Richard Drury
To December 31 st 2024: |
LRCP Fairness Fund I Gross |
LRCP Fairness Fund I Web |
S&P 500 |
Russell 2000 |
MSCI World Index |
Trailing 1-yr Complete Return: |
52.4% |
40.3% |
25.0% |
11.5% |
21.6% |
Trailing 2-yr Complete Return: |
108.0% |
80.1% |
57.8% |
30.4% |
50.5% |
Trailing 3-yr Complete Return: |
134.0% |
98.7% |
29.2% |
3.7% |
23.9% |
Trailing 4-yr Complete Return: |
231.9% |
163.1% |
66.3% |
19.0% |
51.6% |
Trailing 5-yr Complete Return: |
267.0% |
186.8% |
96.9% |
42.8% |
76.6% |
Trailing 6-yr Complete Return: |
276.2% |
193.9% |
158.9% |
79.2% |
126.3% |
Trailing 7-yr Complete Return: |
261.9% |
182.8% |
147.5% |
57.4% |
110.6% |
The figures above are on a cumulative foundation and are unaudited. Future outcomes may also be offered on a cumulative foundation on this part. Annual outcomes shall be illustrated beneath for many who want to measure us primarily based on 12-month cycles. Nonetheless, we view the cumulative outcomes as most significant since we are attempting to construct wealth far into the long run and the annual outcomes are solely necessary in as a lot as they contribute to a 3, 5, 10, and 20-year monitor report. |
Annual Outcomes: 2024: |
LRCP Fairness Fund I Gross 52.4% |
LRCP Fairness Fund I Web 40.3% |
S&P 500 Vitality 5.7% |
AMZ 24.4% |
XAL -1.0% |
2023: |
36.5% |
28.4% |
-.6% |
26.6% |
28.2% |
2022: |
12.5% |
10.3% |
64.2% |
30.5% |
-35.0% |
2021: |
41.8% |
32.4% |
53.3% |
39.9% |
-1.7% |
2020: |
10.6% |
9.0% |
-33.7% |
-28.8% |
-24.2% |
2019: |
2.5% |
2.5% |
11.8% |
6.5% |
21.3% |
2018: |
-3.8% |
-3.8% |
-18.1% |
-12.4% |
-22.4% |
To reiterate, our purpose is to have good absolute returns in the beginning, which ought to result in good relative returns versus the broader markets. Nonetheless, I additionally assume it’s necessary to spotlight the efficiency of the first sectors by which we really feel we now have a bonus and by which we make investments. There is no such thing as a motive to current this aside from for transparency causes. Proudly owning a extremely concentrated portfolio will forestall our outcomes from trying like something we examine them to in most years, however understanding the efficiency of power broadly, midstream power particularly, and North American airways will add some context for these companions who want to do some higher-level evaluation. Please see the accompanying disclaimer & footnotes on the finish of the letter for a broader description of every of those indices. |
RESULTS FOR 2024
Our partnership returned 52.4% gross and 40.3% internet of efficiency charges in 2024.
Promoting is tough! The punchline is that we utterly exited our Vistra (VST) place 2-weeks in the past, promoting our remaining block of shares round $170, however we’re hardly clairvoyant. Actually, virtually instantly our sale appeared untimely because the inventory subsequently jumped to $199, after which just a few days later the inventory went down 28% to $137 on a report Chinese language AI startup DeepSeek (DEEPSEEK) makes use of considerably much less capital and power of their AI mannequin than incumbent US variations. I needed to scramble to my laptop computer and delete about 20% of what I had written for this year-end letter. It simply didn’t resonate as a lot after Monday. The complete first web page of the primary iteration was spent admonishing myself for not slowing down the tempo of share gross sales to seize the next value after which went on speaking about classes discovered from focusing solely on valuation after I ought to have stepped again and appeared on the larger image. We nonetheless left some huge cash on the desk to make certain, even after this week’s sell-off, however the previous few days simply reiterated a lesson we’re acquainted with: know what you don’t know, and embrace it.

