Latest / The Dutch Investors / #54 | Serial acquirers & holding companies w/ Michael Gielkens

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#54 | Serial acquirers & holding companies w/ Michael Gielkens · The Dutch Investors

• 0:00
  SPEAKER_00: Welcome to a brand new confrontation by the Dutch investors.
• 0:04
  SPEAKER_00: I'm your host team, and in today's episode we will talk about holding companies and serial acquirers, a much requested topic by many of our listeners.
• 0:15
  SPEAKER_00: You will learn how they operate, why they're potentially interesting from an investing standpoint, what the differences are, the KPIs to look for, and so much more.
• 0:25
  SPEAKER_00: And I won't be doing this alone.
• 0:27
  SPEAKER_00: No no no.
• 0:28
  SPEAKER_00: I'll be talking to Michael Gilkens from Tresor Capital.
• 0:32
  SPEAKER_00: He's a fund manager and an analyst focusing mostly, but not exclusively, on holding companies and serial acquirers, and he knows all about them.
• 0:42
  SPEAKER_00: I'm sure you'll enjoy today's episode as much as I did making it.
• 0:47
  SPEAKER_00: So let's jump into today's conversation with Michael Gjulkens.
• 1:18
  SPEAKER_01: Yeah, it's it's uh it's good.
• 1:19
  SPEAKER_01: We're uh we're happy that uh the air conditioning in the office is working again.
• 1:23
  SPEAKER_01: So uh that was problematic earlier this week.
• 1:26
  SPEAKER_01: But uh uh so far um climate's good and uh everything's going well.
• 1:30
  SPEAKER_01: So um looking forward to doing the podcast.
• 1:32
  SPEAKER_00: It's uh it's good to have you on the show.
• 1:34
  SPEAKER_00: You're actually one of the most requested guests so far.
• 1:37
  SPEAKER_00: Uh it's probably due to our quite large Dutch following as well.
• 1:41
  SPEAKER_00: But yeah, lots of investors wanted to hear from you and learn about investing, specifically holding companies and serial choirs.
• 1:48
  SPEAKER_00: I I got a lot of questions about them.
• 1:51
  SPEAKER_00: So yeah, thanks for taking the time out of your day to do this.
• 1:54
  SPEAKER_00: I know you really wanted to go to the beach today, so uh thanks.
• 1:59
  SPEAKER_00: For those unfamiliar with the concepts, maybe you can briefly explain what they are and why they are different from, let's say, call it a regular company.
• 2:10
  SPEAKER_01: Um well they're they're investment companies.
• 2:12
  SPEAKER_01: So the the the main role of of these firms is to invest and reinvest uh capital into the uh the highest um uh return potential opportunities that they can that they can find.
• 2:24
  SPEAKER_01: So um for example, if if you have a serial acquirer, uh the cash flows can be can be reinvested.
• 2:32
  SPEAKER_01: So so basically the returns as a shareholder that you can make are a function of the uh the reinvestment rate and the return on those investments uh that they are that they are making.
• 2:45
  SPEAKER_00: Isn't that something all companies should do?
• 2:47
  SPEAKER_00: Allocate capital the to the best of their ability?
• 2:50
  SPEAKER_01: Uh yes, but it's very few companies that are actually able to do it well.
• 2:54
  SPEAKER_00: Fair point.
• 2:55
  SPEAKER_00: So how did you end up specializing in serial acquires and holding companies?
• 3:00
  SPEAKER_00: Why those two specifically?
• 3:02
  SPEAKER_01: Um well when I started out in this business um a few years ago, um there was a there was a strategy investing in in just all kinds of different uh active funds and uh a few individual companies.
• 3:16
  SPEAKER_01: And uh one of my first jobs was to find which which companies have been able to get the the outperformance or have been able to actually get the good performance that we've been been been generating.
• 3:29
  SPEAKER_01: And and uh Berkshire Hatherway and Investor A B two holding companies were uh the standouts, and most of the active fund managers uh surprise, surprise, didn't uh meet the benchmark returns that we were looking for.
• 3:43
  SPEAKER_01: And meanwhile, Berkshire and and Investor A B were quite easily outperforming um since they were bought at uh let's say 20 2010, 2012 for some clients, uh even even before.
• 3:57
  SPEAKER_01: So that was uh that was a bit of an eye-opener uh professionally.
• 4:01
  SPEAKER_01: Um and uh one of my colleagues he actually got me into this business, and I was in an investment club with him when I was still a student, and he was talking about Berkshire Hathaway and Warren Buffett, and that kind of got me on the on the track to that laid the foundation, if you will, to to learn and study more about these kind of companies.
• 4:22
  SPEAKER_01: So uh Berkshire was actually the first stock that I bought uh in my dad's portfolio still.
• 4:28
  SPEAKER_01: Uh so we bought it together, if you will, and and um uh Investor B was one of the first as well.
• 4:35
  SPEAKER_01: And and the fascination kind of started there already with with investing in all kinds of companies.
• 4:40
  SPEAKER_01: And you think, hey, I should buy different kinds of stocks.
• 4:43
  SPEAKER_01: So you're buying uh banks, so so about some shares of SNS, which wasn't so successful over the long run.
• 4:51
  SPEAKER_01: Um, and then gradually you're you're yeah, you're making some some early mistakes, if you will, and you you're gravitating towards the the strategies that have worked, have worked out, and you're you're starting to study why were these companies able to get these these kind of performances.
• 5:08
  SPEAKER_01: Um and yeah, that's that's a function of uh a few of the the the things that are now the core of our investment strategy.
• 5:15
  SPEAKER_00: All right, so let's talk about the serial acquire playbook.
• 5:19
  SPEAKER_00: I believe you're the founder of TraceOc Capital, correct?
• 5:23
  SPEAKER_01: One of the one of the one of the co-founders.
• 5:25
  SPEAKER_01: So we're with with four partner shareholders uh where we uh we co-own the the company.
• 5:30
  SPEAKER_00: Yeah.
• 5:30
  SPEAKER_00: Is the investment fund focused mostly on holdings and serial acquires, or is that just your preference and specialty or no?
• 5:38
  SPEAKER_01: So so it's actually this uh managed accounts.
• 5:41
  SPEAKER_01: Um, but we're we're actually looking at maybe launching a fund, investigating that as we as we speak.
• 5:47
  SPEAKER_01: No, it's it's um I would say from for clients with an equity exposure, it's um either the full exposure or over 75% of their uh of their portfolios with us.
• 6:00
  SPEAKER_01: So in our in our model portfolios, um especially clients with a more uh uh you could say offensive uh profile, they are looking at uh close to 80% allocation towards towards these kind of companies.
• 6:14
  SPEAKER_01: So that we we manage it as a separately uh managed uh strategy, and we're also tracking the performance against the benchmark uh where we have a monthly uh fact sheet uh which we which we provide for for clients.
• 6:28
  SPEAKER_00: Okay, okay, I see.
• 6:29
  SPEAKER_00: That's uh that's exciting.
• 6:31
  SPEAKER_00: Uh so let's say you're looking for a serial choir.
• 6:34
  SPEAKER_00: Uh you've read a couple books, you saw the success of companies like Constellation Software, uh Topicus, maybe even Berkshire Hathaway at the beginning, and you want to find one yourself.
• 6:45
  SPEAKER_00: How do you typically look for these serial choirs?
• 6:48
  SPEAKER_00: Do you just stumble upon them or screen for them?
• 6:51
  SPEAKER_00: Uh can you tell us a bit about that?
• 6:54
  SPEAKER_01: Um well it's it's uh screening can work, but it's it's it's hard to model.
• 7:00
  SPEAKER_01: Uh there are very different business models in in in terms of acquisitions, but I know there are screeners where they show like cash acquisitions or something like that, so so that could be a an indication, but then a lot of companies do acquisitions, so uh that's not a screener uh option per se.
• 7:17
  SPEAKER_01: No, it's it's mostly uh yeah, looking in looking in different um networks, if you will.
• 7:24
  SPEAKER_01: So I'm I'm very active on on X uh Twitter, um active in communities, going to conferences and communicating with other investors.
• 7:34
  SPEAKER_01: So that automatically helps you find um interesting opportunities, or uh you help others find interesting opportunities.
• 7:42
  SPEAKER_01: Um, but it's it's to some extent, yeah.
• 7:45
  SPEAKER_01: Is it screenable?
• 7:46
  SPEAKER_01: I mean, uh insider ownership is might be screenable.
• 7:50
  SPEAKER_01: Um return on invested capital could be screenable, uh valuation or uh let's say the the the balance sheet strength uh EV Ebada could be screenable.
• 8:01
  SPEAKER_01: So these are things that you could find in a screener, but um it's also a lot of just yeah, working, uh turning over a lot of stones, and and uh after a while you develop, I would say, a sort of a um a radar for things that you're looking for, and you can very quickly say say no to some ideas or to some companies, or um very low insider ownership is is almost automatically one of our uh one of our uh points.
• 8:33
  SPEAKER_01: We uh we want to have a significant skin in the game for a company.
• 8:37
  SPEAKER_01: So that's an important variable um uh consistency in in earnings.
• 8:43
  SPEAKER_01: You don't want to have very very high levels of cyclicality uh if if you're uh running a a uh portfolio.
• 8:50
  SPEAKER_01: Uh strong balance sheets are very important for us.
• 8:52
  SPEAKER_01: So maximum level, I would say, of two and a half to three times operating profit in uh in um in leverage, and um yeah, high return on invested capital.
