Welcome to Sunday’s Idea Brunch, your interview series with great off-the-beaten-path investors. We are very excited to interview Nitin Sacheti!

Nitin is currently the founder of Papyrus Capital GP LLC, the general partner of a New York-based long/short investment partnership. Before launching the fund, Nitin worked as an assistant portfolio manager at Ampere Capital and as a senior analyst at Tiger Europe, Cobalt Capital, and CharterBridge Capital. Nitin is also the author of “Downside Protection: Process and Tenets for Short Selling in All Market Environments.”

Nitin, thanks for doing Sunday’s Idea Brunch! Can you please tell readers a little more about your background and why you decided to launch the fund?

Thank you for having me. I look forward to your newsletter weekly and shorted TPVG a couple years ago after The Bear Cave’s article. I had bought a Hydrow in COVID and sold it soon after reopening, so any company that owned debt in a business like that piqued my interest to do more work!

While I love analyzing businesses and stock psychology, I had an itch to build (or help build) a business that wasn’t quite fulfilled as an analyst at larger hedge funds. I also noticed that most long/short funds catered to a concentrated institutional investor base focused on shorter-term liquidity (as LPs) and shorter-term performance. To me, a void existed in running a small fund that locked up capital, appealed to smaller family offices and exploited the time arbitrage in the market – i.e. the better risk/return in both longs and shorts afforded to investors looking out 2-3 years in more esoteric, mid-cap special situation investments. I also hoped to eliminate the layer between me as the portfolio manager and the LP to ensure investors understood my perspective and stuck with me through the frothy valuations like we’ve seen in the Magnificent 7 stocks over the past several years.

Just as important as filling a void in the market, I love working with my close friends and family and being in the trenches with partners who have become like family. I was excited to turn that into a business and, hopefully, build loyal bonds with great people as we look to build a business together, regardless of whether those partners are LPs, colleagues, vendors, or advisors.

Can you tell us a little more about your research and investment process and how it has changed over time?

The overarching secret sauce in my investment process is a combination of hard work, intellectual curiosity, past experience, temperament, and, most importantly, creative deductive reasoning. I think the first three can be learned, but the latter two are somewhat innate.

How I applied those characteristics has changed over time, which I believe makes sense since businesses and processes should iterate to improve.

At launch, I would have said my process involves rigorous bottoms-up fundamental analysis through industry contacts, filings, transcripts, expert calls, and Excel modelling to build a mosaic of a business and identify an accurate price target, upside/downside skew, and timeframe to position size. I would have told you that applying this process to 25-30 investments in isolation would generate outsized returns vs. the market.

Today, I realize that rigorous fundamental analysis is the single greatest part of the process but what I’ve learned is that there is so much more to it, in order to enhance returns.

I look at my process today and believe it’s a combination of optimizing several attributes. I believe I am a very good bottoms-up business analyst and short-seller. I think I am a good identifier of future secular trends – focusing the fund on digital infrastructure and energy infrastructure. I think I am a pretty good trader – I know the psychology of my names well and can buy dips ahead of catalysts and sell on spikes. I believe I’m a fairly good covered options trader – identifying when volatility can be lower through LEAPs or where we can sell covered calls or sell puts to take advantage of short-term volatility.

Putting that all together, I used to believe that being a great investor means you are the best at one thing. That’s likely the case for super specialized asset classes, but I’ve realized that in public market equity investing, being good~above average in a lot of things when optimized together, likely result in the best outcomes.

As mentioned above, creative, deductive reasoning is at the heart of my process. I learn a business in detail so I can best use that creativity to predict future outcome and earnings streams of the business and understand the psychology of the stock. I then use that same reasoning to attempt to identify the best ways to trade that stock to optimize our returns.

As it relates to secular growth, when I initially launched the fund, I focused mainly on telecom, media and technology special situations. I often bought low growth, high cash flow businesses (radio or billboards, for example). While I still buy businesses where I believe the cash flow tail is longer than the market estimates, I realized along the way that the tailwind of secular growth provides a greater intrinsic value buffer and a higher likelihood for rotation into a sector/stock. At the beginning of 2023, I widened our focus to energy infrastructure (both to power AI and decarbonization) along with digital infrastructure and I’m very happy with the results of our strategy shift.

