Gator Capital Management Q2 2025 Investor Letter

Dear Gator Financial Partners:

We are pleased to provide you with Gator Financial Partners, LLC’s (the “Fund” or “GFP”) 2025 2ⁿᵈ quarter investor letter. This letter reviews the Fund’s 2025 Q2, shares our current view on interest rates, and shares our investment thesis on WEX Inc (WEX). (“WEX”).

Review of 2025 Q2 Performance

During the 2ⁿᵈ quarter of 2025, the Fund had a strong performance. We outperformed both the broader market and the Financials sector benchmark. The Fund’s holdings in small and mid-cap Financials outperformed the largest bank and insurance companies. The outperformance of small and mid-cap Financials in Q2 was a reversal from Q1, where large-cap Financials outperformed. Commonly, stocks of small and mid-cap companies outperform in the beginning stages of stock market rallies.

Our long positions in Robinhood Markets (HOOD), Societe Generale (OTCPK:SCGLF), Esquire Financial (ESQ), Barclays PLC (BCS), and Axos Financial (AX) were the top contributors to the Fund’s performance. The largest detractors were long positions in Global Payments (GPN) and BBX Capital (BBX) and short positions in Toronto-Dominion Bank (TD), JP Morgan Chase (JPM), and NMI Holdings (NMIH).

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Our Current View on Interest Rates

We believe that the Federal Reserve should cut interest rates two times this year. The short end of the yield curve remains inverted, signaling that the bond market is pricing in lower rates ahead and that monetary policy is currently too restrictive. An inverted yield curve has been a reliable signal that the Fed is behind the curve and risks causing a recession.

We believe the Fed’s primary monetary tool, setting interest rates, is a blunt instrument and cannot affect drivers of inflation outside the scope of monetary policy. Regulatory bottlenecks and artificial scarcity create inflationary pressures. A few examples of artificial scarcity are in sectors like housing, healthcare, and college education. Zoning laws, restrictive land-use policies, and rent-control regulations drive housing scarcity. The rising price of healthcare services can be linked to limits on medical school enrollment and residencies, and by health insurance companies empowered by the Affordable Care Act. The cost of college education has been driven by elite universities not increasing their class sizes in at least three decades despite significant increases in demand and ample technological improvements in teaching. These areas (housing, health care, and college education) have created persistent inflation that monetary policy cannot resolve with higher interest rates.

We also believe public pressure and jawboning from the White House are counterproductive. The Fed must maintain its independence and credibility. With the current public pressure on the Fed, we are concerned that the Fed will wait until it is unquestionable that the economy has slowed before it cuts rates. At that point, the rate cuts may be too late to prevent deeper economic damage.

Pricing pressures from tariffs are one-time in nature, and higher interest rates do not reduce inflationary pressures caused by tariffs. Tariffs act as a tax. Increasing taxes by imposing tariffs will slow the economy, not accelerate it. While we recognize the Fed’s concern that inflation expectations could become unanchored, we disagree that inflation expectations are the highest risk at the current time. The housing market has been slow for three years, and the labor market has softened compared to the 2018–2023 period. These are not the conditions in which inflation tends to accelerate.

That said, many companies have discovered newfound pricing power in the post-COVID era. Consumers are flush with cash and exhibit strong brand preferences, which has allowed businesses to maintain or raise prices with less pushback. This “rent-seeking” behavior may represent a structural shift in how price increases flow through the economy.

We admit that our call for lower rates and a steeper yield curve would benefit the Fund’s portfolio positioning. We are currently overweight small and mid-cap banks, which would benefit from a steeper yield curve. While a few specific holdings, such as First Citizens (FCNCA) and Axos Financial, are well-positioned for a “higher for longer” rate environment, we believe the portfolio overall stands to benefit more from a modest reduction in short-term rates and a steeper yield curve.

Investment Thesis on WEX Inc.

WEX Inc. offers a compelling investment from current levels. WEX is a payments company with three segments: fleet fuel cards, health savings accounts, and corporate payments. WEX’s business model is attractive because it is capital-light. Almost all net income generated by the company is available as free cash flow to pay down debt, make acquisitions, or return to shareholders. Although growth has slowed in recent years, the valuation doesn’t reflect the high-quality nature of the business.