• 9:02
  SPEAKER_01: So ideally uh over 15%.
• 9:06
  SPEAKER_01: Uh that's uh that's a metric that we that we also screen for.
• 9:09
  SPEAKER_01: So let's say we have a database of around 500 uh companies, either holding companies or serial acquirers.
• 9:16
  SPEAKER_01: Um what what we basically see is if we apply these variables and if we apply our metrics that we're looking for, uh automatically we're already losing between 80 to 90 percent of the entire universe.
• 9:29
  SPEAKER_01: So um it's it's like what Bessenbinder finds with his studies that a handful of companies generates the outperformance in the long run.
• 9:37
  SPEAKER_01: We've also seen that that companies that don't meet these criteria uh oftentimes aren't able to get the return metrics that we are looking for.
• 9:46
  SPEAKER_00: Yeah, he talked about the 4%, right?
• 9:48
  SPEAKER_00: Yeah, the communities and talking to other investors is such a good piece of advice.
• 9:52
  SPEAKER_00: Uh we just launched our uh our community and we talked to this Swedish investor who mentioned a Swedish serial acquire of private schools in Sweden.
• 10:02
  SPEAKER_00: Apparently, that's a pretty big thing there.
• 10:05
  SPEAKER_00: It's it's tiny but highly profitable just if you look at the at the figures.
• 10:10
  SPEAKER_00: So yeah, that that is a good way of finding ideas.
• 10:14
  SPEAKER_00: So let's say you find an interesting serial acquire.
• 10:18
  SPEAKER_00: Where do you start?
• 10:19
  SPEAKER_00: What does your research process look like when you analyze one?
• 10:23
  SPEAKER_01: Um so yeah, finding finding these four uh or five attributes that we uh that that I just mentioned, that's that's very important for us.
• 10:30
  SPEAKER_01: Um ideally you want to have a a founder, owner, operator, or a a large, let's say, reference shareholder or family as a as a as a as a partner.
• 10:41
  SPEAKER_01: And then we're yeah, we're starting to to see what what are the end markets, uh, what's the what are the the exposures in terms of where are their economic profits coming from, actually?
• 10:52
  SPEAKER_01: So geographically or industries or stuff like that, and just seeing is there a kind of a moat uh with this company?
• 10:59
  SPEAKER_01: Is the management doing the right things?
• 11:01
  SPEAKER_01: How is management turnover?
• 11:03
  SPEAKER_01: These are some these are some some early things that we are we're we're looking at, that we're screening for, that we that we try to get a sense of.
• 11:11
  SPEAKER_01: Is there a good write-up available from from an uh ideally a fundamental quality style investor?
• 11:18
  SPEAKER_01: That um who are if if it's a US company or or in general, who are our partners in the shares?
• 11:25
  SPEAKER_01: So uh who are the top five or top ten individual shareholders?
• 11:28
  SPEAKER_01: All these kinds of things can tell you something about about um uh other people who already did the work, for instance, or uh yeah, what are some some things to look for?
• 11:38
  SPEAKER_01: And then you're yeah you're just gradually digging deeper and layer after layer basically if you if if they survive the the the 80 to 90 percent shift uh at at the start, uh then you're you might be looking at a diamond in the rough that that uh deserves some further polishing.
• 11:55
  SPEAKER_00: So to invert that question, if if you're looking into the businesses, are there any uh I don't like the word red flag, but are there any red flags or any things you don't want to see in a serial acquire specifically that just makes you wanna leave it and just go on to the next?
• 12:14
  SPEAKER_01: Um well one thing is is if you have um a serial acquirer that that takes on significant amounts of uh leverage to do acquisitions, uh in a in in in especially in a time when interest rates are are low.
• 12:29
  SPEAKER_01: Um I think REQ Capital did a did a study on that, on serial acquirers, where they showed that uh there are a few companies that they should they did a case study on that that had significant leverage to buy, let's say, low quality companies at any price.
• 12:46
  SPEAKER_01: The best example I think is Storz Kogan, Frederick Carlson, the former Livco CEO, currently the CEO of Roko.
• 12:53
  SPEAKER_01: Uh he he he basically said if you if you there are only so many companies that you can buy of low quality in come uh with with no mode at any price with high leverage, uh there's only there's only so long that that can that that can be successful.
• 13:09
  SPEAKER_01: And at some point uh fundamentals are are uh are going to be uh driving the business, the the the quality of the earnings, the the the mode of these companies um will be will be very significant.
• 13:23
  SPEAKER_01: So companies with a high amount of cyclicality, that's that's something I would um I'm yeah that we don't look that we don't like to invest in.
• 13:32
  SPEAKER_01: Also different styles of management.
• 13:33
  SPEAKER_01: Uh for instance, uh a new CEO comes along and and a few years ago investor A B had a I think last year investor AB had a switch in CEO.
• 13:42
  SPEAKER_01: Yeah, that can also be a trigger.
• 13:44
  SPEAKER_01: How how does the new management team uh run the company?
• 13:48
  SPEAKER_01: And um yeah, the the the the CEO that left the company had a had a very uh high amount of skin in the game, 30 years or 25 plus years with the company.
• 13:58
  SPEAKER_01: Um and then the new guy, Christian Saderholm, comes in.
• 14:02
  SPEAKER_01: He's also 20 years with the company and uh has a similar amount of skin in the game already as the the CEO that's leaving the company.
• 14:09
  SPEAKER_01: So it's it's not like there's a there's a rookie taking over the reins.
• 14:13
  SPEAKER_01: He he knows the company extremely well.
• 14:16
  SPEAKER_01: Uh uh has been working with the the non-listed serial acquisition uh group of companies with uh with Investor A B from Patricia Industries.
• 14:26
  SPEAKER_01: And um now he's the CEO of the of the whole of the whole enterprise.
• 14:30
  SPEAKER_01: So that gives a that gives a very that's that that's potentially a green flag, uh or or at least uh not um a potential red flag.
• 14:38
  SPEAKER_01: But if someone from outside is hired, we we used to be investors in Alberts, a Dutch, a Dutch company.
• 14:45
  SPEAKER_01: Uh they were run by Jan Alberts, the founder, then you had uh uh Pelsma, who who was the chief operating officer appointed by Jan Alberts, and then at some point he left.
• 14:56
  SPEAKER_01: And instead of finding an internal hire, they hired a French uh CEO from outside of the company.
• 15:03
  SPEAKER_01: Nothing against French people, but but um we preferred to have someone from the inside being promoted.
• 15:11
  SPEAKER_01: So a combination of that plus uh that they that the company was reaching our fair value, close to 50 euros.
• 15:17
  SPEAKER_01: That was just a reason for us to sell the to sell the the position last year, um, and to to find other opportunities to invest in other opportunities where um yeah, the mode or the quality of the business were were a bit higher.
• 15:31
  SPEAKER_01: Uh and and no skin in the game and management level, that's the biggest red flag in our in our view.
• 15:36
  SPEAKER_01: We've seen a few things like there's a serial acquirer in Australia that's buying uh uh accounting companies where the CEO is is always talking about Warren Buffett.
• 15:48
  SPEAKER_01: At every single chance he gets, at some point, that yeah, it you could say it's communication to attract the type of shareholders that you're looking for.
• 15:56
  SPEAKER_01: You could also say, well, at some point you're trying to borrow the the name and uh attach it to your company.
• 16:03
  SPEAKER_01: Uh there's a Swedish serial acquirer where I think that they had uh four CFO changes in in about two years' time.
• 16:12
  SPEAKER_01: That's uh very significant red flag in my book.
• 16:14
  SPEAKER_01: So so these are things to look for.
• 16:19
  SPEAKER_01: To avoid, yeah.
• 16:21
  SPEAKER_00: Or to avoid, yeah, rather.
• 16:25
  SPEAKER_00: Yeah, yeah, yeah.
• 16:26
  SPEAKER_00: Why is it that Sweden is so successful in uh with serial choirs?
• 16:31
  SPEAKER_00: It seems like the country is punching way above its its weight.
• 16:34
  SPEAKER_00: Technion, Livco, Attech, uh, maybe Lagerkranz, Instalco.
• 16:40
  SPEAKER_00: Why is that, you think?
• 16:42
  SPEAKER_01: Um well Sweden has a very interesting uh and a very unique dynamic in the in the in the country.
• 16:48
  SPEAKER_01: So on the one hand, I would say it's it's um it's a very pro-business economy.
• 16:53
  SPEAKER_01: Uh, we're going to to to uh publish something that was a deep dive in our newsletter a few weeks ago about uh Sweden as a is it the new silicon or is it the Silicon Valley of Europe basically?
• 17:05
  SPEAKER_01: Where you can see there's there's a deep capital market, there is a pro-business government, there are pro-business regulations.
• 17:13
  SPEAKER_01: Um there is a a uh for instance for for smaller shareholders, there's a very high active ownership amongst uh small private investors, whereas in in other countries, um I would say without becoming too political, uh investors are seen as the cash cow to to fund the government deficits, if you will, uh, versus in Sweden, where they say no, it's it's a very good way to build up your pension, if you will.
• 17:44
  SPEAKER_01: So uh a few weeks ago there was an interesting uh documentary uh uh on on Bloomberg Wall Street Week, uh where the the CEO of Investor A B was actually one of the uh one of the guests, and we also highlighted that in our in our deep dive, um, where he he he names a lot uh a few things where Sweden, why Sweden particularly is uh yeah, maybe a breeding ground of successful businesses and economic growth, and particularly the the serial acquisition model, I would say, because of this um positive economic uh dynamic, but also Swedish culture, uh it's very it's very um pro-business, very uh open-minded.
