Low Asset

Legacy Ridge Capital Partners Equity Fund I 2021 Annual Letter


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To December 31st 2021:

LRCP Equity Fund I Gross

LRCP Equity Fund I Net

S&P 500

Russell 2000

MSCI World Index

Trailing 1-yr Total Return:






Trailing 2-yr Total Return:






Trailing 3-yr Total Return:






Trailing 4-yr Total Return:






The figures above are on a cumulative basis and are unaudited. Future results will also be presented on a cumulative basis in this section. Annual results will be illustrated below for those who wish to measure us based on 12-month cycles. However, we view the cumulative results as most meaningful since we are trying to build wealth far into the future and the annual results are only important in as much as they contribute to a 3, 5, 10, and 20-year track record.

Annual Results

LRCP Equity Fund I Gross

LRCP Equity Fund I Net

S&P 500 Energy



























To reiterate, our goal is to have good absolute returns first and foremost, which should lead to good relative returns versus the broader markets. However, I also think it’s important to highlight the performance of the primary sectors in which we feel we have an advantage and in which we invest. There is no reason to present this other than for transparency reasons. Owning a highly concentrated portfolio will prevent our results from looking like anything we compare them to in most years, but knowing the performance of energy broadly, midstream energy specifically, and North American airlines will add some context for those partners who wish to do some higher-level analysis. Please see the accompanying disclaimer & footnotes at the end of the letter for a broader description of each of these indices.

“a business earning 20% on capital can produce a negative real return for its owners under inflationary conditions not much more severe than presently prevail. If we should continue to achieve a 20% compounded gain—not an easy or certain result by any means—and this gain is translated into a corresponding increase in the market value of Berkshire Hathaway stock as it has been over the last fifteen years, your after-tax purchasing power gain is likely to be very close to zero at a 14% inflation rate…

…the inflation rate plus the percentage of capital that must be paid by the owner to transfer into his own pocket the annual earnings achieved by the business (i.e., ordinary income tax on dividends and capital gains tax on retained earnings)—can be thought of as an “investor’s misery index”…We have no corporate solution to this problem; high inflation rates will not help us earn higher rates of return on equity.

One friendly but sharp-eyed commentator on Berkshire has pointed out that our book value at the end of 1964 would have bought about one-half ounce of gold, and fifteen years later, after we have plowed back all earnings along with much blood, sweat and tears, the book value produced will buy about the same half ounce. A similar comparison could be drawn with Middle Eastern oil. The rub has been that government has been exceptionally able in printing money and creating promises, but is unable to print gold or create oil.

Warren E. Buffett—from the 1979 Berkshire Hathaway shareholder letter.

Buffett’s assessment of the deleterious impact high rates of inflation have on wealth creation is relevant to all investors today. He wrote this forty-two years ago, a time that most closely resembles the current macro environment than any period since. And while Nate and I won’t pontificate on future rates of inflation, we do know December’s Consumer Price Index (CPI) advanced 7%, the highest rate in forty years, and the Producer Price Index (PPI) rose 9.6%, the highest rate since the data was first tracked in 2010. Buffett’s “investor’s misery index” is pointing up.

Our portfolio is very well positioned to excel in such environments.

Results For 2021

The partnership gained 42% gross of performance fees last year. I would characterize the results as acceptable. While four-times the prior year’s return, Nate and I think we did a much better job in 2020. Putting up decent results when everything you own was down in the year is much harder than putting up decent results when everything was up. And while investing is never easy, last year felt a bit easier. The absolute return of the portfolio was great, and relative to broader indices it was good, but compared to energy indices we could have done a bit better. Midstream energy stocks underperformed upstream stocks by a decent amount, and we have a general aversion to most upstream investments. Returns on and of capital tend to be quite poor for those businesses, and while that’s changing for some, we know that what’s good for upstream will ultimately be good for midstream, so we’re currently focused there.

The cumulative gross return of the partnership since it was started four years ago is +55%. That’s underwhelming when compared to the broader indices referenced above. Our specialties are capital intensive, un-ESG(ish), cyclical, and “value”, which have been investing gale force headwinds the past several years. No excuse, just an observation. Regardless, it’s imperative we beat the broader indices over the long-haul if we’re to have done our job properly.

The great news is that we feel like these headwinds are finally shifting to tailwinds for a strategy like ours—a strategy that focuses on free cash flow and returns of capital, while insisting on reasonable returns on our capital. The passive investing community has forfeited their opportunity for reasonable returns in our opinion. With the S&P 500 doubling the last 3-years, expected future returns have definitively come down. It’s the only way to justify buying “the market” at current prices. If you expect low-single-digit returns you can pay over 20x for an asset. We continue to expect more from our investments.

We remain optimistic about our portfolio

There are several reasons we think our portfolio still has meaningful upside, even after a good year.

MLP price to DCF multiples historical data
  1. Midstream energy remains cheap. Updating the Distributable Cash Flow chart for 2021 results shows that valuations are still a long way off from historical averages. And while the average can move down if there’s a structural shift in multiples, we’re fine betting there’s still a strong bias against energy that at least partially reverts in time. Over the past 15-years the average DCF multiple is 10.5x and we ended 2021 at 5.9x, suggesting 78% upside to get back to the average. And that math assumes no fundamental improvement in the denominator (cash flows), which is not at all consistent with commodity prices, current E&P activity levels and implied future energy production. Additionally, although the cumulative return of our portfolio over the past 4-years is positive, the returns in the sectors we’ve been focusing on are not. The Alerian Midstream Index (AMZ) and S&P 500 Energy sub-sector are each down 7% cumulatively, while the NYSE Arca Airline Index (XAL) is down close to 30%. These sectors remain massive underperformers over a multi-year period, so we are still fishing in fertile waters.
  2. If valuations don’t revert closer to the mean, we’ll still get acceptable returns. Remember that DCF is essentially a FCF metric for midstream, but it uses maintenance capex as opposed to total capex. Most of midstream is in maintenance mode and will be for several years as asset utilization increases on existing infrastructure. The cash flow yield on these companies is close to 17% and we own a few with yields over 20%. Whether the cash gets returned through distributions, stock repurchases, or even debt reduction, we don’t particularly care….


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