Sark bid – decision time

Sark bid – decision time
28 June 2024

Two weeks ago, my British readers will have seen my name splashed all over the media.

I made it onto the cover page of the Financial Times, if only with a short news story. A more extensive, rambunctious piece appeared on the FT's widely-read Alphaville blog.

The Sunday Times followed suit, with the cover page of its magazine dedicated to my plans.

Thanks to their journalists, I now have a whole variety of new nicknames and adjectives, including "German tycoon", "German upstart", and "eccentric".

I was also reported to have a "bad smell" about myself, based on the incontrovertible evidence provided by a highly credible source on Sark.

This flurry of media reports led to an avalanche of enquiries in my inbox.

How to best deal with such enquiries?

Of course, you write an article about it!

The Sark Property Company, of which I am the CEO, will shortly publish its marketing deck for a GBP 35m Series A funding round.

While my lawyers are signing off on the final version of that document, I wanted to inform Undervalued-Shares.com readers how I’m hoping it all unfolds.

Today's Weekly Dispatch is a behind-the-scenes tour of this exciting project, addressing the kind of questions that investors have been asking me during the past weeks, and especially since the media spotlight fell on Sark once again.

Legal disclaimer: no part of this article constitutes investment advice or a solicitation of funds. The Sark Property Company, and its parent company, Sarnia Asset Management, are run independently from Undervalued-Shares.com.

What's new?

If you have read my articles about Sark from September 2023 and November 2023, the following will complete your understanding of what's going on and how the investment case will shape out.

As I reported in November 2023, "following 2.5 years of preparatory work, we now focus on just a few remaining tasks."

Admittedly, we then slow-walked the remaining work, but this was also due to simple commercial considerations.

We did recently finish some critical pieces of work:

Valuation: following a complex, extensive process of gathering information on the ground, we completed our financial model and valuation. This included taking into consideration a lot of local intel; much of which, I dare say, someone who doesn't live on Sark would find virtually impossible to procure.

Professional advisor for structuring and fronting the bid: we have retained the services of Savills Guernsey, the leading experts for anything real estate in the Bailiwick of Guernsey. Savills will advise us on structuring the bid and represent us vis-à-vis the professional advisors of the vendor (with whom they are now in active contact).

Anchor investor: Harris "Kuppy" Kupperman is the founder of Praetorian Capital. With a 11x net return since 2019, he currently ranks as one of the world's best-performing fund managers. Praetorian Capital will come onboard with a significant investment, and Kuppy himself is in the process of joining the board of the Sark Property Company.

It's been quite a journey to get to this point, but it does feel like it's now decision time.

That's true for us as a company, but also (by extension) for Sark as a whole.

Island politics

Not everyone is a fan of what I am doing.

If there was a cheerleader for those who believe I shouldn't be involved with any of this, it's now probably Paul Armorgie.

Armorgie is the 68-year-old Speaker of "Chief Pleas", Sark's parliament. He is the man who sits atop the island's parliament in what is supposed to be a politically neutral position. His role is supposed to be that of someone who rises above pettiness and politics, and unites rather than divides.

As he told the FT's Alphaville, "there's a nasty smell about [Swen]".

What led him to say that?

It's hard to say. As Armorgie admitted to Alphaville, "I haven’t done my due diligence on Swen".

Does it feel right for the speaker of a parliament to launch a personal attack against an individual when he has nothing concrete to base it on?

Some say he wanted to bait me into a tit-for-tat, so that I become part of Sark's divisive politics.

Personally, I don't think anyone can ever discern other peoples' motives. Mindreading is beyond us.

What we can do, however, is to follow the money.

Armorgie presides over a parliament that currently seems to be on the cusp of a growing corruption scandal – and one that has been in the making for a long time.

As the Guernsey Press reported on 15 June 2024, two members of Sark's parliament have been threatened with being disbarred from an important committee "after an investigation into a lease agreement to a private individual on a building owned by Chief Pleas".

It’s widely known in Sark that the property in question is the "Old Island Hall ", which is a bar and restaurant in a prime location. The building was rented by Chief Pleas to an individual for what appears to be an unusually low sum of GBP 96 per month. A similar restaurant in Sark would typically attract rent in the range of GBP 1,000-2,500 per month. The building was given out on a ten-year-lease with an option for another ten years, and the rent was even not indexed to inflation.