In your book Downside Protection, you advocate for an empathy-based approach to stock analysis, such as thinking like a competitor, a purchaser, a consumer… How do you use this perspective when researching a company, and has it helped you uncover risks or opportunities that others miss?

I’d reference my Hydrow rower example above to support this empathy-based approach. All professional investors do things a little differently based on comfort factors—this is what allows us to maintain our emotional temperament through volatility.

Some investors are comfortable starting with quantitative or accounting screens, identifying red flags, and following through with more qualitative work. I have a friend who begins his research solely with insider buying/selling screens – he won’t own a stock that insiders are not buying.

My comfort zone is in buying businesses that trade based on secular trends and customer value propositions, which often involves the empathy of putting yourself in the shoes of the ‘five forces’, as you allude to in your question. To me, the quantitative follows the qualitative and the qualitative correlates to a Five Forces analysis.

We shorted Chegg (CHGG) a few years ago as students returned to college, and I asked myself, if they were password sharing before COVID, why wouldn’t they return to sharing subscriptions? While this example is quite obvious in hindsight, such an approach also helps when a thesis changes.

We were long Calumet Specialty (CLMT) last year with a $35 price target, but ended up selling in the low $20s. After Trump was elected, quite simply, I put myself in the shoes of a renewable fuel customer – under this administration would airlines keep pushing to pay a premium for sustainable aviation fuel; very unlikely which, in my opinion, really changed the investment thesis. Again, while this seems obvious, asking these questions even after we own a business helps me control against commitment and consistency bias.

You have previously said that “pattern recognition is key to finding great owner-operators.” What patterns, both positive and negative, are most predictive of long-term outcomes for investors in owner-operator led companies?

I’ve made many mistakes in investing in owner/operator lead businesses, notably where the owner has a long history of value creation, but where he/she has taken a backseat (as Chairman) at an older age to a general (as CEO) now running the business, day-to-day. While vetting the owner’s track record is important, it’s much more important to spend time with and understand the incentives and personalities of the day-to-day management teams – are they smart and hungry, using the halo of the Chairman to think long-term and build a great culture or are they overpaid, knowing that the Chairman’s halo offers a country club culture to take little risk and collect an annuity stream. I think this logic can be applied to any monopoly/oligopoly business, too – many of the Mag7 businesses have used their extraordinary scale and cash flow to keep innovating.

It's also important, in my opinion, to understand how the owner/operator built his reputation – did he lever up when money was cheap and bet the farm on a lucky break, or has he methodically assessed risk/reward and slowly grown his business. One of the smartest owner/operators I’ve met told me one of his keys to success is allocating capital only when he sees a short-term opportunity to take out cost along the way and ‘play with house money.’ I think this logic can be applied to investment managers, too – it’s important to invest with managers who slowly and methodically balance risk/reward across great opportunities vs. betting the farm on a single outcome.

In your most recent investor letter, you wrote that you “continue to watch the cockroaches in the system” and that “heightened volatility often exposes real cracks.” Can you tell us what you mean by that, and if there are any asymmetric opportunities if volatility gets worse?

I’m not one to use the macro environment to generate investment ideas. I factor macro into every name in which we are invested, but more to predict how that might affect owner earnings. That said, in my opinion, volatility often shakes out the weak hands that buy the flavor of the month and results in the most durable businesses performing best over time – given my confidence in the businesses we own through cycles, volatility allows me to (1) sell cheap to buy cheaper in dislocation, (2) use options to enhance returns with a big dip or spike and (3) allows our investors to see the power of shorts in blunting volatility in order for us to play offense in a drawdown. The latter is often forgotten in an up and to the right market, like we saw in 2023/2024, but speaks to the power of long/short in a volatile market.

In terms of exposed cracks, we saw heightened volatility create issues with the basis trade in early April or the carry trade last August (with likely more measured follow-through since). Generally, I think leverage causes chain reactions, and volatility often causes risks in levered assets that often set off that chain reaction.

What are some interesting ideas on your radar now?

Thanks for asking, process is always interesting to discuss but putting that to practice is what’s really interesting. I am excited to share two ideas in the energy infrastructure space today.