between 4-10%, has been the largest engine of returns. It blends event and catalyst filters with fundamental stock-picking criteria. Lexcor like sustainable cashflows, growth, quality and strong balance sheets. They seek companies that have a sustainable competitive edge through concentrated markets and high barriers to entry that create pricing power; they also give a high importance to management integrity. Share price targets under


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excor founders, Kaveh Sheibani and Nicholas Gourdain, aim to compound at 10% per year and protect their own capital and that of their external investors. They


bull and bear scenarios are determined with a 4–5- year view and updated at least quarterly. Sometimes the bear case is above the current share price. Catalysts sought could be fundamental or external. A recent example was a spin-off that highlighted a “sum of the parts” valuation anomaly. After a food ingredients firm, disposed of a commoditized corn starch business, its higher growth nutrition ingredients business was left at a much cheaper implied multiple than the peer group and was also seen as a takeover target.


A more diversified and tactical short book The short book is smaller, more diversified and has smaller positions. It is spread across 20-25 positions, typically between 0.5 and 2%. If a short position grows to c. 5% it will typically be reduced or cut. The shorts are not hedges for longs but are intended to make absolute returns and have done so.


Shorts have the inverse characteristics of longs: no pricing power, stretched balance sheets, deteriorating margins, aggressive accounting and sometimes even fraud. Price targets for shorts can sometimes be zero. Portfolio turnover is higher in the short book, with more tactical trading and attention paid to technical considerations such as short interest, which funds are short, and the risk of “meme stocks”. Corporate events that could complicate shorts, such as rights issues, special dividends and spin-offs, are also monitored.


Net long with tail risk hedges Lexcor do not take a directional view on the market and maintain a net long equity exposure of 55- 70% based on a bottom-up approach, though this is typically reduced to about 40-60% by tail risk hedges in the form of puts on European equities (or sometimes CDS-s). The puts and CDS-s generated a 10% gross return in March 2020, and the tail risk book has contributed positively since inception – though in more normal markets it is expected to be an expense.


The tail risk hedges are also designed to help the managers stay calm, sensible and objective since stress can upset perception of risk and lead to bad decisions. No meaningful leverage is used.


Cherry-picking event driven opportunities The opportunistic book is true to its name: sized between 0 and 30% of gross exposure, depending on


the opportunity set. It has been uncorrelated to the long/short equity book and can sometimes even be counter cyclical when risk off periods throw up more dislocated situations.


This opportunistic sleeve can invest in merger arbitrage, holding company discounts and share class spreads, and is very selective. Monitoring every spread would be a full-time job which Sheibani has done before. Now Lexcor keeps a radar screen to cherry-pick opportunistic situations and in 2022 the book is having its best ever year, from just three positions: two equities and one corporate bond. All four books have generated positive performance since inception, with longs making most, opportunistic second, shorts third and tail risk fourth.


German property and corporate governance One multi-year theme around German real estate involved five different companies, with some winning and losing positions and several reshuffles in response to events.


The fundamental thesis included asset values below replacement cost, demand exceeding supply, limited cyclicality and potential for rent increases. The last of these was threatened by plans for a Berlin rent freeze, which led Lexcor to exit one position at a profit in 2019. They later returned to the space with two holdings at deep discounts to NAV that they expected to be acquired. Lexcor also accurately anticipated that within two years the constitutional court of Germany would overturn the rent freeze that was implemented in Berlin. But one position was wrong footed by a corporate action that neglected the interests of minority shareholders. The loss was relatively small since the holding had been downsized due to corporate governance concerns, and with hindsight Lexcor wish they had fully exited.


Incidentally, remedying the corporate governance weaknesses would have been too ambitious. Lexcor is very seldom overtly activist but does engage more discreetly in an active dialogue, sharing what it believes are constructive suggestions behind the scenes. One exception was when Lexcor had an 11% position in a firm that received an opportunistically low takeover bid during Covid, and Lexcor led the negotiations that secured a higher offer. In any case Lexcor prefers to work behind the scenes and avoid investments in companies where it is necessary


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