Why this global manager backed L1 wi

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Hello, and welcome to the Rules of Investing.
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My name is Chris Conway. My guest today is Greg Dean,
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founder of Langdon Equity Partners. Last time Greg joined me,
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he was on the other side of the world in Canada.
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Here he's in Melbourne today with me. But we discussed
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building Langdon with a clean sheet of.
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Paper, why cash flow is the north star, and the
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importance of field research. More than three hundred company meetings
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in a year. Today we're going to go a little
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bit deeper. We'll explore the most important forces shaping global
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small caps into twenty twenty six. Langdon's base case and
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how it could be wrong, how the portfolio is positioned today,
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and a couple of key ideas reflecting that positioning.
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Greg, Welcome back to the Rules of Investing.
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Thanks Chris.
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Before we dive in, Greg, just a quick question. How
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are you enjoying your time in Australia. I know it's
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not your first visit. Any highlights so far?
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Some golf over the weekend, Wow Vergerie Play played Kingston
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Heath and Holy and Bit Golf Club. I try to
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get down time more than maybe I did. You know
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my twenties and thirties when I'm on these longer stints yep,
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and golf is definitely that for me. But I think
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I had a fifty degree swing from takeoff to landing. Yeah,
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it was minus seventeen in Toronto when I left, and
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goodness when my Sydney was thirty when I touched down.
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So that was that was pretty nice.
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More importantly, mate, how did you hit it down at
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Kingston Heath?
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I could always hit it better, but yeah, we don't
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get a twelve month golf season. I'm lucky to play
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twenty times back home, and half of those are usually
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when I'm traveling for work. So it was pretty nice
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in a in February to be on the course.
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Yeah, fantastic. All right, let's get into some market stuff. Now.
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You and I are talking on a morning after the
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Dow has just been has just fallen eight hundred and
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something points.
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I didn't even think.
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It's closed yet, probably closes.
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We're having this conversation obviously off the back of Trump
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and the Supreme Court decision to say that his tariffs
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were illegal, and now he's bought a new lord a
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new set of tariffs, and anyway, the uncertainty that's around
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that it has been a hot start to twenty twenty
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six as well. Greg, So, in the context of all
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of that, what are you paying attention to this year
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as we move into what's likely to be of volatile Yeah.
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Well, I'd say first that isn't he fun? You know,
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we get so much of this back home in Canada,
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like front page news that you know, it's only been
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periodic that the rest of the world has sort of taken,
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you know, direct impact from what he's been doing. But
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it's good to be in a different hemisphere. I'm not
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gonna like, but like I've actually been finding the last
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call a month or so. You know, there's very few
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times in my career where like, this job requires all
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of your senses and all of your focus and all
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of your sort of waking attention. And I don't say
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that lightly. I think that that we're just in the
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midst of like a very big regime change in the market,
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way bigger than AI. I think AI is catalyzing a
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lot of the rethinking of some of these things. But
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you could replace you know, AI disruption risk with just
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simple overvaluation of a lot of these companies that have
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been taking hits. And so you know, he's added to
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the uncertainty as he always does. Twenty five was tariffs,
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twenty six is AI and now tariffs are back on
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the agenda. But you know what we've always stayed laser
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focused on is how are the fundamentals, how are the
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businesses performing? And we have done our very best over
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fifteen years to avoid you know, macro calls, currency calls,
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interest rate calls, because those are just not enduring value
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creating decisions. Having said that, I'm like hearkening back to
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like early twenty twenty when people were like, are we
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going to travel again? Will people ever stay in a hotel?
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Like?
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The questions now are like, well, you know, will I
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ever pay for software? Will we ever need mortgage brokers?
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Will insurance brokers ever exist? Like there's these crazy existential
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questions that are being asked, and so it's it's a
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pretty fun time to come to work.
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So with those existential questions, as you eloquently describe them,
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do you try and lean in at various points, Greg
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and just go back to the fundamentals and the valuation
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and look at those companies that have fallen forty fifty
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sixty percent some of the software companies and say, the
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market's currently pricing these companies like they won't exist in
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the future, and we don't think that's reality.
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Or are there some questions.
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Because this is what people at home are wrestling with,
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are there some questions where you just say, that's too
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hard right now, we won't even bother, like.
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We're on that spectrum? Do you do you try to
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live well?
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I think I grew up in this business with a
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healthy dose of dose of humility, and the market, you know,
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would say, it's if you're if you're a world class
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the market's still going to be right forty five percent
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of the time. And I think coming at these things
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with not ego lead and saying, you know, it's down
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a lot, but I like it even more. Or you know,
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we trust the management team, like because the reality is
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right now they don't know and we don't know. And
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so what we're doing is casting a wider net, you know,
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interrogating broader than just the business and the executive where
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you know, we've relocated one of our UK team members
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to the Bay Area for several months to basically just
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build out an informal network not just around how could
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existing public companies be disrupted, but you know, what are
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the AI native startups doing, and how are some of
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the like like twenty thirty year career tech investors handling
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owning both application software and some of these you know
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llms or AI native startups, and you know, our you
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know call to action has always been how do you
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hold opposing views but strongly? And so you know, without
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dodging the question right now, we're we're of the view
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that this could be like the world's most uncomfortable uh
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you know, growth to value transition that's happened probably in
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our lifetime given the size of the companies that are
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under question, or there could be this sort of like
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vaccine moment where people go, yeah, of course we're still
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going to use you know, application software, and it's going
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to be offering us all these agentic services that are
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going to come at lower margins and you know, blah
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blah blah. So so if the answer is one or the other,
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we need to be prepared. We're not. Our job is
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not to predict that like over this period of time.
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Like and I always like to make things relatable. Remember
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when robo advice, Yeah, was going to take one hundred
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and seventy five percent share of all wealth advice in
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the world. Where is it today? Maybe ten? And so
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like these, there's a customer type that makes sense for
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that delivery method. There's going to be a customer type
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for insurance distribution, for software distribution, for mortgage broking, like
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but it's not going to be one hundred percent of
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the market. And whether or not it is in twenty
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twenty six or twenty thirty six, like these are all
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the things that people are wrestling with because humans don't
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handle change well. Stock markets handle change even worse. But
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I think we've sort of attuned ourselves to being very
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good at handling or underwriting people and change.
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Greg just something that you're talking about.
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Then I just want to ask this question, how important
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is it right now to have the ability to have
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your mind changed?
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Is this something that you're facing you know every day?
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You know, you know you've talked about constantly challenging yourself
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and being open to new information. Having your mind changed
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must be super important right now when you're making portfolio decisions.
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I will say, you look back at your process, you
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look back at your philosophy, and there's certain aspects of
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it that were very happy. We decided we're important like
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and it largely you know, orients around the lack of
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house style. These these shops that are like I only
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do X or I'll never do Y. Sometimes you end
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up backing yourself into the corner because you're forced to
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do what no longer makes sense. But you've just conditioned
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everybody in the ecosystem of your business that you'll always
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do that. And so we've we've always lived in that
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when the facts change, will change our mind. And we're
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sort of loyal to the truth and to data and
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to like deep interrogation. And so one of the subtleties
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that probably gets neglected every time somebody looks through our
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deck is we've never liked high returns on capital. We've
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always been fearful and paranoid that it invites competition, customer pushback,
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regulatory intervention. And so we've always preferred stable and improving
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returns on capital. And so where you see the crosshairs
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all these companies, data businesses, software companies, classifieds companies. The
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thing that everybody loved is now the thing that everybody's
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worried about. They don't reinvest. You know, they've got ninety
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percent margins, their capex is zero, like what if, what if?
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What if? And we're like, yeah, they should have been
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paranoid then, and they better be paranoid now. And if
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they don't put themselves out of business, somebody else will.
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So these platform shifts are never going to go away.
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It will Google in twenty seventeen from mobile to debt,
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their desktop to mobile, like tons and tons of examples
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that dell from you know, PCs to you know, infrastructure.
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We're going to see more. It's just I don't think
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we'll ever see one again on this scale because you know,
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it was forty percent of the S and P right
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the US is eighty percent of the MSCI world. Like
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the concentration effect of the last fifteen years is what's
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making this so uncomfortable for people.
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I think, Yeah, Greg, you talked about not making predictions,
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but I just did want to get your thoughts on
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a base case for small caps over the next couple
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of years.
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That might even be too far out given the environment
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that we live in.
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But there was this conversation about falling interest rates, particularly
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in the US, being supportive of smaller caps broadening from
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you know, the Magnificent seven and the concentration and broadening
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you know down the market cap spectrum, are those things
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still in play? And you know, is there anything else
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that might drive the case for small caps over the
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next year or so.
