Investment Philosophy

  • Value investor mindset and free cash flow focused
  • Seek proven businesses, identifiable assets
  • Establish mean reversion potential (profitability, balance sheet and re-rating)
  • Identify catalysts for change
  • Develop exit thesis to mitigate illiquidity risks (3–5-year time horizon)
  • Engage with all stake-holders to de-risk and add value

Often confused with ‘Process’, the philosophy of an investor is what they believe drives share prices and outperformance over the long-term. We believe that investment returns are generated by purchasing a share for less than the intrinsic worth of the company, (a ‘value’ philosophy), enhanced by identifying companies that can increase their fundamental intrinsic worth over time, to avoid ‘value traps’. We seek to optimise the IRR by identifying ‘catalysts’ which will un-lock the share’s discount to the business’s worth or accelerate value creation. For ‘core’ investments we ourselves may be the ‘catalyst’ through the provision of capital, insight and personnel.

We are medium-long term investors with a typical time horizon of 3-5 years, as this period allows for intrinsic worth to be recognised more widely and fundamental improvements or changes to have a positive effect. We stick to what we believe we understand, avoid unproven business models and are adverse to high indebtedness. We believe that a company’s intrinsic worth is driven by its future cashflows discounted back to today, however we do not make long-term forecasts and seek businesses with identifiable near-term cash flow generation to justify our assumptions on upside. Our financial analysis is focused on cash flow generation and returns on capital.

The fast-changing nature of the world economy and technology means any confidence in growth forecasts many years hence for individual companies are fraught with risk. We therefore focus the majority of capital into ‘recovery’, turnaround’ or ‘transformation’ opportunities, where the past can be a true guide to the potential future. There are businesses that have historic evidence of cash generation, yet have fallen on difficult times and have depressed profitability typically as a result of strategic mis-steps (poor m&a), bad management (execution) or a lack of adaption to changing end-markets or circumstances (inertia). These special situations of depressed returns are usually accompanied by a significant de-rating and low valuation. Many of them have underlying, or the prospect of, above-average growth rates, however it is the normalisation of returns that drives improved intrinsic value.

“many shall be restored that now are fallen and many shall fall that are now in honour”

Quintus Horatius Flaccus 65BC. (Ben Graham reference in ‘Security Analysis’)

With new management and an evolving Board, key issues can be identified, a strategic plan agreed and, if executed well, can lead to a mean-reversion and recovery of returns. This in turn leads to a re-rating, the combination of which drives an outperformance of markets. We seek therefore to exploit ‘fear’ and ‘negativity’ at a company level where we believe a ‘turnaround’ is possible and structural change has not permanently damaged prospects.

We believe in the highest standards of sensible corporate governance, noting that small company circumstances don’t always fit with generic rules for all companies. We actively target large stakes in companies to ensure a ‘voice’ and ‘influence’, and through the strength of our arguments seek stakeholder support. Our philosophy is therefore heavily ‘engaged’ which requires much higher than average contact with executive management, Boards and advisors. The purpose of this ‘engagement’ is to build a deep understanding of the company’s dynamics, a positive relationship with those appointed to run and oversee the company and ensure their focus is on the maximisation of shareholder value.

a margin of safety is achieved when securities are purchased at prices sufficiently below underlying value to allow for human error, bad luck, or extreme volatility in a complex, unpredictable and rapidly changing world"

Seth Klarman