A panel has recently found "that the lease on the 'old island hall' had not been put out to tender, records and minutes of meetings were not kept or were inadequate, …. Trustees had not been informed and the lease had not been drawn up by a legal professional."

There are other circumstances to this, including the fact that the building was in disrepair and the tenant committed to doing improvements to the building.

First impressions, though, are terrible for Chief Pleas.

Not putting it out to tender breaches government rules and good governance. One wonders, why was best practice, even what would widely be considered as normal practice, not followed?

It feeds into a broader image problem that Sark's parliament suffers from. Many residents have issues with the 18-member parliament's approach to transparency.

Residents had tentatively known about the matter of this seemingly favourable rental lease for a long time. Now turned from rumour to reality, bets are already out that further embarrassing cases will be exposed where Chief Pleas mismanaged taxpayer funds.

Now imagine an entity like the Sark Property Company appearing on stage and making a commitment to operate on the basis of radical transparency:

  • We always repeated that anyone on the island who wanted to speak to us about anything should simply reach out.
  • Ahead of our bid for the portfolio, we will not just publish an extensive legal document about our company and its plan, but even voluntarily register this document with Guernsey's financial services regulator. It will be for Sark's public and the entire world to see and be something the public can hold us accountable for.

Could some feel threatened by this approach and this level of professionalism?

When it comes to the work of Chief Pleas, I am afraid that Sark's residents/taxpayers/voters have a lot worse coming their way. I see further news coming with regards to the island's future solvency and the quality of public services.

It had always been obvious to me that Sark would get entangled in such issues. The island's government doesn't have long-term planning concerning finances or other strategic issues. For an island like Sark, you should have multi-decade planning in place. Sark's lack of such long-term strategic planning is one of the reasons why I rented on the island instead of buying a property – it just looks a bit too iffy to make a long-term commitment. Add the issue of the real estate portfolio currently owned by the Barclay family, with its well-known history of political conflict and (more recently) various operational and financial issues.

However, I also believe what one visitor to the island once told me: "This entire situation can probably only be unstuck if a large investor helps unblock some of the blockages."

Indeed, the island has a multitude of problems to overcome, but none that couldn't be resolved if its stakeholders worked together and made a concerted effort. Given how small Sark is, it would not be difficult to identify a few quick wins, get them executed, and by doing so create positive momentum and a sense of positivity. That's why I am fairly relaxed about Sark's current challenges.

Dredging up the bad stuff

Secretly, I am actually grateful for characters like Armorgie.

I did have an agenda when I decided to engage with major media outlets ahead of organising such a bid. I was hoping that detractors, doubters and critics would step forward. I wanted to see what they would come up with and stress-test our proposition and position. Criticism is nothing but free advice.

As Sark's Seigneur, Christopher Beaumont, and myself told the Guernsey Press in June 2023, we "understand the ambivalence and mistrust that some locals feel about the project."

After all, anyone who steps into Sark will inevitably inherit some of the legacy issues left behind following the conflicts with the Barclay family.

This is an island that has been in crisis and decline for years, and there is a pervasive sense of doom and gloom. Anyone attempting to improve something on Sark would walk into a difficult situation and be viewed with scepticism, no matter who they are or what they propose.

That's why we invested into engaging the public and key stakeholders.

A public workshop that the Sark Property Company funded led to the largest gathering of residents in living memory. Independent, world-leading experts were tasked with summarising a baseline of what Sark residents felt at the time. The resulting report was published on our website in its full, original form. No redactions, no hiding.

Our subsequent engagement with various other stakeholders was productive in some cases, and not so productive in other cases. Chief Pleas takes a special place among them. We had productive conversations with quite a few individual members of Sark's parliament, but we were visibly blocked by other members of parliament.

Are we concerned about that? Of course, we wish it was different. However, when some members of Chief Pleas publicly lash out at us, it may well be them projecting their growing problems onto others. Also, as the case that made it into the Guernsey Press shows, some members of Chief Pleas may have an altogether different agenda of their own that we can only speculate about.