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Look, I am the world's worst like broad market forecaster.
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I will indulge this question, but.
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I won't hold you to it.
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If find me somebody who was on record four years
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ago saying Gold's going to five thousand, yep, you know,
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hardware is going to outperform software by one hundred percent.
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We're going to re arm the developed world, and defense
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contractors or the new growth stocks, they almost were put
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out of existence during you know, very intense scrutiny of ESG,
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and now they've gone from you know, untouchable uninvestable to
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like everybody's top pick. So I think what you've seen
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from broad markets is that people are calling it a broadening.
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I don't think it's a broadening. It's just a rotation,
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the rotation out of these very large, very long performing,
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well performing areas into some areas that hadn't performed well
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for a really long time. And so it's hard to
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call how these broader markets are going to deliver. But
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we've sort of spent our careers saying we don't care.
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We're going to deliver fifty over three, fifty percent over
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three years, one hundred percent over five These are the
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targets we set for ourselves, and because of the businesses
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we invest in in the and the you know, level
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of control they have over their key value drivers, it
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doesn't really matter if rates are half a percent or
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five percent. And we sort of proved this, I think again,
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to ourselves and to clients, because when we launched in
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twenty two, rates were half a percent and we were
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walking into this wall of rate hikes and everyone was
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like almost wanted to give us a hug, like are
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you are you sure? And we'd ended up delivering twenty
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one percent over those first three years, which was better
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than large cap, significantly better than small cap, and we
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reminded everybody you don't need beta to deliver strong returns.
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Yeah, and those numbers came when you know, there's a
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couple of twenty percent plus years for the S and
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P in there.
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As well, So it did very well.
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Let's dive into some of the portfolio metrics. Greag So
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estimated three year revenue growth for the portfolio. This is
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as per your January update nineteen point one percent versus
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the misky world five point five taught me through that
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obviously revenue growth creat key driver for the small comps
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of small caps.
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Yeah, and I think that's sort of the better leading
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indicator of where we would see returns for our strategy,
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which is, you know, thirty holdings out of four thousand,
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we going back to this high returns, low reinvestment and
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that being you know, historically a good thing, and our
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view was more medium returns that are improving at high
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rates of reinvestment. That twenty percent growth is supported by
249
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a big chunk of reinvestment that's going on in each
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of these businesses. We've always encouraged our companies like invest
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for the long term, don't invest in things that you
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don't know how it's going to go. Make sensible choices
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and take sensible risks. But don't be afraid to spend
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twenty million bucks this year, you know, scaling up a
255
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sales team even though they're not going to be profitable
256
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until twenty twenty eight, like, because you can find the talent,
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now's the time. And so what we're like, we feel
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good about the portfolio delivering that sort of mid to
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high teens and as you said, closer to twenty percent revenue,
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and it's supported by heavy internal investment for growth. And
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then some of our companies have made some big acquisitions
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in the last year. And the irony there is when
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everybody else is doing deals. Often our companies will sit
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out and they'll say, well, PE has crazy expectations, I'm
265
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not going to pay that, or you know, none of
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these other companies are really forced to sell, so we're
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just gonna wait. And then what we've seen in the
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private markets with all this like obsession around DPI or
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the lack of DEPI, has meant better assets that are
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being sold by these sponsors at lower multiples. And so
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perfect example, CSW, one of our largest holdings, they spent
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00:13:26.320 --> 00:13:28.559
a billion dollars last year on two acquisitions and they
273
00:13:28.600 --> 00:13:31.320
didn't issue a dollar of equity because they had such
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a clean balance sheet because they'd been waiting for these
275
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sort of fat pitches. So that nineteen is probably like
276
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two thirds organic, one third's m and A and is
277
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what I think our clients should be focused on versus
278
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like interest rates or broad markets.
279
00:13:45.679 --> 00:13:47.679
Let's talk about another metric that stood out to may
280
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operting margin and the question here is is this a
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consequence of, you know, some of the other things that
282
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you look for in the portfolio, or do you target
283
00:13:55.440 --> 00:13:58.639
a very healthy operating margin twenty five point six percent
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versus the misky point two percent.
285
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So I'm gonna guess that's the misky large misky voting
286
00:14:05.919 --> 00:14:08.120
indecks I put here from your night's ste Yeah, so
287
00:14:08.600 --> 00:14:11.320
that's the that's the subtlety of of sort of what
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we compare against. We don't want to be the nicest
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house on a not so great street, and so for
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00:14:17.120 --> 00:14:19.559
most of our clients, the bedrock of their portfolio is
291
00:14:19.639 --> 00:14:22.399
large cap and so we think it's more reasonable to
292
00:14:22.480 --> 00:14:25.399
compare the metrics of our portfolio to the core of
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00:14:25.440 --> 00:14:28.399
their portfolio. And you can see that whether it's roa
294
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operating margin, we're like one and a half times, you know,
295
00:14:32.320 --> 00:14:35.360
and it and it comes from not a specific focus
296
00:14:35.360 --> 00:14:40.159
on it, more trying to find businesses that are hard
297
00:14:40.159 --> 00:14:43.240
to kill. And so that twenty five percent op margin,
298
00:14:43.279 --> 00:14:45.720
if next year it was twenty two because there were
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00:14:45.759 --> 00:14:49.039
sensible growth investments to make, we would support that. And
300
00:14:49.080 --> 00:14:52.200
so it's not about like high end and getting higher.
301
00:14:52.200 --> 00:14:56.759
It's it's more just big enough to withstand tariffs or
302
00:14:56.879 --> 00:15:00.679
wage inflation or you know, input cost infraation years ago,
303
00:15:00.759 --> 00:15:03.720
like outbound freight went nuts and all these consumer businesses
304
00:15:03.759 --> 00:15:06.320
had huge costs to pass on. You can't do that
305
00:15:06.360 --> 00:15:09.120
if you're running at a four margin or a twelve margin.
306
00:15:09.200 --> 00:15:12.080
And so we don't like screen on it, but we
307
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do think that, you know, there's a sensible margin that
308
00:15:15.519 --> 00:15:17.919
helps these companies become more resilient. Yep.
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00:15:18.720 --> 00:15:20.960
Greg, not asking you to sign your own death warrant,
310
00:15:21.000 --> 00:15:23.840
Binny stretch, but what are the big risks?
311
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What are the things that you worry about?
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00:15:25.480 --> 00:15:27.360
What are the things that you're debating with your team
313
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when you're back in Canada. You know, what's top of
314
00:15:29.559 --> 00:15:31.840
the board, Like, guys, these are the things we need
315
00:15:31.879 --> 00:15:33.639
to be mindful of from one day to next.
316
00:15:33.679 --> 00:15:34.960
What's the top of the board right now?
317
00:15:35.799 --> 00:15:38.399
My team would definitely be tired of me talking about
318
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leverage yep, because I think what we want to remain
319
00:15:44.039 --> 00:15:46.720
for our clients is an all weather solution and not
320
00:15:46.799 --> 00:15:49.279
end up a point solution. And you know, fifteen years
321
00:15:49.320 --> 00:15:51.320
is a long enough period to feel comfortable that like,
322
00:15:51.440 --> 00:15:54.000
that's that's what we've been able to deliver. But you
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00:15:54.080 --> 00:15:56.480
have to stay on it, you can't you know, get
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complacent or drift. And I think there are times where
325
00:16:00.679 --> 00:16:03.320
there's a there's a you know, good argument for more
326
00:16:03.399 --> 00:16:07.240
leverage in the portfolio or more leveraged businesses, and then
327
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you get this period that we're in right now of
328
00:16:09.240 --> 00:16:13.720
like paralyzing levels of uncertainty for most people, and you go, oh, man,
329
00:16:13.759 --> 00:16:16.120
I'm so glad that we don't own any of these
330
00:16:16.159 --> 00:16:19.919
highly levered companies because leverage and uncertainty is terminal, and
331
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so you know, if we can just control and we
332
00:16:21.919 --> 00:16:24.519
can control it, so like, let's not own banks, let's
333
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not own reeds, Let's not own you know, a capital
334
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intensive industrial that has five turns of debt and a
335
00:16:30.720 --> 00:16:33.559
ten Roe. Like, there are other things we can do
336
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with our time and our capital, and so it doesn't
337
00:16:36.240 --> 00:16:37.679
mean you get paid in that. And I think it's
338
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actually probably part of why performance hasn't been great in
339
00:16:40.080 --> 00:16:43.000
the last six twelve months, because we are under levered
340
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relative to broad markets, large cap, small cap. But you know,
341
00:16:47.480 --> 00:16:49.879
in the same thing happened during COVID, when everybody was
342
00:16:49.919 --> 00:16:53.960
worried about their portfolio, we were out buying airline caterers
343
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and hotel chains that had like eighty percent owned assets.