When you return and skim our prior letters, you’ll discover us arguing that the Unbiased Energy Producers (IPPs) had been valued as if demand for his or her product (electrical energy) was declining, which we didn’t assume was the case. We argued energy demand was steady, and pricing was resilient, albeit unstable, as a result of compelled closure of fossil gasoline crops and growing quantities of intermittent energy provide (renewables). We additionally thought firm capital allocation insurance policies would benefit from that disconnect till everybody else awakened and realized what we realized with respect to demand, then voila, a 20% FCF yield would compress to 10%, and on a a lot smaller share rely. However, in 2024 consensus energy demand expectations blew proper previous steady on their method to unmitigated progress (see graph). The drastic change in expectations compelled a recalculation within the terminal worth math of Wall Avenue discounted money move fashions, and when paired with the thrill round Synthetic Intelligence, IPP shares took off: Vistra (VST) +262%, Talen (TLN) +215%, Constellation (CEG) +95% and NRG (NRG) +79%.
After DeepSeek, I’m guessing the slope of this graph has decreased meaningfully, and I’ve seen early estimates suggesting incremental energy demand could possibly be lower in half. We had been doubtful concerning the prior change in estimates and are simply as doubtful concerning the new change in estimates. It’s not that we expect they’re essentially mistaken, we simply don’t assume they’re dependable sufficient to base our funding selections on, which was proved out this week. We acknowledge the danger a number of the commentary and information illustrated right here is outdated by subsequent week, however that truth lends assist to our give attention to provide pushed funding theses.
We are actually completely happy former house owners of Vistra and are grateful to Curt Morgan (ex-CEO) and Jim Burke (present CEO) for his or her constant messaging and management in executing a shareholder pleasant capital allocation plan. We’re undecided there’s something they might have accomplished higher over the previous 7-years. I consider Jim has been extra resolute in his promote technique than us (he nonetheless has his first tranche of choices with a $14 strike so far as we all know), whilst shares appreciated over 700%. Such pay is nicely deserved, and we actually couldn’t be happier for him and his staff!
Portfolio Replace
It’s the primary time since 2020 that I can say our portfolio is noticeably totally different. What has not modified is we stay extremely concentrated, proudly owning positions in solely 10 corporations, with the highest 3 comprising 40% of the portfolio and the highest 6 plus money comprising 90% of the portfolio. Along with exiting our Vistra place, as talked about above, a extra refined distinction is that money is increased than it’s ever been to begin a 12 months, ~27%. This displays our lack of success find new concepts large enough to exchange VST, mixed with a need to have ample dry powder within the occasion of elevated volatility.
Moreover, we had beforehand commented that in our opinion there was just one sector clearly out of favor, as evidenced by a few of its constituent shares breaching COVID lows. That sector was airways, and we began allocating significant capital to it beginning within the 3 rd quarter of final 12 months. As I write, ~15% of the portfolio is invested in US airways.
The desk on web page 2 exhibits the efficiency of the NYSE Arca Airline Index (XAL), which is among the indices we measure ourselves towards since airways are a sector we spend money on when the danger/reward is favorable. And whereas the XAL didn’t appear to do an excellent job reflecting the efficiency of the massive US carriers final 12 months, all of which had been up, the index does have a adverse complete return since 2018, which speaks volumes about sentiment. By the summer season of final 12 months even business leaders United (UAL) and Delta (DAL) had been nonetheless nicely beneath their pre-COVID highs and never a lot above their COVID lows.
The market was suggesting the business had reverted again to the reckless capability progress and capital destruction it was identified for previous to 2009, regardless of the wave of consolidation and rationalization that adopted thereafter. We disagreed. We thought the business went by means of a traditional bullwhip impact1 as airways tried to match provide with the unprecedented demand skilled put up COVID lockdowns, which may amplify and elongate the restoration course of for such a labor and capital-intensive business. We weren’t precisely positive when the sector would make the flip, however it appears to be there now.
FOLLOWING THE CAPITAL CYCLE

At its core we consider investing is a reasonably easy endeavor and we attempt to strategy it as such. As Nick Sleep would say, it’s all about money in, money out. Simply hope the money popping out is greater than the money that went in. It’s why we are inclined to gravitate to excessive dividends and enormous share repurchases—they make the mathematics simpler! Normally, we additionally consider that what’s fashionable is greater than possible a foul funding and what’s not fashionable on the very least has the preliminary substances of an excellent funding. Common investments appeal to capital, which attracts competitors, which finally depresses returns. Unpopular investments get capital taken away, competitors exits, and returns stabilize if not enhance. Marathon Asset Administration wrote about this Capital Cycle of their International Funding Critiques which had been then compiled into two books: Capital Account and Capital Returns. This chart from Capital Returns illustrates the inverse relationship between asset progress and international inventory returns from 1990-2015.
