The ‘Special Situations’ guy: Urquhart Partners’ Richard Cheesman

Imagine spending all day fishing in the JSE’s darker pools for oddities like Afrocentric preference shares? Well, that’s where one-time Investec analyst Richard Cheesman has decided to cast his net with a new “Special Situations” hedge fund that his young firm, Urquhart Partners, is launching next month. 

“All the good investment managers dabble in this area, but none of them really specialise in it,” he tells Currency in an interview. “It’s niche, but historically an area where returns have been quite good and uncorrelated, and I’d even say with lower risk, because there’s often quite a large cash underpin to these special situations.”  

The special situations Godfather, if you like, was American investor Joel Greenblatt, who ran a fund in the 80s for a decade, producing returns of 50% per year. It’s one of the best investment records ever and Greenblatt introduced a world of newbies to his view through popular books like You Can Be a Stock Market Genius. 

So what are these situations, exactly? Cheesman tells Currency that, to explain, look no further than two absolute bangers of the past 10 years: Montauk Renewables and Thungela Coal. 

In Montauk’s case, the “confusing American business”, as Cheesman describes the renewable energy unit, was spun out of parent HCI in 2014 at R4 a share. Two years later, the stock had drifted down to just R2. But then, it caught fire; by June 2018, Montauk’s share price touched R100 and its market cap, at R13bn, was bigger than that of its former parent.  

Thungela, the perhaps equally poorly understood coal business, was offloaded by Anglo American in 2021. Anglo no longer wished to have dirty energy coal on its books and the stock listed on the JSE at a lowly R25. Anglo American’s shareholders each received one Thungela share for every 10 Anglo shares they owned. 

It was an inauspicious debut, not least thanks to a downbeat report from short-seller Boatman Capital that posited the company would be bankrupted by its environmental liabilities. Boatman valued the stock at zero. 

Yet, two years later – helped in no small part by Russia’s (unforeseen) invasion of Ukraine and the subsequent jolt to coal prices – Thungela recorded a net profit of R18.2bn. Its shares hit R377.52, and it paid out a full-year dividend of R100: four times its listing price. 

It’s an illustration of precisely why these market freaks can be so exciting. 

“It’s an area I really like and it’s manageable for a small team, which Urquhart Partners is,” says Cheesman. “We can’t cover the whole JSE and we can’t be better than everyone else out there on Absa or Sanlam, but in these very specific circumstances, hopefully we can be the best in the industry.”

Cheesman says he has always enjoyed the “weird or peculiar” securities that are too small and complicated for the bigger investment houses to spend time on. “There are enough of these weird entities to string together and get a portfolio of interesting securities which have uncorrelated returns and have historically done quite well,” he says.

What, you may ask, are uncorrelated returns – and why do these matter? 

Cheesman explains: “The best way to have a portfolio is where different parts move and act in different ways. If there’s a financial crisis, you don’t want to have your whole portfolio just collapse; you want to have things which are uncorrelated with the rest of the portfolio so some of it holds up.” 

For pensioners especially, it’s hugely difficult to experience market drawdowns of 40%, say, and uncorrelated returns are generally an investor’s nirvana. 

This is the central thesis of hedge funds, which can go both long and short equities – profiting from both an increase in a share’s price, and a decline. In Urquhart’s case, “if we invest in a buyout situation like Adcock or Curro or MultiChoice, those shares aren’t going to perform based on what the economy does or how competitors are acting”. 

Of course, if there’s a complete market collapse – like March 2020, when Covid lockdowns were imposed worldwide – nothing will be spared. But, outside of that, Cheesman says the behaviour of these investments hinges on whether that particular deal is proceeding according to plan.

Some of Cheesman’s initial investment experiences demonstrate why this can be such a successful strategy. 

One of his first trades was in life insurer Liberty Group, which was controlled by Liberty Holdings through a complicated pyramid structure. But after Standard Bank received a capital injection from Chinese juggernaut ICBC in 2008, it collapsed that structure. “One day you woke up to a 20% return, out of the blue and unrelated to anything else – you didn’t have to take a bet on what interest rates were going to do, for example, or how commodity prices might change,” he says. 

Making your own luck

The aim for Urquhart investors is that in any year where the overall market is down, they will still do alright thanks to this strategy. But where Urquhart will lose out is if there’s a roaring bull market and all shares are swept up. 