344
00:16:58.159 --> 00:17:00.159
Because even if we felt like even if no one
345
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was going back to a than that hotel owner, which
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00:17:02.519 --> 00:17:04.519
was this public company in Ireland, they'd probably just sell
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those properties to a contra developer right like they had higher,
348
00:17:07.000 --> 00:17:09.599
better uses. They weren't just a property manager. And so
349
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we're in the same boat right now. We're sort of
350
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building that wish list of businesses that we just can't
351
00:17:14.480 --> 00:17:16.960
believe we may get the chance to buy. But we're
352
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accepting of the fact that the terminal values are going
353
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to be significantly different than they were six months ago.
354
00:17:22.160 --> 00:17:24.799
I don't think people are putting forty times free cash
355
00:17:24.799 --> 00:17:27.000
flow on ten years from now it's free cash flow anymore,
356
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and they probably never should have the same Like office property,
357
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I can't come to Melbourne and not talk about property.
358
00:17:31.640 --> 00:17:35.480
But like these two three caps that fully let office buildings,
359
00:17:35.519 --> 00:17:38.519
we're trading at with seven percent rank growth assumed forever
360
00:17:39.200 --> 00:17:42.559
like COVID blew that up. And it's important that you
361
00:17:42.640 --> 00:17:46.440
have like an absolute threshold for valuation and not just
362
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relative And so I think with leverage top of mind,
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probably consumer credit number two. So it's like corporate leverage
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and then personal leverage that's the big thing. We want
365
00:17:57.799 --> 00:17:59.359
to make sure we look back and don't get wrong.
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00:18:00.680 --> 00:18:03.759
Greg, you talked about building a wish list of stocks
367
00:18:04.039 --> 00:18:08.039
for the portfolio. So currently there's thirty positions if I'm
368
00:18:08.039 --> 00:18:11.480
not mistaken, can hold up to forty and you've got
369
00:18:11.480 --> 00:18:13.599
a bit of cash if I'm not mistaken, around six percent.
370
00:18:14.119 --> 00:18:16.759
So is that a function of just again waiting to
371
00:18:16.799 --> 00:18:19.839
say how some of these things unfold, keeping a bit
372
00:18:19.880 --> 00:18:23.240
of dry powder, keeping some spots opening the portfolio, and
373
00:18:23.240 --> 00:18:25.279
then some cash ready to deploy, you know, when you
374
00:18:25.319 --> 00:18:28.000
think the time is right. Is that sort of how
375
00:18:28.000 --> 00:18:29.240
are you thinking about it? How are you putting the
376
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portfolio together at the moment.
377
00:18:30.880 --> 00:18:34.640
So short answer is actually no, but it's a very
378
00:18:34.680 --> 00:18:40.119
Melbourne reason. So johns Lyne went private johns lyn grip yep, yeah,
379
00:18:40.119 --> 00:18:42.799
and we were i think one of the three biggest owners,
380
00:18:42.799 --> 00:18:46.519
second biggest owner when it privatized, and we were sad
381
00:18:46.559 --> 00:18:48.839
to see it go both because it was like, you know,
382
00:18:48.880 --> 00:18:52.319
restoration assets are very dearly valued globally. You've owned one
383
00:18:52.359 --> 00:18:56.240
of the top performing North American restoration platforms for almost
384
00:18:56.240 --> 00:19:00.640
fifteen years, and you know we love to see Obviously
385
00:19:00.680 --> 00:19:02.839
they were big owners and we thought it was kind
386
00:19:02.880 --> 00:19:05.519
of going private at two low of a multiple. It
387
00:19:05.559 --> 00:19:07.119
was more to do with like where the you know,
388
00:19:07.240 --> 00:19:11.920
cat cycle was. And so when it privatized, we went
389
00:19:11.960 --> 00:19:14.960
to the sponsor, PEP Specific Equity Partners, and said, we
390
00:19:15.039 --> 00:19:17.119
really want to buy back into this business, Like we
391
00:19:17.160 --> 00:19:18.839
think we've been a good steward of the business. As
392
00:19:18.839 --> 00:19:21.440
a public company, we have the you know, flexibility and
393
00:19:21.480 --> 00:19:25.079
our fund to own a private and so long story short,
394
00:19:25.240 --> 00:19:29.880
we're buying back into that business through one of pep's
395
00:19:29.880 --> 00:19:32.440
funds as a co investor in that asset, and it's
396
00:19:32.480 --> 00:19:34.279
going to be a roughly three or four percent weight,
397
00:19:34.359 --> 00:19:37.680
so we're actually just holding cash to fund that investment
398
00:19:37.759 --> 00:19:41.799
that's going to close imminently. But having said that, the
399
00:19:41.839 --> 00:19:45.680
repositioning that we will likely undertake because these sort of corrections,
400
00:19:46.279 --> 00:19:48.400
you know, our job is to my old boss used
401
00:19:48.440 --> 00:19:53.680
to say, you can always find a faster horse, and
402
00:19:53.680 --> 00:19:55.519
and so we're in the midst of trying to do that.
403
00:19:55.640 --> 00:19:58.720
But it doesn't happen in days or weeks. I think
404
00:19:58.720 --> 00:20:01.119
there's some there are some ballot in the portfolio that
405
00:20:01.160 --> 00:20:03.039
have done what they were supposed to do. We own
406
00:20:03.039 --> 00:20:05.799
to self storage based business in the UK, not because
407
00:20:05.839 --> 00:20:07.599
we thought it was going to double cash flows in
408
00:20:07.599 --> 00:20:10.559
three years, but because we saw a lot of revenue certainty,
409
00:20:10.839 --> 00:20:13.079
a lot of cash flow certainty, and in these sort
410
00:20:13.119 --> 00:20:16.240
of like more uncertain periods, might be an asset that
411
00:20:16.799 --> 00:20:18.680
doesn't sort of get caught up in all the uncertainty,
412
00:20:18.680 --> 00:20:20.839
and we can use those as source of funds as
413
00:20:20.880 --> 00:20:23.759
well as like and I'll say this, our business today
414
00:20:23.799 --> 00:20:26.400
is bigger than it was January first, despite the the
415
00:20:26.519 --> 00:20:30.039
NAB having corrected ten percent. Like our clients us as clients,
416
00:20:30.039 --> 00:20:33.920
so we internal capital is up thirty percent from November.
417
00:20:33.960 --> 00:20:36.559
We have written big checks into the fund personally, but
418
00:20:36.960 --> 00:20:39.319
our largest clients are doing that as well, so they're
419
00:20:39.359 --> 00:20:43.319
giving us the cash to go out and find opportunities
420
00:20:43.359 --> 00:20:45.319
with so that we're not in a situation where we're
421
00:20:45.480 --> 00:20:46.759
selling something to buy something.
422
00:20:48.079 --> 00:20:51.960
Let's talk about some of the overweight, so overwhite financials
423
00:20:52.240 --> 00:20:54.079
this was something that stood out, and we will talk
424
00:20:54.119 --> 00:20:56.640
about one of the financial stocks that you hold in
425
00:20:56.640 --> 00:21:01.680
the moment, but over white financials Europe versus the US
426
00:21:02.759 --> 00:21:05.240
taught me through how those came about. Again, sometimes they
427
00:21:05.279 --> 00:21:08.200
come about simply through the stuff picking. Sometimes the directive
428
00:21:08.200 --> 00:21:09.240
decisions so just told me.
429
00:21:09.200 --> 00:21:12.519
Through those Yeah, I'm starting to sound old here, but
430
00:21:12.599 --> 00:21:17.519
I was overweight the US early Trump first term.
431
00:21:17.599 --> 00:21:19.839
Okay, the US.