From the get-go, we always planned for the base case of our investment to be entirely independent from Sark's politics.

Assuming Sark's government doesn't expropriate private landlords or bans renovating houses, our immediate plans are all based on existing legislation. In fact, nothing would oblige us to reach out to Sark's parliament or anyone else. Anyone from anywhere in the world can buy real estate in Sark – no government permit required. We simply reached out because we felt it was the right thing to do.

We do think that some of Sark's current challenges would be easier to overcome if there was a large investor who was willing to engage deeply with stakeholders about:

  • Building more housing, including affordable options. In other jurisdictions, this is what governments try to achieve in collaboration with large landowners.
  • Helping to take the population to a level where the community has critical mass, which will enable commercial offerings and public services to improve.
  • Providing more jobs, including career options for young people. On an island with an average age of >50 years, you need to make a special effort for the young.
  • Developing strategies that will help Sark to reduce (or even overcome) the extreme seasonality of its ailing tourism industry.

However, tackling all of this is a huge set of challenges, which will take many years to work through.

For our own plans, we prefer to break things into smaller steps. That makes them easier to achieve and de-risks the entire venture.

The investment case – officially spelled out

The Sark Property Company will soon release a fundraising deck for a Series A funding aimed at buying the portfolio of the Barclay family and refurbishing it. This deck will be available for download on the company's website. Any member of the public will be able to look up what exactly our plans are.

There will be a few surprising facts in the deck. E.g., it will make clear how the Sark Property Company is not at all interested in Sark's past. The team managing the company simply wants to work with everyone to make Sark a better place – and by that, we mean anyone and everyone, with no questions asked about the past. It specifically includes working with the Barclay family, who own a family "home" (= castle) on Brecqhou, the neighbouring island, which we assume they will keep. In early 2022, I had signed a very first document with a member of the Barclay family to take an initial step towards a potential portfolio sale to us. In the document, we included an entire section on forming a "continued collaboration" with Brecqhou. Indeed, we want to work with anyone who is willing to work with us and does so in good faith. The past doesn't matter to us, we are only interested in creating a good future.

It will explain why Sark isn't just a quirky, but also a really difficult investment case to make work:

  • In Sark's idiosyncratic real estate market, you can currently sell newly-build residential property only with a significant discount to replacement costs. Someone who built a house for GBP 2.5m for themselves in Sark would probably struggle to re-sell it for GBP 1.5m.
  • The strong presence of leaseholds in Sark had always made the market difficult, and more recently made it come almost to a complete standstill because no one is willing anymore to step into the outdated, convoluted system.
  • There is a multitude of Sark-specific challenges, such as the mix of public and private ownership of roads, the widespread issue of asbestos used in housing, and contamination of land because there is currently no law against such contamination.

Much of Sark's real estate market makes no sense, and that's one of the reasons why the island is currently a bit stuck.

We have cracked all these nuts in terms of making solutions work within an investment case that is attractive for investors, but it did take us three years and half a million worth of expenses to get to this point.

The deck for Series A will show how the Sark Property Company's funding will be broken into three stages:

Series A: GBP 35m of equity to bid for the portfolio of properties and, if successful, carry out major refurbishments.

Series B: GBP 25-50m to carry out further pre-agreed property purchases in Sark and their refurbishment.

IPO: GBP 50-200m of equity to allow for significant investments into Sark, including new housing and infrastructure, but also potentially other businesses.

Over 15-20 years, this should grow into a GBP 1.5-2bn real estate business with lots of ancillary activities.

Publishing the underlying legal document will give residents, the public and journalists some of the insights that they have been gagging to see, including:

  • How will the team that initiated this company be rewarded financially?
  • What safeguards and limitations prevent any single investor from becoming as dominant as the Barclay family?
  • Which key risks has the company identified for investments in Sark?

It'll also contain information on:

  • Which steps will be taken to protect what makes Sark special?
  • What's in it for residents and visitors of Sark?
  • Why can our plans totally change the government's prospects for generating tax revenue – potentially even allow to discard taxes for lower-income residents?

To be clear, once again – all this may yet come to nothing.

We could have a change of heart at the last minute, and either walk away entirely or file it all away for now and revisit the idea in a few years.