• 18:28
  SPEAKER_01: There are uh some some big families like the Wallenbergs that um that that are yeah, you could say long-term stewards of capital, so there's automatically a bit of a a longer-term investment horizon embedded in in the culture as well.
• 18:44
  SPEAKER_01: And Sweden is a very small, a very small uh country.
• 18:48
  SPEAKER_01: So at some point you've you've uh you've exhausted your your home market and you're automatically looking for uh international markets.
• 18:55
  SPEAKER_01: So is that is that are you going to do that organically or are you going to do that through uh through acquisitions?
• 19:01
  SPEAKER_01: And I think Bir Berkman and Beving uh started the model in Sweden uh with buying other companies and then spinning off uh at tech and lager crunch and at tech again spinning off at life.
• 19:14
  SPEAKER_01: So there's a you could say kind of a a um a Metrushka adoles situation in terms of structure.
• 19:22
  SPEAKER_01: So um yeah, that's it's it's been successful and then it automatically attracts uh other other businesses where they say hey we have excess capital, what can we do with that?
• 19:33
  SPEAKER_01: Well, instead of instead of paying a dividend, we could also reinvest it in in other companies, and um so the companies like Livco or Indutrade were uh were were inspired by that as well.
• 19:44
  SPEAKER_00: Yeah, that's a good point.
• 19:45
  SPEAKER_00: I I I hadn't thought about that.
• 19:47
  SPEAKER_00: If you have a small country based on the amount of people you have, you you kind of have to focus internationally and acquiring businesses is one way to do so.
• 19:56
  SPEAKER_00: That's uh I didn't think about that one.
• 19:59
  SPEAKER_00: So a lot of people confuse maybe serial acquires with companies doing MA.
• 20:05
  SPEAKER_00: Uh most acquisitions fail if you look at uh mergers and acquisitions.
• 20:10
  SPEAKER_00: When is someone like truly a serial acquire?
• 20:14
  SPEAKER_00: Because you could argue, and I'm going out on a bit of a limb here, but I guess that once you become large enough, like Berkshire Hathaway, uh Constellation Software, maybe even LVMH, it could also be considered a holding company, but also like a serial acquire, maybe.
• 20:30
  SPEAKER_00: These models are built around acquiring, holding, and operating a decentralized portfolio of companies, right?
• 20:37
  SPEAKER_00: So is there some overlap there?
• 20:39
  SPEAKER_00: What's your take?
• 20:40
  SPEAKER_01: Yeah, so so uh we started out with with investment companies.
• 20:43
  SPEAKER_01: So so there's um uh a slide that you might know where you basically go from uh a high level of integration to a very low level of integration where you have roll-ups, platforms, accumulators, and holding companies.
• 20:57
  SPEAKER_01: Um I could share it and you could maybe add it to the to the show notes, or we add it on uh on on X or something.
• 21:03
  SPEAKER_01: Uh but it's a very interesting, yeah, it's a very interesting way of where you basically see what's the strategy of the uh of the company and what's the level of integration.
• 21:14
  SPEAKER_01: And basically, if you have a very high level of integration, you're basically a roll-up buying companies in a similar industry.
• 21:21
  SPEAKER_01: Uh so for instance, think about uh uh well you could you could think about Kelly Partners Group buying these accounting companies or waste management buying uh buying uh uh waste companies uh in in local markets.
• 21:36
  SPEAKER_01: It's it's a it's a it's uh an acquirer of of markets where the focus is more you could say on on synergies, one industry, uh and and and uh uh scale advantages.
• 21:47
  SPEAKER_01: Where on the complete other end of the spectrum, you have the holding company where there is no level of integration, where there are many different levels of of um uh sectors, industry.
• 22:00
  SPEAKER_01: Industries, uh uh listed private companies, uh, you you name it, it's very so like a Berkshire Hathaway, uh like an investor A B, uh, where you have a very very different level of of strategy.
• 22:12
  SPEAKER_01: And then in between, you could say you have the likes of Livco or or or uh um uh attack, these kind of companies where you have acquisitions in different end markets.
• 22:23
  SPEAKER_01: So Livco has two uh dedicated platforms in dental industry and demolition and tools, uh, and then you have uh the the let's say system solutions, which is basically a hodgepodge of different end markets, uh where you could say, well, you could say the dental division is a roll-up of dental companies, but then system solutions is uh it's it's more of a of a platform of different different uh different end markets altogether.
• 22:52
  SPEAKER_01: So uh you could say you can distinguish it in the matter of integration, in the matter of where you're looking at at synergies, but to distinguish holding companies and serial acquirers from let's say the the sporadic MA, uh, because all acquisitions we have been taught destroy value.
• 23:11
  SPEAKER_01: You might be familiar with a very interesting study by McKinsey, where they say there's a small subset of companies that do regular acquisitions where acquisitions are actually the business model.
• 23:23
  SPEAKER_01: So, to what level is that an LVMH or a or a Berkshire Heatherway?
• 23:27
  SPEAKER_01: Uh they did more acquisitions uh a decade or two decades ago than than the past years, if you will.
• 23:33
  SPEAKER_01: And then you have companies that are buying uh 100 companies a year.
• 23:37
  SPEAKER_01: So that's that's the typical serial acquirer, if you will, like a constellation software, uh where your your acquisitions really are your your your your business model.
• 23:48
  SPEAKER_01: So these they call it uh programmatic MA.
• 23:51
  SPEAKER_01: So if you do a lot of uh a lot of deals and a lot of small deals, particularly, then acquisitions really become an acquired skill, and and that's and maybe even a competitive advantage.
• 24:03
  SPEAKER_01: Because of course, when once you have done uh one you've bought 100 companies or even 1000 companies, then you have a playbook of what to look for, how to how to buy these companies, and so it's very different from from buying a very having a very large uh merger of equals, for instance, when you have two different comp corporate cultures, two different uh uh ERP systems, two different accounting systems, and then management's attention is basically for a couple of years focused on integrating these these companies, uh, and it might actually not be successful.
• 24:39
  SPEAKER_01: So, you've you've seen, I think, the the the the the Warner Brothers Discovery merger where they're now untangling everything again.
• 24:46
  SPEAKER_01: So now they're doing a D-merger again because they've they weren't able to combine the companies, uh, because it was just such different end markets.
• 24:56
  SPEAKER_01: So, so um, yeah, doing these very big deals, that's where the the the the destruction of capital basically comes from, and doing a lot of these smaller deals that can actually uh yeah generate uh a uh a statistically significant level of alpha.
• 25:13
  SPEAKER_00: I'd like to ask you a question surrounding uh goodwill.
• 25:16
  SPEAKER_00: I think most investors know that goodwill is usually intangible, uh the premium paid over book value for things like brand, customer relationships, uh market position, maybe.
• 25:28
  SPEAKER_00: I guess few realize how much of the asset base it can represent in serial acquires.
• 25:32
  SPEAKER_00: Can you maybe just explain to me, as I'm like 12 years old, uh, how to think about goodwill for serial acquires?
• 25:40
  SPEAKER_00: Because to add to my question, a couple months ago I analyzed the company Assilor Luxotica.
• 25:46
  SPEAKER_00: It's it's an exceptionally almost under the radar company.
• 25:50
  SPEAKER_00: It's it's it's very large, but most people don't even know they exist.
• 25:55
  SPEAKER_00: But half, yeah.
• 25:57
  SPEAKER_00: Um Del Vecchio, yeah, Del Vecchio story, it's a great story.
• 26:00
  SPEAKER_00: Half of its total assets,$30 billion, is goodwill.
• 26:06
  SPEAKER_00: So what does that tell me or the investor?
• 26:10
  SPEAKER_00: Is that perhaps a red flag?
• 26:12
  SPEAKER_00: Is it uh can it be positive depending on the context?
• 26:16
  SPEAKER_00: Because goodwill also lowers return on invested capital, and it's one of the KPIs you looked for.
• 26:22
  SPEAKER_00: Uh I believe you said that uh just a few minutes ago.
• 26:25
  SPEAKER_00: So, uh, how to how do you think about all of that?
• 26:28
  SPEAKER_01: So uh um normally you would say a large goodwill component on the balance sheet is is um is a red flag when you're in general analyzing a company.
• 26:38
  SPEAKER_01: For serial acquirers, I would say it's a bit different.
• 26:41
  SPEAKER_01: It it really depends on your view of can the company get a good return on on those investments.
• 26:48
  SPEAKER_01: And uh when acquisitions are your business model, then uh of course you have a large goodwill position.
• 26:55
  SPEAKER_01: And that translates also through to the to the to the earnings figure.
• 26:59
  SPEAKER_01: So I'm always very uh cautious to look at price earnings ratios when uh you're amortizing goodwill.
• 27:06
  SPEAKER_01: When if it's a good management team with a good acquisition track record, they're not likely to overpay for an acquisition.
• 27:15
  SPEAKER_01: So then the goodwill that you're activating is the fair market value of the company that they're buying.
• 27:20
  SPEAKER_01: And then if you're optimizing the companies that you've bought, then you could say that the companies are becoming more valuable instead of less valuable, but you're writing them down because of an arbitrary uh uh goodwill amortization.
• 27:35
  SPEAKER_01: So that has an impact on on the earnings figure.
