1. BOND BEATS – puregym

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  2. All investment strategies have the potential for profit and loss, your or your clients’ capital may be at risk.

  3. When it comes to disruptors, it’s not business as usual. That’s why we believe they are good investments. PureGym, which launched in the UK in 2009, is as disruptive as it gets. That’s because it has radically redefined a whole industry by breaking down the barriers to gym membership.

    While most gyms have cafés, swimming pools and saunas, charging on average £600 annual membership fees, PureGym’s offering is simple. It fills hangar-like rooms solely with gym equipment and charges just £20 per month for year-round 24/7 access, no annual contract required. It has turned joining a gym into a £20 decision, rather than a £600 decision. 

    It’s normal that a disruptor comes in and takes a share of the market, but PureGym has done more than that. As PureGym’s brand ambassador cyclist Sir Chris Hoy puts it:

    “They offer 99% of what 99% of the population could possibly want for a truly great work-out.”

    Its low-cost model has actually grown the market and brought entirely new bodies to the gym: 28% of their clients say they have never had gym memberships before.  

    What’s more, for those looking for an anonymous space to workout unobserved, PureGym delivers. Gyms are staffed by just two or three people, you sign up and register for classes online and enter through an electronic door with a password.

    This technology-based operating model is also important from an investment standpoint. With bonds, we are looking for a company that generates cash, so they can pay us interest and ultimately pay us back. Thanks to PureGym’s low costs, a lot of what they take in as revenue quickly becomes cash. When this bond came to the market in January 2018, it had almost six times the amount of debt to profit. We think that over two years, this business will go from being six times leveraged to less than five times leveraged.

    One of the ways PureGym will do this is by continuing to expand. It is currently expanding at 20–25 new gyms per year, and its expansion plans seek to more than double the number of gyms it operates over the next decade. Its business model means it can double the amount of fitness equipment versus a traditional gym at half the price. 

     

     

    Twenty months ago PureGym decided to buy the gym chain LA Fitness which we saw as a stroke of genius, while others thought it was a departure from the company’s strategic plan. What was PureGym doing buying a luxury gym chain that had cafés, swimming pools and saunas? The answer was simple: location, location, location.

    The only way PureGym can get competitive advantage over other gyms in the value gym sector is by having gyms in great locations. PureGym filled in the LA Fitness swimming pools, closed down the cafés, added more gym equipment, and can now boast competitive advantage because it can offer value gym memberships, even within the capital city of London.

    We believe the more they grow, the more resilient this company will become, even and especially during an economic downturn. We have already seen evidence that similar, no-frills gyms operating in the US during the recession did well, and we think that because they are the value option, PureGym would benefit in uncertain times.

    That said, we are continually evaluating the risk of all of our holdings. We build portfolios and diversify risk by buying companies that aren’t correlated to each other. The key risk for PureGym is that it provides its customers with flexibility to sign up for a month-by-month contract. That’s great from a customer perspective, but the risk to us, as investors, is that every PureGym member could walk out tomorrow. However, because we don’t own any other gym companies in our portfolio and no other company that we own is exposed to a similar risk, when you view PureGym in light of our overall portfolio, it doesn’t leave us widely exposed. 

    It is likely that we will own PureGym for a long time, because we believe it will be able to deliver an attractive income through the cycle – no pun intended. PureGym is not just disrupting an industry, it is making a real difference to people’s lives. What’s not to like?

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