Also, our bid may not be accepted by the owner.

Last but not least, other bidders can enter the fray. Maybe Chief Pleas finds the spare cash to buy the estate and rent out individual properties for GBP 96 per month?

The outcome of all this is really still up in the air.

While it's all decided, there'll be plenty more fun and games along the way.

Be careful when following this story

"Do you want to become the new Seigneur of Sark?", was one of the questions I was asked by the Sunday Times.

Some of the questions I get on an ongoing basis are so off-the-wall that I am not sure if they are simply meant as a joke.

Needless to say, this is all part of the game you have to play when engaging with mainstream media. I'll have to live with the British media forever using my German accent to refer back to the German occupation of the Channel Islands in the 1940s – a cheap shot, but that's par for the course.

As someone who occasionally utilises PR to get messages out, I do know how to play that game. In fact, I even gave the Financial Times and the Sunday Times a list of the island residents who despise me and with some brief background about each them. I wanted to help both publications to craft an edgy story. After all, who'd want to read about any of this if everyone agreed on everything?

Armorgie was actually among the people I recommended to both newspapers to speak to. My briefing about him was: "Never quite know where to put him as he gives off contradicting messages."

Indeed, I last had a substantive conversation with Armorgie when he listened to me at an event of the Sark Chamber of Commerce. In May 2023, I gave a public presentation to Sark's business community about our plans and views (subsequently made available for download), followed by an Ask-me-Anything session. Armorgie was in attendance in his capacity as Speaker of Chief Pleas, and afterwards during a one-to-one conversation repeated several times to me: "All the power to your elbow." He is widely known on the island to tell one person one thing, and another person another thing.

Sark is much more similar to other places in the world than it would like to admit. Its human side is rife with the same kind of gossip and hear-say as any other small village. The characters are never really evil, they are simply human. Living in a small village, you have to accept people and try to get on with everyone.

Sark also suffers under insufficient communication. There is no local newspaper anymore and that makes it hard for anyone to stay on top of what's happening. The lack of information can magnify worries. According to the assessment of the community that was published in July 2023, the population's concerns include: "A lack of transparency, trust and poor communication from Chief Pleas." Like most other places, trust in politics (and politicians) is not great in Sark.

This is not a problem that the company I set up created. It pre-dated our work, and Chief Pleas' home-brewed issues will likely make this worse in the time leading up to the next elections in December 2024. My colleagues and I won't be able to resolve it, nor is it our responsibility. If Member A of Chief Pleas doesn't know what Member B of Chief Pleas has discussed with us, that's their problem rather than ours. However, if the lack of communication between members of Chief Pleas leads to my work getting bad-mouthed, I will step in and set the record straight.

What we will do during this upcoming, imminent phase ahead of formally submitting a cash offer through Savills Guernsey is to provide a set of documents that will further up the game in terms of how transparent the Sark Property Company is.

We will also continue to engage with quality media and anyone locally who approaches us to learn more or discuss concerns.

We'll also keep speaking to podcasts and blogs. Given their different format and operating model, podcasts and blogs can provide much more depth and authenticity than a mainstream media report ever could. E.g., for anyone interested in the finer nuances of all this, I highly recommend listening to the new 1h 15min podcast I did with the Free Cities Foundation about our advances in Sark.

Interest in the investment case of Sark has been overwhelming, especially since the report in the Financial Times came out. The company will publish its Series A deck on its website soon. Undervalued-Shares.com cannot be involved in the fundraising because it's legally a separate entity, but you can easily get more information by registering for the latest developments on the website of the Sark Property Company, or simply by checking on the website since the deck will be freely available for download.

Doing due diligence of this project is easy.

Just wait for documents to be ready, and then read the source material and engage with the publishers.

Everyone will be able to do their own smell test, provided they can read.

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The company featured in my latest research report is currently a lame duck.

It has tremendous growth opportunities, though, both organically through innovation and through M&A – if management gets its growth engines revved up again.

Will it?

Laggard turning growth stock

Laggard turning growth stock

The company featured in my latest research report is currently a lame duck.

It has tremendous growth opportunities, though, both organically through innovation and through M&A – if management gets its growth engines revved up again.

Will it?

Laggard turning growth stock

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