These two books have had an enormous affect on my considering over time. Our elevated funding in airways mixed with our divestment of IPPs throughout the previous a number of months is basically a response to the Capital Cycle: provide is increasing in a single business whereas slowing within the different. Fortunate for us this additionally coincided with plummeting share costs in a single sector, whereas share costs within the different went straight up.
Gasoline Fired Energy Technology
US energy demand is anticipated to develop near 16% over the subsequent 5-years, which is thrice final 12 months’s estimate and a progress fee akin to that exiting World Warfare II. It additionally compares to precise demand progress of 1% a 12 months over the previous 20 years. To satisfy this demand, Wooden Mackenzie estimates that over the subsequent 5-years the provision of US pure gas-fired energy technology will enhance 35% greater than it elevated the prior 5- years, whereas S&P International Market Intelligence assumes a fair larger 66% enhance. Moreover, incentives to retire previous gas-fired crops are reducing and decommissioning is getting pushed out.


And pure gas-fired energy isn’t the one supply of electrical energy technology getting a supply- aspect push, it’s simply the shortest cycle. Small Modular Nuclear Reactors (SMRs), the restart of mothballed giant reactors, delayed retirement of coal-fired crops, and the drive for extra renewable energy solely provides to our concern that the dangers are growing that energy provide might get overbuilt. Moreover, predicting when a few of these services come on-line is sort of unimaginable, so at a minimal discovering a provide/demand equilibrium shall be lumpy, and as soon as commissioned most of those property have a 50+ 12 months life. If buyers don’t get the demand aspect of the equation appropriate the business is in for years of monetary agony, akin to the early 2000’s.
The conclusion for Nate and I is that even placing valuation apart (and valuation isn’t that nice anymore), the assumptions required to make a supply-side argument for proudly owning IPPs at this a part of the cycle has far surpassed the psychological gymnastics we’re able to, so we’re transferring on.
US Airways
Whereas it felt prefer it solely took about 9-months for the common investor to acknowledge the economics of IPPs had modified for the higher, it took 9-years of consolidation, bettering returns on capital, deleveraging, and share repurchases earlier than one of many best buyers of all time—Warren Buffett—acknowledged the economics of the US airline business had modified. From 2017 to April 2020, he owned extra inventory in US airways than anybody, however COVID quickly upended the basics of the sector and made it actually laborious to foretell once they would stabilize, so he offered his place. We owned Ryanair (RYAAY) going into March 2020 and I capitulated as nicely however have been looking out for indicators that business economics had been heading again towards pre-COVID ranges ever since.
These indicators began showing this previous summer season and now we’re getting tangible proof that capability and capital self-discipline are reemerging. Whereas the graph beneath solely exhibits home capability progress by means of the 1 st quarter of 2025, it’s noteworthy that progress is the bottom it’s been in a decade. Historical past and administration commentary recommend that is the start of an extended pattern.

JP Morgan Aviation Credit score (HG/HY) 2025 Outlook
Scott Kirby, CEO of United Airways, described“an inflection level that may kick off a multi- 12 months run that appeared rather a lot like 2012 to 2014 for airline earnings and buyers” on the corporate’s 3 rd quarter name. He then adopted that up on the 4 th quarter name with“two further tailwinds this time round…structural provide constraints which can be going to final a minimum of for the remainder of this decade…And second, domestically, the seeds of the 2012 to 2014 period’s demise had been being sown on the time, with 15% to twenty% progress from the ULCCs. It’s very laborious to see that taking place once more.”
The impetus for these adjustments was underwhelming monetary efficiency for almost each airline except United and Delta. The poor outcomes led to an activist marketing campaign from Carl Icahn at JetBlue (JBLU), an activist marketing campaign from Elliott at Southwest (LUV), and a Chapter 11 submitting from Spirit (OTC:SAVEQ). The message was clear that sure airways wanted to shrink, or a minimum of dramatically gradual their progress, exit unprofitable markets, and begin transferring towards a suitable return on capital or heads had been going to roll.
