FreeGulliver 2021 Year End Letter

December 23, 2021
Yearly Review
“There are three types of people. People who make things happen. People who watch things
happen. And people who WONDERED what happened. Just don’t be in the third group.”

This quote came from a talk in the mid-nineties given by the YLC when I was president. The
speaker, whose name I cannot remember was the Principal of Fortier High School. This quote has
always stuck with me and is as relevant today as it was then. I feel this is where we are as we
head into 2022. As investors we do not want to be the people who wondered what happened. It
is incumbent on us to try to see where things are going as opposed to where they have been. It
is in this light that I want to talk about two areas that interest us as we move into the new year.

Real Assets

The first area to discuss are real assets. Broadly defined, Real Assets are physical assets such as
real estate, commodities, and infrastructure. As allocators we are always trying our best to keep
our clients invested in asset classes that have the best opportunities for attractive risk adjusted
returns and stay away from those that are skewed the other direction. As we are not market
timers, we are really talking about larger macro issues. We believe that fixed income will have its
share of problems as we move into a world where governments continue to print money and
debase their currencies. As such we need to look for places that will provide income for our
clients and still protect from currency debasement and inflation. Over the last years, we have
grown our portfolio of offerings of different types of real estate. Now we have started to focus
on other Real Assets such as barges, rail cars, timber, and farmland as ways to invest. These all
have the benefit of being somewhat protected from inflationary pressures while providing, in
many cases, higher income than many areas of the bond markets. However, it is important to
understand that these real assets are often illiquid, and they may be “riskier” than certain fixed
income assets.

Liquidity risk is a risk that does not get much coverage but is a risk we love to take as long as it
makes sense for our clients’ investment policies. We like liquidity risk because it is relatively easy
to plan around. There are two major decisions/risks that a client needs to understand – volatility
and liquidity. The first is an easy one that is frequently discussed. It is framed as how much market
risk are you comfortable with? How much volatility are you comfortable with? Generally, the
higher the ability and willingness to take risk, the higher the allocation to equities should be
compared to fixed income, and vice versa. The key input in bond prices are interest rates which
are currently at a historically low level. The Federal Reserve has already communicated its plan
to start increasing interest rates in 2022, so bond prices could be headed lower. The conundrum
is that bonds are supposed to be “low risk”, but in a rising interest rate environment,
mathematically their prices are supposed to go down. Real Assets offer a different building block
to create a portfolio with potentially lower overall volatility.

The second decision that gets less attention is liquidity. An investor needs to decide how much
liquidity risk is appropriate for his/her portfolio. It is stating the obvious that one does not want
to have 100% of their investments in illiquid assets. However, given a proper allocation and an
understanding of income and expenses it is relatively easy to plan around some illiquidity. We
spend a lot of time discussing this type of risk as it tends to be one that you can use to potentially
increase your returns without taking on a lot of volatility.

To summarize, Real Assets have the potential to generate higher risk/adjusted returns, higher
income, provide portfolio diversification, and can protect against inflation. The risk is that Real
Assets are significantly more illiquid than traditional financial assets, so proper cash flow planning
is essential way to reduce that risk.

Digital Assets

The second area we are starting to focus on is Digital Assets, blockchain technologies and what
some refer to as Web 3.0. I must say that no one has been more critical of Bitcoin than me. I have
been a cynic. After reading, listening to podcasts, and talking to many people I am here to say
that I was wrong. While I still worry about the price of Bitcoin, I have come to understand it not
as a currency but more as a store of value. This is especially true given the debasement of
currencies that most governments seem to employ. There appears to be a race to the bottom for
most developed countries.

However, Digital Assets, such as crypto currencies, are only a small part on what we feel needs
to be focused on as we move into the new year. More importantly we believe that we are
undergoing a technical evolution within the internet, powered by the new blockchain technology.
Broadly, two of the most promising applications of blockchain technology are smart contracts
and what many refer to as Web 3.0 or simply Web3. Think of smart contracts as a web-based,
trustless, and secure form of transferring something of value. I use the broad phrase “something
of value” merely because the offshoots (re: opportunities) are nearly endless – from
instantaneous payment processing anywhere in the world, disintermediating the layers of
payment verification and clearing, to even title transfer for a house or a car. Whereas smart
contracts do exist currently, Web3 is a lesser discussed and arguably more nascent area. Web3
is basically the idea of a decentralized internet. For example, think of having access to information
you need and/or want without the centralized control basis of our data, currently (think: Amazon,
Google, Microsoft, Facebook et al). The idea is the creation of a more democratic internet,
controlled by the people. As these technologies are in their early stages it will have a lot of losers
in relation to the winners. We are in the process of putting together an investment strategy
around these themes and will share soon. Just like the sector, this fund will have tremendous
volatility. However, we also believe we will have tremendous upside over time.
Another way we intend to participate in the Digital Assets space is through Venture Capital
investment in the private markets. In 2021, we launched our first Fund of Fund Private Equity
Fund called Laurel PE Fund I. Venture Capital investments we make in Digital Assets will be made
through Laurel PE. So far, we have made one investment directly in this space and a few in the fintech space as well. We are actively using our large network that we have developed over the
many years we have been investing in private equity. As we speak, we are talking to many
managers trying to find the best. While Laurel PE Fund I is now closed, we will probably create
Laurel PE Fund II in late 2022/early 2023.

We feel we are at the very beginning of Web3 and digital assets and are learning as much as we
can about this new technology. I am taking a course in Blockchain Strategy taught by Oxford
University in January to learn more. We are excited about the future and hope to be able to talk
more about what we have learned in future letters.

As I want to keep this relatively short, I will end with a note wishing everyone Happy Holidays
and a healthy New Year. Let’s all resolve NOT to be in the group who WONDERED what happened.
We are excited about the future and look forward to the New Year.

This letter does not constitute an offer to sell or a solicitation of an offer to purchase an interest in any funds managed or administered by FreeGulliver LLC or its affiliates. An offer can be made only through an approved offering memorandum. An investor considering an investment in any fund should rely solely upon an approved offering memorandum and must rely on their own examination of the person or entity creating the terms of the offering, including the risks involved. Past performance is not indicative of future results.