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Corsair-Capital-Q3-2010

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					                                                   Corsair Capital Management, LLC
                                                    350 Madison Avenue, 9th Floor




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                                                         New York, NY 10017



                                                                                                             October 13, 2010


  Dear Limited Partner:




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  For the third quarter ended September 30, 2010, Corsair Capital was up an estimated 6.9%* net,
  after all fees and expenses. Since inception in January 1991, Corsair Capital’’s compounded net
  annual return is 15.1%.




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                                         Corsair Capital (net)     S&P 500         Russell 2000
  3Q10 return                                           6.9%          11.3%              11.3%
  YTD return                                            6.9%            3.9%               9.1%
  Annualized since inception (1991)                    15.1%            8.7%             10.1%
  Total return since inception (1991)

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                                                      1513%            419%

  After declining in August on continued worries about the European Economic Union and
                                                                                          573%


  sovereign debt risk, the U.S. equity market rebounded strongly with its best September in 71
  years. Most pundits believe the catalyst for this rally was a speech by Ben Bernanke at the
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  Federal Reserve’’s annual meeting in Jackson Hole, Wyoming, where the rationale for a second
  round of quantitative easing (QE2) was first formally suggested. Then, in mid-September, the
  Federal Reserve released the statement that ““measures of underlying inflation are currently at
  levels somewhat below those the committee judges most consistent, over the longer run, with its
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  mandate to promote maximum employment and price stability.””

  In other words, the Fed signaled it was still quite concerned about continued high unemployment
  and near term deflation and thus, was again ready to perhaps print hundreds of billions of dollars
  (QE2) in order to help the situation. Unfortunately, history shows that devaluing one’’s
  currency through money printing and deficit spending is not a recipe for long-term success
  (otherwise Argentina would now be an economic powerhouse). Since the Bernanke speech, the
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  U.S. dollar has already declined approximately 7% against a basket of our trading partners’’
  currencies. And our trading partners are not content to sit by and see us devalue the dollar. ““We
  are in the midst of an international currency war, a general weakening of currency”” warned
  Brazil’’s Finance Minister –– reminding his fellow International Monetary Fund partners of the
  ““beggar thy neighbor”” policies (competitive currency devaluations) which exacerbated the Great
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  Depression of the 1930’’s.

  In the meantime, investors have assumed that the Fed will spend this new money on a large
  buying spree of Treasury bonds and other fixed income instruments. This, in turn, has driven
  interest rates on both 2-year (0.33%) and 5-year (1.03%) Treasury notes to record low levels and
  reduced the cost of borrowing for most all borrowers. Nevertheless, many economists would
  argue that lowering interest rates at this point in time is akin to ““pushing on a string.”” The real
  unemployment problem is not due to a lack or cost of capital, but rather that businesses are
  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 Capital Management, LLC and its affiliates have examined or may examine opportunities. Corsair Capital Management, LLC 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 in the future will be profitable and may in fact
  result in losses.
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  refusing to take risks or hire new workers due to uncertainties over government policies,
  including higher taxes and regulatory (especially health and environmental) burdens.

  Meanwhile savers, who have already taken $1 trillion out of money market accounts since
  January 2009 in search of yield, are again being forced into investing in riskier assets (longer
  dated or lower rated bonds and stocks). However, savers are not the only ones affected.
  Corporations, states and municipalities with pension and healthcare plans now find themselves




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  with massive future burdens as they are unable to earn enough on their assets as originally
  assumed. For example, according to the National Association of State Retirement
  Administrators, the top 100 U.S. public pension plans currently use an expected annual return of
  8% on their assets when calculating their outstanding pension liabilities. Should the actual
  returns be 2 or 3% lower (very likely given approximately one-third of their assets are in




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  Treasury bonds), the present value of their obligations would go up by hundreds of billions of
  dollars. Of course, the liability associated with our country’’s Social Security promises would
  likewise be hugely underestimated.



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  As far as the stock market is concerned, however, many stocks are currently trading at 11-12
  times next year’’s expected after-tax earnings. This equates to approximately 8 –– 9 times pre-tax
  earnings or (calculated inversely) an earnings yield of 11-12% which is looking more and more
  attractive in a 3.8% 30-year Treasury bond world. Investors, who are being forced to take more
  risk by the Fed, are starting to believe that stocks are cheaper by comparison. If investor
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  sentiment changes just a little bit, there is no reason why we cannot see stocks at 13-14 times
  earnings (an earnings equivalent yield of 7-8%). Of course, investors take on the risk that these
  companies might not earn what they are expected to. Nevertheless, this sentiment shift and
  search for yield seem to be the driving forces behind the market moving higher right now.
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  Another factor which might boost the equity markets could be a significant acceleration in
  merger and acquisition activity. Over the past two years, many corporations have ruthlessly cut
  costs, improved efficiency and lowered inventories and receivables. In short, even in this
  relatively weak economy, they find themselves solidly profitable with significant cash reserves
  and access to capital. Since they are not growing organically, they may very well start to
  consider growing by acquisition. As was clearly demonstrated by the bidding war for 3Par
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  Corporation between Hewlett Packard and Dell, when companies use cash (which for practical
  purposes earns them nothing), corporate management teams can justify paying very high prices
  for target companies.

