Karst Peak Capital’s substantial investment in Neuren is definitely worthy of investor attention but I don’t necessarily see it as a “red flag”.
Karst Peak has a reputation for doing extensive due diligence prior to making its long-side investments which it typically aims to hold for own for 3 to 5 years. The fund’s first significant investment in an Australian biotech was in Avita Medical (AVH) in 2018. It entered in mid-2018 and is mostly out now, reaping ~ $100m profit on an original $19m investment.
Some of the thinking behind the fund’s investment approach (on their website) is set out below.
Our investment approach is contrarian, fundamental, and long-term oriented, with an emphasis on identifying promising companies before they are well-known to the broader market. Our goal is to buy high-quality businesses when they are out of favor, misunderstood, undiscovered, or underappreciated.
We manage a concentrated portfolio of long-term holdings, which requires us to have high conviction in our investments, which in turn leads us to run an extensive due diligence process when evaluating new opportunities.
We are bottom-up investors and like to dig deep in our due diligence process. As a result, we tend to avoid highly macro-sensitive and commodity-sensitive sectors and stick to businesses where a talented management team can influence outcomes.
Our goal is to build a concentrated portfolio of high-quality businesses that can compound value over a long period of time. These companies should be run by passionate management teams with skin in the game.
We believe the most important factor to determining business quality is assessing barriers to entry—the depth and width of the moat around the business—which ultimately will determine the return on invested capital of the company.
We spend a significant amount of time focused on investment opportunities in Australia and New Zealand. These markets have produced some of the world’s best performing stocks in recent years, yet are off the radar of many global investors. Our particular focus is on companies based or listed in Australasia that generate a significant proportion of their current or future revenue overseas.
So, it could be argued that Karst Peak’s significant investment in NEU is a positive sign because it suggests
Karst Peak considers NEU to be a high quality business that is misunderstood and unappreciated.
Karst Peak’s decision to substantially invest in NEU was only made after conducting extensive due diligence.
Karst Peak believes NEU has a talented and passionate management team who can influence outcomes.
Karst Peak perceives NEU’s targeted market to have low levels of competition and high barriers to entry.
Karst Peak expects that the NEU share price will rise significantly past $1.00.
Although Karst Peak Capital’s involvement is likely to be little comfort to anyone who invested @ $3.00 or $4.00, it should bolster confidence that NEU is a great buy at current levels.
NEU Price at posting:
$1.25 Sentiment: Hold Disclosure: Held
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