A Private Equity Approach to Public Markets | Deiya and Dean Pernas Interview

Pernas Research hunts potential energy in public stocks

Pernas Research applies the private equity playbook to public markets. The brothers look for potential energy before it reaches the financials and judge management with deep skepticism. They prefer a rising trajectory over a strong current business and use poker-derived discipline to survive long enough for their variant perception to pay off. They plan to launch a fund in October that charges only on outperformance of the S&P 500.

Takeaways

• Public markets still offer a deep opportunity set. Deiya Pernas says developed-market investors can choose from about 10,000 listed companies. Private capital is deep and companies stay private longer, and the post-COVID listing boom added many companies that came to market too early, but public markets still hold plenty of opportunity.
• They buy potential before it reaches financials. Pernas Research looks for potential energy in decisions and capital allocation not yet visible in results. Capstone Energy emerged from bankruptcy with new management and lifted gross margins from below 10% to 25% after insourcing key IP. They bought at $1 and it reached $5.50.
• They never trust management and verify claims. Deiya Pernas says CEOs are salesmen who stay optimistic. Public investors lack private market board control. They judge capital allocation talent and whether the CEO's lens matches the company's problem. Sleep Number bought back $800m at its 2021 peak before going bankrupt.
• Trajectory matters more than current quality. The brothers prefer a company moving from bad to okay or good to great over a fantastic business beginning to deteriorate. They call this trajectory over quality. Burberry's brand dilution between 2010 and 2020 is why they avoid declining trajectories, however strong the brand.
• They sell on broken thesis or rich price. Dean Pernas says there are two reasons to sell. A holding can break the thesis, or the price can be too high. They owned a remittance business and knew regulation was a risk, but a provision in Trump's bill was more onerous than expected.
• Poker bankroll discipline shapes position sizing. Deiya Pernas says portfolio pitfalls are concentrated illiquid positions, shorting, leverage, and aggressive averaging down. He uses poker bankroll management, where a player sits with 1% of their bankroll. Even after a 50% drop, going all in risks survival, so they size to stay alive.

Endor's collapse from market leader to bankruptcy

1. Endor, the sim racing company behind Fanatec, was founded in 1997 by Thomas Jackermeier and created the sim racing industry.
2. COVID demand rose six or seven times, but operations could not handle servicing many more customers, with delays of several months and complaints on Reddit and customer service boards.