432
00:21:20.000 --> 00:21:22.279
Yeah, he kind of came in and you know, cut
433
00:21:22.319 --> 00:21:26.599
taxes across you know, the entire country and also made
434
00:21:26.640 --> 00:21:29.039
it made it okay to own financials again, right, Like
435
00:21:29.079 --> 00:21:31.119
there was this they were sort of like toxic, and
436
00:21:31.119 --> 00:21:34.200
you're actually only seeing European financials sort of lose that
437
00:21:34.279 --> 00:21:36.799
stigma of toxicity like in the last six twelve months,
438
00:21:36.839 --> 00:21:39.160
like they've been probably one of the best performing parts
439
00:21:39.160 --> 00:21:43.119
of Europe. But ironically, we don't own any capital intensive financials, right,
440
00:21:43.200 --> 00:21:46.759
and so so we're in like asset management, litigation, finance,
441
00:21:47.119 --> 00:21:50.000
P and C, underwriting in the specialty and s market,
442
00:21:50.480 --> 00:21:55.559
personal lines, brokerage, mortgage brokerage, and so we we think
443
00:21:55.599 --> 00:21:59.240
those data and exchanges. We just think that there's a
444
00:21:59.240 --> 00:22:02.000
lot of really high quality businesses there that control their
445
00:22:02.000 --> 00:22:04.839
own destiny. But if you'd told like ten years ago
446
00:22:04.880 --> 00:22:07.839
me that we'd ever own like thirty eight forty percent financials,
447
00:22:08.440 --> 00:22:10.519
like the answer would have been no way. So so
448
00:22:10.640 --> 00:22:14.000
it's it's very well diversified within that broad exposure. And
449
00:22:14.000 --> 00:22:17.359
we were tested back in twenty three. Remember the SVB
450
00:22:18.079 --> 00:22:21.759
regional banking crisis. Yes, KBW regional bank index in the
451
00:22:21.799 --> 00:22:25.359
US was down forty percent. Our stocks were positive in
452
00:22:25.400 --> 00:22:28.880
the quarter. We did I think nine hundred relative positive
453
00:22:28.920 --> 00:22:31.000
alpha in that quarter. And we had clients at the
454
00:22:31.000 --> 00:22:33.519
time going, oh my god, you're thirty five percent financials,
455
00:22:33.559 --> 00:22:35.559
forty percent financials. I'm reading these headlines like should I
456
00:22:35.640 --> 00:22:38.599
be worried? And we said, we don't own any regional banks, Like,
457
00:22:38.640 --> 00:22:40.839
we don't think so, and so you have to kind
458
00:22:40.839 --> 00:22:45.400
of dig deeper than these like sector classifications or country classifications.
459
00:22:45.400 --> 00:22:49.079
But there's like we prefer shorter flights to longer flights.
460
00:22:49.119 --> 00:22:53.079
If there were more high return opportunities in the US,
461
00:22:53.720 --> 00:22:55.880
like we'd be thrilled because we can get in and
462
00:22:55.920 --> 00:22:58.200
out of every city in the US in a day, right,
463
00:22:58.279 --> 00:23:00.119
and so we would love there to be more to
464
00:23:00.160 --> 00:23:02.759
do there. It's thirty three percent of the fund, you
465
00:23:02.799 --> 00:23:04.799
know one day it'll be fifty. I think I just
466
00:23:04.839 --> 00:23:05.599
don't know when that'll be.
467
00:23:06.880 --> 00:23:08.839
And the europe chiote, again, is it just a function
468
00:23:08.880 --> 00:23:11.960
of the types of opportunities that you like to look for,
469
00:23:12.200 --> 00:23:14.559
just more of them currently exist in Europe At the moment, we.
470
00:23:14.839 --> 00:23:18.480
Have always had a preference for like not necessarily founder led,
471
00:23:18.559 --> 00:23:21.599
but owner operated businesses. Somebody who when we go to
472
00:23:21.640 --> 00:23:26.240
bed is still deeply concerned about that business on a
473
00:23:26.319 --> 00:23:27.960
day to day basis. They don't have to have been
474
00:23:27.960 --> 00:23:31.880
the founder, but usually you can like that DNA permeates
475
00:23:31.920 --> 00:23:35.799
the organization. And I think Europe, you know, until very recently,
476
00:23:36.160 --> 00:23:40.359
was just overweight those types of businesses at sensible valuations.
477
00:23:40.839 --> 00:23:43.400
Right right now we're seeing the it's going the other way.
478
00:23:43.440 --> 00:23:46.640
The US is corrected, Like we will definitely own at
479
00:23:46.640 --> 00:23:49.880
some point a US software business, which we're thrilled about.
480
00:23:49.880 --> 00:23:51.680
But it's been three and a half years and we've
481
00:23:51.680 --> 00:23:54.039
been able to only find one. So at some point
482
00:23:54.200 --> 00:23:56.319
we might be able to find two. And so you know,
483
00:23:56.359 --> 00:24:00.440
Europe is getting more credit, it deserves more credit. Has
484
00:24:00.440 --> 00:24:04.000
actually seen like deeper corrections in some of the areas
485
00:24:04.000 --> 00:24:06.640
that we care about, so that might change things. But
486
00:24:06.920 --> 00:24:09.359
on the margin, yeah, we've got like Dow and Co.
487
00:24:09.519 --> 00:24:11.720
Which is the Formula one caterer. I know that the
488
00:24:11.799 --> 00:24:13.119
Melbourne GP is next week.
489
00:24:13.160 --> 00:24:15.759
I just got my tickets yesterday. Yeah, taking my two boys.
490
00:24:15.799 --> 00:24:18.839
So yep, and so everybody loves you know, liberty backed
491
00:24:19.039 --> 00:24:21.680
Formula one. But does anybody know that in Austria there's
492
00:24:21.720 --> 00:24:23.960
a caterer that's done all of the Padda Club since
493
00:24:24.000 --> 00:24:24.759
nineteen eighty six.
494
00:24:24.839 --> 00:24:25.799
Would never have known that?
495
00:24:25.880 --> 00:24:26.759
There you go and go.
496
00:24:26.880 --> 00:24:28.960
I've been every year since it's been in Melbourne Sea
497
00:24:29.079 --> 00:24:30.119
twenty five years or something.
498
00:24:30.279 --> 00:24:32.160
Owan Coe check the napkin at the if you get
499
00:24:32.160 --> 00:24:35.119
into any of the hospitality and it's thirty three percent
500
00:24:35.160 --> 00:24:38.279
owned by the founder based in Vienna and they also
501
00:24:38.319 --> 00:24:43.279
do business class for Turkish BA Delta. It's an unbelievable
502
00:24:43.279 --> 00:24:45.799
two billion dollar business that very few people have come
503
00:24:45.839 --> 00:24:47.240
across and we own a lot of it.
504
00:24:47.480 --> 00:24:48.200
Yeah that's great.
505
00:24:48.279 --> 00:24:52.480
Yeah, let's talk about let's talk about greg another found
506
00:24:52.480 --> 00:24:55.359
a led business, a Melbourne based found.
507
00:24:55.079 --> 00:24:56.440
A lead business, no list.
508
00:24:56.480 --> 00:25:00.720
It is l One Group founded by Mark Rafie, who
509
00:25:00.759 --> 00:25:03.960
I have had the pleasure of interviewing many times before.
510
00:25:05.240 --> 00:25:08.279
Seven point six percent white in the portfolio. Got to
511
00:25:08.319 --> 00:25:10.839
talk about this obviously because it's a Melbourne based business.
512
00:25:11.359 --> 00:25:12.240
I own it as well.
513
00:25:12.319 --> 00:25:15.440
For the record, so the listeners understand that what do
514
00:25:15.480 --> 00:25:16.240
you love about it?
515
00:25:17.359 --> 00:25:20.559
I will hazard that between Isaac and myself we met
516
00:25:20.759 --> 00:25:23.160
over one hundred probably close to one hundred and fifty
517
00:25:23.319 --> 00:25:26.319
listed asset management firms in the last fifteen years, yep,
518
00:25:26.519 --> 00:25:31.039
trying to find one on right, because in theory, again
519
00:25:31.119 --> 00:25:33.440
you can't live in theory, but in theory they should
520
00:25:33.480 --> 00:25:36.400
be great businesses yep. Right, you know, you know every
521
00:25:36.680 --> 00:25:40.200
January what your revenues could or should be apart from
522
00:25:40.200 --> 00:25:43.920
market fluctuations, organic growth. If market returns are six seven
523
00:25:43.960 --> 00:25:47.640
eight percent, like, that's pretty good, and then they don't
524
00:25:47.680 --> 00:25:50.160
require a lot of capital to continue to grow. And
525
00:25:50.240 --> 00:25:54.920
so you know, I'll be honest, Pinnacle was the only
526
00:25:54.960 --> 00:25:57.240
listed asset manager that we ever found that was worth
527
00:25:57.279 --> 00:26:01.119
owning yep. As well as this very special situation back
528
00:26:01.240 --> 00:26:03.720
back in Canada called Westam which we still want. So
529
00:26:03.759 --> 00:26:07.200
that's like last time, Yeah, that's that's that's two out
530
00:26:07.200 --> 00:26:08.839
of one hundred and fifty meetings, Like it's not a
531
00:26:08.839 --> 00:26:11.559
great hit rate. And so we came across l one
532
00:26:11.799 --> 00:26:14.680
from just years of being here and hearing about their reputation,
533
00:26:14.839 --> 00:26:19.480
hearing about their performance and studying the greats frankly and
534
00:26:19.960 --> 00:26:22.039
to the extent that we could as as a private company,
535
00:26:22.440 --> 00:26:25.240
and and you know, we love the fact that one
536
00:26:25.319 --> 00:26:27.640
hundred percent of their net worth is in their funds.
