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Interview with Peter Wick, Managing Partner, CDL Principal Investors — Transcript

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0:02[Music]
0:12Peter your focus is on Europe and U
0:16there are lot of different countries uh
0:18I'm curious to understand better based
0:20on your
0:21experience uh what are some of the
0:24pitfalls um when it comes to uh
0:28investing as an owner for the long term
0:31in European companies uh how do you do
0:34things differently and uh how do you uh
0:39best achieve your goals uh as an
0:41investor in Europe okay well I you know
0:45as I said we have um we have a
0:48traditional value approach uh but um in
0:52addition to this traditional value
0:54approach uh we have uh an ownership
0:57approach an active ownership approach
0:59and to
1:01exercise uh control influence and
1:03ownership um across European country
1:07indeed it's different um in in uh you
1:11know depending on on the the the
1:14legislation the culture um of the
1:17respective country and so while the the
1:20numbers are the numbers uh uh in every
1:23country uh are the same U I think uh the
1:27way we
1:28approach uh Industries or companies uh
1:32is very much um know beside having the
1:36the eye of a of a value investor we also
1:39want to have an eye on how can we as
1:42owners how can we develop the company in
1:45a value orientated way um and uh that
1:49you can only
1:50do uh in the framework of uh the
1:54governance of uh of that particular
1:56company and that particular country and
1:59the governance there I basically would
2:01say is there are two two sides to it one
2:05is what I call governance formal
2:07governance and the other one is
2:09governance in fact and the formal
2:12governance obviously depends on on the
2:14rules and regulations of that particular
2:17country and then obviously the
2:19governance in fact is uh you know who
2:23are your management uh um you know what
2:26is their what are their attitudes
2:29attitude uh how how do they communicate
2:33um you know how they approach uh how do
2:36they approach um uh the shareholder um
2:40um what is their understanding of um of
2:45um Capital allocation etc etc and you
2:48know there there's a lot of um to this
2:52day there is um it's very heterogeneous
2:55I would say I would say both the
2:57governance uh in a formal way the the
3:00governance in in fact you know if you
3:03let's say starting a good example is
3:06obviously attitudes to to shareholders
3:10um um it's you know in the UK in an
3:15Anglo-Saxon context you have the concept
3:17of fiduciary duty U stewardship the um
3:23which is very much ingrained into the
3:25law but also in the mentality um of of
3:29management um um uh I think it's a clear
3:33understanding that uh management is the
3:36steward of of the shareholder um at U
3:41that the company is
3:43entrusted by the shareholder uh to to
3:46management whereas at the other end of
3:48the
3:49spectrum um uh let's say the Germanic
3:53approach uh which is prevalent in
3:58both uh Germany and
4:00Switzerland um management um views
4:05itself and you know it's legally uh uh
4:08um actually enshrined there is no such
4:12thing as people often forget uh there is
4:15no notion of fiduciary duty uh uh
4:20there's no legal notion of it and uh and
4:24management views itself as one of the
4:28stakeholders in the company the
4:30shareholders obviously being stakehold
4:32stakeholders as well uh but the
4:35stakeholder concept as opposed to the
4:37shareholder concept has far reaching
4:41consequences in the way people are
4:43interact with with shareholders so in
4:45other words typical German management or
4:48typical Swiss management will without
4:51any U you know bad intentions or face
4:54will will not accept uh the notion that
4:58they are uh that they have a fiduciary
5:00share uh Duty towards the shareholders
5:03they view themselves as a part of the
5:05corporation that is you know
5:08shareholders are a part the creditors
5:11are a part um some say even clients or
5:15shareholders or stakeholders and
5:18obviously most importantly in in a in a
5:21Swiss and in a German context the
5:24employees so um so this you know this
5:29sort of framework is is a very very
5:31different one in the end
5:33obviously um you know what we want is uh
5:38we want value orientation a value
5:41orientation means that we want to to uh
5:46to uh to have the optimum uh shareholder
5:49value possible and I think in both at
5:53both ends of the Spectrum in a in a UK
5:56context as in a Germanic context uh you
5:59can get there it's just that you have to
6:01approach it you have to approach it
6:03understanding uh the mentality the the
6:06law etc etc that is behind it the
6:09Netherlands is kind of in in between as
6:11I always
6:12say uh it has a little bit of both
6:16traditions and um um an interesting case
6:21um I would say is also
6:24um uh you know the the the regulations
6:28as to um acting in concert um which is
