Caravel Capital July 2024 Partner Letter

Dear Partners,

For the month of July, Caravel returned +2.57% compared to +3.55% for the benchmark (1.22% for the S&P 500 & 5.87% for the SPTSX).[1] This brings year-to-date total net return to +2.75% for the fund and +14.57% for the benchmark, respectively.

July saw some of the rotation we hinted at in our June letter. Small caps broadly rallied on renewed optimism about rate cuts in the second half of the year amidst better-than-feared economic data. We continue a cautious optimism in this regard, maintaining our robust hedging strategy and adjusting it in step with buoyed asset prices.

Professionally managing an investment portfolio is (we imagine) in some ways similar to managing a professional sports team. Both involve rigorous vetting and analysis (scouting) of both current and potential future positions (players). As duration-agnostic managers, we evaluate positions that stand to contribute on short (1-6 months), medium (6-18 months), and long-term (>18 months) bases. This can be likened to a manager that compiles a team containing homegrown players drafted and developed within the organization, free agent signings, and ‘rentals’, perhaps who have been acquired via trade on expiring contracts.

Where am I going with this? Good question. I imagine a manager is satisfied when all the components of the organization within his or her control are meeting or exceeding expectations. This would include scouts, coaches, staff, and of course players.

Such was the case with Caravel’s portfolio in July. The fund experienced balanced gains across a variety of strategies, including merger arbitrage (+150 bps gross), fixed income & convertibles (+85 bps gross), & equity long-short (+75bps gross). These returns are all well in excess of our annualized targets relative to the capital allocated to these strategies.

Gains in the merger book were led by the closing of Argonaut Gold’s acquisition by Alamos Gold, and the subsequent spinout of Florida Canyon Gold (“FCGV”).  For investments of this nature, Caravel always looks to gain a competitive advantage over the market.  This requires an immediate “all hands on deck” approach to due diligence. Within hours of the announcement of this transaction, we had read every available disclosure and made calls to FCGV’s management team, research analysts, investment bankers, and industry experts familiar with what would become FCGV’s assets.  After determining we were able to obtain this advantage, we started accumulating FGCV in May at an average cost of approximately 20 cents per share. In mid-July, within days of listing, the stock traded materially higher, and Caravel used that opportunity to exit its position at an average of 67 cents.  Although we felt there was still upside to the stock we referenced a phrase often used at Caravel, “we will leave some meat on the bone for the next guy” as we sold out of it.  That saying proved to be true. In a rare circumstance, only two weeks after FGCV started trading it was taken over by another public company. This validated the work we had done and the value we believed the market was initially missing when we accumulated our position.

Gains in the fixed income & convert book were driven in large part by our Ascend Wellness term loan, which we originally wrote about in our April letter. As we expected might happen, Ascend refinanced the debt ahead of it becoming current in September, and used the proceeds of the new financing to call ~80% of our notes at $102.375 per $100 held. This resulted in a win of about 45 bps net to the fund in July.

Gains in the equity long-short book were balanced. One notable winner that we will mention was Kraken Robotics (PNG), a Canadian listed small cap marine technology and battery company. We initially established a position in PNG as part of an equity financing the company completed in May 2024 at $0.95 per share. This financing has left the company in a strong financial position to execute on the plethora of attractive growth opportunities that lie in front of them. Best of all is the company is led by a capable management team and has developed a deep competitive moat over years of hard work and good execution. We believe that the market is just beginning to appreciate the position PNG is in, with shares now trading at ~$1.40. Think of this one like a prospect with huge upside selected in the late rounds of the draft. Stay tuned.

My mother taught me “when you lose say little, when you win say less.” So, we will keep it to that. We are pleased, but not satisfied. We will continue to try to put together months like July for ourselves and for our partners.

If you have any questions about our fund, strategies, or just want to catch up, we are available via phone or email to our partners at any time.

We thank you for your continued support,

Jack and Glen

Managing Partners, Caravel Capital

[1] Benchmark = 50/50 weighting of S&P 500 & SPTSX Composite Indices