Corsair Capital 2Q2012 Letter - PDF

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Corsair Capital 2Q2012 Letter - PDF Powered By Docstoc
					                                                                                                                                                                          July 23, 2012


Dear Limited Partner:

For the second quarter ended June 30, 2012, Corsair Capital was down an estimated 2.2%* net,
after all fees and expenses, bringing our 2012 performance to 5.0%*. Since inception in January
1991, Corsair           compounded net annual return is 14.3%.

                                                                      Corsair Capital (net)                              S&P 500                    Russell 2000
2Q12 return                                                                        -2.2%                                   -2.8%                          -3.5%
YTD return                                                                          5.0%                                    9.5%                            8.5%
Annualized since inception (1991)                                                  14.3%                                    9.0%                         10.2%
Total return since inception (1991)                                               1659%                                    543%                           714%

The tug of war between the bulls and the bears continued during the second quarter as the markets
declined in both April and May, only to rally in June. Traders were again whipsawed between the
negative economic/ budgetary developments in Europe and the positive effects from
announcements of monetary stimulus by the European Central Bank. Additionally, investor
confidence was eroded by the poor debut of the much anticipated Facebook public offering (which
recorded the steepest 1 month decline for any IPO greater than $1 billion in addition to its first day
trading halts/snafus) and the surprise multi-billion dollar loss incurred by JP Morgan in
its balance sheet. Brought to you via MarketFolly.com

As mentioned in last            letter, the primary macro-investment concern seems to have shifted
from Greece to Spain lately (although Antonis Samaras,                 newly elected prime minister,
tried to hold the spotlight by saying Greece should renege on certain austerity measures recently
agreed to as part of its latest European Union bailout package).                banks are in need of
additional capital and the            forecasted budget deficit continues to shrink ever more slowly
with each revision. Reflecting these concerns,            10-year bonds are now yielding north of
7%, a level some economists believe is unsustainable if the country is to remain a member of the
euro zone.

*Unless otherwise noted, performance figures included herein (which include the reinvestment of dividends, capital gains and other earnings) are for
Corsair Capital Partners, L.P.                       . The figures for the fund are based on an investment made as of the inception of the fund, are
calculated net of fees and expenses, are based on unaudited data, and may be subject to adjustment. Additionally, the figures for the fund are calculated
using the highest management fee per annum rate generally offered by such fund at the time for Corsair Capital, a 1.00% rate through May 2002, a
1.25% rate from May 2002 through 2009, and a 1.50% rate commencing January 2010. Although the portfolios of the other funds within the Corsair
Capital          have been substantially similar to Corsair Capital, the actual returns of such other funds have varied. Also, results for individual investors
within a particular fund managed by Corsair Capital Management, LLC                  or its affiliates have varied based on, among other things, the applicable
fee rate and the timing of capital contributions and redemptions/withdrawals. For additional important disclosures regarding this letter, please see the last
page of this letter.

This letter is not a research report or recommendation to buy or sell the securities mentioned herein. The examples herein are illustrations of ways in
which Corsair and its affiliates have examined or may examine opportunities. Additionally such examples do not represent Corsair                       entire
portfolio and in the aggregate may represent only a small percentage of Corsair              portfolio holdings. Corsair and its affiliates may, at any time,
buy or sell any of the securities mentioned in this letter and may change its long or short position at any time without providing any notification of such
changes. It should not be assumed that any trading activities pursued either nor or in the future will be profitable. Such activities may in fact result in
losses.

       Corsair	
  Capital	
  Management,	
  LLC	
  	
  |	
  	
  350	
   Madison	
  Avenue,	
  9th	
   Floor	
  	
  |	
  	
  	
  New	
  York,	
  NY	
  10017	
  	
  |	
  	
  	
  212.389.8240	
  
Conversely, the yield on German 10-year bonds is at a record low, approximately 1.2%. Per a
recent Fortune magazine article, investors used to         -       returns in the bond market, are now
in a new world, where             -      risk is more the norm. Investors face the conundrum of
incurring absolute losses (i.e., paying a small negative yield to get their money back) in holding 2-
year or shorter maturity paper from Finland, Austria, Germany, Denmark and Switzerland, while
likely risking even higher real losses (after adjusting for inflation) in holding similar debt issued by
the U.S., the U.K. and Canada.

