Mount Curve Founder and Managing Partner, Anand Philip, always wanted to run his own business, and be in control of his own destiny. He drew inspiration from the founders of York Capital, where he helped to build out a private equity offering. After nearly two decades in mid-market private equity – including spells at Castle Harlan and Blackstone – Philip resolved to go solo. He personally piloted a public equity track record, verified by an accounting firm, before launching with his own capital and outside investors including private equity and hedge fund managers including ex-bosses and colleagues from multiple former employers, company executives and board directors, and a professor from his alma mater, Harvard Business School. “The attraction of a smaller asset base is more potential for both absolute returns and alpha, because smaller public and private companies tend to be more inefficient and thus laden with more alpha potential,” says Philip.
The strategy is primarily US equity long/short, though it can also make private equity investments (inside and outside the core strategy) and has done one so far. Private equity experience and networks play a larger role in terms of the style of analysis, due diligence and channel checks carried out to build and validate long and short investment theses for public companies. “Private markets knowledge and intelligence, conversations and idea generation are married with more traditional experience in valuation,” says Philip.
The attraction of a smaller asset base is more potential for both absolute returns and alpha, because smaller public and private companies tend to be more inefficient and thus laden with more alpha potential.
Anand Philip, Founder and Managing Partner, Mount Curve Capital Management
For both public and private equity, the strategy takes a multi-year view rather than obsessing over quarterly earnings reports, though shorts usually have a shorter time horizon. The strategy has been net long since inception in July 2020, averaging below 100% exposure, but the short book has been punching far above its weight – generating 45% of alpha vs. the S&P 500 as of June 2022, and strong double-digit absolute returns since inception. “Shorting can be episodic, and we have had a banner year shorting secular decliners as well as generally low quality, unprofitable companies, which have seen their share prices collapse by 30 to 50% or more,” says Philip.
One successful short was a heavily indebted multi-level marketing firm. Philip sees no inherent problem with certain MLM business models per se, but in this case it was an over-levered company selling environmentally-unfriendly products without a clear moat around its business. Meanwhile, cash flow analyses showed the company would be forced to cut or eliminate its dividend to preserve lender collateral. Forensic accounting analyses showed worsening business trends. “For shorts, we like to build the mosaic of identifying multiple negative factors weighing on a company that could come together to influence its trajectory. The thesis played out within a couple of quarters as management cut the dividend, breached debt covenants and delayed financial statements, generating over a 40% realized short gain,” says Philip.
The long book has made up most of the remaining double digit absolute returns. Philip is wary of crowded longs since they can fall prey to momentum reversals and hot money outflows: “Crowded longs are a closet momentum strategy that works on the way up but unwinds quickly on the way down. I prefer my core long holdings to have as stable an investor base as possible”. On the short side, he is more cautious of high short interest names in a bull market, but becomes bolder in bear markets, though in either case maximum position sizes are much lower than for the longs. Shorts are capped at 3% whereas longs can normally grow to 15% and occasionally even larger, subject to getting comfort on risk constraints such as leverage, volatility and beta.
The industry focus is mainly on three broad sectors: industrials, consumer and services. The investment universe adds up to a few thousand companies predominantly listed in the US, with market capitalisations generally between $200 million and $20 billion. This wide range allows for a flexible and dynamic approach to stock-picking. During the Covid crisis, Philip sometimes found small caps with no sell side coverage trading at deep value multiples with net cash and no debt. The emphasis has recently moved towards larger names: “The average market cap has risen in 2022 as we have focused on more defensive and higher quality companies,” says Philip.
Some generalisations can be made about factor exposures. Longs are less leveraged and may have some growth but will not be in the top quartile of earnings growth because such firms tend to be unprofitable, and Philip defines profits after stock-based compensation. This also rules out many of the fastest-growing high technology companies. “We do not have any long holdings that are unprofitable, but their growth rates are still reasonable,” he says. Philip closely monitored the “stay at home” versus “re-opening” factor exposures, which added value in 2020 while detracting it in 2021, with little net effect.
In mid-2022, Philip sees exceptional value in selected high-quality names, which can include large caps with strong free cash flows: “Here quality is defined as sustainable growth, low churn rates and reasonable valuations without needing to believe rosy assumptions,” he says.
More off the beaten track, he has identified consolidation stories in lowly valued small to mid-cap industrial companies that can make roll up acquisitions of rivals also trading at low valuations, and increase market share, pricing power and margins. “The consolidators and acquirers are trading at single digit EBITDA multiples and single digit or low double digit PE ratios. Though there is some execution risk, we track them very closely to ensure they are following a solid private equity playbook and some of the executives even came from private equity,” points out Philip. “A recession could even be benign for this strategy, since the targets could be acquired even more cheaply,” he adds.
Philip could contemplate public activism but has not done any yet and has sometimes decided against it after consulting with other asset managers and law firms. He is more likely to be “constructivist” and indeed to pursue more discreet, private activism: “I argued that a slow growing tax preparation company should scale back poorly-conceived investment plans and focus more on cost savings and cash flows (but does not take full credit for them doing so). The projected (and actual) cash flows improved significantly on management’s pivot and we made close to a 50% realized gain on that investment in little over a year”.
