Compass Points you to Private Equity Strategy

11/12/2019 5:00 am EST


Stephen Mauzy

Income-Investing Specialist, Wyatt Investment Research

Private equity investing is impractical for most individual investors; there are wealth and income barriers and negotiating individual private transactions requires expertise, notes Steve Mauzy, editor of Wyatt Investment Research.

So, let someone else do the negotiating for you. Compass Diversified Holdings (CODI) is that someone. It’s a fund investment that gives you the private-equity exposure you want sans the hassle of getting that exposure.

Compass invests in a particular private-equity niche — middle-market companies. These companies are valued between $50 million to $500 million.

Compass comes in strong on all its investments because it comes in as a control equity investor. Management, therefore, picks its battles carefully. The portfolio is composed of only eight investments.

When you think high concentration, you might think high risk. Think again. Compass demands discipline. Its private-equity investments must generate strong annual operating cash flows. They must be led by strong management teams.

Compass demands strong cash flow from its investments because its policy is to deliver high-yield dividends to its investors. Compass pays a quarterly dividend of $0.36 per share, which generates that generous 7.1% yield.

Diversification further mitigates risk. The eight holdings are spread across industries, which are not only middle-market, but Middle-America.

Sterno Products, the largest holding, is the leading manufacturer of portable food-warming fuel. Another investment, Liberty Safe, is the premier designer of home gun safes. ERGObaby is a top designer of babywear products and accessories.

The portfolio also includes a tactical apparel manufacturer. Another holding designs and produces airguns and archery products. The leading custom molded protective manufacturer rounds out the bunch.

It’s basic stuff, to be sure, but don’t be dismissive of the basics. I’m a patient income investor, as such, I appreciated that Compass takes the long view. It measures its holding period in years. The goal is to buy when the time is right and to sell when full value is apparent.

For example, Compass acquired Fox Factory Holding (FOXF), a maker of suspensions for mountain bikes, for $80 million in 2008 when it was a private company. Five years later, Fox went public and returned 550% on Compass’ investment. Such are the rewards of patience.

An investment need not go public before Compass will cash out at a profit. If the price is right, Compass will sell. Manitoba Harvest is profitable example. Compass sold Manitoba Harvest, a global leader in branded, hemp-based foods, to Tilray Inc. (TLRY) in February for $323 million.

Since its 2006 IPO, Compass has acquired 19 platform companies. It has divested 11 of them. The divestitures have generated realized gains of $1 billion.

Recent sales have solidified the balance sheet. The sales also give Compass a plethora of capital — $1 billion in capital — to pursue new value opportunities.

Since its IPO, Compass has outperformed the Russell 2000 by 167 basis points and the S&P 500 by 139 basis points. It has also enriched investors with a constant dividend stream, paying $18.24 in dividends per share, or 120% of its IPO price. You get it all this private-equity exclusivity starting at only $20 a share.

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