6:33which are very important to us because
6:35what we usually do uh before we um
6:40before we have
6:42um before we enter a position which by
6:45definition in our case is usually a
6:48liquid or at least very large um we
6:52obviously want to know we have to know
6:55um you know who else is invested in a
6:58significant way and what their
7:01attitudes uh are um I.E how how
7:06they you know how will they react to to
7:10uh to our presence in in the company and
7:12uh and how will they react to our
7:16ownership strategy or at least to our
7:18concept now in a in a Dutch Concept in a
7:23Dutch context for instance there's
7:26virtually no barrier to um talking to
7:30other shareholders uh it's uh um you
7:33know acting in concert is not viewed uh
7:36broadly speaking is not viewed as
7:39something um you know problematic um and
7:43uh there are
7:46um the laws compared for instance to the
7:49Swiss um uh law as far as acting in
7:52concert is concerned uh are
7:55diametrically uh um different that also
7:58comes from
8:00from a mentality let's say from a
8:03cultural background where um in in the
8:06Netherlands um you tend or you used to
8:10have at least very
8:12concentrated Dutch shareholder groups
8:15who were just by tradition goes back in
8:18two centuries or three centuries um who
8:21were used to uh talking together
8:25deciding on uh uh on the fate of of the
8:28company on you know as owners um um you
8:31know who should be the management of the
8:33company um um should they diversify
8:36should they uh increase the capital
8:40decisions of that kind it was it was
8:43just very normal that uh that uh the
8:47Dutch shareholders uh you know would
8:49talk to each other in openly about it
8:51and take decisions together outside of
8:54the framework of of uh of a general
8:57assembly now
9:00uh that is a very different concept uh
9:03from for instance the the Swiss one
9:07which uh which is much more um inspired
9:11in that respect by the
9:13Anglo-Saxon um concept uh that you know
9:16you're you're
9:18uh every shareholder has a right at
9:21least to know um if there are
9:24shareholder groups that in somehow um uh
9:28have an influence on the company and uh
9:31and uh you know every shareholder should
9:33be protected against uh let's
9:36say uh information as symmetry U you
9:39know IE if you're a shareholder in a
9:41company in this country in Switzerland
9:44um you have a right to know what other
9:46shareholders groups uh who they are
9:49number one and ideally what what they're
9:51thinking so that is um uh having said
9:56that um Switzerland has one of the most
9:58strict this um acting and concert uh
10:03regulations u in uh in
10:08uh as far as I I know in Europe so the
10:14the way you approach these
10:17shareholder contacts is by definition
10:20has to be totally different uh and um it
10:23has also evolved in a Swiss
10:26context um to the point that um
10:30you know the way we resolve this is is
10:32quite simple we we will talk to the
10:34other
10:35shareholders uh while we are simply not
10:39shareholders ourselves I will not buy a
10:42single
10:43share um when we you know before um not
10:48having ended these uh these uh it's part
10:52of our research
10:54really um so it's it's part of our
10:56research really we have to uh it's very
10:59important um to know the attitude but
11:01you can only find
11:03out uh while um in in without having
11:07this problem that uh you you have to uh
11:11uh disclose that you're acting in
11:13concert and thereby engaging the names
11:15of the other shareholders as well um if
11:18you're not a shareholder yourself so
11:21it's a it's kind of a relatively
11:24complicated uh uh Affair but you have to
11:27know that if you're Shar holder and you
11:30start talking to other shareholders in
11:32this country there is a very low
11:34threshold to having this having to
11:36disclose it and the moment you disclose
11:38it uh you know if if uh if you have to
11:42disclose this early on in your game plan
11:44obviously that can that can uh change
11:48your your ability
11:50to to get to the position that that that
11:53you want so that's it's a big difference
11:55between the Netherlands and Switzerland
11:57for instance so um these are a few um
12:02these are a few U uh examples of uh you
12:06know how you operate in or why you have
12:09to operate differently in one country uh
12:12versus the other I mean in in terms of
12:15the practicalities of ownership
12:17orientated
12:19investing um and another very important
12:22in mind view very important uh factor is
12:25that you know should you be on the board
12:28as an executive uh should should one be
12:31represented on the should one be
12:33represented in the board and you know
12:36the broad answer is in a in a UK context
12:38that is almost never
12:41necessary because there's a strong
12:44framework of uh checks and balances in
12:47place uh there is a there's also a
12:50notion um that uh just because you're a