  The Portfolio
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  Innophos (““IPHS””) traded up during the quarter as the company reported very strong Q2 results
  and announced an accretive debt restructuring, cutting interest expense in half starting in Q4.
  IPHS earned Q2 adjusted EPS of $0.94, or an annualized EPS run-rate of $3.74, despite analyst
  expectations of $0.69 for the quarter. Over the next few quarters, management believes the
  combination of effective pass through of higher prices to customers and shifting of capacity to
  higher-value products in Mexico will more than compensate for increasing input costs. Based on
  the company’’s stable end markets, high barriers to entry, leading market shares, under-levered
  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 Capital Management, LLC and its affiliates have examined or may examine opportunities. Corsair Capital Management, LLC 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 in the future will be profitable and may in fact
  result in losses.
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  balance sheet, and ramping cash earnings, we firmly believe that IPHS is a very good business
  and that its P/E multiple will expand to reflect these characteristics (see Appendix). The stock
  ended the quarter at $33.10.

  Globe Specialty Metals (““GSM””) positively contributed to the portfolio this quarter, as it
  announced FY2010 earnings last month that exceeded analyst estimates. The shareholder
  friendly management team and board also initiated GSM’’s first ever annual dividend, signaling




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  confidence in the company’’s underlying business fundamentals. Silicon metal and ferrosilicon
  prices continue to strengthen amid tight industry supply dynamics and a rebound in demand from
  key markets. As such, industry experts are currently predicting higher near and long term prices
  for silicon and ferrosilicon. Ongoing acquisition activity represents another key catalyst, as
  dominant strategic players announced acquisitions in the silicon metal sector. We believe the




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  M&A activity reinforces our thesis that the industry boasts high barriers to entry and tight
  supply, which will continue to lead to higher silicon metal prices. The stock ended the quarter at
  $14.04.



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  MDS Inc. (““MDZ””) shares rose strongly during the quarter as the company reported several
  positive developments that brought the company closer to completing its restructuring by the end
  of 2010. Most notably, the NRU nuclear reactor returned to operation, allowing MDZ to re-enter
  the Mo-99 supply chain in the medical imaging market. In connection with the re-start of the
  NRU reactor, the company also signed a contract with its primary medical imaging customer
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  which should improve financial results starting in fiscal Q4. In the medical sterilization segment,
  MDZ announced it has extended an agreement with a Canadian power generator that will secure
  the company’’s Co-60 supply through 2020. We expect more positive developments, including
  the conclusion of the MAPLE Project arbitration proceedings. The stock ended the quarter at
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  $10.10.

  Expedia’’s (““EXPE””) stock price more than made up for its second quarter decline, rising nearly
  50% during the past three months. The company beat earnings expectations due to continued
  strong growth at its TripAdvisor division and robust travel sector trends led by increased
  consumer discretionary spending. The stock ended the quarter at $28.23.
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  On the negative side of the ledger, Live Nation (““LYV””) declined as their earnings disappointed
  investors. Interestingly, through 2009 and the beginning of 2010, LYV's concert business
  generated consistent results and defied much of the economic downturn - a factor which attracted
  us to the investment. However, as 2010 progressed, LYV's concert business proved to be more
  cyclical in nature than we and the market had anticipated. While LYV’’s concert segment has
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  faced challenges in recent quarters, LYV reported strong earnings in its sponsorship and
  ticketing segments. We continue to closely monitor the concert industry in order to assess the
  company’’s ability to meet the business model potential we recognized following its merger with
  Ticketmaster in the beginning of the year. The stock ended the quarter at $9.88.

  Lastly, as many of you know, Corsair has enjoyed a long history of investing in post
  reorganization equities. Most recently, LyondellBasel (““Lyondell””) has proven to be a classic
  post reorganization investment, having emerged essentially as a new company with a highly
  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 Capital Management, LLC and its affiliates have examined or may examine opportunities. Corsair Capital Management, LLC 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 in the future will be profitable and may in fact
  result in losses.
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  improved balance sheet, new upper and middle level management and very conservative
  projections set forth in its Plan of Reorganization. Lyondell’’s stock rose sharply during the
  quarter, driven by blowout Q2 earnings. In fact, the company’’s Q2 EBITDAR alone almost met
  its entire fiscal year 2010 projection published in its disclosure statement. Though Lyondell
  recently emerged from bankruptcy, the company has already generated enough cash that it can
  now be considered underlevered. We look forward to Lyondell’’s imminent NYSE stock listing
  under ticker LYB, which should serve as a catalyst for sell-side firms to ““discover”” Lyondell’’s




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  attractive valuation relative to its peers in the chemical industry and will enable institutional
  investors and mutual funds to invest in the company. Finally, we are very impressed with
  Lyondell’’s new executive management team who seems focused on one goal: creating
  shareholder value by delivering operational and financial excellence. The stock ended the quarter
  at $23.90.