537
00:26:27.680 --> 00:26:29.680
They're not allowed to do anything outside their funds. Like
538
00:26:29.720 --> 00:26:32.720
that cultural alignment was interesting. What became more interesting was,
539
00:26:32.759 --> 00:26:35.279
you know, around last summer when it started getting you know,
540
00:26:35.599 --> 00:26:38.440
rumored that everyone's taking around at Platinum. Who's gonna end
541
00:26:38.480 --> 00:26:40.680
up with it? This l one group might be considering
542
00:26:41.079 --> 00:26:44.400
merging their private firm with this public company. And you know,
543
00:26:44.480 --> 00:26:47.599
I'm four years into building a vestment firm and thinking
544
00:26:47.640 --> 00:26:50.519
putting myself in their shoes, like why would you want
545
00:26:50.519 --> 00:26:53.240
to take your business and put it in the public market,
546
00:26:53.440 --> 00:26:55.519
Like you must have a you must have a plan, right,
547
00:26:55.839 --> 00:26:57.960
And so we were very curious to go hear the plan,
548
00:26:58.039 --> 00:27:01.759
and so ISAAC came down here last fall spend time
549
00:27:01.799 --> 00:27:05.039
with them. I was virtual, and it was a very
550
00:27:05.200 --> 00:27:08.119
very impressive meeting. Like obviously I don't need to tell
551
00:27:08.200 --> 00:27:11.440
you or your audience about the performance that they've delivered
552
00:27:11.440 --> 00:27:14.599
for their clients. But there was a lot of thought
553
00:27:14.640 --> 00:27:17.359
and intent that went into this listing or reverse listing
554
00:27:17.359 --> 00:27:19.799
into the public company, which aid We think they got
555
00:27:20.039 --> 00:27:24.160
for a great deal and be lucky us. They announced
556
00:27:24.200 --> 00:27:27.599
roughly a month after getting controlled that they were going
557
00:27:27.599 --> 00:27:29.519
to do a capital raise. But you know, we do
558
00:27:29.599 --> 00:27:33.039
this with very very few companies that we come across.
559
00:27:33.319 --> 00:27:35.839
We'll try to create an opportunity as opposed to wait
560
00:27:35.880 --> 00:27:38.759
for an opportunity. And so in that meeting with Mark
561
00:27:38.799 --> 00:27:41.480
and Raff and I don't remember if Julian was in it,
562
00:27:41.480 --> 00:27:44.400
I don't think you'd been hired yet, CEO. But Isaac said,
563
00:27:44.440 --> 00:27:46.079
you know, if you guys, it looks like you guys
564
00:27:46.119 --> 00:27:47.559
have a lot of ambition. You'd like to sort of
565
00:27:47.599 --> 00:27:50.720
build out. The plan in a sense, is to build
566
00:27:50.759 --> 00:27:55.920
out more affiliates in the in the mindset of a pinnacle,
567
00:27:56.000 --> 00:27:59.200
to stake other firms with fifty percent and very large
568
00:27:59.240 --> 00:28:02.960
balance sheet investment into their strategies. And you know, we've
569
00:28:03.000 --> 00:28:05.599
seen that work really really well at the firm that
570
00:28:05.640 --> 00:28:08.480
has you know, a minority stake in our firm. And
571
00:28:09.119 --> 00:28:11.119
you know, Mark and Raff are both like, you know,
572
00:28:11.200 --> 00:28:13.920
relatively young guys who have a long, hint runway ahead
573
00:28:13.920 --> 00:28:16.799
of them. And so Isaac kudos to him, said, you know,
574
00:28:16.839 --> 00:28:18.440
if you guys are looking to raise a few hundred
575
00:28:18.440 --> 00:28:21.319
million to do some of these balance sheet investments, you
576
00:28:21.319 --> 00:28:23.880
know we would be in for fifty million, right, And
577
00:28:24.519 --> 00:28:28.000
sure enough a month later they called and said, you know,
578
00:28:28.279 --> 00:28:31.359
we're gonna do a you know, wall crossed us, and
579
00:28:31.480 --> 00:28:33.759
we're going to do a placement. We'd like to cornerstone
580
00:28:33.799 --> 00:28:36.759
it with a small number of people, and then we're
581
00:28:36.799 --> 00:28:38.559
going to broadly distribute. I'll see.
582
00:28:38.559 --> 00:28:39.759
You guys were part of the corner stone.
583
00:28:39.799 --> 00:28:42.319
Yeah, we were part of the cornerstone. We you know,
584
00:28:43.319 --> 00:28:45.880
either we chose not to be named, they chose whatever.
585
00:28:45.960 --> 00:28:47.960
But we actually wrote the second largest check into that
586
00:28:47.960 --> 00:28:52.519
business fifty million, right and and and now the hard
587
00:28:52.559 --> 00:28:55.440
part right now it's go execute and and and you know,
588
00:28:55.559 --> 00:28:57.720
so there's it's a it's been a very nice bright
589
00:28:57.759 --> 00:29:01.279
spot since the check timing that we wrote. But ultimately,
590
00:29:01.960 --> 00:29:04.920
you know, we're in this for five ten years. We
591
00:29:04.920 --> 00:29:07.039
think it's going to take a long time to build out.
592
00:29:07.119 --> 00:29:08.920
But we think that they're in it for the right reasons.
593
00:29:08.960 --> 00:29:11.960
And we love the fact that they have control, right Like,
594
00:29:12.000 --> 00:29:14.559
I think one of the biggest protections that they have
595
00:29:14.680 --> 00:29:17.519
against ending up like all these other listed investment firms
596
00:29:17.839 --> 00:29:20.640
over time is the fact that there's investment led people,
597
00:29:21.039 --> 00:29:24.480
investors at the helm making decisions, you know, and with
598
00:29:24.519 --> 00:29:27.119
their reputation and their and their capital at risk. So
599
00:29:27.559 --> 00:29:30.119
can't say enough good things about you know the firm
600
00:29:30.200 --> 00:29:32.960
and the vision that they have for the equity, and
601
00:29:33.000 --> 00:29:35.240
I had actually mentioned to them on Friday, I said,
602
00:29:35.279 --> 00:29:37.880
you know, I we put it in the deck because
603
00:29:37.880 --> 00:29:40.279
it's our largest holding and we wanted to explain it
604
00:29:40.319 --> 00:29:43.519
to people. We didn't expect people offshore to know, you know,
605
00:29:44.000 --> 00:29:46.799
much about L one. They're not really you know, big
606
00:29:46.880 --> 00:29:51.559
yet outside of Australia. But I've been surprised in meetings
607
00:29:51.680 --> 00:29:56.359
with their clients that so few understand the equity story
608
00:29:56.759 --> 00:29:58.920
run right, And it's still early days, and I think
609
00:29:58.920 --> 00:30:01.640
they're smart to not be over promotional, right, They're they're
610
00:30:01.640 --> 00:30:04.160
gonna stand on results, They're not going to stand on
611
00:30:04.160 --> 00:30:06.359
on promises and hope, and we think that's the right
612
00:30:06.359 --> 00:30:08.200
way to handle it. But yeah, I think I've come
613
00:30:08.240 --> 00:30:10.680
away from this trip even more bullish on the business
614
00:30:10.720 --> 00:30:12.960
because so few it's you know, you mentioned you owned some,
615
00:30:13.079 --> 00:30:15.519
but there's a lot of the LP community here that
616
00:30:15.640 --> 00:30:18.359
we overlap with them on and I'm walking out of
617
00:30:18.440 --> 00:30:20.920
rooms going I can't believe they own the fund, but
618
00:30:20.960 --> 00:30:23.079
they don't. They haven't done their homework on the GP
619
00:30:23.640 --> 00:30:26.880
so anyways, we'll see how that ages. But we're excited
620
00:30:26.880 --> 00:30:27.480
about that one.
621
00:30:27.440 --> 00:30:28.880
Yeah, fair, fair enough.
622
00:30:28.960 --> 00:30:31.480
No, they definitely, like you say, they stand on performance
623
00:30:31.519 --> 00:30:33.799
and they have always And then the rest of the
624
00:30:33.839 --> 00:30:35.880
story tells itself, so to speak.
625
00:30:36.480 --> 00:30:39.359
Just does an investigate. I wanted to ask you, do
626
00:30:39.400 --> 00:30:41.599
you like long short strategies, because.
