You’re in for a treat. My friend from across the pond – Alex – has a real knack for deep dives on underfollowed companies. Follow him on X here: Simeon Research.

Alex is a full-time investor, investing for the long term in quality companies within tech, healthcare, and insurance.

And he loves Canada. 3 holdings from his portfolio are $CSU, $TVK, and $VHI …

Large Caps: $CSU.TO – 30% $GOOG – 14% $AMZN – 14% $BRO – 9% $ASML – 5%

Mid Caps: $KNSL – 5% $MEDP – 5%

Small Caps: $NXSN.TA – 5% $TVK.TO – 5% $VHI.TO – 4% $HIMS – 4%

I asked Alex to perform a deep dive into a little-known company traded on the Toronto Stock Exchange: Pinetree Capital ($PNP). I don’t see much talk about Pinetree anywhere, and that’s more surprising when you find out who it’s helmed by… none other than Mark Leonard’s son – Damien Leonard. (Mark being the Founder & CEO of Constellation Software)

Here’s a recent photo of Damien Leonard below (the glorious beard is genetic by the way, and I believe its growth is correlated with gains in the share price of $PNP).

But time will tell…

Photo of Damien Leonard, CEO Pinetree Capital

Pinetree Capital Deep Dive:

Pinetree Capital (PNP.TO): A Unique Approach to Venture Capital
Written by: Simeon Research

Basic Data:

– Market Cap – $107 Mil
– Share Price – $11.5
– P/E – 5.72
– Revenue CAGR 3yr – 57%
– Gross Margin – 100%

Overview

Pinetree Capital operates as both a venture capital and private equity firm, specializing in a diverse range of investments, from early-stage ventures to mature companies. The firm focuses on micro and small-cap companies, believing they offer more attractive risk-to-reward opportunities.

It’s important to note that before 2016, the company operated as a resource management firm until it was acquired and transformed into an investment vehicle. Now, it invests in companies across the software, finance, and healthcare sectors. These industries provide excellent opportunities for vertical applications and niche-focused enterprises.

It’s important to note that software is absolutely essential for companies to operate effectively in today’s world, but I will discuss that further in the next chapter.

Investment Criteria

As a company that invests in others, the philosophy guiding its investment decisions is closely tied to its success.

Their principles go as follows:

A) They stick to their area of competence meaning they only work for companies they understand and have insight on
B) They only have 8-12 investments.
C) No controlling stakes, they trust the management they picked to deliver over a long period of time.
D) Long term oriented
E) Buy at a discount relative to the intrinsic value of a company!
F) The primary focus is of course equity, and occasionally debt and convertible securities.
G) While they avoid intervening with the companies / management, if the situation arises, they will provide strategic counseling.
H) Equity Positions fluctuate between 7-12% of the total assets owed although they state this may at times exceed 20%.
I) Mission Critical Software and Services

I can clearly see here parallels between Pinetree and Constellation software which makes total sense given that the President of Pinetree is Damien Leonard the son of the GOAT of compounding; Mark Leonard (Constellation Software), I really like this direction but we have a lot more to cover.

Down the Rabbit Hole

If you recall the company before 2016 was a resource management company but the changes that happened after that really interested us.

CEO Richard Patricio was replaced by Peter Tolnai an activist investor who bought a 31% stake in the company through the open market. All previous board members and staff were replaced.

The next move was a share consolidation of 100:1 bringing the shares outstanding to 4.5 million.

After this in 2017, Tolnai stepped down from being the CEO of Pinetree, and here where Damien Leonard was bumped up to the CEO position while previously holding a COO position at the company.

It is worth mentioning that even though Tolnai stepped down he reduced his stake to just 7.8% to L6 Holdings (which is run by the children of Mark Leonard, the name L6 is actually L from Leonard and 6 is the number of Leonards involved!). After some research, I found that L6 owns around 1,000,000 shares of CSU, so the ties of Pinetree with the Leonard family are closer than actually meets the eye.

To strengthen this argument even further we can see in 2023 in the case of Quorum Information Technologies; L6 & Pinetree both invested. A total 25.5% stake (11% Pinetree and L6 14.5%).

We have even seen Pinetree buying a 2.6% stake in a company like Sygnity which is considered the CSU of Poland that has a very similar approach to investing. The ties and inspiration from Constellation Software are surely there and play an important role in Pinetree’s success.

Moat

It is essential for every business to have a unique approach or competitive edge that sets it apart and enables it to grow beyond expectations.

In the case of Pinetree, I can identify several key areas that could be considered an advantage.

First, we need to discuss the legacy investments situation, as they are the cornerstone of Pinetree’s strategy. Pinetree reports losses amounting to 390 million CAD, which are listed under the Deficit section of the equity balance sheet.

