Argonaut Legacy

June 18th, 2022

Dear Friends & Partners,

While the market lunges day-to-day at the latest top-down macro headlines – sending successively each asset class to all-time lows – our high conviction & deep value analysis has uncovered a selected few extremely attractive investment opportunities in businesses that we believe have never been so unfairly valued. As a matter of fact, their valuations are currently so depressed that these companies trade at a ridiculous fraction of their book value and well below the cash on their balance sheets while generating extremely strong free cash flows, offering therefore an entry point rarely seen since 2000. While it is not the first time the core concept of intrinsic value is being challenged by markets beyond the most elementary common sense, we are now firmly determined to take action after monitoring some of these unduly neglected opportunities for many years as we know for a fact that they are on the verge of a major breakout and that these deeply discounted prices now offer an incredible margin of safety and extraordinary upside.

We are mindful that periods of significant volatility and macroeconomic uncertainty frequently produce cheap stocks when looking through a rearview mirror, especially in overlooked and out- of-favor sectors. Conversely, the current market turmoil exposed a commonly accepted paradox consisting in considering that when a high-flying private technology round subject to extreme hype soared until it reached a wildly expensive valuation, it was considered low risk due to its exhibited low level of past (completely suppressed) volatility, firmly convinced that trees would grow to the sky forever and at an ever-increasing pace.

This misguided idea abruptly came to an end on liquid markets and it is only a matter of time before the liquidation wave reaches the VC and late stage private growth market which is currently closed because of a buyer/seller stand-off. Founders who raised at record valuation (50-100x+ ARR) refusing that a new multiple regime now prevails (roughly 5x and still adjusting) leading to an absence of price discovery in this segment of private capital. We will probably have to wait Q3 and Q4 in order to have real price discovery going on, with probably a lot of down-rounds & valuation meltdown; not to mention crypto assets which are being liquidated across the board, definitely debunking the myth of such assets posing as store of value, inflation hedge or even decentralized currency as we have seen widespread contagion between the most recent spectacular crypto-collapses.

Therefore, we are now definitely convinced that a secular mean reversion is happening for the foreseeable future. For Argonaut Legacy, in addition to identifying extremely attractive valuations, we believe we have also uncovered a handful of businesses that are undergoing transformational changes in their structure which is exactly what we are looking for: a strong catalyst unlocking significant deep value, absolutely unforeseen or simply disregarded by market participants who were until recently too busy chasing hyper growth stories and buying the dip on the back of the latest bubble burst, while irrationally ignoring incredible bargains and obvious asset plays, not to mention the most undeniable turnaround stories.

We anticipate that our approach will lead to strong double to triple digit returns as our deep value assessment gets reflected in the stock prices of our hidden gems. Our targets are small-caps through which we own free optionality on unique real assets and scarce resources of tremendous value trading at their deepest discounts and lowest multiples ever. We are currently buying into these companies revealing extremely depressed valuations while running businesses with incredibly high barriers to entry and fortress balance sheets generating massive & sticky free cash flows. These stocks are completely overlooked and we focus on special situations where we are absolutely certain of a positive catalyst or turnaround over the short to medium term through an extremely deep knowledge, understanding and proximity built over many years and concentrated on a few high convictions. We are now firmly decided to take an active role in a selected few situations, including taking some of these companies private while creating long-standing shareholder value.

While we are subject to short-term volatility in holding these positions especially when correlations converge, we believe by peering just over the weekly horizon engulfing most in the financial world, we can distinguish extraordinary opportunities that could play out over the next 12-18 months.

In traversing today’s investment landscape, we find it helpful to remind our valued partners of the core principles of our approach – principles we believe should allow us to generate highly attractive and vastly superior returns over the next few years.

Argonaut Legacy offers a deep value, high conviction strategy focusing on special situations with significant embedded upside. Our approach is concentrated, opportunistic and volatility accepting in the short-term in order to generate double to triple digit upside over a 12 to 18 months investment horizon. Derived from a deeply independent thinking, these principles are contrarian by nature and fly in the face of the unrealistic expectations prevailing until now and most so-called active managers who emphasize (un)sustainable and overcrowded growth stories, unproductive diversification which ultimately led to the current widespread collapse. Recent market moves have only exacerbated the difference between the two schools of thought.

Timeless contrarian wisdom tends to confirm that patiently waiting over a full cycle while being prepared on a few rare and disconcertingly logical occasions, to take a swift, timely, and concentrated decision, will often be rewarded handsomely.

While we all await the inevitable time when people finally stop being delusional believing in all kinds of digital schemes involving limited supply of nothing, capital-burning unicorns and free money, we believe this creates a once in a generation opportunity, as fewer and fewer market participants are choosing to play in our consensus-agnostic sandbox. Therefore, we are pleased to be uniquely positioned to offer within Argonaut Legacy these diamonds in the rough that are disdainfully left behind for your greatest benefit.

Yours truly, Argonaut Legacy