• 27:38
  SPEAKER_01: I would say for for companies with a good track record, so that's very important, management teams.
• 27:44
  SPEAKER_01: Um that's why we always first look at the partner that we're the management team that we're partnering with.
• 27:50
  SPEAKER_01: What's their track record of acquisitions?
• 27:52
  SPEAKER_01: Have they have they created value or destroyed value?
• 27:56
  SPEAKER_01: Uh so goodwill in and of itself isn't a isn't a problem per se.
• 28:01
  SPEAKER_01: But um yeah, if if if it's resulting from large acquisitions that have questionable uh incremental returns on on that investment, um yeah, you could you could take it right down as a as an investor, for instance, in your uh in your analysis of the of the of the valuation of the company.
• 28:21
  SPEAKER_00: I mean, most sites just give you the ROIC, but I mean that takes into consideration goodwill as well.
• 28:27
  SPEAKER_00: I've always learned that you shouldn't take out goodwill in a physical business, but sometimes I guess it can be useful to take out in software businesses.
• 28:36
  SPEAKER_00: Is that something you do, or usually you just leave it there?
• 28:40
  SPEAKER_01: No, usually goodwill because because goodwill is is the invested capital.
• 28:44
  SPEAKER_01: So so those are the companies that you've that you've bought.
• 28:47
  SPEAKER_01: So uh you you should be able to get a good a good return on those investments unless you are overpaying or or something.
• 28:54
  SPEAKER_01: So um I would say you usually Goodwill is a is um I wouldn't exclude goodwill from the return on invested capital.
• 29:03
  SPEAKER_01: What is interesting, what the Swedish serial acquirers do is they look at the the return on um on working capital, which is a bit of a Berkman and Beving metric.
• 29:13
  SPEAKER_01: Uh they've they've coined that the use of that.
• 29:15
  SPEAKER_01: So that basically shows how efficient the company is with their uh with their with their working capital.
• 29:22
  SPEAKER_01: That that can also be an added value, and and of course, goodwill isn't part of the of the working capital of a company.
• 29:29
  SPEAKER_00: Do you uh are you familiar with uh the company Technion?
• 29:32
  SPEAKER_00: Yes.
• 29:33
  SPEAKER_00: Uh they've been struggling a bit recently, mostly due to worse than expected acquisitions in uh in tougher industries in the past.
• 29:41
  SPEAKER_00: Um the new ones appear to be a lot more profitable and and to be better.
• 29:46
  SPEAKER_00: We've talked a bit about the the the model behind them, uh behind serial acquires, but but let's say you're looking under the hood of these serial acquires and you're trying to understand what kind of companies they are buying or uh bought in the past.
• 30:05
  SPEAKER_00: So, how do you assess the quality of the companies they acquire?
• 30:08
  SPEAKER_00: How can we know or find out as investors whether the acquired companies are any good, or do you just have to trust management here?
• 30:17
  SPEAKER_01: Yeah, on the on the one hand, you have to trust management to some extent because they're running the company on a daily basis, of course, but you're also looking at metrics like uh organic growth, for instance.
• 30:28
  SPEAKER_01: So if if if they're buying companies that uh have uh have a good level of quality with them, then normally you'd say you you are you're also looking at at organic growth.
• 30:40
  SPEAKER_01: But what are their end markets, for instance?
• 30:42
  SPEAKER_01: What's the business model?
• 30:43
  SPEAKER_01: So I if I recall correctly, Technion has bought uh I think it were a bit of their part of the early acquisitions that were uh a bit more cyclical, yeah.
• 30:53
  SPEAKER_01: The home builders and stuff, a bit more cyclical and uh in nature, and um so that that kind of comes back to bite you in the ass, if you will.
• 31:03
  SPEAKER_01: Um if I can say that on the on the podcast, otherwise you can edit it out.
• 31:07
  SPEAKER_00: But uh of course you can.
• 31:11
  SPEAKER_01: So so that's that's the thing.
• 31:14
  SPEAKER_01: Um, but discussions with management are uh important there as well.
• 31:18
  SPEAKER_01: Normally, if if a company has a has an earnings call or has a letter to shareholders or has a has an uh annual general meeting like a Berkshire Hatherway or a consolation where you can ask questions for for a while, um then you can get a sense of these companies.
• 31:35
  SPEAKER_01: But that that also follows from uh uh uh building up some some experience with the companies, right?
• 31:42
  SPEAKER_01: So you know more about Berkshire after owning it for 10 years than you did when you first started looking at it.
• 31:47
  SPEAKER_01: So it's it's it's also a bit of a a skill, and it also becomes a part of your part of your skill set, uh part of your tool set, if you will, uh when you've when you've been following these companies for for uh for over five to ten years.
• 32:02
  SPEAKER_00: Yeah, you you're just adding more context and you have more information uh over time, right?
• 32:07
  SPEAKER_01: So yeah, yeah.
• 32:08
  SPEAKER_00: That makes sense.
• 32:09
  SPEAKER_00: Do you have uh an opinion on Technion?
• 32:12
  SPEAKER_00: Just out of curiosity.
• 32:14
  SPEAKER_01: Well, if I if I can it's uh be brutally honest.
• 32:19
  SPEAKER_01: One of the red flags I just mentioned pertains to Technion.
• 32:22
  SPEAKER_01: So I think they had a a CVO change uh a few years ago.
• 32:28
  SPEAKER_01: They had four CVOs in two years.
• 32:30
  SPEAKER_01: So that was uh that was a that was a bit a bit problematic.
• 32:33
  SPEAKER_01: Uh if I recall correctly, uh Daniel Zhang, who was the chief experience officer at the time, uh he's he's quite active or used to be quite active on Twitter.
• 32:44
  SPEAKER_01: And at some point someone told him, like, hey, in the quarterly report, your uh share count went down.
• 32:50
  SPEAKER_01: So he apparently had did a share transaction, and someone said, Well, you didn't report it, and then the the reply was yeah, but chief experience officer isn't a uh isn't a a role that needs to be reported to the Swedish authorities.
• 33:06
  SPEAKER_01: So those were a few things where I was like, hmm, is that is that uh I mean it it could be it could be uh um a coincidence, but there was or at least I would say yellow flags to look for.
• 33:20
  SPEAKER_01: Um so so to be honest, uh in Sweden there are a few of the bigger ones who were who are still internationally speaking quite small in terms of the opportunity set.
• 33:30
  SPEAKER_01: So an ATEC or a LIFCO are just a very small uh still.
• 33:36
  SPEAKER_01: If you if you look at an international context, so uh I would just say I would I would go for for those who in my opinion are are best in class.
• 33:45
  SPEAKER_01: Uh Lagerkruns, Indy Trade and and Um Roko are are interesting as well.
• 33:52
  SPEAKER_01: So I've to be quite honest, I've I've I just haven't given Technion that much attention versus those other companies, and and you don't want to have 10 Swedish industrial serial acquires because then then you could be you could better buy an ETF.
• 34:08
  SPEAKER_00: It makes sense.
• 34:09
  SPEAKER_00: I mean what you're saying is there are so many good opportunities out there, and uh serial acquires depend highly highly on the on the on capable management.
• 34:19
  SPEAKER_00: So if you just don't have a good feel feeling with management teams, right, it's probably just better to keep looking.
• 34:25
  SPEAKER_00: So that that makes total sense.
• 34:26
  SPEAKER_00: And I think I think they're they're turning the ship around.
• 34:31
  SPEAKER_00: Uh I think they are very honest, they they stay in close contact with investor relations.
• 34:36
  SPEAKER_00: That that that makes sense.
• 34:38
  SPEAKER_00: Lastly, before we head over to the holding companies, I do have a lot of questions about that as well.
• 34:43
  SPEAKER_00: Is there anything you'd like to share about the culture or incentives uh from uh serial choirs, or is it pretty similar to like uh is it just dependent on the the type of company you are, um what the incentive structure should be?
• 34:59
  SPEAKER_00: Uh any thoughts?
• 35:01
  SPEAKER_01: Well, I mean the gold standard is is is is constellation, right?
• 35:04
  SPEAKER_01: So so uh mandatory reinvestment of your uh of your uh uh of your bonus in the uh in the in the shares on the on the public market and and uh not being able to sell them for for a couple of years.
• 35:18
  SPEAKER_01: Um that that's the ultimate the ultimate gold standard, if you will.
• 35:22
  SPEAKER_01: Um but not every company can have a CEO that earns one euro or zero euros of uh or dollars of uh of um of compensation.
• 35:31
  SPEAKER_01: So uh it depends per company.
• 35:34
  SPEAKER_01: What we typically look for is is a similar a certain amount of skin in a game.
• 35:40
  SPEAKER_01: We prefer to have a large owner of the of the shares, so a reference shareholder who owns, let's say, 20 10, 20, 30 percent of the of the company, uh, on the one hand gives them a gives them a strong uh vote as a as a uh a large shareholder.
• 35:55
  SPEAKER_01: Uh and and and yeah, it it um makes sure that you don't get these these opportunists that want to break up the company and and get a get a short-term profit versus uh long-term value creation, but it also aligns the incentives of management with the uh with the external shareholder.
• 36:16
  SPEAKER_01: So it's it's it's kind of a solution to the principal agent problem, if you will.
• 36:20
  SPEAKER_01: Uh management teams have their own incentives basically.
• 36:22
  SPEAKER_01: So uh I always like to say, as Charlie Mongo said, uh, show me the incentives and I'll show you the outcome.
