COVID-19 Update letter

by El Cap March 16th, 2020

Like all of you, we have been paying close attention to how the world is responding to the COVID-19 global pandemic. First, and foremost, we hope you and your families are safe, healthy, and reasonably prepared for a self-imposed quarantine. Given the broader uncertainty in the market we wanted to share an update on El Cap, and the market landscape from our seat as private market investors.

Predicting the economic ramifications of the pandemic is difficult, and this uncertainty has been evident in the market reaction over the past few weeks. Nothing spooks markets like uncertainty and fear. And while the magnitude of the pandemic’s impact is unknown, innovative and disruptive businesses will continue to create and capture value.

We want to be clear: El Cap is open for business and we are eagerly looking to invest new capital behind great operators.

We are in active consideration of new investments now and excited about the opportunities we’re seeing. We have capital, and will be opportunistic and disciplined in deploying it.

What is fueling our optimism about the present and future?

  1. Great businesses are often born in hard times: Constraints force good habits, quality talent is cheaper. Innovation doesn’t stop when the business cycle turns.
  2. Contender vs pretender: Challenging market environments have a way of separating the pack. As inferior businesses fail, it’s easier to identify great businesses.
  3. Resonating message: El Cap’s focus on providing capital for businesses that want to grow sustainably, will increasingly resonate with operators as funding options tighten.
  4. Better valuations: As risk appetites from most investors decrease, so does capital supply and in turn valuations. Lower valuations = higher returns.

Portfolio update: Revive is on solid footing, with low fixed costs, attractive unit economics, no debt, and a strong cash balance. Assuming revenue went to zero (which is not going to happen, revenue has actually grown in the past two weeks) the company would be able to make payroll and fund all expenses for the next 18 months. Revive was built from the beginning using a distributed workforce, so ‘work from home’ is just business as usual. Revive’s ability to maintain its high level of customer service, while competitors reel from a major shift to their daily workflow presents an attractive opportunity to take share. And on that front, Revive landed a large client at the end of last week due to a competitor's inability to meet this new client's needs in the current environment. We are energized about the position and opportunity set in front of Revive, and will be working closely with the team to navigate the current landscape.

In summary, El Cap is well positioned in this shifting market environment. We are monitoring developments closely, and will be in touch as things continue to evolve. We’d love to know what you’re thinking and seeing, so as always, please feel free to reach out for a conversation if you’d like to discuss anything. Thank you for your continued support.

Graham and Dodd famously said, one “should try to be fearful when others are greedy and greedy when others are fearful.” It’s clear what time it is.

Best,

Stew & Kunal

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