“In another case, I suggested that a small cap company outsource its investor relations function to free up the CFO’s time. Once they hired an IR firm, we discussed best practices with that firm to engage investors since the company had minimal sell-side coverage to help it do the selling.”
Philip had three takeover bids close in his pre-launch personal account portfolio, though he only anticipated one of them. “While I expect to own some takeover targets, it’s unrealistic to expect our high market share holdings to be taken over since horizontal mergers might run into antitrust obstacles, although vertical mergers might be possible.” He is nonetheless adept at evaluating which companies might be more attractive to private equity-backed buyers in an MBO or LBO.
Philip’s private equity track record between 2006 and 2019 – deploying around $500 million of equity in small and mid-cap growth and buyouts with enterprise values between $50 million and $1 billion – averaged an IRR of 25%. This spans multiple vintages, including a very bad 2007 and a very good 2009 vintage, but he estimates that it would have been at least top quartile and sometimes top decile.
Whereas some hedge funds restrict their private equity to pre-IPO, Philip usually expects to take a longer-term view. He also takes minority stakes: “Majority ownership would be too time consuming at the moment when we are focused on public equities – a 5% position could take up 25% of my time”.
Mount Curve’s first private equity investment, in a highly cash-generative IT staffing company, greatly outperformed expectations in 2021: “Our private equity consortium persuaded them to devote resources to move from an incoming calls model to an outbound sales effort. The business model works well with the gig economy, which is attracting a lot of IT professionals and the largest tech firms and chief integration officers are using IT consultants. This investment is likely to show a substantial profit,” says Philip. Up to 10% of the strategy can sit in private equity; beyond that it would be housed in separate vehicles.
Philip has held over 10 board roles in the past, mainly at private equity investee companies but also at others. He could contemplate sitting on some boards of long-term holdings that did not need active trading. He also holds advisory roles at his alma mater, Ohio Wesleyan University, where he has sat on the Board of Trustees for the past 11 years and is currently the Chair of the Investment Committee of its endowment.
Mount Curve’s first analysis is based on non-ESG factors, before moving on to ESG analysis, which seeks headwinds for shorts and tailwinds for longs. The recycling economy lent ESG support for one investment that also had strong fundamentals and catalysts: “Since aluminium is infinitely recyclable, whereas plastic is not, the former benefits from the sustainability trend away from plastic. Private equity experience including board seats on packaging companies and seeing cost pass throughs in contracts was also useful in providing confidence that increased metal prices would be passed through to customers. A spin-off of a tinplate maker to a private equity buyer was a bonus, and I expect further non-core divestitures. The position has been a winner so far”.
There can also be pairs trades within an ESG friendly sector. The aforementioned long was paired against a short in a more richly valued aluminium can maker with fewer catalysts, which has generated a 15% absolute gain, and also hedged out some sector exposure.
Philip is focused on returns and would not own the long side of the pair indefinitely because he has observed the feast and famine cycle of the aluminium industry, which may at some stage run into overexpansion and overcapacity and be forced to cut prices.
Industrial cycles will sometimes be more relevant than economic cycles. The approach is mainly bottom up driven, though Philip is alert to a range of macroeconomic scenarios and might at some stage reduce net exposure meaningfully: “I am not sure if the Fed will engineer a slow landing. I envisage a low risk of recession combined with high inflation but would probably add significantly on the short side in that sort of environment. I am open minded about a range of scenarios, which could include 1970s-style stagflation, or might repeat the 2000-2007 golden age for hedge fund equity investing, when value greatly outperformed unprofitable growth”.
The Mount Curve team includes a full-time senior-level analyst who also brings both hedge fund and private equity investing experience to the table, as well as an MBA from the Wharton School of the University of Pennsylvania. His work experience includes roles as a private equity associate at mega-fund Thomas H. Lee Partners, a stint at a billion-dollar event-driven hedge fund and then helping to launch another long/short equity fund (with a heavy focus on shorting) before joining Mount Curve two years ago.
Operational functions are mainly outsourced to the service providers, including Goldman Sachs, Opus Fund Services, Seward & Kissel, Grant Thornton and prime broker BTIG, which has been especially supportive on the capital introductions side, by tailoring introductions to the needs of emerging managers.
Philip is fortunate in having been able to launch without seed capital. He could contemplate some form of fair and reasonable acceleration deal, but the ideal partner would bring strategic value in addition to capital.
Mount Curve can be classified as a minority-owned manager. A resident of Austin, Texas, Philip has lived in eight cities across three countries. Born in India, his Christian religion made him a minority. He spent almost a decade of his childhood in Muscat, Oman, and when he moved to the US to take up a scholarship in Ohio, he was also a minority. That repeated experience of being from the outside has trained him to think like an outsider, which can be a particularly valuable skill in investing.