• Will

A "Non-Competed" Investment Blueprint Of An "Esoteric" Investor: Orthogon Partners

At the heart of what we strive to do at Golden Southeast is to deploy capital into unique opportunities often overlooked, ignored or cast aside by most others. We try to be either way ahead of the curve or completely off the curve, building our own curve. As we further formalize our activities, we are increasingly looking to build sustainable, capital efficient businesses "on top of" & specifically designed for these "niche" opportunities. To that end, we stumbled upon a young firm a few years back doing something rather similar to this. To their credit, they were then & remain at a far more advanced stage than we are at today. The firm is Orthogon Partners & their approach to investing coupled with their subsequent success has greatly inspired & informed us in our own activities. This post will provide a brief overview of Orthogon, while also shedding a bit of light on our aims, activities & thought processes at Golden Southeast.

As a bit of background, Orthogon Partners was founded in 2016 by Rishi Ganti, a former investment professional at the $60Bn AUM Two Sigma Investments. At Two Sigma, Rishi was responsible for managing the wealth of the firm’s principals, including founders John Overdeck & David Siegel. Orthogon's Fund I held a final equity close in November 2017 with $137M of committed capital. Fund II was of a similar size and was launched in September 2018. The firm is headquartered in New York City and has investment operations in Europe and the Americas.

At the core of the firm's investment approach is the belief that "the market will reward you for bringing assets into a market, even more than it will reward you for pricing that asset correctly in the market", as per Rishi himself. More specifically, the investment team at Orthogon focuses exclusively on "esoteric", "non-competed" assets, which are inherently alpha-rich and uncorrelated with virtually all other assets.

Ok, so what does "esoteric" & "non-competed" actually mean in this context?

Well, let's break things down. To start, conventional assets include the likes of public equities, private debt, private equity, bonds & so forth. Beyond those, there are then "niche" assets, which would encompass, for example, litigation finance, rail car ownership, pharma & music royalties & patent investing. In both of these buckets, competition exists when bidding for said assets. Varying degrees of competition, no doubt, but competition nonetheless. So, in order to "win" an asset, you either need to be the highest bidder (thereby reducing your "margin of safety" / the relative likelihood & magnitude of your future returns) and / or bring some other apparent "edge" to the table that allows you to differentiate from competitive bidders (i.e. be significantly more knowledge about the asset, have superior execution capabilities, benefit from "time arbitrage" by way of a longer investment time horizon). All in all, most such markets are full of smart, driven participants all seeking the same end, using many of the same tools powered the same thought processes...it is a bloody, and sometimes fruitless, fight for alpha, with only a portion of contenders left standing, often with little to show for it in light of the resources & effort expended.

Esoteric assets, on the other hand, are those assets where, in most cases, there is no competitive bidding...frankly, there is usually no one even looking at the opportunity as an investable asset at the moment...besides you. As supply-demand dynamics generally dictate, when you are the only bidder for an asset, the price ultimately paid is usually, at a minimum, very "fair", if not a highly attractive bargain. This is even more likely should there be an eager seller, with the upside only further enhanced if you can surface this previously "hidden" asset into a marketplace...one which is sometimes a market of your own making. Mind you, by the way, that the aggregate market size of non-traded, esoteric assets is multiples the size of the more liquid, visible & traded assets we see everyday. Now, not every one of these non-traded, esoteric assets is a viable investment opportunity, but they exist nonetheless...just look around.

In sum, Orthogon seeks out the most inefficient of inefficient markets, where a market oftentimes doesn't even yet exist.

Now, a big caveat here...high-quality, relevantly skilled / knowledgeable human capital is essential to this strategy, full stop. Moreover, the time & effort required to develop & execute among these esoteric assets is substantially greater than if one were to be buying stocks or assessing pharma royalty notes. Oftentimes, far more time & effort are required, which naturally helps insulate these opportunities from rising competition, though also generally forces one to "get their hands dirty" to make the play actionable.

So, what do we mean by "get their hands dirty"?

Well, for starters, Orthogon investment professionals have to step away from their Excel spreadsheets & computer monitors, figuratively & sometimes literally, to go out & unearth these unique opportunities. These "gems" aren't showing up on a Bloomberg terminal nor are they usually being emailed to you in a tidy pitch deck. Secondly, and arguably more importantly, these investments require the team to actually build an operating business to mechanize the opportunity over the long-run. To use an example, Orthogon partnered with experienced operators within the charter school space to build Charter School Capital, a first of its kind, fascinating & successful business that finances charter schools backed by state receivables. Critically, these "startup" businesses, like Charter School Capital, are not established to be flipped by Orthogon at the end of a 10 year fund cycle. Rather, they are structured to endure and are often characterized by the self-liquidating nature of the underlying assets. Recurring cash flows, therefore, are often the crux of investment returns, not a typical "exit" transaction.

