My name is Hugo Navarro and this is my first letter as Fund Advisor of PEQUITY U&U Global Opportunities, FIL, from the Sapphire Capital EAF team.

It is intended for those who are invested with us, those considering it, and those who are simply curious.

I don’t think any of you will enjoy another letter full of Buffett quotes and complaints about how expensive and risky markets are right now. So I’ll skip that and go directly to the point: let me explain how we plan to make money.

Our investment strategy

Many people explain things from the top down; they observe what happens and reason backwards. That can be useful, but it often produces conclusions that don’t generalise well. We start from first principles instead.

Economists argue that markets are completely efficient and impossible to beat over time. Let’s start with that base assumption. For a market to be perfectly efficient, three conditions need to hold: all information must be available to every participant simultaneously, all participants must be fully rational, and none of them must have biases.

None of these are true. Let’s take them one by one.

Information. In today’s world, internet-available information is more or less universally accessible. Over time, AI will make that edge thinner as processing time of information gets shorter. But there is a vast amount of valuable information that isn’t on the internet: credit-card data, foot traffic, customer satisfaction surveys, expert calls, management meetings. This kind of data lives behind expensive subscriptions or requires real network access. Having a data advantage in non-public information is genuinely costly to acquire (in money or time), but it’s not impossible to achieve.

Rationality. Investors are not perfectly rational. But beyond that, there are structural reasons even rational investors misprice things, and the most important one is risk vs. uncertainty.

Most professional investors define risk as volatility. But volatility isn’t the same as fundamental risk. Ask yourself:

Would you rather buy a highly volatile dollar bill at 50 cents, or a very stable rock at $10?

In one case, the asset is genuinely worth $1 regardless of price action. In the other, the rock is worth nothing.

This distinction is the entire game. Most professional investors understand it in theory but can’t act on it in practice. Their clients can redeem at any time and judge them on quarterly performance, so the industry concentrates on opportunities with 3-12 month timeframes where uncertainty is low and the situation is easy to model.

Because even if the investor understands risk isn’t volatility, for the client risk = volatility and the client sadly ends up dictating what the manager will do in order to maximize his AUM.

A fund should be closer to a dictatorship rather than a democracy.

Their constraints are our advantages. That’s why this fund is structured to attract long-term investors and screen out short-term holders.

Once we’ve identified a mispricing, the question becomes: when does it close? A security can stay undervalued for a long time. We need a path.

How a thesis plays out: Enterprise Group

Enterprise Group is a Canadian small-cap that rents gas turbines to oil and gas producers. The unit economics of the rental model are strong, which attracted us initially.

When we first looked, the valuation reflected a narrative that the company would reinvest aggressively and grow at a high CAGR. Then 2025 happened. Despite significant capex and an acquisition, revenues and profits were flat year-over-year. The narrative shifted from “compounder” to “stagnated business.” The share price halved.

Our research told a different story. A top-3 client had paused exploration mid-year (a temporary near-term hit) but was returning in 2026 alongside new tier-1 contracts the company had quietly onboarded. Management had been understated about this in public commentary, which is why the market missed it. When we spoke with them directly, the picture became clear.

Today, the business is cheap, the unit economics remain strong, and the negative narrative is still in place. As growth resumes, we expect the old narrative to come back, and the rerating that follows.

The model is straightforward: identify when a flawed negative narrative is creating a mispricing, then identify the catalyst that will break that narrative. We don’t bet on undervaluation alone; we bet on undervaluation with a path.

Why small caps

This framework works best where information is hardest to find and where market participants are least sophisticated. That’s the small-cap market.

A $1 billion fund cannot meaningfully own a $100-200M company. Institutional money largely doesn’t bother. We can talk directly with management teams, speak to industry insiders, and often find alpha in public filings simply because nobody else is reading them. Analyst coverage may not exist or may be of poor quality. Combined with our other edges, this gives us a real chance of either having more information than the market or simply understanding the same information better.

Why now: the structural case

There is one more reason worth explaining here, and it has less to do with the businesses themselves than with how the market itself is changing. A recent paper by Michael Green, Hari Krishnan and Stephan Sturm formalises something many fundamental investors have felt intuitively for years. Passive vehicles are price-insensitive by design. They buy when money flows in and sell when money flows out, regardless of whether anything is cheap or expensive.

As the passive share of a market grows, the force that normally pulls prices back toward fair value gets weaker. The paper places the critical threshold around 65% passive ownership; past 90%, volatility starts trending nonlinearly. Large-cap US indices have been moving in that direction for years. The Russell 2000 already shows symptoms of it, with mechanical bids propping up companies whose fundamentals are deteriorating, simply because they sit inside the basket that passive vehicles must own.