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  Organizational Matters

  After nearly seven years of working at Corsair Capital Management, we bid farewell to Alec


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  Henry, who joined Eagle Capital Management. We wish Alec all the best in his new position.

  Additionally, we are pleased to welcome Daniel Friedman who joined us during the summer
  from Goldman Sachs’’ investment banking division.
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  Thank you for your continued support and confidence. The attached Appendix is a write-up of a
  core investment. Please feel free to call us with any questions you may have at (212)389-8240.

  Sincerely,
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  Jay Petschek                                                           Steven Major


  * The funds’’ returns are based on a typical investor in Corsair Capital since inception. For Corsair Capital 100 or Corsair
  Capital Investors returns, please refer to your capital statement.
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  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 Capital Management, LLC and its affiliates have examined or may examine opportunities. Corsair Capital Management, LLC 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 in the future will be profitable and may in fact
  result in losses.
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  Appendix –– Innophos (““IPHS”” –– $33)

  IPHS is a leading specialty phosphates company in North America serving stable, diversified end
  markets. Applications for its products include flavor enhancers in the food and beverage industry
  and inactive drug additives in the pharmaceutical industry. Our thesis rests on the view that 2008
  and 2009 earnings misrepresent the business’’ stability, and reported GAAP earnings understate
  the true earnings power of the company.




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  Because IPHS uses raw materials like phosphate rock and sulfur that overlap with the broader
  fertilizer industry, fertilizer supply/demand dynamics can create volatility in IPHS’’ results. IPHS
  historically priced supply contracts on a one year lag to market prices; as phosphate rock prices
  spiked in 2008 from $50/ton to as high as $450/ton, IPHS benefitted significantly by raising its




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  prices to customers while not incurring higher input costs. However, this dynamic reversed in
  2009 when IPHS’’ raw material costs reflected the higher 2008 phosphate rock prices, while
  lower 2009 rock prices forced IPHS to lower its fees. IPHS’’ earnings in 2009 halved year over
  year, and based on this volatility, the market now considers IPHS a very cyclical company.


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  IPHS has since tailored its business to properly align changes in raw material costs with product
  pricing. Three key changes are worth highlighting: 1) supply contracts for rock will re-price
  quarterly instead of annually, limiting lag time; 2) capacity in Mexico will be reallocated from
  phosphorous-based detergents, which face demand headwinds stemming from environmental
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  concerns, to stable food, beverage, and pharmaceutical specialty salts/acids; 3) phosphate rock
  sourcing will expand from one supplier to multiple suppliers. We believe that these changes will
  result in future earnings stability at the company. Our view is that IPHS has a great business
  stemming from its diversified end markets, specialized products and high barriers to entry (these
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  include the cost of constructing a greenfield plant, locating phosphate rock supply and
  demonstrating flavor/cleaning agent efficacy).

  Bain & Co. recognized the company’’s stable end markets and cash generation and bought out
  IPHS in 2004. Excess depreciation from the write-up of fixed assets in the buyout has caused
  reported GAAP earnings to understate cash earnings. IPHS reports around $50m of annual
  depreciation, outpacing maintenance capital expenditures of only $20m-$25m. This factor leads
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  us to believe that the current reported earnings do not accurately reflect the true earnings power
  of the business. IPHS earned Q2 EPS of $0.79 –– removing the excess depreciation yields
  adjusted EPS of $0.94. We expect sell-side analysts to appreciate IPHS’’s true value in the near
  term as depreciation begins to decline and approach maintenance capital expenditures.
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  Because there is little seasonality in the company’’s markets, we can use Q2 performance to
  measure run-rate earnings; Q2 adjusted EPS of $0.94 equates to an annual run-rate of ~$3.75.
  We feel confident that IPHS can earn $4.00 of adjusted EPS in 2011. Our target price of $50
  reflects a 12x-14x multiple we view the business warrants. We also believe IPHS is once again a
  potential LBO target as it is under-levered and generates stable cash flow.



  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 Capital Management, LLC and its affiliates have examined or may examine opportunities. Corsair Capital Management, LLC 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 in the future will be profitable and may in fact
  result in losses.

				
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