The largest spoiler of the prior decade’s business rebirth was Spirit, with their irrational ranges of aggressive capability progress. Nonetheless, this time round CEO Ted Christie stated,“the underside line is, we have to run a smaller airline and get again on higher monetary footing.” Spirit filed for chapter in November, is anticipated to exit this quarter, and can shrink meaningfully. However, in my view the important thing change over the previous 12 months is similar change that occurred in 2012 when Southwest wanted to enhance their monetary efficiency. Because the 2nd largest home provider with over a 20% market share, and with a fame as a market disruptor, this was, and is once more, an enormous deal for elevating the ground on fares. Again in 2012 they exercised capability self-discipline by rising lower than 2% for a few years, which resulted in improved pricing, and simply as necessary for house owners of airline shares, a lot improved sentiment. Now, along with altering a number of the most unusual facets of their enterprise mannequin, administration goes to gradual progress as soon as once more, forcing costs increased and serving to to enhance returns on capital. Underneath the watchful eye of Elliott they’ve dedicated to capability progress of solely 1-2% a 12 months by means of 2027, in comparison with common capability progress of 16% a 12 months from 2021-2024.
With business “disruptors” on their heels, points within the provide chain are merely a aspect notice within the supply-side pushed argument for why airways are instantly attention-grabbing once more. These points embrace Boeing’s (BA) ongoing manufacturing issues, Pratt Whitney GTF points, and common MRO constraints. Finally these shall be remediated to various levels, however within the interim they’re serving to assist our view.
Lastly, extra capital on the largest carriers has been dedicated to their steadiness sheet (Delta and American) or shareholders (United and Southwest). We promote each types of capital deployment, however clearly desire the latter. Once more, United’s messaging is on level. CFO Mike Leskinen:“this business must get higher at returning money to shareholders. We have to have extra common returns of money to shareholders.” Amen. The inventory market provides these corporations numerous alternatives to repurchase shares at enticing costs, thus creating enduring long-term worth for fairness house owners. We’ll elaborate on our considering on this matter in future letters, however in our opinion every firm ought to have its monetary home so as (manageable leverage) and be ready to repurchase significant quantities of inventory when the market will get foolish, which it usually does with this business. In our opinion, that’s how they will greatest appeal to the affected person long-term house owners they need and the valuations they deserve.
Midstream Vitality
The Midstream Capital Cycle hasn’t been almost as dynamic over the previous 12 months as US Energy Technology or US Airways, however with over 40% of our portfolio invested within the area we’d be remiss to not have a look.

This chart from Wells Fargo illustrates that in the interim there’s nothing terribly alarming with respect to the quantity of capital being invested in oil and fuel infrastructure. Whereas we now have come up from the lows of 2021 and 2022, we’re nonetheless 30% beneath the 2019 peak and roughly 23% beneath the common from 2013-2019, the interval when midstream was making an attempt to maintain up with the US manufacturing progress introduced on by the shale revolution. In comparison with then we now have hydrocarbon demand pulling on midstream capex and we suspect capital spending shall be increased than estimated right here. If everybody’s assumptions (new & previous) with respect to Knowledge Facilities and energy demand are remotely appropriate it will likely be obligatory.
Wealthy Kinder, founding father of Kinder Morgan (KMI):“That is probably the most thrilling time to be within the midstream pure fuel market than I’ve seen in my lengthy many years on this enterprise.” And to paraphrase present KMI CEO, Kim Dang:‘We’re early in information heart and energy demand for pure fuel, we expect pure fuel demand will develop 28 bcf a day by 2030…I’ve seen numbers that recommend 10 bcf a day for energy demand and we’re solely forecasting 3 bcf a day as of now, so there’s potential for upside.’
Once more, these estimates would possibly already be outdated and I’ve seen numbers suggesting KMI’s authentic 3 bcf a day estimate is definitely spot on beneath the newest guestimates. Our partnership has publicity to pure fuel pipelines, however we don’t personal the shares most related to the ability demand theme. These shares had been down near 10% final week as hopes for above common EBITDA progress by means of the top of the last decade cooled off. The names we personal will little doubt profit from the incremental name on fuel, however in addition they supply valuation safety. For the meantime progress capex for midstream corporations is again in vogue, however we’ll definitely be looking out for a deteriorating Capital Cycle.
ADMINISTRATIVE
Annual Partnership bills are roughly ~15bps (.15%). This contains prices for our Fund Administrator, a Gatekeeper2 (an additional layer of regulation required by Colorado), and analysis prices, which as of proper now’s solely a subscription to FactSet (we depend on the charity of a small group of sell-side corporations). The Normal Companion (Legacy Ridge Capital Administration LLC) covers all different prices, together with audit, tax, journey, and so forth.