Investors everywhere are searching to obtain a decent return. However, with the memory of 2008
and last summer in mind, very few wish to take on any market risk at the moment. As Jim Grant of
         Interest Rate Observer points out, this is the first time in 12 years that pension managers
are putting more money into fixed income securities than equities (41.4% vs 38.1%), whereas, just
a few years ago they were putting twice as much into equities (60.3%) than in bonds
(29.3%). Investors remain clearly worried and are acting as if we are in a
as the Jerome Levy Forecasting Center describes it, a world with sluggish worldwide economies
and huge policy stimuli.

Looking forward, investors are also seemingly bracing themselves for a bruising presidential
election campaign. The                   from either side is likely to be somewhat nasty and
divisive. Furthermore, no matter which side wins, the long-term solutions to the over-borrowing
and over-spending we have incurred (not to mention how to make improvements in our education,
infrastructure, defense and healthcare) will be difficult to find and to implement. Nevertheless, we
heed the words of Warren Buffett, and realize that for equity investors               is your friend,
euphoria the enemy.

Portfolio Update

As compared to the past few quarters, our holdings had few significant moves during the second
quarter. In general, most of our investments faded a bit along with the equity markets.

Innophos Holdings              last mentioned in our year-end 2011 letter, was our largest positive
contributor with its move from $50.12 to $56.46. IPHS continued to meet earnings expectations
and is on track to generate close to $5.00 per share in cash earnings in 2012. We continue to
believe this specialty ingredient/additive company is worth 15x earnings given the quality of its
business model and clean balance sheet. The company just announced another accretive
acquisition and we believe management will continue to allocate capital in a shareholder friendly
manner.

This letter is not a research report or recommendation to buy or sell the securities mentioned herein. The examples herein are illustrations of ways in
which Corsair and its affiliates have examined or may examine opportunities. Additionally such examples do not represent Corsair                       entire
portfolio and in the aggregate may represent only a small percentage of Corsair              portfolio holdings. Corsair and its affiliates may, at any time,
buy or sell any of the securities mentioned in this letter and may change its long or short position at any time without providing any notification of such
changes. It should not be assumed that any trading activities pursued either nor or in the future will be profitable. Such activities may in fact result in
losses.

       Corsair	
  Capital	
  Management,	
  LLC	
  	
  |	
  	
  350	
   Madison	
  Avenue,	
  9th	
   Floor	
  	
  |	
  	
  	
  New	
  York,	
  NY	
  10017	
  	
  |	
  	
  	
  212.389.8240	
  
Six Flags           also mentioned in our year-end 2011 letter, was our second largest positive
contributor, climbing from $46.77 to $54.18. SIX came out of bankruptcy in 2010 and continues
to successfully execute on its business plan as formulated by its management team which took the
helm in August 2010. The company has been returning cash to shareholders via both stock
buybacks and dividends (they recently raised their dividend from $0.06 to $0.60 per quarter which
represented a 5+% annual dividend yield). Lastly, SIX is exploring the sale of its minority
ownership in Dick Clark Productions which is expected to generate another $1.00 $2.00 per
share of cash. MarketFolly.com: Your source for hedge fund letters

Aperam                  written up in the appendix to our 2011 year-end letter, was our largest
negative holding, having declined from 13.88 to 10.36. A spin-off from steel company giant
ArcelorMittal, APAM basically gave up the gains it had recorded for us in the first quarter of the
year. A slowing world economy and, in particular, a drop in nickel prices hurt demand for its
stainless steel products. We continue to believe APAM is very cheap on any normalized earnings
basis and is particularly cheap compared to its closest competitors Acerinox and Outokumpu.

TNS, Inc.              mentioned as a positive contributor in our last letter, likewise gave up its first
quarter gains, as it traded down from $21.73 to $17.94. TNS continues to expect core earnings of
$2.50 per share in 2012 (excluding start-up losses from its Cequint subsidiary). We saw no
particularly negative news during the second quarter. However, a weakening euro will affect their
earnings and the rollout of their NameID cellular product seems a bit behind
schedule. Nevertheless, we believe the                 shares to be quite undervalued at less than 8
times core earnings and see potential for the new cellular products to add significant additional
value.

Thank you for your continued support and confidence. See the attached Appendix for a write-up of
a current core investment. Please feel free to call us with any questions you may have at 212-389-
8240.