• 36:28
  SPEAKER_01: So incentive structure is one of the one of the more important things uh to look for.
• 36:34
  SPEAKER_01: And so you want to see a certain level of uh bonuses being given for return on invested capital.
• 36:42
  SPEAKER_01: Ideally, you don't want to have a 10% dilution each year in terms of share-based compensation, uh, if you can if you can avoid it.
• 36:51
  SPEAKER_01: Uh so so these are some things that are that are uh important that we that we look for.
• 36:57
  SPEAKER_01: But it it all boils down to uh to skin in the game.
• 37:01
  SPEAKER_01: And and and sometimes um at especially at the start of the company, yeah, it's not possible for the for the founder to to own uh 60% uh of the of the of the of the shares as a block, um because he had to uh invite other shareholders to to support the growth of the company.
• 37:21
  SPEAKER_01: So or you have a you have a um a controlling shareholder who appoints a manager like investor a b.
• 37:27
  SPEAKER_01: There's there isn't the Wallenberg in the in the managing board, uh, but they hire uh extremely skilled uh managers with with a significant amount of skin in the game in terms of their uh multiple on their uh on their annual uh earnings, for instance, or in the annual income.
• 37:44
  SPEAKER_01: So that's also a way that you could look look at it, like five to ten years of salary, uh, or of your base salary in the shares.
• 37:52
  SPEAKER_01: That's that's um that's that's a different mindset than when you only own options or one or two shares, and uh when the options options vest immediately selling them versus versus retaining them.
• 38:04
  SPEAKER_01: That's like if you don't believe in your in the shares of your company, why should we as as outside shareholders, right?
• 38:10
  SPEAKER_01: So so that's that's something that that's also very important.
• 38:13
  SPEAKER_00: Let's say you uh you have a portfolio of serial acquires and uh and the stock market closes for 15 years, and you can only look at two performance metrics, two KPIs.
• 38:25
  SPEAKER_00: Uh what metrics would you look at to assess whether the company is going in the right direction?
• 38:30
  SPEAKER_01: Um well uh a couple of serial acquirers have a have um have a very good metric that that approaches the growth of intrinsic value per share.
• 38:39
  SPEAKER_01: So consolation and toppicas, for instance, they have uh free cash flow available to shareholders.
• 38:46
  SPEAKER_01: Um Livco also has a metric like free cash flow per share, so that's like after uh cap uh maintenance capex, but uh before acquisitions.
• 38:57
  SPEAKER_01: So they say we could we could pay this out as dividends, we could reinvest this in acquisitions, we could do organic growth with this, so growth capex.
• 39:05
  SPEAKER_01: Uh so that's basically the the the the number that you can can own as a uh the the the the cash that you uh uh it approaches owner earnings basically.
• 39:16
  SPEAKER_01: What Berksh what Buffett uh coined, a term the Buffett coined.
• 39:20
  SPEAKER_01: That's if a if a company uh has that metric, that's very useful, or otherwise I would say uh free cash flow or operating cash flow minus capex per share.
• 39:32
  SPEAKER_01: Uh that's a very important metric, and return on invested capital.
• 39:36
  SPEAKER_01: That's just uh uh that's just the the two important ones.
• 39:39
  SPEAKER_01: And if I can add one third, and I cheat a cheat a little here, uh it's a reinvestment rate.
• 39:45
  SPEAKER_01: So basically, how much how much of your capex can you reinvest, or of your cash flow can you reinvest at that high level of uh so so Swedish companies have a have a they they have a dividend culture, so they pay 30 to 50 percent in terms of dividends, uh, and then the the rest of the portfolio is reinvested in um in um at least 20 to 25 percent uh return uh metrics, which automatically yields uh very interesting, so you could say one to three percent dividend yield, and then maybe uh 12 to 20 percent uh yield on cash flow, if you will, uh which which translates to your to your return, and then you of course have the the final component which is uh which is the market value or the market valuation, but that doesn't exist when the market closes for 15 years, so uh that wasn't part of the equation.
• 40:38
  SPEAKER_00: Yeah, you're you're cheating a little bit here.
• 40:40
  SPEAKER_00: But um I don't know if you've read this book, uh Buffett and Munger Unscripted.
• 40:45
  SPEAKER_01: You have no I I've still got it on my uh on my list.
• 40:49
  SPEAKER_01: I think Alex Morris published it earlier this year.
• 40:52
  SPEAKER_00: Yeah, I I gotta I gotta give it to him.
• 40:54
  SPEAKER_00: It is one of my I know it's it is his book, but most of uh the information is from Buffett and Monger, right?
• 41:00
  SPEAKER_00: I mean he just distilled 30 years of um gold nuggets from Buffett and Monger and listed them by topic.
• 41:09
  SPEAKER_00: So I just uh I'm I'm reading it for the second time now, and I uh yesterday I was reading on incentives, and um, and if you just hear them talk about how simple it should be, they they only have uh they only grabbed ever grabbed a napkin, talked to the CEOs, uh, wrote down a little equation of how they want their business to perform and what metric they'll they'll track, and that's it.
• 41:35
  SPEAKER_00: He never thought about it longer than five minutes, he keeps saying, and you know, some of some of these incentive structures seem so complicated, and uh uh it's it's a great book.
• 41:45
  SPEAKER_00: I I highly recommend people to to to read the book and buy the book.
• 41:49
  SPEAKER_00: I'm not sponsored by him, just uh my uh my honest opinion.
• 41:52
  SPEAKER_00: Yeah, that was serial quise.
• 41:54
  SPEAKER_00: Uh are you still uh down to do the holding company section or are you falling asleep already?
• 41:59
  SPEAKER_01: No, no, no.
• 42:00
  SPEAKER_01: Um uh I could do this for two hours, so no worries for me.
• 42:03
  SPEAKER_00: Uh oh, okay.
• 42:04
  SPEAKER_00: Good to know, good to know.
• 42:05
  SPEAKER_01: I always say just drop in drop in a quarter, like a vending machine, and I'll just keep talking until uh until you until you unplug me, basically.
• 42:13
  SPEAKER_01: Yeah, all right.
• 42:16
  SPEAKER_00: Let's uh let's talk about holding companies.
• 42:19
  SPEAKER_00: Can you briefly uh uh briefly explain what is a holding company?
• 42:24
  SPEAKER_00: How do they make money?
• 42:26
  SPEAKER_01: So it's it's basically just a stock like any other, but the business model is is is basically investing the balance sheet of the company.
• 42:34
  SPEAKER_01: So to some extent similar to serial acquires, but but in a different way.
• 42:39
  SPEAKER_01: So they're they're completely unconstrained, uh, typically in terms of are you buying uh stocks of listed companies?
• 42:47
  SPEAKER_01: Are you investing in private equity?
• 42:50
  SPEAKER_01: Are you investing in direct ownership of uh private companies?
• 42:55
  SPEAKER_01: Um some companies have a lot of bonds, uh, gold even on the balance sheet.
• 43:00
  SPEAKER_01: So it's it's truly unconstrained.
• 43:02
  SPEAKER_01: You you could basically call it a listed family office.
• 43:05
  SPEAKER_01: So it's it's just like uh when it's a it when it's a family running the company, it's basically just a way for them to uh to manage their their uh their wealth, uh, and you are able to tag along uh at very low uh ETF-like uh uh fees for running the holding company.
• 43:24
  SPEAKER_00: Is uh investing in a holding company basically saying uh you do the work for me, I I trust that you can reinvest my money basically in uh in good businesses, or is that too simple?
• 43:37
  SPEAKER_01: Well, it's it's uh that's the essence of it, but uh doing that very well is also uh a challenge.
• 43:45
  SPEAKER_01: So there are a lot of holding companies that actually destroy value versus create.
• 43:50
  SPEAKER_01: Um so um I mean, partnering with a with an owner operator or partnering with a family uh sounds like the ideal thing to.
• 44:00
  SPEAKER_01: do right i mean you're you're you're just hiring the manager and then he will buy uh he will buy companies and he you're basically uh subcontracting your your capital allocation to the management team of the holding company but then they also have to do it well so how do holding companies do it well what what makes i mean they come in all shapes and sizes from Berkshire Hathaway to very small industrial companies holding companies what makes a a good holding structure work a very long-term focus that's that's that's key uh if you're if you're trying to optimize on a quarterly basis then that's that's not going to uh that's not going to work um so often they are actually countercyclical so when uh uh public markets are are uh priced for perfection they prefer to to stay in cash or just buy um private companies but uh yeah also I would say having low levels of debt that creates optionality so uh oftentimes you have a bit of a lazy balance sheet if you will but um yeah you could you could also view that as optionality for when the market market drops uh significantly you could actually buy uh companies that you own or new companies at a at a lower price I would say diversification to some extent is important that's that's you could say counterintuitive because some of the best investors run concentrated portfolios and on the other hand uh there are very few companies that have been in the portfolio for over five to ten years even for Berkshire Heatherway if you if you look at their listed companies so it's like Coca-Cola or American Express um but uh yeah some companies have been have been uh uh bought and sold like like uh a Disney in the past or these kind of firms so so we prefer companies with a with a bit of a diversification between asset classes as well so public and private companies you could buy the public companies yourself but the private companies you can only buy when investing in the holding companies so that's also an interesting uh distinguishing factor of these of these structures um but it's also just having a controlling shareholder which makes sure that you're looking at the longer term uh in terms of strategy in terms of stability counterintuitively they're also dynamic so normally you would say if if there's a controlling shareholder it's a very boring boring company but they're they're actually very dynamic in terms of investing uh through the market cycle uh being active when uh ready to pounce when the opportunity uh when when an opportunity presents itself um and and um yeah basically basically you're you're buying an actively managed uh etf at etf uh at etf costs but partnering with a with an owner operator in most cases so doing it well is is is um i mean the ultimate ultimate uh uh metric is uh net asset value growth per share right so a lot of these holding companies publish in uh an an intrinsic value per share and they just show uh the growth through time and uh I believe investor a b has been able to grow it over 12% for over 100 years so then in the end you're also making that the on the longer term the stock price approaches the growth of the intrinsic value per share so investors have also made uh over 12% uh uh kager uh investing in those shares since 1919 yeah I wasn't around back then so I wouldn't know but uh me neither by the way so oh okay uh lots of these um companies talk about um decentralization is that a requirement for a holding company or is it just one way of running it or yeah I I I to be honest I don't know of um of a of a holding company where a centralized structure has been very successful.
