Stockholm (HedgeNordic) – In the February-March period of 2020, market participants went from thinking everything was flawless to hopeless amid heightened concerns about the spread of coronavirus outside of China and its ramifications for the global economy. Malmö-based money manager Mikael Petersson followed Warren Buffett’s advice of betting big “when there’s blood in the streets” to launch a second fund, a concentrated long-only equity fund, Coeli European Opportunities.

“We realized some time after the launch of our long/short equity fund that we got so many interesting investment proposals in smaller companies to which we could not allocate time and capital because of some liquidity constraints,” says Petersson, who founded long/short equity fund Coeli Absolute European Equities in early 2018. The team at Coeli had everything prepared for a new fund launch in the summer of 2019. “We put the project on hold while waiting for the right opportunity to launch,” Petersson tells HedgeNordic. That opportunity came during the Coronavirus-induced market turmoil in the February-March period last year.

“In mid-March, we took the decision to launch on April 1. The simple thesis was: if you are not buying equities here and now in a market crash, you should probably never invest in any equities.”

“In mid-March, we took the decision to launch on April 1,” says Petersson. “The simple thesis was: if you are not buying equities here and now in a market crash, you should probably never invest in any equities,” recalls the fund manager, who used to work alongside Steven Heinz at London-based hedge fund Lansdowne Partners in the late 1990s and early 2000s. “The decision to launch was spot-on,” reflects Petersson. His approach of “hardcore stock-picking with a high level of concentration and a focus on small- and midcaps” has paid off handsomely. Coeli European Opportunities is up over 80 percent net-of-fees since launching just a year ago. “We were proactive and it paid off.”

Petersson employs a time-tested investment approach to run the long-only equity fund. “We rely on the same approach used to run the long/short equity fund,” says Petersson. “We are looking for misunderstood companies, offering good value, with significant value potential and where the management teams are focused on creating value,” he elaborates. Despite an overlap of positions between the two vehicles, the long-only equity fund has the flexibility to own larger positions in smaller companies. “With the fund’s quarterly liquidity, we do not need to focus on the daily flows in and out of the fund,” emphasizes Petersson. “We can own up to 15 percent in a single company, compared to ten percent for the hedge fund.”

“With the fund’s quarterly liquidity, we do not need to focus on the daily flows in and out of the fund.”

Additional Spice: Unlisted Companies

The fund’s quarterly redemption terms with investors enable Petersson and analyst Fredrik Östlind to invest in less-liquid, higher risk-reward opportunities but also allocate up to ten percent of the fund’s portfolio to high-potential unlisted companies. “I am a specialist in listed equities and we are very busy with that,” says Petersson. “But we have this deal flow from the unlisted space coming in, which represents an extra spice for both the long-only and long/short equity fund,” he continues. “We are not out there looking for something, we have individuals and organizations knowing that we do this, so we have this flow of investment opportunities that is not available to many people.”

“We have this deal flow from the unlisted space coming in, which represents an extra spice for both the long-only and long/short equity fund.”

“It is not a core business for us, but so far, we have done tremendously well and have had huge successes with our unlisted investments,” Petersson points out. The first investment done by long-only Coeli European Equities in the unlisted space was clinical-stage biopharmaceutical company Sensei Biotherapeutics. “European Opportunities invested in Sensei Biotherapeutics in September 2020 at $4 and the company IPO-ed five months later at $19, with a share now trading around $14,” says Petersson. The long/short equity fund has made even more rewarding investments in the unlisted space.

“It is not a core business for us, but so far, we have done tremendously well and have had huge successes with our unlisted investments.”

“Our first investment in the unlisted space was in a German technology company called Cryptology,” recalls Petersson. “We invested at €20 three years ago and its now trading around €180 in the market. We sold out in the fourth quarter last year,” he continues. “Our second investment was Atai Life Sciences, where we participated in the first capital round at €18 in September 2018. In the fourth capital round a month ago, they raised $157 million at €155,” describes another successful investment in the unlisted space. “The market has been very favorable for this asset class and as companies and investors have discovered us, we have a strong deal flow coming to us,” says Petersson. “We are clearly benefitting from a strong international network.” Both funds also have some indirect investments into Bitcoin, made when Bitcoin was trading at significantly lower levels, according to Petersson. “Let us see the outcome of that, but it is looking promising.”

Performance and Edge

With Coeli European Opportunities up over 80 percent in a little over a year, “so far we have delivered on our promises,” says Petersson. “We have made few mistakes, we have been reasonably right with the market timing of the launch, but most importantly, we have many names that have had very strong returns,” he continues. All holdings in Coeli Absolute European Equities and Coeli European Opportunities share one common characteristic: management teams focused on value creation. Petersson is looking for capable management teams that know how to best put to use internally-generated cash flows.

“We have made few mistakes, we have been reasonably right with the market timing of the launch, but most importantly, we have many names that have had very strong returns.”

“As investors, we provide capital to public and private companies, so we want to understand how management teams allocate our capital,” explains Petersson. “We want to know whether share buybacks are creating value, or whether reinvestments are generating attractive returns on incremental capital,” he continues. “If the management is not switched on and cannot explain capital allocation decisions, we just walk away.”

“If the management is not switched on and cannot explain capital allocation decisions, we just walk away.”

The process of understanding company capital allocation decisions requires a lot of research and discussions with management teams. “We probably do more research work than 95 percent of the market and we think we are quite good at valuing companies,” says Petersson. “Obviously, it helps that we are well connected and that we have been doing this for more than 20 years.”