Sincerely,



Corsair Capital Management, LLC




This letter is not a research report or recommendation to buy or sell the securities mentioned herein. The examples herein are illustrations of ways in
which Corsair and its affiliates have examined or may examine opportunities. Additionally such examples do not represent Corsair                       entire
portfolio and in the aggregate may represent only a small percentage of Corsair              portfolio holdings. Corsair and its affiliates may, at any time,
buy or sell any of the securities mentioned in this letter and may change its long or short position at any time without providing any notification of such
changes. It should not be assumed that any trading activities pursued either nor or in the future will be profitable. Such activities may in fact result in
losses.

       Corsair	
  Capital	
  Management,	
  LLC	
  	
  |	
  	
  350	
   Madison	
  Avenue,	
  9th	
   Floor	
  	
  |	
  	
  	
  New	
  York,	
  NY	
  10017	
  	
  |	
  	
  	
  212.389.8240	
  
Appendix DigitalGlobe                                                 - $14.22 )

DigitalGlobe           a leading US satellite imaging company, provides customers with real-time
and archived images from three satellites. Originally founded in 1993 with the first U.S.
commercial license to gather high-resolution digital imagery of the earth, DGI has built an enviable
(and we think underappreciated) position in the still-nascent commercial imaging industry. Near-
term uncertainty has created an attractive opportunity to gain exposure to a high-quality business
with multiple earnings drivers, a solid balance sheet and a management team focused on creating
shareholder value. We see the potential, within the next two to three years, for DGI to generate
$2/share of EPS and fetch a $30/share valuation.

While DGI has a diverse customer base, the National Geo-Spatial Agency             the primary
U.S. government procurement agency for geo-spacial information, contributes about 50% of DGI
revenue. In mid-February, DGI and its main competitor, GeoEye                 sold off due to
impending government spending cuts. Our research, which included conversations with
management and competitors and extensive quantitative and qualitative analysis, supported our
view that while a severe cut was unlikely, DGI stock already reflected a worst-case-scenario
without any credit for its superior positioning relative to GEOY.

This fact was not lost on GEOY; in May GEOY attempted to purchase DGI in a $17/share cash and
stock bid, a nearly 40% premium to             price as of April 30. DGI rejected             offer,
arguing the proposed transaction failed to reflect the            intrinsic value and the benefit of
synergies both could accrue in a merger.        decision to forego a quick 40% return corroborates
our view that its stock does not reflect the value of the underlying assets. A month later, NGA
vindicated        decision when it announced its intent both to fully exercise its DGI contract for
FY 2013 and to cut funding to GEOY. Going forward, if NGA were to cut DGI funding, which we
view as highly improbable, DGI has the flexibility to immediately re-route satellite capacity to
replace a portion of revenue, cut related costs and capital requirements. Earlier today DGI
announced a merger with GEOY. The company notes the net present value of just the capital and
cost synergies from the proposed combination is in excess of $1.5B, representing more than the
current market caps of the two companies. Our initial impression is this transformational
transaction should add significant value to DGI shareholders while substantially de-risking the
investment.

Jeff Tarr,       CEO/President and former President/COO of IHS, further convinces us the value
of         opportunity set will accrue to shareholders. Jeff oversaw         2005 IPO at $16 and its
subsequent fivefold rise in its stock price, driven by substantial revenue and profit growth. Our
This letter is not a research report or recommendation to buy or sell the securities mentioned herein. The examples herein are illustrations of ways in
which Corsair and its affiliates have examined or may examine opportunities. Additionally such examples do not represent Corsair                       entire
portfolio and in the aggregate may represent only a small percentage of Corsair              portfolio holdings. Corsair and its affiliates may, at any time,
buy or sell any of the securities mentioned in this letter and may change its long or short position at any time without providing any notification of such
changes. It should not be assumed that any trading activities pursued either nor or in the future will be profitable. Such activities may in fact result in
losses.

       Corsair	
  Capital	
  Management,	
  LLC	
  	
  |	
  	
  350	
   Madison	
  Avenue,	
  9th	
   Floor	
  	
  |	
  	
  	
  New	
  York,	
  NY	
  10017	
  	
  |	
  	
  	
  212.389.8240	
  
 research confirms Jeff played an integral role in        growth, which gives us confidence in his
 leadership and the ability to grow shareholder value for DGI. Over time, we expect Jeff to use the
 traditional arsenal of value creators dividends, share repurchases and disciplined M&A and
 prove DGI correctly rejected            $17/share offer. DGI believes it can meaningfully expand
 the market size for images and imaging solutions and should grow its commercial division by
 10%+ annually, reaching $1bn revenue in 4 to 5 years. If successful, DGI could generate $4/share
 of free cash flow that could command a $60/share valuation.

