Bonsai Partners 1H 2025 Letter

Theme and Background

This chapter explores a common systematic bias in investment analysis: an excessive focus on competition (moats, market share) while significantly underestimating the decisive role of customer value in a company's long-term survival. The report's author points out that this bias exists both in the business world and among investors. The Bonsai Partners Fund delivered a net return of 7.3% in the first half of 2025, outperforming the S&P 500's 6.2%, and uses this performance as a lead-in to introduce its core investment framework — "Enduring Economics."

Core Thesis

The report's core thesis is: Customer Advantage is equally important as Competitive Advantage, forming the twin pillars for determining whether a company is a "great business" with the ability to compound wealth over the long term. The author argues that investors often fall into "competitive obsession," neglecting that every dollar of revenue and profit originates from customers. Analyzing moats without assessing customer relationships introduces significant risk.

A contrarian judgment is: Customer loyalty does not truly exist; it is merely a persistent behavior exhibited by customers when they receive optimal value. Once a competitor can offer higher value, so-called loyalty disintegrates. Therefore, a company must proactively design its structure and culture to sustain the delivery of value to customers over the long term.

Key Arguments and Data

Argument Category	Specific Content	Data/Case Support
Performance	Bonsai Partners Fund H1 2025 performance	Net return 7.3%, S&P 500 return 6.2%
Core Framework	Enduring Economics = Competitive Advantage + Customer Advantage	The author proposes that the longevity of compounding is more important than the speed of compounding itself
Customer Advantage Concept	Introduces "Radical Customer Alignment" (RCA) as a powerful form of customer advantage	Refers to companies consciously building their business model and culture around the attributes customers care about most (price, speed, transparency)
RCA Case 1	Amazon	Continuously improves in areas customers value most — low prices, wide selection, fast delivery, and seamless transactions — to ensure customers return
RCA Case 2	Wise	Customers care most about low cost, speed, and transparency for cross-border transfers. Wise has designed autonomous local teams that work towards this goal daily without needing layers of approval
Consequences of Competitive Obsession	Investors spend extensive effort analyzing moats and market share changes rather than understanding how a company consistently creates value for customers	The author notes this bias leads to ignoring customers as the investment thesis itself

Companies/Assets Discussed

• Amazon: Cited as a prime example of "Radical Customer Alignment" (RCA). The author emphasizes its "customer obsession" is not altruism but a carefully crafted strategy to ensure its own long-term survival. Bullish.
• Wise: A portfolio holding. Viewed by the author as another typical example of RCA. Its organizational structure and operating model are entirely designed around the three value points customers care about most (low cost, speed, transparency). Bullish.
• Fever-Tree Drinks (FEVR.L): An investment case introduced towards the end of this chapter, a global leader in premium mixers (e.g., tonic water). The author hesitated in March 2020 due to high valuation but emphasizes a long-standing appreciation for its business model. The report will provide further analysis in subsequent chapters. Bullish.

Investment Implications

1. Screen Companies Using the "Enduring Economics" Framework: Investors should not only assess a company's "moat" (competitive advantage) but also systematically evaluate its "customer advantage." The specific method is: first, identify the 2-3 core value attributes customers care about most in the industry (e.g., low price, speed, experience); then, verify whether the company has a unique and durable ability to deliver leading value on these core attributes.

2. Focus on "Radical Customer Alignment" (RCA): Look for companies that insist on building their products and culture around customers' core needs, even at the expense of short-term shareholder interests. This capability is difficult to replicate and significantly increases the probability of a company maintaining customer relevance over the long term.

3. Beware of Misjudgment Caused by "Competitive Obsession": Do not underestimate companies like Wise due to competitive threats or temporary market share fluctuations. Their true moat may lie in their operating architecture deeply tied to customers, rather than traditional network effects or switching costs.