Other investments where Orthogon is or has been active include small business loans in Mexico, low income housing in Peru, factoring receivables at the Vatican & financing the Government of Iceland.

To close out this overview, I'll paraphrase Rishi in how he aptly describes how Orthogon operates, using an easy to grasp analogy: when the firm stumbles upon an interesting bump in the ground, they'll take the time to assess what exactly it is. Sometimes, it is a gold nugget. Now, instead of grabbing that nugget, putting it in their pocket & celebrating being rich for a day, they pick up the gold nugget, they look around & ask "who owns this land?", they buy all the mineral rights to the land & they put an expert mining operation on the land & mine that up-until-then undiscovered gold seam until it's exhausted. They are, in effect, building "alpha-factories". These entities can think & grow, react to threats & expand into adjacent areas...in other words, a flexible, adaptable, always learning, cash flowing investment entity.

For more information about Orthogon, I'd highly recommend the podcast interview of the firm's founder, Rishi Ganti, on the Invest Like The Best podcast. Admittedly, this is how we first learned of Orthogon.

We'll now dive a bit into how our activities & aims at Golden Southeast are both similar & nuanced from those of Orthogon.

Right off the bat, I'll note that, while we are not as exclusively focused on esoteric assets as Orthogon, we do similarly seek out opportunities generally well off the beaten path and overlooked by most. Often, we find that our most interesting theses come to be from serendipitously connecting disparate dots pulled from different asset classes, geographies, time periods, strategies & so on and ultimately working them together in creative ways in what are usually "virgin pastures".

Take, for example, our small business ("SMB") acquisition concept & specifically the opportunity in Japan. In arriving at this thesis, we pulled from SMB growth financing strategies in emerging markets, private equity investing in the U.S. in the 1980's & 1990's, venture capital portfolio construction & the workings of a collateralized loan obligation.

To add a bit more color, we are creating a scalable investment platform that is providing access to / liquidity into an otherwise illiquid, massive asset class - silo'd, trapped & non-scalable individual SMB cash flow streams - & aggregating them under an umbrella entity, while financing the acquisition of those cash flow streams with a self-liquidating, high-return investment instrument. No one is doing this in Japan (& very few elsewhere globally), yet the Japanese market & culture is incredibly primed / fitting for this specific strategy, with subsequent returns to both equity holders in the HoldCo entity as well as the deal financing investors being unparalleled on a risk-adjusted basis given the total lack of competition & other Japan specific market realities.

So, very similar to Orthogon, our aim is to deploy capital into this opportunity by way of building an operating business around this "esoteric" asset (i.e. cash flowing Japanese SMBs with <$3M in free cash flow being sold by retiring owners), while leveraging a self-liquidating investment instrument.

A further example of an esoteric asset we've previously uncovered & found much success in exploiting is land lending in Koh Samui, a resort island off the coast of Thailand. Quite simply, entrepreneurial, small-time, local developers will pool equity capital to acquire a piece of prime beachfront or hillside vista-view land & attempt to build a resort, villa or the like. Either as a quasi-construction loan or, more often, an effective bridge loan, these entrepreneurs will turn to what has historically been a private individual lender (usually a well-connected, wealthy Thai family) for additional capital (~$25k to ~$1M, with most in the low $100k's).

Annual interest rates are usually at the max allowed in Thailand, 15%, though additional fees & penalties lift the effective all-in rate, if you will, to between 20% to 30%. It is easiest to simply be repaid, of course, however, the real money (& work) is in the borrowers defaulting & handing over the prime real estate and perhaps a half-built villa at 30% to 40% of the then-present market value. We then either flip the property to a more sophisticated developer waiting in the wings at, say, 90% of the market value or partner with such a developer & "gift" the land in exchange for equity in the partnership to where we end up owning a chunk of a fully built villa we then sell or rent out. It is very much a network-based market - you need to be plugged in - and it also requires an astute understanding of Thai real estate & lending laws. Lots of optionality & creative ways to approach each deal here, though the overall opportunity is rather size constrained (i.e. we can't deploy $100M here), even if we were to expand to Phuket and other Thai beach resort towns.

Given such, we have not (yet) built a sustainable business around this opportunity, as we are aiming to do within the SMB space, so it remains more of a one-off, occasional play for us today. We tend to categorize this land lending investment more so into our "off the curve" & highly niche bucket, while our SMB acquisition & Japanese late stage VC theses are more so "ahead of the curve" & very large (tens of billions), scalable opportunities. Alas, we have a long way to go before we reach the sophistication & success of Orthogon Partners, but we are moving there & actively building in our own way, on our own timeline.

As always, should you be interested in further discussing any of the above, please don't hesitate to reach out. Always happy to discuss at greater length & to explore potential value-add partnerships / relationships.

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