• 48:06
  SPEAKER_00: I mean to some extent uh every holding company is by definition decentralized because uh Warren Buffett isn't isn't going to run C Scandies uh and and and Mark Leonard isn't going to go to a uh German uh local golf software company to to tell them how to uh uh code the T times into the software package right I mean uh on the on the holding company level by definition your primary role is allocating the capital and allocating it wisely you could have a centralized role in that respect so Berkshire Hathaway is the the the the role uh until not not that long ago you had you had two two guys in their 90s who were just sitting in an office in Omaha uh with with 20 people around them and they were just looking at interesting opportunities buying companies or or not doing anything at all uh uh and that was the role at at the holding company level um and you also have have companies that are a bit more hands-on so you could say for instance constellation has the best practice sharing uh on a quarterly basis on the board level they try to look at investment cases where uh a VMS company filter political market software company went wrong or one that's doing it extremely well and what can we learn from that and can we share those learnings with our with our subsidiaries so then you're giving your portfolio companies a toolbox if you will uh on how to optimize and investor a b for instance has an active role through the through the board of directors so they're they're not running the companies directly from the management board but through the board of directors they try to help them in terms of strategy in terms of uh they call it future proofing so for instance uh very early on they were looking at how can we make these companies um uh how can we be a leader in terms of AI and digitization versus uh being a laggard and being competed away how can we be uh a best in class company in the industry and that's a very clear um thing that they are staring on and where they have very high uh high quality demands from from the companies so so that's uh I would say a bit more hands-on but yeah doing a board meeting once every uh few months uh isn't that hands-on if you will but it's it's more than what what what Berkshire does or used to do we've talked quite a bit about holding discounts on uh on the podcast and in uh several articles so why do these holding discounts exist um and to to add to my question why are holding companies sometimes more interesting than investing in the in the company itself uh for example uh some of us own the holding company process you're probably familiar with it yeah we own it as well yeah you're basically buying 10 cent with a a discount um i just looked at fiscal ai if you bought the company somewhere in 21 10 cent you would get a a 7% return and uh process returned almost 50% so you can see the discount um lowering here uh it's getting smaller maybe to simplify my question what is uh why are there holding discounts and why are holding companies potentially interesting investments so you you could basically view a holding company discount as the the holding company variant of what you normally would see as a price earnings or a price cash flow metric right it I mean in the end it it shows how much are people willing to pay for a uh for for the for the portfolio of the company so a company with a discount of 30% could be very expensive and a company with a discount of 10% could be very cheap depending on the track record of management.
• 52:15
  SPEAKER_01: So as we're speaking Investor AB has a discount of 10% but there aren't that many companies that are able to generate uh 12% or more per annum since uh since 1919 so you could say to some extent it's it's it's justified that they have a lower discount uh because the strategy has proven itself the management has proven itself and so you demand a lower discount for owning the company whereas with um process a couple of years ago might be a good example uh on top of having let's say china specific risks there were also the the the the the the concentration in one company uh what which was a which was an issue you had at that point in time still uh a very significant detraction from the non-10 cent activities uh which they've turned around by now so so now there are a few things in place that I would say justify a lower discount than uh 50% or something which it was a few years ago there were also some technical factors of course but they were listed in in uh South America with the holding company Nasperus uh and then they were so much so large in the in the local market that basically pension funds were forced sellers which which artificially inflated the discount so I mean that was a specific uh uh opportunity I would say at the time of the listing of of process in the Netherlands that they created a vehicle and now they've also optimized the non-cent portfolio and now you you could see the the management team uh ironically enough since Bob van Dijk left uh has has you could say optimized the company a bit and so now a lower discount is is justified but you still have uh Chinese sp China specific risk you still have concentration risk so you could say process still deserves a uh discount of of of maybe 20% versus a um an investor a b where you're investing in companies listed on uh markets in Sweden Switzerland uh the US different level different rule of law uh different different markets uh a more pro-business uh shareholder base but they're all there are holding companies with a with a 60% discount they have only destroyed value over a five 10 20 30 year period so the only role for the holding company to exist is basically uh so that the nieces and nephews of the founders have uh have something to do and get a get a get a good uh get a good salary get a get a nice uh get gets yeah it's it's literally it's it's nepotism at its highest form so you really have to be vigilant in terms of which companies you're buying and what are the metrics that you're looking for.
• 55:04
  SPEAKER_01: So that that's why we say 80 to 90 percent of companies in our universe whether that be a holding company or a serial acquirer is automatically it it's it's automatically discarded because the the metrics that we're looking for the the the the most important things aren't uh aren't there and having a a high discount no the typical value investor would say oh it's a high discount so it's a very cheap it's very cheap compared to the sum of the parts but uh you're you're not going to realize the sum of the parts unless there is a breakup or unless the company is privatized.
• 55:38
  SPEAKER_01: So you had like uh um a Spanish holding company Corporación Financiera Alba the the the March family just delisted it and so you had a very one once in a uh uh lifetime uh a huge jump in the share price because at some point the the the the the significant and consistent discount was was was closed uh but apart from uh something like that happening um you you need the management team and the founding family to to uh to to close the this the discount and the only way you you're going to do that is by showing that you that you create value and um I always use an example of a French company it's it's Peugeot Invest.
• 56:22
  SPEAKER_01: Uh it used to be group FFP and and so the Peugeot family basically used that as a vehicle to to run their portfolio in so the largest position by far was was Peugeot now it's it's Delantes after the merger with with Fiat Chrysler and they started investing in private equity they started investing in uh real estate uh both both public companies and private companies well they invested in Orpea which has been kind of a disaster so uh that was a uh over 90% drop in value uh they had a a private portfolio uh of of real estate companies uh or the real estate developer which went bankrupt uh so they've they've had a a lot of destruction of value in the non-Pugeot uh companies and then you have a core holding company of a core holding which is a highly cyclical uh car business so just in terms of the structure we don't like those assets so we don't we wouldn't buy it the the company has destroyed value in terms of uh errors of commission significant errors of commission in terms of the companies that they've bought either listed or or or private and then on top of that you have a uh you have nepotism of its highest form uh in terms of if if a if a man if a if a family wants a high a high income you could pay a dividend and all shareholders benefit from that but what the Peugeot family did is they said oh the the there is a there is no listed company anymore which carries the name Peugeot and isn't that a shame we we would like to have a listed company that carries the name Peugeot so you have their holding company which is ran which was ran by uh uh and and and is controlled uh through the board by people of Peugeot it's still the case by the way and they decided that the Peugeot family should get a license fee for using the name Peugeot so as an outside shareholder I would say I don't care what what name you give the company for for all I care you call it you call it core holding company uh SA and and uh you leave it there or you keep the name uh group FFP uh I I don't mind as a shareholder but you're extracting resources from the holding company in favor of the family um I mean a clearer form of of uh uh misalignment of interests uh I I I I can't think of and and there are a couple of holding companies in France that have that haven't been able to create value for a long time and then you say well they they have a very big discount yeah but if if you don't create value then there you could say the discount is justified similarly to a a I would say a regular company destroying value yeah well then then as a manager why should you earn a high price earnings multiple so that you could see this as a as a as the variant of that in a holding company.
• 59:28
  SPEAKER_00: So what you're saying is that a holding discount correlates to the quality and opportunities of the businesses it's invested in sort of and a high discount can be expensive and a low discount can still be cheap.
• 59:43
  SPEAKER_01: Yeah and and and and then you have companies where uh of course some of the components of the balance sheet are considered to be too cyclical or too sensitive.