627
00:30:41.400 --> 00:30:44.440
I know when I was looking up to some portfolios
628
00:30:44.599 --> 00:30:45.759
love that sort of strategy.
629
00:30:45.759 --> 00:30:47.519
No, no, it's not what you do. You long only.
630
00:30:48.279 --> 00:30:51.640
But do you ever have any tinge of jealousy that
631
00:30:51.680 --> 00:30:55.119
you can't run some shorts because you must come across
632
00:30:55.119 --> 00:30:56.440
some companies that you look at and go.
633
00:30:56.680 --> 00:30:58.119
Is that's a that's a bit of a stinker.
634
00:30:58.880 --> 00:31:02.599
It's so funny. You know, I grew up at at Fidelity,
635
00:31:03.000 --> 00:31:07.839
and so that place was you know, there are a
636
00:31:07.839 --> 00:31:10.119
thousand ways to get to the finish line. Ye find
637
00:31:10.119 --> 00:31:11.759
the way that works for you. And so I got
638
00:31:11.759 --> 00:31:14.279
to interact with all these different sort of persona types
639
00:31:14.640 --> 00:31:19.640
and different investment strategies. Narrow scope mandates broad scope mandates large,
640
00:31:19.759 --> 00:31:23.799
large long short long only. And I honestly can tell you,
641
00:31:23.839 --> 00:31:26.480
like I don't have the temperament or the DNA too
642
00:31:26.480 --> 00:31:30.039
short stocks and the coverage model there required us to
643
00:31:30.039 --> 00:31:32.240
have buys and holes and cells and you had to
644
00:31:32.240 --> 00:31:34.640
go meet your cells, you know, ten times a year,
645
00:31:34.720 --> 00:31:37.240
just to remember that they still suck and that you
646
00:31:37.279 --> 00:31:39.680
wouldn't give them money. And I never walked out of
647
00:31:39.720 --> 00:31:41.319
one of those meetings going, man, I wish I could
648
00:31:41.359 --> 00:31:44.039
short that company. It just it just I think as
649
00:31:44.079 --> 00:31:47.799
a sort of like I don't know, paranoid optimist, I
650
00:31:48.200 --> 00:31:52.400
are skeptical optimists. It just I don't prosecute those negative
651
00:31:52.759 --> 00:31:55.240
sides of the coin as thoroughly as you would need to,
652
00:31:56.160 --> 00:31:58.559
you know, to profit from shorting. Not to say that
653
00:31:58.640 --> 00:32:01.759
it obviously can't make a great business like you can.
654
00:32:02.079 --> 00:32:04.720
You can immunize yourself from beta and from other things,
655
00:32:05.160 --> 00:32:07.440
or go along like a great company short a less
656
00:32:07.440 --> 00:32:09.720
good company in the same exposure. So I can see
657
00:32:09.759 --> 00:32:11.759
why it's a valuable tool for clients. I just don't
658
00:32:11.759 --> 00:32:14.440
think I have the skill set to command that tool. Yep.
659
00:32:14.519 --> 00:32:16.680
And you can be infinitely wrong because the share cross
660
00:32:16.680 --> 00:32:17.640
can just keep on going.
661
00:32:17.759 --> 00:32:21.160
So yeah, I'm conscious of Tom greg.
662
00:32:21.200 --> 00:32:24.079
So let's just talk about a couple of other positions
663
00:32:24.079 --> 00:32:27.920
in the portfolio that you lock right now. What's maybe
664
00:32:27.920 --> 00:32:29.799
one that performed really well for you over the last
665
00:32:29.799 --> 00:32:33.279
twelve months, or even maybe a race and addition, Yeah.
666
00:32:33.119 --> 00:32:35.359
We covered l one, which was definitely both of those.
667
00:32:37.599 --> 00:32:43.400
But you know recent edition actually is a company called Topicus,
668
00:32:43.720 --> 00:32:46.359
which is one of the satellites of the Constellation software
669
00:32:46.440 --> 00:32:49.480
sort of ecosystem, and we actually bought it at launch
670
00:32:49.720 --> 00:32:52.079
or shortly after launch of the fund back in twenty two.
671
00:32:52.759 --> 00:32:55.759
Man's who worked there for several years. He's covered technology
672
00:32:55.799 --> 00:32:58.720
for us. I used to own it like the mothership
673
00:32:58.720 --> 00:33:01.000
Constellation back when it was a small cap I think
674
00:33:01.240 --> 00:33:06.319
twenty nine to twenty thirteen, fourteen, something like that, and
675
00:33:06.359 --> 00:33:09.240
so we knew the business very well, and you know,
676
00:33:09.279 --> 00:33:10.799
we ended up making something like two and a half
677
00:33:10.839 --> 00:33:14.680
times our money over a couple of years. And basically
678
00:33:14.720 --> 00:33:17.359
in June of last year said okay on valuation grounds
679
00:33:17.799 --> 00:33:21.039
like skinny I are are more downside than upside, Like
680
00:33:21.160 --> 00:33:24.720
we're going to move on. And you know, we very
681
00:33:24.720 --> 00:33:28.160
recently bought it back because it's corrected probably sixty five percent.
682
00:33:28.720 --> 00:33:32.880
And what we know about that business is that, well,
683
00:33:32.960 --> 00:33:36.240
here's an interesting thought experiment for your listeners. Let's say
684
00:33:36.319 --> 00:33:39.119
terminal values. This was Mansteur's I thought very compelling argument.
685
00:33:39.200 --> 00:33:43.880
Let's say terminal values are zero for a big chunk
686
00:33:43.880 --> 00:33:48.279
of application software. This business that the multiple we paid
687
00:33:48.319 --> 00:33:52.039
is about ten times free cash flow unlevered, So in
688
00:33:52.079 --> 00:33:54.720
a world where their terminal value is zero, we probably
689
00:33:54.720 --> 00:33:57.640
will get our money back in a downside scenario and
690
00:33:57.680 --> 00:34:00.680
we get the benefit of their infrastructure. The fact that
691
00:34:00.759 --> 00:34:02.799
we know that they're twenty five percent cash on cash,
692
00:34:02.839 --> 00:34:05.960
IRRs are probably going up because everything they might want
693
00:34:05.960 --> 00:34:08.239
to buy is probably down forty or fifty percent. In
694
00:34:08.280 --> 00:34:10.360
this last while they hadn't bought a listed company, I
695
00:34:10.360 --> 00:34:13.079
think they've bought two listed companies in the last fifteen
696
00:34:13.159 --> 00:34:16.039
years because there were just the listed companies on a
697
00:34:16.119 --> 00:34:19.159
valuation basis would have never met their hurdle rate. And
698
00:34:19.199 --> 00:34:21.800
now from what we've been able to gather, there's more
699
00:34:21.840 --> 00:34:25.079
time spent within that firm on listed companies than ever,
700
00:34:25.400 --> 00:34:27.920
and so we think that like the downside is we
701
00:34:28.000 --> 00:34:29.800
get a capital we get our capital back, which we
702
00:34:29.800 --> 00:34:32.519
would not be happy with. But the upside is their
703
00:34:32.679 --> 00:34:35.840
M and A just got more interesting like broader scope
704
00:34:35.880 --> 00:34:37.480
set of M and A and the fact that they
705
00:34:37.519 --> 00:34:40.800
don't run with leverage means that like the Toma, Bravos
706
00:34:40.800 --> 00:34:43.599
and the Vistas and all these big PE sponsors that
707
00:34:43.639 --> 00:34:46.199
have competed for the same assets that they would want
708
00:34:46.239 --> 00:34:48.679
to buy. On the large side, they're going to be
709
00:34:49.079 --> 00:34:52.000
digesting nine turns of debt on most of the software
710
00:34:52.039 --> 00:34:54.480
take privates that they did, and Constellation is going to
711
00:34:54.519 --> 00:34:56.320
have a free run with no debt on, no gearing
712
00:34:56.320 --> 00:34:58.159
on their balance sheet to look at some of these things.
713
00:34:58.239 --> 00:35:01.000
So we think the upside could be significant in a
714
00:35:01.000 --> 00:35:04.039
world where terminals are zero or not. And so we didn't,
715
00:35:04.079 --> 00:35:05.559
you know, go in and make it a five percent weight.
716
00:35:05.599 --> 00:35:09.320
It's closer to like one one and a half. But
717
00:35:09.519 --> 00:35:11.599
you know, we're excited. And that one performed well for
718
00:35:11.679 --> 00:35:13.800
us the last year or so, and and and you know,
719
00:35:13.840 --> 00:35:15.599
when you can buy stuff you know, really well back
720
00:35:15.639 --> 00:35:18.360
at at prices that that you like, that's sort of
721
00:35:18.400 --> 00:35:18.840
the dream.
