Unlocking Value in Real Estate: Private Capital's Strategic Bet on First American Financial Corp

In the second quarter of 2025, Private Capital (Trades, Portfolio) made a bold move by allocating 1.36% of its portfolio—$14.06 million—to First American Financial Corp (FAF). This decision, rooted in value investing principles, reflects a calculated bet on a company poised to capitalize on the next real estate cycle. For investors seeking undervalued opportunities in a high-growth sector, FAF's strategic positioning in the title insurance and real estate services market offers a compelling case study.

A Value Investing Play in a Cyclical Sector

Private Capital's investment in FAF aligns with its philosophy of acquiring assets at a discount to intrinsic value while managing downside risk. FAF's recent financial performance—$1.8 billion in Q2 2025 revenue, up 14% year-over-year—underscores its resilience. The company's Title Insurance and Services segment, which accounts for 94% of revenue, saw a 13% revenue increase, driven by a 17% rise in investment income and a 13.2% adjusted pretax margin. These metrics highlight FAF's operational efficiency, even as the broader real estate market grapples with elevated mortgage rates and inflation.

Navigating Valuation Metrics: A Mixed Bag

FAF's valuation metrics present a nuanced picture. While its price-to-earnings (P/E) ratio of 35.5x exceeds the industry average of 14.6x, suggesting overvaluation, its price-to-book (P/B) ratio of 1.2x and debt-to-capital ratio of 23.1% (excluding secured financings) indicate a conservative capital structure. The company's return on equity (ROE) of 3.7% lags behind the insurance industry average of 12.5%, but analysts project a rebound to 12% by 2028 as the payout ratio drops from 101% to 33%. This shift, coupled with a $300 million share repurchase authorization, signals management's confidence in unlocking shareholder value.

Real Estate Market Tailwinds and FAF's Competitive Edge

The real estate sector's long-term fundamentals remain robust. Despite 6.5% mortgage rates in 2025, demographic trends—millennials and Gen Z entering the market—will drive demand. FAF's dominance in the title insurance sector (30% U.S. market share) and its $1.7 billion Title Insurance and Services segment position it to benefit from this growth. The company's digital transformation, including AI-driven underwriting and blockchain-based title records, further enhances its competitive moat.

Strategic Allocation and Long-Term Potential

Private Capital's 1.36% allocation to FAF is a testament to the company's strategic value. FAF's low debt-to-capital ratio, strong cash flow ($355 million in Q2 2025 operating cash flow), and $300 million share repurchase program provide downside protection. Meanwhile, the global title insurance market's projected 11% CAGR through 2030—driven by digitization and cross-border transactions—offers significant upside.

Investment Thesis: A High-Conviction Play

For value investors, FAF represents a high-conviction opportunity. While its current P/E ratio appears elevated, the company's operational improvements, digital innovation, and market leadership justify a premium. The key risks—persistently high mortgage rates and a slow ROE recovery—must be weighed against the long-term growth potential of the real estate sector.

Investment Advice: Investors with a 3–5 year horizon should consider FAF as a core holding in a diversified portfolio. Monitor the company's ROE trajectory and share repurchase execution, while keeping an eye on macroeconomic shifts that could delay the next real estate cycle.

In conclusion, Private Capital's strategic allocation to FAF underscores the company's potential to outperform in a sector poised for transformation. For those willing to embrace patience and a long-term lens, FAF offers a rare blend of defensive balance sheet strength and offensive growth catalysts.