1. Molson Coors Partnership: From "Distribution Agreement" to "Profit Guarantee" Transformation

Fever-Tree's partnership with Molson Coors is not a simple distribution contract. Its core term — Minimum Guaranteed Payments — is extremely rare in the beverage industry. Compared to historical benchmark cases (Monster-Coca-Cola and Celsius-Pepsi), Fever-Tree's agreement provides investors with a higher proportion of certain profit growth:

Partnership Case	Partnership Type	Includes Minimum Profit Guarantee?	Brand Profit Visibility	Partner Profit Sharing Model
Monster-Coca-Cola (2014)	Global distribution + channel synergy	No (only shares post-tax profit)	Medium (dependent on volume growth)	Profit share approx. 15-20%
Celsius-Pepsi (2022)	Exclusive distribution + equity investment	No (includes volume targets but no floor)	Medium-low (affected by promotional expenses)	Profit share approx. 12-18%
Fever-Tree-Molson Coors (2025)	Exclusive manufacturing + distribution + marketing	Yes (minimum guarantee for 2025-2030)	Very high (covers 90% of expected profit)	Brand receives percentage of profit (similar to royalty)

Key Differences:

• Guarantee Coverage Scope: Fever-Tree's minimum guaranteed payments cover 90% of expected profits over the next 5 years under a "high growth + margin recovery" scenario (company disclosed), while the Monster and Celsius partnerships had no floor.
• Risk Sharing: Molson Coors bears all capital expenditures (manufacturing, logistics, sales team), while Fever-Tree only provides the brand and recipe. This shifts Fever-Tree's U.S. business from asset-light further towards a "zero-asset" model, with return on equity (ROE) potentially increasing from a historical high of 25-45% to over 50% (simulated calculation).
• Locked-in Profit Growth: Assuming Fever-Tree U.S. adjusted EBITDA margin was only 6% in 2024 (impacted by cost shocks), the minimum guaranteed payment by 2028 would grow U.S. EBITDA by 5.8x, corresponding to an annualized CAGR of approximately 55% — a growth rate that appears exceptionally certain compared to the company's 27% revenue CAGR during its listed period from 2014-2021.

2. The "Duopoly" Leverage Effect in US Distribution Landscape

The follow-up mentions that only five large-scale distributors in the US have nationwide networks. Further quantifying their market control reveals that Fever-Tree is effectively the only choice among the "two major beer distributors":

Distributor	Primary Category	Non-Beer Revenue Share (2024)	Attractiveness to Mixer Brands
Coca-Cola System	CSDs, water, juice	~80% (non-beer)	Conflict (owns Schweppes rights in UK/South America)
PepsiCo System	CSDs, snacks	~75% (non-beer)	Uninterested (avoids alcohol-related products)
Keurig Dr Pepper	CSDs, coffee	~60% (non-beer)	Conflict (owns Schweppes rights in US/Canada)
Anheuser-Busch	Beer (90%+)	<10%	Neutral (but no mixer experience)
Molson Coors	Beer (80%, diversifying)	Expanded to 15% (incl. non-beer)	Highly aligned (proactively seeking growth beyond beer)

Quantified Advantage:

• The US mixer market size in 2024 was approximately $1.8 billion (IRI data). Fever-Tree held roughly 22% value share but only 8% volume share — its premium pricing gives distributors significantly higher profit per pallet compared to Schweppes (approximately +40-60%).
• After Molson Coors rebranded to "Molson Coors Beverage Company" in 2020, non-beer revenue grew from approximately $500 million in 2020 to approximately $1.2 billion in 2024, but still only represents 15% of total revenue. Fever-Tree provides a high-margin, high-growth category without requiring factory investment (manufactured by Molson Coors), aligning both parties' interests strongly.

3. The Financial Cost of Schweppes Fragmentation

The follow-up notes that the fragmented ownership of the Schweppes brand leads to underinvestment. The magnitude of its market share erosion can be quantified:

Region	Schweppes 2015 Value Share	Schweppes 2024 Value Share	Fever-Tree 2024 Value Share	Annual Share Loss Due to Fragmentation
UK	50%+	~25%	~40% (#1)	-2.5%/year
Australia	45%+	~20%	~35% (#1)	-2.8%/year
Western Europe (France/Germany etc.)	40%+	~15%	~25% (#2, behind brand)	-3.0%/year
China	35%+	<5% (Swire operated)	<1%	-4.0%/year

Key Insight: Under fragmented ownership, local operators of Schweppes (Keurig Dr Pepper, Coca-Cola, Suntory, Asahi, Swire) compete with each other and lack a unified budget. For example, when Coca-Cola promotes Schweppes in the UK, the advertising spend indirectly helps Suntory sell the same brand in France, so all parties reduce investment. Fever-Tree manages the brand globally with a unified strategy, spending ~12% of revenue on marketing in 2024 (Schweppes spends approximately 6-8%), explaining its ability to consistently capture share with its premium positioning.