722
00:35:19.000 --> 00:35:21.519
Yeah, absolutely, and the and the valueaction still stucks up
723
00:35:21.519 --> 00:35:24.320
and it makes sense. Let's talk about I always love
724
00:35:24.360 --> 00:35:26.639
asking this question, Greg, something that you've sold recently.
725
00:35:26.639 --> 00:35:28.519
Always find there's a lot of intel in.
726
00:35:28.800 --> 00:35:31.760
What people have been selling, whether it be because it
727
00:35:31.880 --> 00:35:34.320
hit a target and you locked in a good guy, know,
728
00:35:34.400 --> 00:35:36.360
whether it was one one that maybe didn't go rot.
729
00:35:36.400 --> 00:35:39.000
What's something that you sold of light.
730
00:35:44.400 --> 00:35:47.719
We are probably in the midst of a bigger reposition
731
00:35:49.039 --> 00:35:51.280
on a couple of things. I'd sort of mentioned something
732
00:35:51.360 --> 00:35:56.599
like a safe store. I can't think of any Well,
733
00:35:56.679 --> 00:35:58.320
i'll tell you. I'll go back to last May, because
734
00:35:58.320 --> 00:36:01.960
this one was very painful. Okay. You know, we'd followed
735
00:36:01.960 --> 00:36:04.960
a business from IPO in the UK called ATG Auction
736
00:36:05.079 --> 00:36:08.400
Technology Group. And I also find in these conversations people
737
00:36:08.400 --> 00:36:12.239
always give like very flattering, like negative cases. So I'm
738
00:36:12.239 --> 00:36:14.039
going to give like a not flattering one.
739
00:36:14.320 --> 00:36:16.000
Well, I love that, I love the honesty. Yeah.
740
00:36:16.039 --> 00:36:19.559
Yeah, So we'd follow this business for six years, owned
741
00:36:19.559 --> 00:36:24.519
it for that entire time, and what they do is
742
00:36:24.559 --> 00:36:30.239
basically online a piece of software that allows auction houses
743
00:36:30.280 --> 00:36:33.480
small auction houses, so think like Bontoms and smaller so
744
00:36:33.559 --> 00:36:37.800
no souther Be's, no Christie's. But like online bidding is
745
00:36:38.000 --> 00:36:39.840
in art and antique is still not like a very
746
00:36:39.880 --> 00:36:45.480
popular form of auction. People show up in person on phone.
747
00:36:45.519 --> 00:36:48.960
It's like fifty years archaic type approach. But then COVID
748
00:36:49.000 --> 00:36:51.360
hit and you couldn't show up to these auctions on
749
00:36:51.559 --> 00:36:54.119
like if you weren't online. So the CEO is ex
750
00:36:54.119 --> 00:36:58.079
eBay and had had a vision to basically digitize auction
751
00:36:58.519 --> 00:37:00.800
the way the auction processes would would work in both
752
00:37:01.039 --> 00:37:03.599
industrial and commercial as well as our antique and so,
753
00:37:03.800 --> 00:37:06.679
you know, we made that an investment at my old firm.
754
00:37:06.719 --> 00:37:08.920
We made it a cornerstone or day one investment here.
755
00:37:09.400 --> 00:37:13.280
And as we got deeper in understanding the business, like
756
00:37:13.480 --> 00:37:17.400
even after investing, what we started to become concerned with
757
00:37:17.559 --> 00:37:19.599
is that this sort of vision that the executive team
758
00:37:19.679 --> 00:37:23.800
had was also was not aligned with what customers wanted,
759
00:37:24.039 --> 00:37:26.320
Like they were very happy with the old way. And
760
00:37:26.400 --> 00:37:29.440
so despite them going out and making all these acquisitions
761
00:37:29.440 --> 00:37:32.079
of different pieces of kid and different websites to be
762
00:37:32.119 --> 00:37:35.800
able to sort of digitize this experience, there was something
763
00:37:35.840 --> 00:37:37.360
that wasn't showing up in the numbers that we had
764
00:37:37.400 --> 00:37:40.039
wanted to see, which was volume growth. So they were
765
00:37:40.079 --> 00:37:42.000
getting pricing because now they were saying, oh, we can
766
00:37:42.000 --> 00:37:44.320
do your shipping, we can handle the payments, we can
767
00:37:44.360 --> 00:37:47.679
handle the marketing of your you know, you know, your lots,
768
00:37:47.960 --> 00:37:50.039
and so they were taking more share of wallet from customers,
769
00:37:50.079 --> 00:37:53.039
and customers weren't super happy. Anyways. Long story short, the
770
00:37:53.039 --> 00:37:56.880
stock derated probably forty percent from our cost. But that
771
00:37:57.000 --> 00:37:58.800
was the nicest thing we could say about it is
772
00:37:58.840 --> 00:38:01.599
that it was cheap. We've always promised ourselves that we
773
00:38:01.639 --> 00:38:03.800
will not own a business just because it's cheap. And
774
00:38:03.880 --> 00:38:07.320
so selling that business, you know, in May of last year,
775
00:38:07.400 --> 00:38:09.599
was very uncomfortable because we had done all this homework
776
00:38:09.639 --> 00:38:11.480
in the industry, Like if you'd ask the CEO and CFO,
777
00:38:11.679 --> 00:38:13.920
they would have said, next to the people who work here,
778
00:38:13.960 --> 00:38:16.760
Alex knows more about this business than anybody, like I
779
00:38:16.760 --> 00:38:20.079
always love their facial you know, responses to stuff that
780
00:38:20.119 --> 00:38:22.760
he would find or learn or ask and and so
781
00:38:22.920 --> 00:38:25.599
when you know a business that well, it's even harder
782
00:38:25.639 --> 00:38:27.840
to probably part with it because you just think I've
783
00:38:27.880 --> 00:38:29.519
invested all this time and effort. But it was absolutely
784
00:38:29.519 --> 00:38:32.280
the right call. It just was a very frustrating outcome
785
00:38:32.280 --> 00:38:34.280
for us. So that was sort of the last like
786
00:38:34.400 --> 00:38:38.519
big I'll call it reposition of a sell. And that
787
00:38:38.599 --> 00:38:40.679
was around sort of all that tearfuncertainty, and we'd made
788
00:38:40.679 --> 00:38:43.559
the decision to concentrate into a couple other consumer businesses.
789
00:38:43.639 --> 00:38:46.039
So YETI went from like a three weight to a
790
00:38:46.079 --> 00:38:49.119
five weight around that same timeframe. And Watches of Switzerland,
791
00:38:49.440 --> 00:38:51.119
which is not the same watch as of Switzerland as
792
00:38:51.159 --> 00:38:53.679
the one up and down Collins yep, but different owners
793
00:38:53.719 --> 00:38:56.239
but same name. Those were the two that ended up
794
00:38:56.239 --> 00:38:57.639
getting the proceeds from that sale.
795
00:38:57.760 --> 00:38:59.559
Okay, well, yet he's not a bad business, so goot
796
00:38:59.559 --> 00:39:02.239
friends in that space, and it's the category later in
797
00:39:02.320 --> 00:39:03.480
a lot of those categories.
798
00:39:03.480 --> 00:39:04.960
So not bad at all.
799
00:39:05.880 --> 00:39:07.960
Ah, right, Greg, I'm conscious of your time. We're gonna
800
00:39:07.960 --> 00:39:10.920
have two sort of rapid fire questions to round out
801
00:39:11.280 --> 00:39:12.639
I'm doing it is as quick as you can.
802
00:39:12.679 --> 00:39:13.719
That they are big questions.
803
00:39:13.719 --> 00:39:16.239
Though, what do you think investors are getting wrong about
804
00:39:16.280 --> 00:39:17.079
markets today?