• 59:53
  SPEAKER_01: The best example I can give is is is is Brookfield Corporation uh the holding company on top of uh Brookfield asset management so they own uh oak tree which uh everyone knows maybe from how it marks uh particularly in the Netherlands they they they they own the um the high tech campus where as ml is located for instance you have all these kind of uh these kind of businesses but two very important components of the sum of the parts are uh on the one hand the the the shares of uh carried interest so basically the performance fees uh their share of outperformance in the in the uh funds that are managed by Brookfield asset management on behalf of their clients so to say we have a hurdle rate of 15 to 20 percent and if we exceed it then we get depending on the fund a percentage of the of that outperformance that's that's a pure profit for the for the for the company basically but in terms of market turbulence uh people are saying well it's going to be problematic to realize this on a short term because there will not be an exit for a private equity portfolio in terms of uh an IPO or uh the the uh a um um a sponsor buying it uh a strategic investor buying it so uh investors were discounting the carried interest on the balance sheet of Brookfield which is a very significant component and then Brookfield asset management of course is also discounted because they will probably earn uh uh less carried interest as well on their behalf and less uh fees from IPOs and these kind of things and then another point is they own a big real estate portfolio uh and when interest rates are low real estate is valued very highly and then when interest rates are high um real estate uh could be in trouble so uh especially office real estate and you saw that in the in the covert period uh office and retail real estate so so shopping malls was uh under pressure a lot so basically you could get both the the the the re the real estate portfolio and the carried interest on the holding company level for free by buying the holding company so we we see the a normalized discount range between 25 to 35 percent for Brookfield you could buy it at 50 to 60 percent discount at the peak of of of the volatility there uh so that was just investors pricing in uh throwing away the baby with the bathwater and then a lot of the real estate that Brookfield owns are iconic buildings um so so and and I mean after a while markets are going to normalize again so uh it they will realize the carried interest at some point so it's it's not it's not uh uh you're just postponing those earnings uh to a later event but it's not like it's it's not it's never going to happen so that was those are always moments where we think hey this is an interesting company to to buy uh the the assets and um um um in in in terms of market turbulence so that's where a discount can be elevated for a short period of time which can actually offer a buying opportunity so a similar situation happened in um in February to to April if you will uh we we we started buying um into into Alphabet uh the holding company of Google and at some point everyone was saying well deep the deep seek moment so uh every western company in in uh working in ai was suddenly uh sold off very very arbitrarily and then you got the the the the uh the Trump tariff tantrum in in April where uh uh every company was was or every country was getting tariffed uh where even an island with penguins was uh was very uh very shocked that that happened so every investor was it was like a very strong sell-off as well so uh that was a moment where we started buying uh for clients we started tactically tactically increasing positions in alphabet positions in in in companies like Brookfield because we we saw that the discounts were uh were much higher and and at at some point investors were pricing in that that Google search was was never going to happen again and never or was never was didn't have a future while we're still even though though search traffic is going to to open open AI's chat gpt um you still you still see a lot of people that are actually going going back to Google because now they're they're integrating AI overviews um I saw that on my phone I have a samsung big B which is horrible was replaced by uh was replaced by by by Gemini Google Gemini and you see that a lot of people that are using chat gpt are actually going back to uh back to Google switching to Gemini because they're they they think that the user experience is better there.
• 1:05:11
  SPEAKER_01: Still a lot of people are doing classic search so I mean is it a is it a zero well you could say compared to history you could you could add a lower multiple to it but people weren't weren't valuing uh I would say the the cloud business properly weren't valuing the uh youtube business properly weren't weren't ascribing any value to to Waymo other bets so in our some of the parts of Google that was a or of alphabet that was a very interesting moment where like hey people are throwing the baby out with the bathwater uh in in in February and then in April uh everything was being sold off particularly uh us listed uh listed companies so uh yeah that was also a moment where we were where we were very interesting uh interested in adding to those to those businesses I think it's also about how
• 1:06:00
  SPEAKER_00: People are driven by habits.
• 1:06:03
  SPEAKER_00: Google is a habit.
• 1:06:04
  SPEAKER_00: I think AI, in a way, and not to go off topic here, but I think AI will just increase overall volume, and I think it can also increase just overall search volume.
• 1:06:18
  SPEAKER_00: People will start looking up more stuff.
• 1:06:20
  SPEAKER_00: And yes, lots will go to ChatGPT and Gemini and other services.
• 1:06:26
  SPEAKER_00: But I think a lot of that will probably still go to Google.
• 1:06:31
  SPEAKER_00: Um, and the question is just how well can they still monetize that since it is still their cash cow.
• 1:06:38
  SPEAKER_00: But like you said, they have many, many other very interesting parts of their business that are doing quite well.
• 1:06:45
  SPEAKER_00: So, what are some of your favorite holding companies?
• 1:06:48
  SPEAKER_00: Perhaps a couple well-known names.
• 1:06:49
  SPEAKER_00: You just mentioned Alphabet, Brookfield, and perhaps uh a couple lesser known names for uh people that are interested in looking at them.
• 1:06:57
  SPEAKER_01: Um yeah, sure.
• 1:06:59
  SPEAKER_00: So so uh holding companies or serial acquires or both, or uh yeah, just uh throw out a couple names and uh maybe I know a couple, but uh I'm always looking for interesting names too.
• 1:07:10
  SPEAKER_01: So I would say our our some of our top positions are um and have been for a while, uh Constellation Software and Investor A B.
• 1:07:18
  SPEAKER_01: Uh so those have been around for um the most part of the strategy, for instance.
• 1:07:23
  SPEAKER_01: So so they've had a very good uh contribution.
• 1:07:26
  SPEAKER_01: In the Netherlands process is well known, which which we already already touched upon.
• 1:07:31
  SPEAKER_01: Uh but lesser known, you could say, is um is is MBB, a German uh holding company.
• 1:07:36
  SPEAKER_01: Uh they're uh they they have a very interesting portfolio of um you could say about 300 million in in um in in cash and and um uh and and uh and and large cap equities, and then they own uh about over 800 million euros of uh worth of shares in a uh German uh infrastructure company.
• 1:07:58
  SPEAKER_01: So they are very important.
• 1:07:59
  SPEAKER_01: Uh one of the uh three or four uh top players in terms of uh both underground pipelines for uh gas infrastructure, so both uh classical gas but also LNG and and putting the uh connecting the the LNG terminals to the to the regular gas network, which is of course for particularly Germany a very important market, and uh for also underground pipelines for uh electricity.
• 1:08:30
  SPEAKER_01: So Germany said we don't want these pipelines on top of our on top of our uh over people's houses, we want them underground.
• 1:08:39
  SPEAKER_01: And they are one of the few companies that that are able to do that.
• 1:08:42
  SPEAKER_01: And um uh I think what is very interesting, MBB was able to buy into the company for around 20 million euros, and then they did an IPO uh at about a billion two years later.
• 1:08:55
  SPEAKER_00: Not bad.
• 1:08:56
  SPEAKER_01: So that was uh that was uh that was an insane uh uh uh return.
• 1:09:01
  SPEAKER_01: That's where that's where a lot a lot the cat a lot of the cash comes from.
• 1:09:05
  SPEAKER_01: Uh and and so that's uh most of the business that's public, and then a private company, I think is very interesting, is one of the bigger players in Germany in terms of uh uh cybersecurity, which is called DTS, uh, which is unlisted.
• 1:09:21
  SPEAKER_01: And uh recently, despite having a very significant increase uh year to date of close to um a total return of of close to 70 percent if you add the special dividend to it, we still think it's very undervalued compared to just the sum of the parts of these companies that uh that uh that we just mentioned.
• 1:09:41
  SPEAKER_01: So MBB is a is a lesser-known um uh uh holding company, and maybe in terms of a serial acquirer, uh chapter group could be uh could be an interesting name, or uh, or TerraVest.
• 1:09:54
  SPEAKER_01: Uh two companies.
• 1:09:55
  SPEAKER_01: Uh for TerraVest, we have a write-up on our website, uh treasurecapital.nl, and we have uh one will be published soon on chapters as well, uh, which we also already uh published in our in our weekly newsletter for uh for uh for um for for clients and and people who are interested in that.
• 1:10:15
  SPEAKER_01: So those are those are some names that we've um that were that were uh that are lesser known, I would say, but uh also very very interesting still, even at these uh at these levels.
• 1:10:26
  SPEAKER_00: Yeah, I I know most of them.
• 1:10:27
  SPEAKER_00: I think you went to chapters group a couple months ago, right?
• 1:10:31
  SPEAKER_00: Um I've I've read a couple write-ups on TerraVest.
• 1:10:35
  SPEAKER_00: Um MBB is uh new for me, so that is interesting to take a look at.
• 1:10:40
  SPEAKER_00: Um let's let's work towards an ending of this episode.
• 1:10:43
  SPEAKER_00: I I think uh we both uh need to get some dinner later.
• 1:10:47
  SPEAKER_00: So I just have a couple uh couple short questions and uh we'll we'll end it.
• 1:10:52
  SPEAKER_00: We haven't really touched on a valuation.
• 1:10:55
  SPEAKER_00: We we talked briefly about the net asset value for holding companies, which I think is probably the most obvious way of looking at uh at the valuation of a holding company.
• 1:11:06
  SPEAKER_00: For a serial acquire, some of these companies usually look optically quite expensive, especially if you look at like earnings ratios, right?
• 1:11:13
  SPEAKER_00: Uh, due to accounting standards.
• 1:11:16
  SPEAKER_00: Is there a a framework you use to assess them differently, or how do you uh value uh a serial acquire usually?
• 1:11:24
  SPEAKER_01: Uh serial acquirer is usually a combination of either some of the parts or a uh a pure DCF.
• 1:11:30
  SPEAKER_01: So a DCF uh just for a pure play serial acquirer, but for constellation, for instance, they have two listed companies, so we just take their share of the market value of uh Topicus and Lumine, and then we we value we do a DCF of the non-listed components, so basically the the standalone uh constellation group.
• 1:11:50
  SPEAKER_01: But in general, we just use um uh a discounted cash flow method to um to to value them, and then we try to be a bit conservative.
• 1:12:01
  SPEAKER_01: So uh we look at uh a much lower price to cash flow ending multiple than the current market multiple.
• 1:12:09
  SPEAKER_01: So we we automatically price in some multiple uh contraction over time uh to to um to get a bit of a uh depression, if you will, on the on the valuation there.