Our investment thesis is below:

1. High-Quality Business – WEX Inc. operates a high-quality business model that has low capital intensity and strong customer retention. Payment processing requires limited physical infrastructure. Also, WEX has low customer turnover due to the embedded nature of its services in clients’ daily operations, such as fleet fuel management and employee benefits administration. These offerings often involve customized integrations and data reporting tools that create high switching costs and lead to long-term client relationships. This enables WEX to generate robust free cash flow and high returns on invested capital.
2. Low Valuation on Price to Earnings and EV/EBITDA Basis – WEX appears to be a compelling investment due to its low valuation. Based on our estimates, the stock trades at just 9.7x 2026 expected earnings per share and 8.7x Enterprise Value to EBITDA. These absolute levels are attractive, especially given WEX’s consistent revenue, strong free cash flow, and capital-light operating model. Stock market investors appear to be overly focused on short-term volatility in fuel prices and macroeconomic uncertainty and not giving enough credit to the durability of WEX’s core business and the company’s intention to deleverage and return capital to shareholders. As these concerns fade, there is meaningful potential for multiple expansion.
3. Higher than Normal Debt Level creates a private equity-like investment in the public markets WEX is particularly attractive because its capital structure creates a risk/return profile similar to a private equity investment. However, it remains investible in the public markets. Following the March 2025 tender offer, the company carries a high level of debt, which is a reason why WEX trades at a discounted valuation. However, we believe investors are being overly punitive in their assessment of this leverage. As WEX continues to deleverage, the market will begin to re-rate the stock.
4. Presence of Activist – Impactive Capital owns 7% of WEX and has filed a 13D. The firm wants WEX to sell-off some units and streamline operations. They have also made noise about running a proxy fight to get some representation on the WEX Board of Directors. The presence of an activist investor in WEX shares adds a layer of accountability to management. It serves as a check against value-destructive decisions. We believe Impactive’s involvement signals to the board and executive team that shareholders are closely watching and will not tolerate actions that dilute value or ignore shareholder interests. In our view, the recent tender offer and WEX’s public commitment to avoid pursuing acquisitions while the stock trades at depressed valuation levels are both indirect results of the activist’s presence. Impactive’s influence likely reinforces a disciplined capital allocation strategy, aligning management more closely with shareholder priorities and enhancing the investment case.
5. Strong Capital Allocation – WEX management has recently made a couple of shareholder-friendly capital allocation decisions. In March 2025, the company completed a tender offer to repurchase 10% of its shares. This transaction improved earnings per share in a tax-friendly manner and reflects management and the Board’s confidence in the intrinsic value of the business. Additionally, management has publicly committed to refraining from acquisitions while the stock trades at current levels. This signals that management is focused on maximizing shareholder value.

There are risks to Our Investment Thesis on WEX

1. Economically Sensitive – A risk to our WEX investment thesis is the company’s exposure to economic cycles in its fleet fuel card segment. WEX’s revenues are partly tied to gas prices and fuel volumes, which both usually decline during periods of economic softness. WEX also extends credit to small businesses for their fuel purchases. WEX’s credit losses have risen in past recessions. While the company benefits from a recurring revenue base and long-term client relationships, its economic sensitivity could lead to some earnings volatility. We think other investors are too focused on this risk. As we have a longer-term investment horizon than other investors, we tend to view earnings volatility and credit risk across a full economic cycle.
2. Investor Disinterest in Sector- The second risk to the WEX investment thesis is a lack of interest in small and mid-cap payments processors. Some investors view WEX as a value trap since the stock price has been flat over the past 7 years. However, we believe this view overlooks the substantial improvement in WEX’s valuation. The Company’s P/E ratio has compressed from 22x in 2018 to 9x our 2026 earnings per share estimates despite steady earnings growth, recent share repurchases, and the activist presence. While investor skepticism remains a hurdle, we see it as an opportunity.
3. Unexpected Acquisition- A third risk to our WEX investment thesis is the possibility that management reverses its public stance and pursues an acquisition. If WEX were to announce a deal, it would undermine the deleveraging narrative that is central to our investment case and likely prolong the company’s elevated leverage profile. More importantly, such a move would raise serious questions about management’s confidence in the intrinsic value and growth potential of their core business. An acquisition would damage investor trust and weaken the argument for multiple expansion, potentially keeping the stock trapped in a low-valuation range.

In summary, we believe WEX presents a compelling investment case with an attractive business model, compelling valuation, and a clear commitment to paying down debt. We also caution readers that we purchased shares of WEX in May 2025 at a price below $140. Since then, WEX’s share price has reached $170 due to the general market rally and the company’s strong 2ⁿᵈ quarter earnings report in late July. WEX remains a compelling long-term investment, but the stock has moved in the short term and could retrace recent gains.

Portfolio Analysis

Largest Positions

Below are the Fund’s five largest common equity long positions. All data is as of June 30, 2025.

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Sub-sector Weightings

Below is a table showing the Fund’s positioning within the Financials sector⁵₄ as of June 30, 2025.

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The Fund’s gross exposure is 191.99%, and its net exposure is 69.99%. From this table, we exclude fixed-income instruments such as preferred stock. Preferred stock positions account for an additional 13.32% of the portfolio.

Conclusion

Thank you for entrusting us with a portion of your wealth. We are grateful to you, our investors, who believe in and trust our strategy. On a personal level, Derek Pilecki, the Fund’s Portfolio Manager, continues to invest more than 80% of his liquid net worth in the Fund.

As always, we welcome the opportunity to speak with you and discuss the Fund.

Sincerely,

Gator Capital Management, LLC