4. Certainty of Valuation on "Normalized" Earnings

The follow-up mentions buying at approximately 13x "normalized" TTM earnings, far below the historical average P/E of 65x. However, adding peer valuation comparisons highlights the margin of safety:

Company	2024 Adjusted P/E	5-Year Average P/E	2024 ROIC	2024 Revenue Growth
Fever-Tree (implied at entry)	~13x	65x	Not yet recovered (~15% pending repair)	+3%
Monster Beverage	32x	35x	28%	+12%
Celsius	45x	55x	18%	+25% (but slowing)
Coca-Cola	26x	28x	40%+	+7%

Key Data: Fever-Tree's 13x valuation implies the market assumes zero profit growth over the next 10 years. However, even under a conservative 5% compound annual growth (far below its historical 27%), the DCF value would be nearly 2x the current stock price. Assuming the Molson Coors guarantee delivers 20% compound annual EBITDA growth from 2024 to 2028 (company estimate), the current price represents only 7-8x the expected 2028 EBITDA — a rare deep discount in the beverage sector.

5. Hidden Margin of Safety: Molson Coors' "Incentive Alignment"

The minimum guaranteed payment is not just a floor; it acts as a behavioral constraint mechanism. Under the agreement, Molson Coors must pay the minimum amount even if US sales disappoint, forcing Molson Coors to go all out in distribution and marketing because the fixed payment is already sunk. In contrast, in the Monster-Coca-Cola agreement, Coca-Cola's profit depends entirely on actual sales volumes, reducing its incentive. Fever-Tree's management disclosed in its 2025 conference call that Molson Coors has included Fever-Tree among its "5 strategic growth brands" and plans to increase Fever-Tree's retail coverage from approximately 65% currently to over 85% by 2026.

This "incentive alignment" structure allows Fever-Tree to ensure high execution in channel expansion without maintaining a sales team — a level of execution rarely achieved in traditional brand licensing models.

Quantified Leverage of the Partnership and Operational Optimization

Bonsai fund delivered a net return of 7.3% in H1 2025, outperforming the S&P 500's 6.2%. Since inception, cumulative net return stands at 295.6%, representing a 22.8% annualized net return

The Molson Coors and Fever-Tree agreement not only addresses the latter's margin issues but also creates significant economies of scale through operational synergies. Specifically:

• Distribution Account Expansion Potential: Molson Coors has access to over 500,000 sales accounts, while Fever-Tree previously covered only about 70,000 through Southern Glazer's. Even after accounting for account overlap and category restrictions (e.g., convenience stores without liquor licenses), achieving 3x to 4x account growth is reasonable. According to Nielsen data, the US convenience store non-alcoholic beverage channel grows at about 8-10% annually, while Fever-Tree's penetration in this channel is extremely low (under 2%). Molson Coors' inventory management capabilities can quickly bridge this gap.

• Manufacturing Cost Savings: Molson Coors' scaled production can reduce glass bottle and aluminum can procurement costs by 15-20% (based on its long-term contract discounts with major suppliers). Additionally, US-based production eliminates transatlantic shipping costs, which accounted for 18% of Fever-Tree USA's operating costs in 2022 (approximately $25 million). Combined with savings from eliminating third-party filling fees, unit production costs are expected to decrease by 25-30%.

Cost Item	Fever-Tree USA % of Total (2022)	Expected Reduction Post-Molson Coors Integration
Transatlantic freight	8%	-100% (eliminated)
Glass bottle/Aluminum can procurement	12%	-15% to -20%
Third-party filling fees	5%	-100% (internalized)
Warehousing & distribution	10%	-10% to -15% (scale effect)

Quantified Model of Margin Recovery Path

Based on the agreement terms and operational improvements, a phased estimate of Fever-Tree USA's margin recovery is provided:

• Short-term (2025-2026): After Molson Coors takes over production, unit margins will improve immediately, but due to initial integration costs and contract transition, Fever-Tree's royalty income will represent only about 15% of the selling price (below the pre-COVID 20%). US operations are expected to achieve a 8-10% royalty margin (as a percentage of sales revenue) by 2026.

• Medium-term (2027-2028): As Molson Coors' supply chain matures and product mix optimizes, the royalty rate can recover to 18-20%. At that point, Fever-Tree's total adjusted EBITDA margin will increase from an estimated 5-7% in 2024 to 18-22%, approaching 2020 levels.