Once I began the fund in 2018 all the capital invested was my very own, due to this fact I paid all of the bills no matter how they had been allotted. Moreover, as I attracted outdoors capital I wished to maintain bills low and incentivize the GP solely on efficiency. This nonetheless stays the case, nonetheless a number of the working bills Nate and I presently cowl ought to finally be paid by the Partnership since they’re both obligatory (Tax and Audit) or helpful to all Companions (Analysis). We have now no intention of constructing adjustments now, however it’s attainable we attain out to LPs by year-end to allow them to know we’ll be expensing tax and audit from the fund going ahead. At our present AUM and present Richey Might (audit/tax) charges this may equate to an incremental 10bps (.1%) of fund expense. An additional 10bps coming off the highest of our Companions’ returns makes me cringe, so except AUM grows or Richey Might charges decline (unlikely) I believe nothing will change, however I wished to offer a 12- month forewarning simply in case.
Type regards,
Kristopher P. Kelley
Footnotes 1 The bullwhip impact is an financial time period referring to the pronounced adjustments in demand as you progress alongside a provide chain, however begins on the retail stage (the tail of the whip); the hazard comes from every step within the provide chain estimating demand extra incorrectly than the final. 2 The Gatekeeper approves all withdrawals from the partnership. We use C Lution LLC and the price is de minimis. Disclaimer & Footnotes This letter is for informational functions solely and doesn’t replicate all the positions purchased, offered, or held by Legacy Ridge Capital Companions Fairness Fund I, LP. Any efficiency information is historic in nature and isn’t a sign of future outcomes. All investments contain threat, together with the lack of principal. Legacy Ridge Capital Administration LLC disclaims any responsibility to offer updates to the knowledge contained inside this letter. This letter could embrace forward-looking statements. These forward-looking statements contain identified and unknown dangers, uncertainties, assumptions and different components which can trigger precise outcomes and efficiency to be materially totally different from any future outcomes and/or efficiency expressed or implied by such ahead trying statements. Efficiency for 2018 is offered by Richey Might & Associates, our auditor, and was offered through a Efficiency Evaluation for a separate account that was transferred into the Fund and constituted 100% of the property of the Fund as of November 1, 2018. Outcomes are internet of fund bills. All efficiency associated figures for the Partnership are unaudited. Indices are offered as market indicators solely. It shouldn’t be assumed that any funding autos managed by Legacy Ridge Capital Administration will, or intend to, match offered indices in holdings, volatility or type. Index returns provided are believed to be correct and dependable. The S&P 500 is a market capitalization weighted index that measures the efficiency of the five hundred largest US primarily based corporations. The Russell 2000 Index is a market capitalization weighted index that measures the efficiency of the smallest 2000 shares within the Russell 3000 Index and is a typical benchmark for smaller corporations. The MSCI World Index is a market capitalization weighted index that’s designed to be a broad measure of equity-market efficiency all through the world. It’s comprised of shares from 23 developed nations and 24 rising markets. The AMZ is an index offered by Alerian and measures the return of 32 Grasp Restricted Partnerships on a complete return foundation. The S&P 500 Vitality sub-index includes these corporations included within the S&P 500 which can be categorised as members of the GICS power sector. There are presently 28 constituents within the S&P 500 Vitality sub-index. The XAL is the NYSE Arca Airline Index. There are presently 14 constituents within the XAL, with most domiciled within the US. This letter doesn’t represent a proposal or solicitation to purchase an curiosity in Legacy Ridge Capital Companions Fairness Fund I, LP. Such a proposal could solely be made pursuant to the supply of an authorized confidential personal providing memorandum to an investor. This reporting doesn’t embrace sure data that needs to be thought of related to an funding in Legacy Ridge Capital Managements funding autos, together with, however not restricted to vital threat components and sophisticated tax issues. For extra data please consult with the suitable Memorandum and skim it fastidiously earlier than you make investments. |
Authentic Submit
Editor’s Observe: The abstract bullets for this text had been chosen by Looking for Alpha editors.
Editor’s Observe: This text discusses a number of securities that don’t commerce on a serious U.S. alternate. Please concentrate on the dangers related to these shares.