Dear Partner,
In the second quarter of 2025, Woodbridge Capital Partners I, LP (the “Partnership”) returned -1.33% while the S&P 500 returned 10.94% (with dividends reinvested). Since its inception in April 2020, the Partnership has returned 197.15% compared to the S&P 500’s 152.84%.
Despite a rocky start to Q2, the S&P 500, which saw a 19% drawdown from February highs on tariff fears, ended the quarter at an all time high, as markets continue to shake off trade war fears, geopolitical tensions, stretched valuations, and ballooning US government debt.
After “Liberation Day,” the White House announced a 90-day pause on tariffs for most countries, allowing time for negotiations and diplomacy. Since then, the striking of a number of temporary agreements with key trading partners has helped to assuage the fear of a global trade war. Later in the quarter, headlines turned to focus on the One Big Beautiful Bill, which was signed into law on July 4th, a major victory for the Trump Administration. The OBBB included, among other things:
- A permanent extension of 2017 Tax Cuts
- Increased SALT deduction cap
- Reduction in taxes for overtime and tips
- Increased border security and defense spending
- Tightened eligibility criteria for Medicare and food stamps
Overall, market reaction to the OBBB has been favorable due to the cutting of taxes and increased deductions for business investment. However, the One Big Beautiful Bill is widely expected to significantly increase the size of our national debt – the Congressional Budget Office estimates approximately $3.4 trillion through 2034. The United States already has one of the highest debt-to-GDP ratios in the developed world, at 120.9%. Higher interest rates over the last few years have further increased the burden of our debt, as annual interest outlays have soared from $352 billion in 2021 to a projected $952 billion in 2025. We now spend more on interest to service our debt than on national defense, our largest discretionary expense.
Despite Trump’s heckling of Jerome Powell, the Federal Reserve has held rates steady since December. Trump wants lower interest rates because he believes they will stimulate the economy, which they likely will, however, lower interest rates would be inflationary, and the Fed has only just gotten inflation under control. If the tariffs and deficits weren’t enough to make it clear already, this administration is not worried about inflation. Nevertheless, the Fed is expected to start lowering rates in the second half of 2025. The Fed admitted that it would have happened sooner if not for the tariffs.
Turning to our portfolio, a few updates. We’ve decided to hold on to some of the shares of the Swiss subsidiary spun out to us by our telecom company. Initially, our intention was to sell them because we would prefer to put that money into the parent, which is significantly more undervalued. However, interest rates in Switzerland are extremely low. In fact, the Swiss National Bank’s policy rate is currently set at zero. This is largely because the Swiss franc has very low levels of inflation and is considered a safe haven asset. Unlike the United States, Switzerland has a very low level of sovereign debt and a balanced budget (a constitutional requirement, actually, known as the “Debt Brake”). Due to low interest rates in Switzerland, we are able to hold the shares on margin at a rate of less than 1.5%, while the stock has a very safe dividend yield of 7.3%. This spread of almost 6% is free money – so long as the shares don’t decline. We believe the shares should appreciate over time as investors are attracted to the dividend and the company uses its excess earnings to deleverage.
The telecom company that was the former parent has been the biggest detractor to performance of late, down 13% in the quarter and 22% year-to-date. While the last few quarters’ operating performance has been mixed, this recent decline is not justified and the stock continues to be absurdly cheap. What’s important to understand is that this company is structured differently from most telecom companies. As a holding company, all of the debt is contained within its operating subsidiaries, leaving the parent debt free. Actually, it has a substantial amount of cash: $6 per share. In addition, they have another $2 per share in stock of other publicly traded companies and $7 per share (appraised by a third party) in investments of private companies. The stock ended the quarter at about $10.
So, even if all of its telecom operations were worthless, the stock would still be cheap, by virtue of their $15 per share in cash and investments. In reality, the telecom operations almost certainly have value and the stock is easily worth double. Management has stated that they are exploring a number of ways to unlock value. At the Bank of America C-Suite TMT Conference held in June, the CEO was interviewed by an analyst and asked what was next for the company after the successful spinoff of its Swiss subsidiary. He responded something to the effect of “Well, if it’s only $12 per share [the analyst’s price target], which by the way is up 20% from here, I’ll be very disappointed.”
Shares of our bank investment have risen significantly, up 31% since the end of the first quarter and over 144% since their lowest point in October 2023. We have begun to reduce the size of our position as the shares are approaching our estimate of fair value. At their lowest point in October 2023, the stock was an unbelievable bargain, trading at 44% of tangible book value. At such a price, an investor in the shares would have done quite well if the bank simply shut down – closed its doors, sold off all of its assets, and returned its depositors their money. This is yet another example of just how irrational the market can be when it is gripped by extreme greed or, in this case, extreme fear.
The next development is regarding our insurance company. We mentioned previously that rumors had surfaced the company was seeking to sell itself. Since then, additional information has continued to come out, and last week the WSJ wrote an article stating that a deal should be announced within weeks, barring any last minute hurdles. The article appears highly credible and is consistent with all previous information that has come out. We feel that the market is dramatically underestimating the probability of a deal occurring, as the stock currently trades at almost exactly the same level as right before the sale rumors first surfaced back in January.
As always, we thank you for your patience and your trust. We remain confident that the Partnership will outperform the S&P 500 over the long term and remain committed to your investment success. If there is ever anything you would like to discuss, please feel free to reach out to us.
Thank you,
Jesse Flowers & Kyosuke Mitsuishi