This is part one of several blogs on Mongolia Growth Group (MGG). I’m going to take a dive into the company to see what I can find and share the info as I go. There have been some interesting developments and I want to know what’s going on.
What Is Mongolia Growth Group?
To understand Mongolia Growth Group, you first need to understand a hedge fund manager named Harris Kupperman, who everyone calls Kuppy. He’s a legend in the business for his eccentric personality and bold trades. He runs Praetorian Capital and serves as CEO of MGG, and writes a free blog far better than this one that you can read here.
Back in 2011, Kuppy thought the Mongolian economy was on the verge of something great. Their GDP was less than $10B, and they had two huge mines - one copper and the other coal - that were going to produce over $10B of minerals annually, bigger than the rest of the economy combined. Kuppy saw an opportunity, but he didn’t want to buy shares in the mining companies. Instead, he set up Mongolia Growth Group with some of his own money to buy rentable real estate in Mongolia’s capital. If the economy sees huge growth, the real estate sector is going to be the beneficiary.
Long story short, the mines didn’t produce as much as he thought and the Mongolian economy didn’t explode. They slipped into a recession and have been crawling out of it ever since. MGG gradually sold assets to cover their operating expenses and didn’t make any headlines for almost a decade.
Enter KEDM
In the 2020 annual report, MGG announced Kuppy’s Event-Driven Monitor (KEDM), a subscription service started by Kuppy, is owned by MGG. KEDM is a weekly newsletter on steroids. It tracks about 20 trading strategies focused around corporate events. They track things like insider buying/selling, mergers, spinoffs, IPO unlocks, and others that you can use to trade.
It started as a free service and then went behind a paywall in June 2021. There was huge demand for the product and MGG received CAD $1.4M in subscription payments the first week. It’s not much, but Kuppy mentioned he thinks it can cover their corporate overhead costs, which frees him from being in constant survival mode. Kuppy can now use the rest of their capital to play offense instead of the decade of defense they were forced to play.
The Next Chapter for MGG
What makes Kuppy a successful investor is his willingness to pivot when circumstances change. He doesn’t fall in love with any investment and let dead money sit in his portfolio. If something changes, he gets out. The same goes for this investment in Mongolia, it’s not working so he’s moving on to something that does.
In the Q3 2021 letter to shareholders, Kuppy noted that he and management have put a lot of thought into how they should move forward. They ultimately decided that going forward the best business model for MGG would be to operate as a merchant bank.
Kuppy wrote, “I primarily see myself as an allocator of capital and believe that transitioning our company into something akin to a Merchant Bank makes the most sense in terms of a future business model. Becoming a Merchant Bank will allow us the flexibility to incubate various businesses, while simultaneously funding growth businesses that we own majority or minority stakes in. . . . Our expectation is that the composition of our balance sheet will migrate towards both minority and controlling positions in various businesses—public and private, where we can influence the outcome of events.”
Kuppy is going to use MGG to invest in both public and private companies. If Mongolian real estate ever becomes a viable investment option again, they’ll pivot back. But until then, MGG will operate as a merchant bank with Kuppy at the helm.
Investment Performance
MGG already has public securities on their balance sheet. In 2020, their marketable securities tripled from CAD $3.7M at the start of the year to over CAD $10M. They had over CAD $7M in gains on their portfolio, which was probably the only reason they stayed in business. They had another huge year in 2021.
Kuppy is running this portfolio similar to his hedge fund, with most of the securities concentrated in uranium, energy, and the housing sector. He mentions these trades on his blog, so it’s no surprise these are his holdings. The “housing sector” means St. Joe Co. (JOE) and probably Cornerstone Building Brands (CNR). He’s long uranium via the Sprott Physical Uranium Trust, and his energy holdings are likely Valaris (VAL) and oil futures options, along with some smaller positions mixed in.
Praetorian Capital has absolutely crushed it the past few years. Look at the below returns. Over 127% in 2020 and almost a 143% return in 2021. These returns are why I am digging into MGG. I can’t invest in Kuppy’s hedge fund, but MGG is publicly traded and might be the next best thing.
Until Next Time
I have more to share but I’m going to cut if off here. In Part II I’ll explain a couple other recent happenings and provide more detail on some of the above. Stay tuned.
Not investment advice.