 As           growth in other sectors accelerates, the stock should de-risk as            relative
 contribution declines. From co-developing Google Earth and the recently announced
 Maps products to managing infrastructure and supporting oil and gas exploration, DGI has
 demonstrated its product can add value to customers across a range of applications. We highly
 value this type of company that can offer a specialty product to many customers across industries
 without having to spend incremental capital and customize for each industry. 2012 continues to be
 a transformational year for DGI: it has gained clarity on the NGA contract, plans to deliver on
 earnings expectations and looks to demonstrate it can use its balance sheet to create value.
 Through our lens, we recognize a transformation that has created an opportunity to own, at an
 attractive price, a strong asset with a world-class management team.
For more hedge fund letters, click here to head to MarketFolly.com




 This letter is not a research report or recommendation to buy or sell the securities mentioned herein. The examples herein are illustrations of ways in
 which Corsair and its affiliates have examined or may examine opportunities. Additionally such examples do not represent Corsair                       entire
 portfolio and in the aggregate may represent only a small percentage of Corsair              portfolio holdings. Corsair and its affiliates may, at any time,
 buy or sell any of the securities mentioned in this letter and may change its long or short position at any time without providing any notification of such
 changes. It should not be assumed that any trading activities pursued either nor or in the future will be profitable. Such activities may in fact result in
 losses.

        Corsair	
  Capital	
  Management,	
  LLC	
  	
  |	
  	
  350	
   Madison	
  Avenue,	
  9th	
   Floor	
  	
  |	
  	
  	
  New	
  York,	
  NY	
  10017	
  	
  |	
  	
  	
  212.389.8240	
  
I M PORTANT DI SCLOSURES

An investment in any Corsair fund is speculative and involves a high degree of risk. Past
performance is not necessarily indicative of future results. There can be no assurances that any
Corsair fund will continue to have a similar return on invested capital because, among other
reasons, there may be differences in economic and market conditions, regulatory and political
climate, portfolio size, investment opportunities, expenses and structure.

References to benchmarks are for illustrative purposes only. Comparisons to benchmarks have
limitations because characteristics of such benchmarks, such as level of volatility and position
concentration, among other things, may differ from those of the applicable Corsair fund. The
Corsair funds do not attempt to track a benchmark.

The information in this letter is as of the date set forth on the cover page hereto and is subject to
change without notice. The delivery of this letter at any time does not imply that the information
or opinions contained herein are correct at any time subsequent to the date set forth on the cover
page hereto.

Any forward-looking statements included in this letter represent the subjective views of the
portfolio managers of Corsair, including the future performance of the market generally and
portfolio companies specifically, based on assumptions that may or may not prove to be correct.
There can be no assurance that these views are accurate or will be realized, and nothing
contained here is, or should be relied on as, a promise as to the future performance or condition
of any Corsair fund, any portfolio company or the market generally. Industry experts and the
portfolio companies themselves may disagree with these views and/or assumptions.

Certain information contained herein has been obtained by Corsair from third parties. While
Corsair believes that such sources are reliable, it cannot guarantee the accuracy of any such
information and does not represent that such information is accurate or complete.




This letter is not a research report or recommendation to buy or sell the securities mentioned herein. The examples herein are illustrations of ways in
which Corsair and its affiliates have examined or may examine opportunities. Additionally such examples do not represent Corsair                       entire
portfolio and in the aggregate may represent only a small percentage of Corsair              portfolio holdings. Corsair and its affiliates may, at any time,
buy or sell any of the securities mentioned in this letter and may change its long or short position at any time without providing any notification of such
changes. It should not be assumed that any trading activities pursued either nor or in the future will be profitable. Such activities may in fact result in
losses.

       Corsair	
  Capital	
  Management,	
  LLC	
  	
  |	
  	
  350	
   Madison	
  Avenue,	
  9th	
   Floor	
  	
  |	
  	
  	
  New	
  York,	
  NY	
  10017	
  	
  |	
  	
  	
  212.389.8240	
  

				
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