From Q3 2024

I can hear you thinking how this could help them in any way. This deficit is very cleverly used to offset any capital gains from sales of legacy investments.

So if for example they own shares in company A and those shares are sold for a 10 million profit they will pay 0 tax and the deficit is reduced by 10 million so it will be 380 million.

The only exception is actual income but since they only operate as a holding company it’s a free way to have 0 capital gain tax until the deficit runs out.

I also consider an advantage the fact that they are not limited in any way in their investments they can invest in whatever fits their criteria. Most funds are limited by the size of the equities they can invest in; geolocation, liquidity, industry, etc., the fact that they are not gives them a slight edge over competitors.

I would call this a risk-agnostic approach! We can see they have investments in the US, Canada, Australia, Poland, Norway, Netherlands, UK, and Germany where most funds are focused exclusively on the United States. However, we will analyze their stock portfolio in the next section.

It is also important that they take an approach of being more concentrated thus focusing more on quality companies with a niche twist towards companies with vertical software solutions.

I would also consider the area of expertise as a key element of their potential success. Vertical software is something I am very familiar with being a $CSU shareholder for a long time. Vertical software not only is less crowded than the broad software market, meaning you can hunt deals more easily and acquire companies at lower multiples, but you can also build expertise. As Pinetree completes deals they can develop great expertise in specific verticals inside the software market helping identify better opportunities.

I can actually write a separate article on why vertical software is one of the best areas to hunt for acquisitions. They have higher retention of clients because the software is essential to run their business thus; very strong retention, pricing power, and very long customer lifetime value. This way there’s more predictable FCF as the revenue is recurring! The retention is reinforced even further by the fact that most vertical software is tailored for the specific needs of each client, this also makes them able to command higher prices and profit margins! Not only that but also vertical software companies are very aware of specific regulations (especially in sectors like finance and healthcare) so they have a deeper understanding of the software needed from the clients further strengthening retention and a closer relationship.

I favour that Pinetree has decided to own companies operating in these niche fields within the vertical ecosystem as it can yield them great profits in a long-term timeframe.

The fact that they haven’t ever sold an investment at a loss speaks volumes of their strict criteria and discipline. It is very positive that their interest is aligned with shareholders with insiders owning 43% of the company.

Portfolio

Let’s go through their stock holdings and analyze selected ones.

According to their fillings as of December 31, 2023, Pinetree owns 10 public equity positions and 1 private, and in the legacy section, we have 7 investments (carried over) where the company considers their real value to be 0.

Pinetree’s largest current position is Bravura Solutions, a software applications company for the wealth management and funds administration sectors in Australia; operating software to manage wealth, insurance, pensions, accounting, and more! We can clearly see the niche focus we explained earlier in the moat section.

Sygnity, the Constellation software of Poland couldn’t be missing from here of course being 12% of the portfolio. We can clearly see a theme of owning even more companies that own vertical software companies, like: Constellation Software, Sygnity, and Topicus. As stated previously they follow the recipe of Mark Leonard; their philosophy is deeply rooted in his principles. Sygnity makes solutions for Banking, Energy, and Public administration. Specifically, it makes Video and voice solutions, Telemedical platforms, document co-browsing, secure messaging, metering systems, and forecast software. Their operation is very well diversified. When it was acquired, Pinetree helped them cut down nonrecurring businesses and restructure bad debt inherited from previous owners (exactly like they did). Then Sygnity moved towards an m&a growth model to further emphasize long-term growth combined with organic growth.

Another company I was impressed with is SS&C, a company providing operating software for businesses, portfolios, taxes, and assets. It is in their words the largest independent hedge fund and private equity administrator in finance and healthcare (a main focus area of Pinetree).

OMDA is one of their best investments in the healthcare software space with solutions on LIMS (laboratory information systems), medication management, connected imaging analysis, emergency, and of course health analytics. One of the key things regarding this company is a common theme we see throughout our analysis: they are very aware of the regulations and special needs of companies in such a regulation-driven industry. A true vertical software play.

Separated by sector we can see a big focus on financial software and dealership software. They come even before vertical software.

This really intrigued me and I found the reasons why more than half of their portfolio is concentrated there.

The software breakdown goes as follows:

Pinetree Capital Annual Report, 2024

The geographical diversification goes as follows:

Pinetree Capital Annual Report, 2024

Observations

Their stock portfolio, although seems to be concentrated, is indirectly very diversified because a lot of its holdings hold multiple other vertical companies of all sizes across the world of multiple market caps. I can also observe that indeed they stick to their area of niche expertise. They have very smartly positioned themselves towards favorable long-term trends.

Final thoughts

The control leverage Pinetree can achieve due to its ties with Constellation Software, its partners like L6, and other active shareholders is commendable.

Cheers,
Alex
Simeon Research

***

Regards,
Robin Speziale
(Ownership Disclosure: $PNP – Yes)

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