• 1:12:21
  SPEAKER_01: Uh and then we we have scenarios with uh a bit more conservative assumptions uh so that we that we um we don't get uh we don't we don't get too optimistic.
• 1:12:33
  SPEAKER_01: But when you're paying um a multiple of 25 times or 30 times today, that could be uh depending on the growth rate, that could be uh uh a market multiple or a lower than market multiple uh in in two or three years time.
• 1:12:50
  SPEAKER_01: So it also depends on your investment horizon.
• 1:12:52
  SPEAKER_01: If you're owning a company for for a year, then then paying too high a multiple might be problematic.
• 1:12:59
  SPEAKER_01: But uh again, to add a maybe a quote by Charlie Munger, um, which is all saying uh he said that at some point over the long term it's hard for a stock to earn a better return than the business, which which underlies it.
• 1:13:14
  SPEAKER_01: So if the business earns a six percent return on capital over a very long period, like 40, 30, 40 years, and you hold it for that time, then uh it's it's very hard to get much more than six percent, even if you pay the very low uh multiple.
• 1:13:30
  SPEAKER_01: And then uh conversely, inverting that if you uh a high multiple, but the company earns, let's say, 15 or 20 or 25 percent returns on their on their capital over that period, then um that's going to be the main driver of your return as a as a shareholder.
• 1:13:49
  SPEAKER_01: So um it's it's very hard to get a different return than that 15 to 20 percent if the company uh uh earns that.
• 1:13:57
  SPEAKER_01: That is of course on a very long-term basis.
• 1:13:59
  SPEAKER_01: So I mean you do have to be mindful, don't pay um uh maybe uh 60, 70, 80 times uh cash flow.
• 1:14:09
  SPEAKER_00: What about 600 times earnings for Palantir?
• 1:14:12
  SPEAKER_01: Yeah, I was just thinking of Palantir.
• 1:14:14
  SPEAKER_01: So don't I would I I wanted to say don't pay 100 times revenue or 600 times earnings.
• 1:14:20
  SPEAKER_01: Uh that's that's um yeah, 100 times revenue.
• 1:14:22
  SPEAKER_01: Um yeah, I mean, I mean it's it's just very hard to see you making making money there.
• 1:14:26
  SPEAKER_00: So I mean, I mean you can in the short term, right?
• 1:14:29
  SPEAKER_01: Yeah, you can in the short term.
• 1:14:31
  SPEAKER_01: I mean, especially momentum is a very strong force in the market, so it's very it's very hard if you're a contrarian and you think, hey, uh it's interesting to buy into into alphabet um in February and then uh and then uh you see the the prices pushed even lower after the uh after the Trump tariffs uh for instance.
• 1:14:51
  SPEAKER_01: Uh but now we're back at at around 200, so I mean for the for the for the A shares.
• 1:14:56
  SPEAKER_01: So I mean it it's it's depending on your it's depending on your horizon.
• 1:15:02
  SPEAKER_01: If you're if you're buying a company for if if your investment horizon is is one year or less, doing anything other than than being in a in a cash or a bond like security, uh I would say is is is speculation.
• 1:15:17
  SPEAKER_01: So uh I would I would I would advise you if uh if if a client comes to us and says, oh I I want to make some money in in the next six months, um I said, well you might as well go to the casino because uh your your odds aren't going to be that much differ different.
• 1:15:33
  SPEAKER_01: You never know what what tomorrow will bring on the stock market, but uh a rolling period of 10 years where you have made a negative return in equities, and especially in these these these top-tier equities, is very hard to find.
• 1:15:46
  SPEAKER_01: So yeah, that's a a point I would I would I would say there.
• 1:15:49
  SPEAKER_00: Yeah, I think that's uh that's uh that's great advice.
• 1:15:52
  SPEAKER_00: It's uh you to you you you briefly mentioned momentum.
• 1:15:55
  SPEAKER_00: I think it's one of the reasons I absolutely hate shorting stocks.
• 1:16:00
  SPEAKER_00: Uh, first of all, you can only earn like a 100% right, so you can uh uh double your earnings.
• 1:16:06
  SPEAKER_00: But besides, I mean, let's say you're a shorting palanter, I think you're very likely to be right, but who knows whether that's going to be six months, a year, five years, ten years, right?
• 1:16:17
  SPEAKER_00: So yeah, momentum is a strong force.
• 1:16:20
  SPEAKER_01: I think Peter Lynch said you can you can be the market can be irrational for much longer than you can stay solvent.
• 1:16:26
  SPEAKER_01: So I I will just end my thoughts on shorting there.
• 1:16:29
  SPEAKER_00: I always like to end with your best piece of advice to investors.
• 1:16:35
  SPEAKER_00: It can be anything, but something you wish you knew much earlier or starting out.
• 1:16:40
  SPEAKER_00: So, what would be uh your best piece of advice to our listeners?
• 1:16:44
  SPEAKER_01: Something that is still underestimated, even even by by by me and by our company, to be honest, is uh the power of incentives.
• 1:16:53
  SPEAKER_01: In the end, everything is going to be driven by what you're paid to do in an organization.
• 1:17:00
  SPEAKER_01: So incentive informs culture, uh, culture informs the very long-term returns that you can make as a shareholder.
• 1:17:08
  SPEAKER_01: Uh, if you're incentivizing on uh revenue growth and an absolute number of revenue growth, uh you're going to buy everything, no matter if it's a negative, negative uh net present value uh equation.
• 1:17:23
  SPEAKER_01: Uh if it destroys value, but you you earn uh you earn a bonus for for doing it, then um then then you're in the end you're you're just going to do that.
• 1:17:35
  SPEAKER_01: So uh from the very top level of the organization to key decision makers lower in the organization, I would say incentive structures is the that's the the the number one thing that that you um that you need to look at.
• 1:17:49
  SPEAKER_01: And and uh a combination of that with with the importance of skin in the game, I would say partnering with good management teams that have a large part of their own personal wealth invested in the company.
• 1:18:01
  SPEAKER_01: Whether that's whether that's one million for a small cap or uh uh ten billion for a large cap, uh 10 billion can be can be uh a small stake, while one million can be a lot of money, depending on the the company.
• 1:18:14
  SPEAKER_01: So that that those are the the I would say the most important things to look at.
• 1:18:19
  SPEAKER_00: That's uh a great note to end on.
• 1:18:21
  SPEAKER_00: Uh thank you so much for coming on the show, Michael.
• 1:18:25
  SPEAKER_00: Uh I hope we I hope we can do something like this again sometime.
• 1:18:29
  SPEAKER_00: It was a lot of fun, and uh we really do appreciate you taking out the time to talk with us.
• 1:18:33
  SPEAKER_00: So thanks.
• 1:18:34
  SPEAKER_01: Always fun to talk about investing.
• 1:18:36
  SPEAKER_01: So thank you very much for uh for your time uh for uh for listening to my ramblings on these kind of companies.
• 1:18:42
  SPEAKER_00: I love your ramblings.
• 1:18:44
  SPEAKER_00: I I wouldn't have asked you asked you any uh any other way.
• 1:18:47
  SPEAKER_00: Um before we go, is there a place people uh can reach out or find or learn more about you or uh the fund?
• 1:18:55
  SPEAKER_01: Yeah, so it's it's um um I'm always active on on X or Twitter, so so uh uh that's at Michael Gilkins, uh which is just my first last name.
• 1:19:06
  SPEAKER_01: Um and I try to tweet some interesting stuff there on markets or on uh on especially on on holding comp holding companies and serial acquirers.
• 1:19:14
  SPEAKER_01: I would say an especially useful resource could be our newsletter, which is which is free.
• 1:19:19
  SPEAKER_01: Uh and every week it's um if you copy and paste everything into uh into uh a Word document, uh it's often exceeding 30 uh 30 pages uh on a weekly basis.
• 1:19:30
  SPEAKER_01: So you have to be a nerd if you want to read everything, but um yeah, we we try to give our view on on markets on uh but uh especially on these kinds of companies.
• 1:19:40
  SPEAKER_01: So it's a deep dive, it's uh news news facts on um on holding companies and serial acquirers, and uh often an um uh a short write-up or an investment case.
• 1:19:53
  SPEAKER_01: Uh and and that can be approached via our our website, treasurecapital.nl.
• 1:19:58
  SPEAKER_00: Is that in English as well?
• 1:19:59
  SPEAKER_01: Uh it can be translated, but we are we are working on uh we currently use MailChimp and we are looking to migrate to a um to a to a platform uh in a couple of weeks at the latest, which uh automatically builds in a translation function uh at least into English and uh maybe a second language, so uh maybe people can reach out to say which language they prefer, whether that's German or French or uh or Spanish, uh Chinese.
• 1:20:28
  SPEAKER_01: Yeah, Chinese, well you never know.
• 1:20:29
  SPEAKER_00: So uh a billion people, right?
• 1:20:32
  SPEAKER_00: The the Chinese capitalists.
• 1:20:34
  SPEAKER_00: Yeah, but um for our listeners, I mean nowadays you have so many AI tools, just copy and paste it in ChatGPT, and uh you'll have the translation uh mostly correct.
• 1:20:43
  SPEAKER_00: I'll make sure to put all the links in the show notes and in the description.
• 1:20:47
  SPEAKER_00: So welcome.
• 1:20:49
  SPEAKER_00: Great talking to you, Michael, and uh, you know, you're gonna be a