A Look at Senvest Capital

Senvest Capital is a company that I've discussed many times but not recently. Many things have happened since I lost wrote about it. So, I am going to review the company here.

Senvest Capital is well-known for being home to the Senvest Master Fund and the Senvest Technology Partner fund. The Mashaal family are majority owners of the company and these two funds are hedge funds managed by Richard Mashaal. This means that Richard Mashaal (through a company he owns) is the general partner. Senvest Capital is a limited partner in this enterprise. And there are also many LPs who are outside investors. The company also owns a lot of illiquid stuff like real estate, REITs, and private companies.

So by owning Senvest Capital, a shareholder actually downs several hedge funds and investments that the public don't normally cannot access.

So the pros and cons of buying this stock is, in principle, very simple. The stock trades at a tremendous discount to equity value — more about this later. And the investment management has an exceptional track record. However, on the negative side, the employee salaries and fees are very high, and they have never paid out dividends.

Another characteristic, which can be good or bad depending how you look at it, is that Senvest Capital's financial fortunes can be wild! The company earned CDN$(51.72) and CDN$39.16 per share in 2018 and 2019, respectively. And the first quarter 2020 has been a disaster, shareholders lost CDN$(129.38) per share! These are all due to the drop in market values of equities, be it realized or unrealized.

For the reset of this document I will refer to all amounts as Canadian dollars.

Senvest Capital promptly posts its monthly hedge fund resulte online. This gives us some idea of the company's performance. The Master fund lost 53% in Q1! No wonder its earnings were so bad. However, it has come back for Q2 and gained back half of the losses by August 1. The Senvest Technology fund was up 25% in Q2 and is positive for the year.

Just like Berkshire Hathaway, the main gauge of Senvest's stock value is the company's equity.

The company's stock should rise and fall proportionally with its equity. Senvest has traditionally traded at 60%-70% of equity. But the recent market drop has increased the discount significantly.

To illustrate the company's value, I have broken down the balance sheet into five components. The first is working capital. This is the safest part of the equity. Market conditions should not affect the value. The second component is the hedge fund portion of the company. The company consolidates the entire hedge fund value onto its balance sheet. So, it must also consolidate the amounts owed to the funds other partners as liability, as well as short positions. The third component comprises the illiquid assets including a lot of real estate, investments in private REITs and private companies. The company tends to put the illiquid investments onto its own books and more liquid investments into its hedge funds. The fourth component of the balance sheet includes assets and liabilities that don't fit in the above three categories. And the last componenent is the amount owed to Richard Mashaal as minority interest.

The following table shows the equity values of the five components at the end of 2019 and Q1 2020, the most recent balance sheet data. All values are thousands of CDN dollars.

	Aug 2020	Q1 2020	2019
Working Capital		29873.00	14284.00
+ Equity investments and other holdings		496424.00	818797.00
+ Real Estate and Illiquid Assets		125701.00	113107.00
+ Other assets minus liabilities		3750.00	-3533.00
- Non-controlling interests		16374.00	23265.00
= Shareholder Equity	780000 (est)	639374.00	919390.00
Shares	2630.00 (est)	2634.00	2652.00
BVPS	296.58	242.74	346.68
Price	135	110.00	172.25
PTBV	0.46	0.45	0.50

So the bulk of the Q1 loss appears to be from the second components which is mostly the hedge funds. The equity value went from $818M to $496M. And we already saw that Q2 hedge fund numbers are much better. The other assets are either liquid and safe, or are illiquid assets which I just assume didn't change in value. So then, the company has a lot of equity that are not tied to hedge funds. Therefore, the company did not do nearly as badly as the hedge funds.

But note the extreme low stock value when compared with the equity. This is not a reasonable valuation. And I don't know the reason for it considering that this was the case at the start of 2020 before the coronavirus impacted the markets. But there is a long-held perception that the company insiders do not treat the minority shareholders fairly. Company insiders are excessively compensated. The company has just 32 employees and they were paid $35 M. That is an average of over $1M per employee!

On top of this, Richard Mashaal, the vice-president of the company, is also paid his fees for running the GP of the hedge funds. The hedge fund charges 1.5% of assets plus a 20% share of profits as management fees. Senvest Capital gets 60% of that fee for providing the infrastructure and employee resources for the hedge funds. But still, 40% goes to Richard Mashaal's company.

The company does not disclose how much it owns in the hedge funds. Instead it lumps all the hedge fund holdings together with its own holdings. The company does show the the external portion of the hedge funds as "Liability for redeemable units" Based on this, I can calculate that the Senvest Capital portion of the hedge funds is about 35%.

The accounting for the hedge funds' fees can be quite confusing, so I've broken it down into a table for clarity. The following table shows who pays the fees and who receives it.

Recipient	External Partners Fees (65%)	Senvest Capital Fees (35%)
Senvest Capital Shareholder Equity (60%)	From: income, liabilities 39%
Minority Interest (40%)	From: income, liabilities 21%	From: income, shareholder equity 14%

So the Senvest Capital receives 39% from external partners and pays Richard Mashaal 14%. This means the company get a net 25% to pay employees salaries. In a down year where the only fee is the 1.5% of assets, one can see it is ony a few million, and that is only a tiny fraction of employee payroll. And even this amount is an overestimation of fees because $189M of assets owned by "employees" are exempt from fees.

On the other hand, Richard Mashaal gets 40% of the fees as minority interest, which was $5.2M in 2019!

Richard Mashaal has certainly been an incredible hedge fund manager. In his more than twenty years managing the funds, funds have grown from $5M to more than a billion under management. But Richard Mashaal and his father Victor already own more than 50% of Senvest Capital, and yet Richard still gets $1.7 M compensation from Senvest Capital, plus payments to him as minority interest.

In the end, there isn't much I can do as a tiny minority shareholder. I do not have the capital nor the time to be an activist. My cold calculation says that no matter the employee compensation, the company is a profitable enterprise in the long run. As such its assets, which are all investments, should not trade at 46% of equity, which is what it is trading at today. The current valuation is 55% off its peak a few years ago. To simply go back to 60% of equity, the shares will gain 33%. And I am confident it will happen sooner than later.