2024 Mid-Year Report - HIT Capital

Posted by Stephen on July 10, 2024July 10, 2024

To our HIT Capital partners,

I hope this update finds you well, avoiding the hurricanes, and enjoying the summer. Hurricane Beryl spun through our neighborhood on Monday while we were up in Illinois enjoying family and beautiful weather. It appears we kept power and are without damage.

As for HIT Capital, the past 6 months has felt like a mini Beryl with our investment software and growing network of micro-cap connoisseurs providing an onslaught of ideas. One of those ideas has recently become our largest holding: CAB Payments. I’ll share more about CABP below after an update on our performance and portfolio allocations.

Performance

HIT Capital increased 5% in the first half of 2024, matching Barclays Hedge Fund Index’s 5% and outperforming iShares Micro-Cap ETF’s -2%. This brings HIT Capital’s compounded annual growth rate to 7.11% and total return since inception to 120%.

Allocations

Our current portfolio consists of 28 securities, including 22 stocks, and 20 micro-caps. The addition of another broker has allowed us to efficiently reach more markets, resulting in our portfolio now spanning 20 industries and 8 countries.

HIT Capital’s allocation guideline is to be invested in 5-20 stocks across multiple regions and industries. The upper end is limited by the number of businesses I can research thoroughly and the minimum is to reduce the possibility of significant losses.

Portfolio Highlight – New Top Position (CABP)

Crown Agents Bank Payments (CABP) has become our largest holding at 16% and is a market leader in business-to-business cross-border payments and FX operating in a market worth over $250 trillion. This mega market has historically been served by a slow, opaque and costly correspondent banking system and CABP is one of businesses disrupting the status quo with solutions that are transparent, faster and 10x cheaper.

The private equity firm, Helios Investment Partners transformed CABP from a sleepy bank into a firm growing 41% a year for the past 4 years. Helio’s underlying funds that hold CABP are nearing the end of their term thus they launched an initial public offering on the London stock exchange last July to sell down their position.

Then after a guidance downgrade in October, there was an opening to build a position at around 5x earnings, which was 2x cheaper than their closest competitor (StoneX), 3x cheaper than the industry median, and 8x cheaper than WISE who is believed to be one of their fin-tech customers.

I believe CABP has an advantage in being a regulated bank with 100 year old deep relationships in hard to reach countries. These unique traits are combined with a tech company’s software and API backbone allowing CABP to scale.

CABP is a good example of what we are looking for in a reasonably priced and growing business. For additional information on CABP you can check out the article I published on Seeking Alpha here.

Portfolio Deal Memos

For a deeper dive into our holdings you can find links to a few more write-ups here. The latest deal memo is on a biotech lottery ticket, Sellas. Sellas is testing an immunotherapy drug targeting acute myeloid leukemia in a phase 3 trial estimated to end by Q4. I estimate the drug’s commercial probability of success at 44% with an estimated value 6x their current market capitalization.

Onward

As we embark on our journey into 2024, I am enthusiastic about the global micro-cap space and improving upon our learnings. Thank you for the privilege of guiding your hard-earned capital. If you have any questions about HIT Capital or hurricanes don’t hesitate to reach out. Until next time, have a safe, prosperous, and joy filled 2024!

Warm Regards,

Stephen Read

This report is intended to assist limited partners in understanding how HIT Capital LLLP (Fund) performed during the period ended July 28, 2024 and reflects the views of the general partner at the time of this writing. These views may change and do not guarantee the future performance of the Fund or the markets. Portfolio composition is subject to change. The current and future holdings of the Fund are subject to investment risk.

Important Information

Hedge fund investing involves risks, including possible loss of principal. An investor should consider the investment objectives, risks, charges and expenses of the Fund carefully before investing. The Offering Documents contain this and are available by contacting Stephen Read @ 309.253.7887 or Stephen.Read@HITInvestments.com. The Offering Documents should be read and understood before investing.

The comparison of the Fund’s performance to a single market index is imperfect because the Fund’s portfolio may contain options and other derivative securities, may include margin trading and other leverage, and is not as diversified as the Standard and Poor’s 500 Index or other indices. Due to the differences between the Fund’s investment strategy and the methodology used to compute most indices, HIT Investments cautions potential investors that no indices are directly comparable to the results of HIT Capital.