Bonhoeffer Capital Management Q4 2024 Letter

2025-03-19 10:55:00 ET

Summary

• Throughout 2024, we transitioned to faster-growing firms in temporarily depressed sectors, aligning with our long-term growth themes like consolidation, affordable housing finance, and infrastructure spending.
• Bonhoeffer Fund's portfolio now includes specialized construction, natural resource royalties, and niche growing banks, with a combined expected growth rate of 30-40%.
• Despite a 9.7% loss in Q4 2024, our portfolio's high-quality businesses and free cash flow growth indicate strong future performance.
• Key investments include Vistry's partnership model, Builders First Source's acquisition strategy, and United Bancorp of Alabama's low-income housing finance, all poised for significant growth.

Dear Partner,

Throughout 2024, we replaced slower-growth firms with durable, faster-growing firms in temporarily depressed sectors and identified similar opportunities in new industries. These firms align with our longer-term growth themes of consolidation, forced selling of assets, transaction processing, affordable housing finance, distribution, infrastructure spending and housing construction. We identified and continue to analyze opportunities in the following industries: specialized construction, natural resource royalties, distributors, logistics companies, housing, and specialty finance. New investments have a combined expected growth rate (return on equity (RoE) * (1-payout ratio)) plus earnings yield of at least 30 to 40%, a metric of deep value incorporating growth.

As we continue to add faster-growing durable companies to the portfolio, I believe we have the highest- quality businesses in the fund’s history, with a discount that continues to persist as the market fails to realize the improvement in our firm’s positions. I believe high quality is reflected in free cash flow growth with highly recurring revenues (such as in subscription businesses), high free cash flow conversion, and returns on equity that are higher than less-risky alternatives, such as well-underwritten debt which currently has yields in the low-teens.

The Bonhoeffer Fund returned a loss of 9.7% net of fees in the fourth quarter of 2024. In the same time period, the MSCI World ex-US, a broad-based index, returned a loss of 7.7%, and the DFA International Small Cap Value Fund ( DISV ), our closest benchmark, returned a loss of 6.5%. As of December 31, 2024, our securities have a weighted average earnings/free cash flow yield of 13.7% and an average EV/EBITDA of 3.4 with 13% growth....

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