Ace River Capital Q1 2024 Quarterly Letter (OTCMKTS:DSHK)
adam goth
Dear partners and friends,
In the fourth quarter of 2023, Ace River Capital Partners, LP (the “Fund”) returned -10.40%. During the same period, the S&P 500 (SPX) and Russell 2000 (RTY) returned 10.8% and 5.2%, respectively.
strategy
my The goal is to maintain a focused portfolio of small and micro companies with unique strengths and growth potential within their industries. The goal is to hold it for the long term. Finding such a company takes considerable time and effort. Due to lack of suitable opportunities, time and resource constraints, and opportunity costs, I will take a significant position in a company that meets my criteria and passes the risk/reward assessment. I don’t agree with broad diversification, but deeply research and follow a limited number of companies. I wouldn’t invest much time in a company if I wasn’t willing to take on an important position. Be confident to add to your position on weaknesses. This approach requires a lot of research and patience. There will be long periods of inactivity with very few transactions, and they rarely have more than five companies at a time. This strategy embraces short-term volatility in the pursuit of higher, long-term, tax-efficient returns.
top position
The fund’s top position is RCI Hospitality (RICK). RICK is the only publicly traded adult nightclub owner in the United States. They currently own 56 clubs across 13 states and an additional 13 sports bar restaurants with the “Bombshells” concept. Because few municipalities issue new adult entertainment licenses, these companies act as local monopolies with excellent unit economics. With the construction of two Colorado casinos underway, the long runway for the adult nightclub acquisition target, the growth potential and spin-off value of the Bombshells concept, and finally the potential upside of an “admireMe” OnlyFans-type website, I think this will remain at the top of my game. I hope so. Position for the near future.
Recent quarters have seen same-store sales weakness in the bombs category. M&A activity appears to have stalled due to inflated 2022 earnings results relative to valuation expectations for club owners and the amount RCI is willing to pay for a more normalized earnings valuation. The CEO has launched a bombshell cost-cutting effort to restore profitability and has engaged in discussions to acquire the club, as revealed in a recent conference call. With this high interest rate environment, upcoming elections, and war activities overseas, we can expect investor funds to be sidelined in the near term. RCI should make significant buybacks during this period, and positive momentum from gaming licenses, bomb ads, or the Respect.com website should provide a nice tailwind at some point in the future. My thesis hasn’t fundamentally changed, but continued poor performance could make the bomb worthless. I still think the company is in a good position and can generate shareholder returns even without a strong contribution from the bomb division.
Added to position – VOXR
Vox Royalty appears to be undervalued compared to most other mining royalty companies. I believe this is a good entry point. The recent rise in gold prices this year will likely boost Vox’s royalty revenue. I have increased this position and will continue to increase from this level until it becomes the second largest position in the fund. Vox appears to be a great value with few downsides. Capital-light business model, with a large backlog of projects in various stages of development, ensuring revenue growth over time and benefiting from rising metal prices due to inflation, demand or uncertainty.
Watching – DSHK
Driveshack may be at an inflection point with all its expensive construction projects coming to a close. I’m expecting a positive earnings report when it next files and expect the stock to react sharply.
Thanks for reading. Please contact us for any reason.
Nicolas Dagnilo
Nick@AceRiverCapital.com | 401-499-3935
Fund Position – Portfolio Weight
Rick, DSHK, VOXR, HZO
Important Disclosure
Generally: This letter is for informational purposes only and is intended to provide an overview of Ace River Capital Partners, LP’s investment strategy and performance. The contents of this letter should not be construed as investment, legal, tax or other professional advice.
No offer to buy or sell securities: This letter does not constitute an offer to sell or a solicitation of an offer to buy any security or investment product. Any such offer or solicitation may be made only by sending a confidential, private offer note.
No tax, legal, accounting or investment advice: The contents of this letter do not constitute, and should not be construed as, tax, legal, accounting or investment advice. Prospective investors should consult their own advisors regarding the tax, legal, accounting or investment consequences of investing in any product described in this letter.
Performance information: Performance information provided in this letter is based on internal calculations and is subject to change. Performance results may vary depending on the timing of investments and cancellations and other market conditions.
Past performance: Past performance is no guarantee of future results. Different types of investments involve different levels of risk, and there can be no guarantee that a particular investment will be suitable or profitable for an investor’s portfolio.
Risk of Loss: All investments involve risk and there is no guarantee that any investment strategy will be successful. The value of investments may fluctuate and investors may not get back the amount invested. Changes in economic, political or other market conditions and issuer-specific events may materially affect the value of a security or portfolio.
Portfolio Guidelines/Organization: Ace River Capital Partners, LP’s portfolio construction and investment guidelines are based on a unique investment process that seeks to identify undervalued securities and maximize returns while minimizing risk. The Portfolio is actively managed and may change at any time without notice to reflect changes in market conditions or the Manager’s assessment of individual securities or market prospects.
Index Performance: Performance information provided in this letter may be compared to benchmark indices for illustrative purposes. Benchmark indices are not intended to represent the performance of any investment product and do not reflect the costs associated with managing an actual portfolio.
Logos, brand names, trademarks and copyrights: All logos, trade names, trademarks and copyrights mentioned in this letter are the property of their respective owners.
Confidentiality/Distribution of Letter: The information contained in this communication has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. This letter and its contents are confidential and will only be communicated to the recipient. “It cannot be copied or redistributed without the prior consent of Ace River Capital Partners and LP.”
Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.