12:53large shareholder uh you know um it
12:56doesn't necessarily qualify you
12:59uh to uh to be a sharehold to be a board
13:03member of this of this company uh and
13:06you can as a large shareholder you have
13:09the same rights as everybody else
13:11obviously plus you have a framework that
13:13in any event protects your interests and
13:16uh there's no necessity in terms of
13:19governance formal governance at least to
13:22be on the board and that indeed that is
13:24U um also our experience um uh you know
13:29there is a we have been active investors
13:32in in the UK context and usually we
13:35there is no simply no need to be on the
13:38board because uh your rights uh were
13:43very well protected uh and was the
13:45notion of stewardship and uh fiduciary
13:47duty plus um the
13:50communication with management was always
13:53on a level where there was no need to be
13:56in the meeting uh uhuk you could very
13:59well understand what was going on in the
14:02company by not being an inside now in a
14:05in a Swiss
14:07context um and in German context uh that
14:10is radically different I think uh and
14:13that's again I'm not talking
14:16about um you know ill will or bad
14:21intentions it's just the way it is um um
14:25uh I would say if you if you are
14:29you know have an important ownership
14:31role to play in a German or in a Swiss
14:33company I think I would strongly
14:35recommend as the rule with the exception
14:39fine but basically I would strongly
14:42recommend um rep board
14:44representation because um of this uh
14:48concept that I talked about before um
14:51there's less checks and balances in
14:54terms of you know the actual uh owner uh
14:59versus management there is u u very
15:03often uh especially when it comes to
15:06Capital allocation m&a
15:08decisions uh also often more and more
15:11compens compensation
15:13issues um there is simply uh you simply
15:19do not have the kind of checks and
15:21balances in control um just by law or
15:25just by the force of the market or the
15:27institution institutions uh the
15:30institutional framework what what you
15:32need is uh a personality uh that fits
15:37into into a board and that it has the
15:41facto the ability to uh to make uh
15:46himself or herself heard on on behalf of
15:51of the owners or of of us as us as
15:54co-owners so you know it's very
15:57important U than you choose the right
16:00person I think it's by no means uh
16:03only by no means uh you know necessarily
16:06uh myself or the
16:09investor um what we do usually um we we
16:14uh through our industry research U uh
16:19which we which obviously we
16:22practice uh for many months often before
16:25we enter any position we usually know
16:28know an industry very very well and we
16:31also build up a network of Industry
16:34experts it's a Executives uh people who
16:38have worked at an executive level in
16:41this industry for 10 or more years and
16:43uh we recruit them um sometimes to
16:46advise us uh sometimes also as as board
16:50members uh in advance of taking the
16:53position so we know
16:55exactly who it is we want on the board
16:59and it has to be uh in in most cases
17:02it's
17:03somebody U familiar with with the
17:06industry and if not it's somebody who
17:10where where we know there's a fit not
17:13necessarily in terms of there always be
17:15a nice consensus or anything but a fit
17:17in terms of getting things done you know
17:20it's not done by having some kind of
17:24figurehead in U in the board where you
17:27know if that person is not able
17:31to uh to function in the in in the
17:34concrete context I let's say for
17:37instance uh that he or she is not able
17:40to to interact in a in a meaningful way
17:44in an effective way with the CEO you
17:46know that is not helpful you know so uh
17:49so it's very important um um you know it
17:53goes back to how to avoid value traps uh
17:56it's it's it's it's basically
17:59knowing uh the industry well enough to
18:02also pick the right people to go in the
18:05board in in this trumic context you know
18:09UK context it's it's a bit different
18:12could you give us an example um about a
18:15past investment a case study that
18:18exemplifies um uh some of the things you
18:21talked about some of the issues and how
18:23you thought about them uh and and give
18:27us a sense of how you Source the idea
18:30all the way through what were the U
18:33thoughts around exiting it and what
18:35happened yes absolutely well I can take
18:38um an example a Swiss
18:42example uh company called
18:44Vora uh which um we entered in
18:50U7 um it um it had you know how how do
18:56you actually Source uh an IDE like Lora
19:00uh
19:01it's you know it's basically uh what
19:04we're looking for in in all cases is um
19:09and that's the difference to let's say a
19:12pure restructuring approach we're
19:13looking to to a business model to find a
19:16business model that um that carries um
19:20free cash flow um the reason being um