805
00:39:20.159 --> 00:39:22.599
You know, I would actually I think they're getting the
806
00:39:22.639 --> 00:39:26.800
big thing right, which is this AI concern is now
807
00:39:26.800 --> 00:39:31.320
broadening to just like overvalued companies and and so targeting
808
00:39:31.400 --> 00:39:34.679
some of these like what I would consider like skinny reinvestment,
809
00:39:34.800 --> 00:39:38.159
high return businesses where they just haven't been put under scrutiny,
810
00:39:38.440 --> 00:39:41.079
like since I since I graduated, Like the people have
811
00:39:41.119 --> 00:39:43.239
just every year paid ten percent more ten percent more
812
00:39:43.320 --> 00:39:49.159
for you know, Thompson Reuter's fact set, Gartner Equifax, that
813
00:39:49.159 --> 00:39:52.079
they're you know, wonderful are ELX, like these wonderful businesses
814
00:39:52.119 --> 00:39:55.360
that don't require any reinvestment. The skeptic in me always
815
00:39:55.400 --> 00:39:57.119
said that that's not a good thing, And I think
816
00:39:57.159 --> 00:39:59.159
so that's something they're getting right. Something they're getting wrong
817
00:39:59.599 --> 00:40:06.840
is probably underwriting too much potential from the CAPEX cycle
818
00:40:06.840 --> 00:40:10.559
and AI right like. And there's a very near to
819
00:40:10.599 --> 00:40:15.320
my home example, Celestica, which again not to pick on them,
820
00:40:15.400 --> 00:40:18.000
but they've had a decent run, so I don't mind
821
00:40:18.159 --> 00:40:21.760
they There were activists trying to take that company private
822
00:40:21.880 --> 00:40:25.440
ten fifteen years ago because the underlying real estate under
823
00:40:25.440 --> 00:40:28.039
the HQ was worth more than the operating business, right
824
00:40:28.039 --> 00:40:31.280
because they owned a huge couple hectares of land in
825
00:40:31.320 --> 00:40:34.039
central Toronto. This was old IBM Canada. It was spun
826
00:40:34.039 --> 00:40:36.880
out like twenty thirty years ago, and you couldn't give
827
00:40:36.880 --> 00:40:39.400
it away four or five years ago. And I think
828
00:40:39.400 --> 00:40:42.840
it's forty or forty five x. It's bigger than Constellation Software.
829
00:40:43.119 --> 00:40:45.559
And they have clean rooms to Basically they used to
830
00:40:45.559 --> 00:40:49.079
handle smartphone assembly and then all that stuff went offshore
831
00:40:49.440 --> 00:40:51.519
and so they had these like no pun intended, dusty
832
00:40:51.559 --> 00:40:54.079
clean rooms that nobody was using. But now there's so
833
00:40:54.119 --> 00:40:56.599
many other hardware components that are needing to be fabricated
834
00:40:57.559 --> 00:41:00.840
and final assembled that Celestica is having a day. And
835
00:41:00.880 --> 00:41:03.199
I just worried that that's one example, But there's like
836
00:41:04.400 --> 00:41:06.440
tons of money going into the to the supply chain
837
00:41:06.440 --> 00:41:09.840
of AI. But you now have you now have to
838
00:41:09.880 --> 00:41:13.079
decide like do these things. Do these companies deserve longer
839
00:41:13.079 --> 00:41:16.880
backlogs than like Boeing in aerospace or like Boeing in airbus?
840
00:41:16.880 --> 00:41:19.440
Do they Are we really going to expect like nine
841
00:41:19.519 --> 00:41:23.280
years from now to see like like supply demand imbalances.
842
00:41:23.320 --> 00:41:23.360
No.
843
00:41:23.440 --> 00:41:26.000
I think there's gonna be tons of capacity that's brought
844
00:41:26.000 --> 00:41:28.800
on because this is commodity work. It's just earning really
845
00:41:28.840 --> 00:41:30.559
good returns right now because there was a lack of
846
00:41:30.599 --> 00:41:34.960
supply and skilled labor, which Celestica was happy to sort
847
00:41:35.000 --> 00:41:37.159
of provide in the in the meantime. So you know,
848
00:41:37.400 --> 00:41:39.599
I think that that's sort of what people are caught
849
00:41:39.679 --> 00:41:42.519
up with that, Like I love my LM and so
850
00:41:42.639 --> 00:41:44.280
I want to put all this money into the hyper
851
00:41:44.280 --> 00:41:46.159
scaling supply chain. And it just reminds me of when
852
00:41:46.159 --> 00:41:48.840
people were smashing iPhones in two thousand and seven to
853
00:41:48.880 --> 00:41:51.159
figure like to figure out who made all the bits, Like,
854
00:41:51.199 --> 00:41:54.360
I just don't think that that was an enduring investment strategy.
855
00:41:55.000 --> 00:41:58.199
Yeah, last one, Greg, we always closed with this question
856
00:41:58.280 --> 00:42:00.320
if markets shut for five years and you could only
857
00:42:00.320 --> 00:42:07.199
own one business, what would it pay who said, yeah,
858
00:42:07.280 --> 00:42:09.800
second biggest wide in the portfolio, if I'm not mistykens
859
00:42:09.840 --> 00:42:10.400
yepes percent.
860
00:42:10.480 --> 00:42:15.440
Yeah. Yeah. They are the probably the most advanced personal
861
00:42:15.480 --> 00:42:17.599
lines insurance broker in the US in terms of being
862
00:42:17.599 --> 00:42:21.119
able to serve customers digitally. And that's the big concern
863
00:42:21.199 --> 00:42:22.719
right now is like what if you never call a
864
00:42:22.719 --> 00:42:26.480
broker to bind insurance ever again, which again, we live
865
00:42:26.480 --> 00:42:29.119
in a world of prepare, don't predict. So let's say, okay,
866
00:42:29.119 --> 00:42:31.519
maybe that is the reality. We think it's going to
867
00:42:31.599 --> 00:42:33.639
be like robos where it's the reality for a portion
868
00:42:33.719 --> 00:42:36.639
of the market. But they're the only company in the
869
00:42:36.719 --> 00:42:39.599
US that can bind a policy online without human intervention today.
870
00:42:39.880 --> 00:42:41.960
On the auto side, they've been investing in this for
871
00:42:42.000 --> 00:42:44.880
like seven eight years. They spend fifty million dollars putting
872
00:42:44.880 --> 00:42:49.119
technology into the carrier's IT environments so that they could
873
00:42:49.119 --> 00:42:51.760
have like an API integration. Because you can't just as
874
00:42:51.800 --> 00:42:56.440
as a broker, convince a carrier to take your customer right.
875
00:42:56.599 --> 00:42:59.280
The carrier gets to ultimately price, like decide if they
876
00:42:59.320 --> 00:43:01.840
want to take the risk. And I think that's different
877
00:43:01.880 --> 00:43:04.760
from software where there this isn't this like risk bearer.
878
00:43:05.559 --> 00:43:08.559
I think that that could be disrupted far more than
879
00:43:08.599 --> 00:43:11.320
some of these areas, where like insurance is very capital intensive.
880
00:43:11.599 --> 00:43:14.280
Somebody who has an auto policy, like the insurance company
881
00:43:14.360 --> 00:43:16.880
might be making thirty bucks a year on you. There's
882
00:43:16.880 --> 00:43:19.800
no money to put a human on that file, which
883
00:43:19.840 --> 00:43:22.559
is sort of what happened with robo advice the customers
884
00:43:22.559 --> 00:43:26.639
where humans said like, I can't really provide that person
885
00:43:26.679 --> 00:43:29.039
advice based on what they're able to pay me. That
886
00:43:29.199 --> 00:43:31.760
those are the customers that ended up going more to robos.
887
00:43:32.199 --> 00:43:34.639
And so I think in the case of Gooseid, whether
888
00:43:34.719 --> 00:43:38.760
or not AI significantly disrupts personal lines, insurance or only
889
00:43:39.199 --> 00:43:41.519
or only in a small way. I think the business
890
00:43:41.559 --> 00:43:44.960
is very well positioned, and it generates strong cash flows,
891
00:43:44.960 --> 00:43:46.840
and it has two turns of debt right now because
892
00:43:46.840 --> 00:43:49.280
they've been buying back stock so aggressively, and the founder
893
00:43:49.320 --> 00:43:52.360
owns forty percent. So I feel really good about that business,
894
00:43:52.360 --> 00:43:54.800
and I don't need this stock market quote to tell
895
00:43:54.840 --> 00:43:56.159
me what's happening.
896
00:43:57.039 --> 00:43:59.039
Greg. This has been an absolute pleasure.
897
00:43:59.199 --> 00:44:01.880
Thank you so much for having a chat with me
898
00:44:02.000 --> 00:44:03.760
and having a chat with our audience and the rules
899
00:44:03.760 --> 00:44:05.679
of investing so great that we got to do this
900
00:44:05.719 --> 00:44:06.199
in person.
901
00:44:06.679 --> 00:44:08.039
Hopefully we'll get to do it again soon.
902
00:44:08.239 --> 00:44:09.679
Definitely, it's way more fun in person.
903
00:44:09.719 --> 00:44:11.840
Thanks Chris, Thanks for listening. Folks.
904
00:44:11.880 --> 00:44:14.159
Remember you can subscribe to the Rules of Investing on
905
00:44:14.199 --> 00:44:16.920
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906
00:44:16.920 --> 00:44:18.480
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