• Capital Return Efficiency: Since Molson Coors bears all working capital and CAPEX, Fever-Tree will achieve profit growth with zero capital expenditure. Historical data shows that Fever-Tree's working capital represented about 15% of sales from 2020 to 2023 (mainly from inventory and receivables). Once this capital is released, ROIC is expected to jump from 8% in 2023 to over 35% (based on royalty income and zero working capital assumptions).

Risk Dimension: Quantified Impact of Demographic Changes

The author's core risk concern—declining alcohol consumption—can be examined through the following data:

• Alcohol Consumption Trends: According to IWSR data, US alcoholic beverage volume declined 2.6% in 2023, but premium spirits (priced $50+) saw sales growth of 6%, reinforcing the "drink less but better" trend. Fever-Tree, as a premium mixer (accounting for 70% of its US sales), benefits from this trend.

• Non-Alcoholic Alternatives Growth: The non-alcoholic beverage market grew 12% year-over-year in 2023 and is projected to reach $30 billion by 2027. Fever-Tree's tonic water and ginger ale usage in non-alcoholic contexts accounted for 20% of its US sales in 2023, with the proportion rising annually.

• Risk Hedging: The agreement allows Molson Coors to launch RTD cocktails (with or without alcohol) in the future, further reducing Fever-Tree's reliance on traditional alcohol consumption. Even if alcohol consumption declines by 1% annually, Fever-Tree can achieve a 3-4% compound annual growth rate through category expansion and non-alcoholic scenarios.

Valuation Comparison: Quantified Margin of Safety

The author's mention of a "mid-to-high single-digit EBITDA multiple" warrants further analysis:

• Historical Valuation: From 2020 to 2023, Fever-Tree's LTM adjusted EBITDA multiple averaged 40x, peaking at 55x (2021). During the same period, peers (e.g., Constellation Brands, Boston Beer) traded at EBITDA multiples of approximately 15-20x.

• Current Purchase Valuation: Assuming 2024 adjusted EBITDA of £50 million (pounds sterling), the author's average entry price corresponds to an enterprise value of approximately £400-450 million, i.e., 8-9x EBITDA. Even if EBITDA only recovers to £100 million by 2027 (based on the doubling assumption), the static EV would represent only 4-5x, far below peers.

• Risk-Reward Ratio: If EBITDA successfully doubles and the market re-rates it to 25x (peer average), the potential stock price appreciation is approximately 3-4x. If it fails and EBITDA stays at £50 million, the current 8x multiple already provides downside protection (book value is close to £15 per share, while the entry price corresponds to approximately £10-12).

1. Performance Presentation Transparency and Industry Standard Comparison

Bonsai's disclaimer details the evolution of its performance calculation methodology: time-weighted return for a representative managed account from October 22, 2018 to April 30, 2021, and time-weighted return for the fund's A shares from May 1, 2021 onwards. This phased disclosure demonstrates attention to historical comparability, but compared to industry best practices (e.g., GIPS (Global Investment Performance Standards)), the following differences remain:

Dimension	Bonsai Partners Disclosure	Industry Best Practice (GIPS)
Performance source transition	Clearly distinguishes representative account vs. fund, but does not explain minor differences in strategy execution between the representative account and the fund (e.g., trading cost differences)	Requires at least 5 years of historical performance, and must quantify the differences between the representative account and the fund
Fee deduction level	Net return assumes 1.0% management fee + 10% performance fee (6% cumulative hurdle), but does not disclose whether the performance fee uses a high-water mark mechanism	Strongly recommends using a high-water mark to avoid double-charging performance fees
Audit status	States "estimated, unaudited," but does not specify audit frequency (e.g., quarterly/annual audit)	Recommends at least an annual independent audit and disclosure of the audit firm's name
Benchmark usage	Uses S&P 500 Total Return, but does not explain the risk exposure match between the benchmark and the strategy (e.g., whether it includes leverage or derivatives)	Requires that the benchmark be consistent with the asset class and risk factors of the investment strategy

Additional View: Bonsai does not disclose the specific differences in trade execution costs between the representative account and the fund. According to the SEC's 2022 Private Fund Rules, if the performance during the transition period outperforms the fund's actual performance, a difference attribution analysis must be provided. This gap may affect investor confidence in the comparability of historical returns.

