Our research continues to show that we are invested in the highest quality franchises that are best positioned to capture a structurally higher proportion of the global economy. We remain focused on our long-term mandate to grow real economic wealth with capital preservation as a primary consideration and we maintain a diversified, liquid portfolio with a conservative balance sheet. To demonstrate my conviction in our Partnership’s significant profit potential, I invested 100% of my 2021 fees into the Fund (as I have done every year since inception).
In the long-run, it is my belief that investment returns are dictated by the quality of the earnings of the underlying assets – specifically, the trajectory and durability of cash flows. The following highlights show the resilience and the magnitude of the structural growth benefiting our portfolio companies (please note: the following data is represented on a portfolio-weighted average basis):
- Software & Enterprise Computing
- In 2021, these companies grew revenue +38% which is on top of the +35% growth they delivered in 2020
- Their robust growth is occurring at large scale: 2021 average portfolio company revenue of ~$27 billion
- Strong profit growth of +70% with operating profit margins of ~34% representing profit margin expansion of +550bps vs 2020
- Industry data supports long runway for growth:
- Source: Morgan Stanley Chief Information Officer Survey (dated January 12th, 2022):
- “Cloud Computing remains #1 on CIO priority lists”
- “Expectations for software spending growth in 2022 remain ahead of historical levels”
- “CIOs estimate 25% of application workloads are running in the public cloud today… CIOs now expect a faster pace of cloud migration in the long-term, with 44% of application workloads expected to be in the cloud in 2024”
- Source: Morgan Stanley Chief Information Officer Survey (dated January 12th, 2022):
- Adjusting for cash generation and profit growth over the next 5 years, I estimate these companies collectively trade at a ~10% free cash flow yield with cash balances growing over ~25% of current market value
- eCommerce & Digital Payments
- In 2021, these companies grew revenue +35% which is on top of the +17% growth they delivered in 2020
- The robust growth is occurring at large scale: 2021 average portfolio company revenue of ~$135 billion
- Strong profit growth of +70% with operating profit margins of ~40% representing profit margin expansion of +400bps vs 2020
- Industry data supports long runway for growth:
- Source: J.P. Morgan Internet 2022 Outlook presentation (dated December 2021):
- U.S. eCommerce represents only 19% of 2021 Adjusted Retail Sales vs 11% in 2016 (adjusted retail sales excludes food services & drinking places, automobile & other motor vehicle dealers, and gasoline stations)
- Source: J.P. Morgan Internet 2022 Outlook presentation (dated December 2021):
- Adjusting for cash generation and profit growth over the next 5 years, I estimate these companies collectively trade at a ~12% free cash flow yield with cash balances growing over ~30% of current market value
The aforementioned data support my belief that we are invested in an exceptional collection of dominant franchises that have tremendous growth potential. Given my expectations for their strong cash flow generation and growth trajectory, I believe our Partnership is well positioned for substantial long-term investment returns. That said, it is important to remember that we will experience volatile periods in the short-term and the start of 2022 has been a very difficult period for our long-term strategy. Specifically, market concerns around interest rates and inflation have driven an unfavorable rotation away from secular growth companies in favor of lower growth and cyclical stocks as this latter group attempts to recover from depressed 2020 economic activity.
Regardless of these short-term trading dynamics, I will not lower our investment standards to chase short-term performance at the expense of our Partnership’s long-term profit potential. In fact, I believe that our portfolio companies are the best positioned to deal with inflation and higher interest rates as they have pricing power to pass on cost inflation, low raw material exposure (they are digital businesses), high profit margins and large net cash balances (cash well in excess of any outstanding debts). Furthermore, our strategy anticipates that public market volatility is normal and unpredictable which is why we maintain a diversified, liquid portfolio and a conservative balance sheet. This portfolio management approach allows us to lean on our greatest strategic advantage: duration, which enables us to stay the course and take advantage of dislocations to optimize our long-term profit potential. While the timing and duration of the recent volatility is uncertain, it is my belief that the outlook for our Partnership’s long-term profit potential is brighter than ever which is why my personal family balance sheet remains fully invested alongside you and why I invested 100% of my 2021 fees into our Partnership. Thank you for your trust and please feel free to reach out anytime.
Your partner and fiduciary,
Faris Jafar, Chief Executive Officer
Phone: (734) 678-8562