19:24you know I call this a positive cost of
19:27carry in our business uh which
19:31is um which is to own a company and to
19:34develop a company you don't want to have
19:36to work against time you the moment you
19:40have negative cost of carry obviously uh
19:43you you uh time is your your enemy now I
19:47want time to be my friend because I can
19:50only do my job as an owner if I don't
19:54have an explicit time limit the moment I
19:56have an explicit time limit I lose my
20:00sovereignty as an owner management feels
20:02that uh every stakeholder in a company
20:05feels it and I lose my legitimacy as an
20:08owner and therefore my Effectiveness so
20:12um you know many many uh of our peers uh
20:16or you know mistakes that I've seen uh
20:20in what the what they call the the
20:22active investment space is actually um
20:25you know i' had warn every everybody
20:27against it is is uh to to have invested
20:30in a in a company or in a in in an
20:32industry where uh where time is your
20:36enemy so that's that's very important
20:39the second thing and obviously in Bora I
20:42can explain why uh there was clear
20:44evidence of there being a relatively
20:47massive uh uh intrinsic free cash flow
20:52um you know the the other thing
20:55obviously um what you want to to to see
20:59is an industry industry dynamics that
21:03are we in capitalism you cannot we in
21:07Creative destruction you
21:08cannot foresee uh you know how
21:11Industries change but I think you can
21:14foresee the pace uh of of change uh and
21:18what we want our relatively stable
21:22industry Dynamics for this very same
21:24reason um you you you know you want to
21:27be able to focus on the ownership issue
21:29at stake uh you don't want uh to have
21:33too many external pressures uh while you
21:36focus on what is going on in the company
21:39I mean there's always external pressures
21:41but uh to the extent you can um you you
21:45go for a relatively stable industry now
21:48stable Industries or Industries you know
21:51or companies um as Warren Buffett would
21:54say you know who who uh who one number
21:57one one can understand but
21:59also who um who are presumably still
22:03around in 10 years from now in about a
22:06similar shape as we as we have them
22:08today you know that's but that's that's
22:11basically what you want so that leads
22:13you automatically usually you you by by
22:17by looking at this criteria very hard it
22:20it leads you to
22:22mature uh Industries uh with relatively
22:26Consolidated
22:27concentrated um um sort of market
22:31shares um ideally uh you end up in
22:35oligopoly or some sort uh where you have
22:38a number of players who all know each
22:40other and you know who they all play
22:43according to certain rules i' say um now
22:46in know vor's case uh it was clear we
22:48had the cash flow we had uh basically um
22:53a monopoly situation um uh or duopoly
22:57but it's it was more almost like
22:59Monopoly situation in the kiosk business
23:01in Switzerland the Monopoly was based on
23:06and that was the
23:07charm um about it it was not so much
23:11based on any artificial uh uh barriers
23:15or regulation uh it was based
23:18on um it's a so-called natural monopoly
23:21which is based on the nature of the
23:24distribution
23:25Logistics uh in in Switzerland uh where
23:29where you have it's a
23:32very um it's a very uh costly
23:38uh basically impossible to rebuild a
23:41logistics system uh in in a country that
23:45has particular topography it's uh it's
23:48very dense uh it's uh it uh you know we
23:52had some 1,700 uh uh Point of Sales uh
23:57and uh you have have to uh deliver twice
24:00a day uh to this point of sales uh a
24:04relatively low value High mix type uh uh
24:09um type uh load um and um you know to to
24:15build the distribution system that
24:17functions for these kiosks to build a
24:20second one a competing one is simply not
24:22an economic uh proposition and we knew
24:25that I mean we that we did our research
24:27on that
24:29uh we we as always we went very far we
24:32uh we hired uh we recruited and hired
24:36industry
24:37expert
24:38um who uh you know who advised us on on
24:43on these matters and you know we also
24:45learned in the process that
24:47actually um some clients uh uh
24:50especially the the Publishers um who uh
24:55who have their magazines and newspapers
24:57shipped
24:59by Vora to these
25:01kiosks um um were unhappy about the
25:05Monopoly and the the rent that went with
25:07it and they actually they were they were
25:10attempts several in the past by those
25:13clients to to uh to rebuild the system
25:17and to compete against their provider
25:19but U they didn't succeed so we knew we
25:22had a very we had a strong uh uh
25:25position uh um that that was based on on
25:30in this particular case on uh it was a
25:33natural monopoly based on physical and
25:36economic uh rules um
25:40which which would apply independently of