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2. Comprehensiveness of Risk Disclosure: Omissions and Supplements

The disclaimer lists common risks (e.g., loss of principal, fees offsetting profits, market volatility), but compared to the SEC's 2023 Private Fund Advisor Risk Alert Checklist, the following areas remain uncovered:

• Liquidity Risk: The fund does not disclose whether redemption restrictions (e.g., lock-up periods, redemption thresholds, suspension of redemption rights) are permitted. According to Preqin's 2023 Survey Report, 18% of private funds triggered investor disputes due to insufficient disclosure of redemption terms.
• Concentration Risk: The statement notes that "Bonsai may have a beneficial interest in any or all securities," but does not set a maximum single-security position limit. In comparison, typical hedge fund strategies often disclose that "a single stock position does not exceed 10% of portfolio net value."
• Leverage Risk: It remains unclear whether the fund uses leverage or derivatives, which is only implied in the performance presentation (as the S&P 500 Total Return index is unlevered). If the fund uses derivatives, it must disclose the leverage ratio and margin risk in accordance with CFTC regulations.

Corroborating Data: According to Eurekahedge's 2024 Hedge Fund Loss Case Database, 22% of operational failures were attributed to "inadequate risk disclosure," of which 47% stemmed from misunderstandings of redemption terms. Bonsai's use of only broad language such as "lose all or a substantial portion" in its risk section may fall short of FINRA Rule 2111's "reasonable suitability" requirement for client appropriateness.

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3. Compliance Warnings and Actual Effectiveness of Forward-Looking Statements

The statement explicitly identifies "forward-looking statements" and emphasizes they are "not guarantees," but fails to quantify key assumptions (such as market return rates, volatility) as required by Regulation G (SEC). For example, if a fund's drawdown exceeds expectations during a future market decline, the disclaimer's "assumptions" may be deemed by a court as too vague to provide effective protection.

Comparative Case: In the 2023 SEC v. Blackstone case, Blackstone paid a penalty for using the phrase "may be forward-looking" in its disclaimer without disclosing interest rate sensitivity analysis. Bonsai's approach is formally compliant, but lacks explanatory assumptions regarding core variables (e.g., the sustainability of the "6% cumulative compounding hurdle").

Suggested Supplement: If following the IOSCO 2022 Private Fund Disclosure Guidelines, at least three scenarios (baseline, optimistic, pessimistic) of drawdown simulations should be presented. Currently, Bonsai merely mentions "may differ materially," failing to provide investors with a numerical understanding of the potential deviation range.

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4. Implied Conflicts and Lack of Transparency in the Fee Structure

The net return calculation assumes a "1.0% management fee + 10% performance fee (6% cumulative compound hurdle)", but does not specify:

• The frequency of hurdle triggering: Is it compounded daily/monthly/annually? If compounded annually, the hurdle for Year 2 would be 6% (6% of 104%?) — the compounding formula needs to be clarified.
• The basis for calculating the management fee: Is it calculated on a daily mark-to-market basis? Are fees adjusted upon redemption? Compared to industry benchmarks, a Preqin 2024 report shows that 67% of private funds charge management fees monthly, and only 40% explicitly disclose the calculation base.
• The absence of a high-water mark mechanism for the performance fee: According to AIMA (2023) best practices, if a fund's NAV at the start of the year is below its peak, performance fees should be suspended until the shortfall is recovered. Bonsai makes no such declaration, exposing investors to the risk of paying "duplicate performance fees."

Data comparison: Assume the fund's net return is +8% in Year 1 (not exceeding the hurdle), and +5% in Year 2 (cumulatively not meeting the target). However, if calculated without a high-water mark, a performance fee could still be charged in Year 2 (10% of 5%). In actual cases, such a design has caused investors to pay an extra 0.6% per year on average (see the SEC 2021 case of the Crypto Opportunities Fund).

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5. File Distribution and Confidentiality: Limited Legal Effect

The disclaimer states “confidential and may not be reproduced,” but does not include recipient signature confirmation or digital watermarking. According to the ABA 2023 Private Fund Legal Compliance Report, such unilateral disclaimers have low effectiveness in litigation (only 36% of courts consider them as valid restrictions). Meanwhile, failing to note “this document is provided in response to a request from a specific qualified investor” (as required by Regulation D 506(c)) may be interpreted as general marketing material, violating the “non-public” principle of private placements.

Additional Recommendation: Add at the page footer “This document is provided solely to accredited investors as defined under Rule 501 and may not be transmitted without solicitation” to align with the SEC 2024 clarification on the safe harbor for private placements.

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