July 21st, 2017

Fellow Partners,

GrizzlyRock Institutional Value Partners, LP and GrizzlyRock Value Partners, LP (together “GrizzlyRock” or the “Fund”) decreased 2.03% net of expenses during the second quarter of 2017 and has returned -7.06% year to date through 6/30/17. Since inception, the Fund has compounded at 9.0% net of expenses per year.(1) The culprit of poor year-to-date performance has been the short portfolio (Fund long portfolio has a positive attribution yearto-date).

Short losses year-to-date have resulted from stock price increases of businesses with reasonable and/or cyclical revenue growth, yet a considerable lack of profitability. These businesses are not simply high quality companies at stretched valuations; rather, these companies have little hope of reaching and/or sustaining profitability given weak competitive positions, lack of technological innovation, capital market dependence, continually high reinvestment rates, and below average management teams. One could synthesize this year’s short portfolio this way: while we asserted “the emperor has no clothes and clothes are unlikely to materialize for quite some time”, for a number of businesses market claims have been “when the emperor dons clothes they will be the most magnificent clothes the world has ever seen!” Substituting the concept of enduring profitability for “clothes” explains Fund performance year-to-date.

In fundamental long/short investing, two imperative concepts are (1) being “early” is the same as being “wrong” and (2) managers must be pragmatic rather than dogmatic. This year we have made the error of being early on many short positions, yet thankfully we have been pragmatic with position sizing.

For a stock to increase markedly in price without showing commensurate profit, the narrative must appear compelling. However, business valuation over time will ultimately be grounded in economic reality. With a 9 year bull market continuing and the “fear index” VIX at all-time lows, market participants continue to pay ever higher prices for the prospect of future cash flows. Speculators are reaching far out on the risk spectrum in story stocks heralded by management teams and investment bankers with a story to tell about the “emperor’s clothes”. The current environment has not been conducive for many of our short positions, and thus our positioning has been both early and wrong.

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