25:44who the management of the company was
25:46now that is so so you know very
25:50important uh criteria if you want to do
25:52the job with you and then the third
25:54thing you look for obviously is the
25:56Improvement potential
25:58um now every every company as every CEO
26:02knows can be
26:03improved uh what you're looking for is
26:08what you can improve as an owner um and
26:11and you as an owner you are not
26:15qualified to to run the company
26:17otherwise you should be the
26:19CEO but you're certainly qualified if
26:22you do a good job um in getting engaged
26:26in a number of what I call ownership
26:29decisions or and and you know obviously
26:33first and
26:34foremost um your your it's it's your
26:39right and and and your your um your
26:42responsibility to appoint uh the right
26:45management so management team secondly
26:49uh you know questions of um uh in the
26:54case of Vora which is the conglomerate
26:56it's obviously questions of capital
26:57allocation ation and business mix how
27:00much risk how much opportunity what is
27:03the Right Mix how do you allocate
27:05Capital across the company um Etc m&a
27:10decisions obviously and compensation
27:11decisions these are the sort of
27:14decisions
27:15that we think we we you know we do a a
27:19good job with and uh that in in addition
27:23to us being reasonable value investors
27:26that that distinguish our approach so
27:28you want to
27:30find you want to find
27:33uh a uh what we call uh the uh the
27:37ownership
27:38Gap uh
27:40meaning an improvement potential or
27:44value potential that you can bring about
27:48um as opposed to let's say companies
27:51that are in turnarounds by you know
27:54management already etc etc where you
27:57know you can't really ask anything as an
27:59order so in Bora it was very very clear
28:02you had um you had um Vora is a good
28:07example in the sense that in it was an
28:09extreme case where based on these cash
28:12flows based on Monopoly decision uh
28:16position and management over many many
28:18years we would say 15 years uh
28:22roughly um 15 years um had done
28:29um had not led the company in a value
28:32orientated way it had all the attributes
28:35if you looked at it from a numbers point
28:39of
28:39view um you had basically all the
28:42attributes of a value investment but
28:45also all the attributes of the value
28:47trap which is which is very hard to
28:51detect obviously if you don't if you're
28:54not willing to go into you know who the
28:56man who management are and um how have
28:59they you know how has Capital allocation
29:03worked in the past and
29:05why you know what has to change in the
29:08company um or what has to change in
29:10general for for the value to be
29:12Unleashed or or the value trap to be
29:14eliminated and in this particular case
29:17it was clear to us and maybe that's
29:20another
29:21thing you know these investment
29:23decisions are not
29:25taken in a matter of weeks or not even
29:27months and Vora was a case where we
29:32knew that we would invest one day and we
29:36had followed the company
29:39over I would say this particular case 10
29:43years um and we were waiting for the
29:45right window to to to to invest and the
29:49right window obviously is when uh when
29:53when valuation is you know is is is
29:55where it is and incidentally and time
29:58they had a profit warning uh one of
30:01several but in the end the one that sort
30:04of broke the cameel back where
30:08management
30:09credibility The credibility of the
30:11company in the Capital Market was was
30:15very badly damaged I mean it was not
30:17just uh that's what you're looking for
30:19you're not looking
30:21for you know usual events where you know
30:24it can happen you miss a number I mean
30:26that's not an issue but if you
30:28if your credibility is
30:31really gone and and there's
30:35capitulation big scale
30:37capitulation in terms of uh Capital
30:40Market participants that is where we act
30:43we always knew that there was an
30:45ownership Gap but the valuation wasn't
30:47quite there so we were waiting and
30:49waiting and waiting and so when when the
30:52time came we we we did you know more
30:55research obviously and um and it was
30:58very clear that management had not
31:02allocated Capital
31:04properly meaning uh the degree of
31:07diversification in The Firm was much too
31:09high it was it had the Monopoly business
31:11the kiosk business as a monopoly and had
31:14several other businesses that I won't
31:16get get into which You know despite
31:19claims to the contrary had no Synergy
31:21and were capitalist allocated into um in
31:24in a in a way that was not value
31:27orientated or not value creating um
31:31so in valora's case in addition and that
31:34that was difficulty but also the
31:37opportunity it was obvious um obvious
31:41after you know serious
31:43research obviously that in this
31:46particular case I'm afraid to say uh
31:49executive management was operationally