Take, for example, the case of Barloworld which is almost certainly being delisted at R120 a share. “If it is bought out at R120 and it is trading at R100, your maximum upside is 20%, say. But if the market gets really excited about South African casino stocks, for example, Tsogo Sun can re-rate from five times earnings to 10 times earnings,” Cheesman says.   

The persistent question is whether “special situations” is just a fancy phrase for luck. In the case of Thungela, you could easily argue that the bumper payback was a pure fluke, thanks only to unforeseeable Russian aggression.

“Obviously there’s some luck, but you’re setting yourself up to be on the receiving end,” argues Cheesman. “A lot of these situations are like buying options, for very little. If you collect enough options, every now and then, one of them pays off. But I think there have been enough examples that we can rule it out being totally a coincidence.” 

Another example is WeBuyCars, which was spun off out of Transaction Capital in April 2024, and which returned more than 100% in the year after that. “That was a well-known business where the financials were clear and there was enough information out there,” he says. 

Spinoffs are especially interesting: a new company that doesn’t have a standalone history (other than in its parent’s annual financial statements), is allocated to investors, who get a proportional share in this “new” business.  

A spinoff is different to an initial public offering (IPO), where only the people who want the security subscribe for the share. With a spinoff, all the shareholders get a share whether they like it or not, and a lot end up selling, as happened with Thungela.

“A lot of investors would say: I’m not going to do the work on this – it’s a loss-making coal business, it’s dirty, and it’s just easier to dump it. So you have indiscriminate sellers not selling for fundamental reasons. And that’s great – I’d rather have people on the other side of the transaction who don’t really have a view on the business or the valuation,” he says.

Being the buyer in such a trade, he says, ends up being far more profitable than if you trade against market geniuses in a well-understood and traded company like BHP Group, say. 

Asked whether South Africa still offers enough such situations, Cheesman answers without reservation. “If you look across all areas – activist investments, spinoffs, restructurings and liquidations – then I think there are enough securities to make up a portfolio.” 

Poorly-performing companies that have been taken over by activist investors are another avenue – including firms like Nampak, PPC, Sun International, Novus and Tiger Brands. 

“We won’t be involved with a company when things are going great, the company is expanding internationally and buying expensive assets. [But] when those assets underperform and the company has liquidity issues, and it gets really bad and really cheap, and something changes, then we’ll get involved,” he says.

Making hay from JSE exits

When Cheesman’s “Special Situation Fund” launches next month, it will be his first entrepreneurial venture. 

The actuarial science graduate, who turns 40 this year, “figured out pretty fast” he didn’t want to be an actuary in a life insurance company. Instead, he joined Investec, spent eight years there and then a further five with hedge fund manager Jean Pierre Verster, who scouted Cheesman via his (anonymous) twitter account to join Protea Capital Management. 

“After a while, I thought the stars were aligning to go out on my own, to try something I always wanted to do. I’ve been managing friends’ and family money for close to 20 years, so I thought it was time to have a go properly,” he says. 

He reckons he is young enough that “if things go wrong, someone in the industry might take me back” but “if this works, we can put together a long track record of good returns for investors”. 

As for its fees, the fund will have a 1.2% management fee and a 20% profit participation above a half-cash, half-JSE hurdle.  

Longer term, though, Urquhart hopes to install a performance-fee only model for investors. 

“It’s what Warren Buffett did in his partnership right at the beginning, and it’s quite nice for investors because we get paid nothing for managing their money, and only if we outperform do we get anything. We want to have a partnership mentality with our investors,” says Cheesman.

The one potentially existential hiccup is the inexorably shrinking JSE.  

In the past week, for example, two companies announced market-moving deals: Metrofile, which is being bought out, and Libstar, which is in talks about a buyout.  

“A shrinking JSE is obviously not a great thing and you hope that trend improves and we get new listings. But while it’s a bad trend for the health of the broader ecosystem, our strategy definitely does benefit,” says Cheesman.  

At the moment, he is tracking 15 delistings and “making hay while we can”. Urquhart, in fact, sees “at least” 90 opportunities on the JSE right now, making any offshore foray unnecessary. 

“Our area of expertise is here: we know the regulators, we know the competitors, we know the unlisted businesses and suppliers. We think there’s enough fish in the pond,” he says. And for now, there is.

This story was produced in partnership with Stanlib.

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