The same mechanic that destabilises mega-caps creates a structural shield for the parts of the market that index providers exclude. Major indices use free-float and liquidity thresholds; a small-cap with concentrated insider ownership or thin daily volume is, by construction, un-indexable. The same illiquidity that scares generalists is what insulates the stock from the mechanical bid on the way up, and from the mechanical selling on the way down. Price discovery there is still done by people reading filings, talking to management, and pricing cash flows.

This is not why I started investing in small-caps, but it is an additional reason why I think this corner of the market will reward us over the next decade. The classic risks haven’t gone away: idiosyncratic business risk, liquidity gaps in stress events, the chance that correlations go to one when everyone needs cash at once. What has changed is the asymmetry. We are trading systemic flow risk in the index for company-specific risk that we can actually underwrite, and for an investor doing the work, that is a trade worth making.

Portfolio construction

We hold 15 to 50 positions, with a caveat: when we play a theme through multiple positions, we treat the basket as one. We aim for diversification that comes from owning different drivers, not just different tickers; independent trends with low correlation between them. The maximum concentration in a single position is 25%, though our top names typically hover around 10%.

Current themes

The fund has one major thematic exposure: energy. We have offshore oil services, coal, and energy-adjacent positions. We mostly play this through the picks-and-shovels, owning the equipment producers will need rather than the producers themselves. The exception is our coal exposure through Thungela, which we hold because it’s an extraordinarily cheap producer with substantial asymmetric upside to underlying coal prices.

Within offshore, we don’t try to forecast the oil price. What we know is that just to offset natural depletion rates, enormous amounts of capex and opex will be required, and the supply of equipment is constrained; there have been very few additions since the last bust.

We also have exposure to platinum group metals, although smaller. Most of our PGM gains were made in 2025 before the fund opened. We retain a position because the asymmetry remains attractive, but the easy gains are behind us.

The remaining positions are largely independent of these themes, each with its own drivers. That’s by design.

Two example positions

CareCloud (NASDAQ: CCLD)

CareCloud is a US healthcare revenue cycle management business, but the thesis is not about the RCM software; it is about the acquisition engine sitting on top of it.

CCLD acquires struggling regional billing firms at 0.6 to 1x revenue and lifts their operating cash flow margins to 20 to 30% within two to three quarters, by migrating those practices onto its own platform and stripping duplicate cost. They are not buying these businesses for their profits, they are buying the customers. Churn in this industry sits around 5% a year, so once a clinic has handed over its billing it almost never switches. That makes an acquired customer cheaper to obtain than an organically marketed one.

The market still anchors to the messy 2022 to 2024 tape (preferred-stock dilution, missed numbers, the restructuring) and the broader software selloff has pulled the stock back to the level it traded at before any of the recent execution was proven. At around a 25% FCF yield on current run-rate, with NOLs shielding taxes for years and a clear path to high double-digit growth from M&A alone, this is a serial acquirer being priced for decline.

SED Energy (Oslo: ENH)

SED Energy trades at roughly 6x FCF, has no debt, and pays out all of its cash (double-digit dividend yield). The engine is six tender barges doing maintenance work in Asia; they compete with jackups but run 30 to 40% cheaper. The cost gap is the thesis: jackup economics set the price floor, so at the trough SED still earns a spread while jackups stack, and at the top jackups get bid into non-maintenance work and barge rates rise behind them. You are paid to hold an option on the upcycle with a floor under it.

It is cheap because it is orphaned. SED came public through a reverse merger, no roadshow, low coverage, screens poorly. Trailing numbers understate the business: the fleet wasn’t fully contracted, so reported earnings reflect partial utilisation. It is now at full utilisation, so the real earnings power has not printed yet. And the price has been capped by PE holders selling to realise gains on assets they bought at distressed values, a price-insensitive seller, not a fundamental one. The earnings step-up forces the re-rate; the exhausted overhang removes what has been holding it down.

What to expect going forward

I will write a quarterly letter sharing our thinking, position updates, and reflections on what’s working and what isn’t.

You should expect honesty about both the wins and the misses. When a thesis breaks, I’ll tell you why. When a position moves against us, I’ll explain whether we’re adding, holding, or exiting. The goal of these letters isn’t to celebrate good quarters; it’s to give you a clear view of how we’re thinking about the portfolio at any point in time.

Looking forward to writing the next one.

Hugo Navarro

Fund Advisor, PEQUITY U&U Global Opportunities, FIL | Sapphire Capital EAF, S.L.

If you have questions, want to discuss the fund, or simply want to push back on any of the thinking in this letter, please reach out. I read everything that comes in and try to respond personally.

Contact information:

hugonavarro@sapphirecapital.es

Fund identification
Fund: PEQUITY U&U Global Opportunities, FIL
ISIN: ES0169013002
Management company: GESALCALA, S.A., S.G.I.I.C.
Depositary: Banco Inversis, S.A.

Fund advisor: Sapphire Capital EAF, S.L.

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This communication is for informational purposes only. It does not constitute investment advice or an offer to subscribe to the fund.