31:53incompetent um so so they didn't have
31:57the skills I'm talking about the CEO the
32:00CFO and
32:01most
32:03about half of the division upper
32:07management in divisions had did not have
32:10the requisite skills
32:12background from a pure experience point
32:16of view but also from a leadership point
32:18of view to to manage this company this
32:21company deserved uh it's a large company
32:24um deserved a better management and now
32:27why this why so so in a Swiss context
32:31the responsibility obviously of of
32:34appointing management is um is with the
32:37non-executives in in in especially the
32:40chairman and um and uh you know it was
32:44clear that the chairman of the
32:47company basically had allowed himself to
32:51to put together a management team that
32:53simply in addition to
32:56being very deficient in capital
32:58allocation also which makes makes M
33:01matters much worse um um was
33:05operationally uh substandard so now why
33:09did the company still generate cash
33:12obviously uh because of the Monopoly
33:15situation so we had a situation where
33:19which is rare uh well not rare in the
33:21sense that we see management weaknesses
33:25but it was rare in that it was a very
33:27rare case where we invested in a company
33:29knowing in advance that we would have to
33:33exchange all of executive
33:36management usually what management is
33:39not is not homogeneous you have a group
33:43and you have we call them allies and uh
33:47and others so we have elements in
33:50management where we definitely can work
33:52with and maybe others we can't it's very
33:54rare that we that we have a situation
33:57which actually I had at the time in
34:0120202 that I alluded to uh or now in
34:05aora where where we knew and we had to
34:07exchange all of management in our
34:10looking back we we have done about um uh
34:1520 such investments in 10
34:18years and in about 2/3 of those
34:22investment we never had to change
34:24management at all we always had a
34:27situation where we could work with
34:28management engage with them and uh in a
34:31onethird where we did change management
34:34U um it was rare that we had to
34:37exchange uh you know everybody I mean
34:40everybody at the executive level that's
34:41that's I think Vora is uh valora is
34:45probably one of two two cases where
34:49where um but it was necessary so um we
34:53knew that by bringing about proper
34:56Capital allocation by bring about proper
34:59um
35:02um operational management um that we
35:06could uh substantially lift the value of
35:09the company both in terms of the actual
35:12earnings through a margin
35:14expansion uh which simply you know had
35:17to be done uh through through a number
35:19of
35:20operational um measures and we knew also
35:24that we could get a better multiple
35:29uh by by you know by increasing the The
35:33credibility of the company over time and
35:36we knew that in terms of capital
35:38allocation we
35:40could um we could um um bring in checks
35:45and balances and and you know avoid um
35:48value destroying Decisions by management
35:51so what we did uh we uh as as I alluded
35:55to before we did our industry research
35:58we we uh
36:01recruited um we recruited a very senior
36:06figure uh from uh you know out of the
36:09retail space um here in this country um
36:13we uh we
36:15uh prepared an operational plan a
36:18strategic plan together with uh what was
36:21going to be the future
36:24chairman and um and uh we we looked at
36:30already in advance uh you know which uh
36:33what what sort of management would we
36:35need starting obviously with the
36:37chairman who who already
36:39was um you know obviously in dialogue
36:42with us as so we developed the the
36:44ownership strategy and and some of the
36:47operational
36:49turnaround parameters together with with
36:51the chairman the future chairman uh all
36:54of that before buying one single share
36:58uh we then talked to other uh known
37:02shareholders um which in one particular
37:05case uh was uh the institutional arm of
37:09a of a Swiss Private Bank uh which um
37:13usually are obviously not known for any
37:15kind of
37:16activism and the question we had is you
37:19know would they
37:22support um an ownership strategy with
37:25you know not we didn't give them any
37:28details you don't do that but you you
37:31can uh clearly in this case uh it was a
37:34matter of asking the incumbent chairman
37:36to resign and would and the The crucial
37:39question is would they as basically the
37:42largest and you know most well-known
37:46shareholder would they
37:50support would they support um you know
37:54us us uh changing
37:58the chairman in this in this particular
38:00uh way and you know level of support it
38:03means it goes all the way from active
38:05support public support private support
38:08passive support there's a lot of Shades
38:10that you have you better be
38:12sure uh you know to find out and how do
38:15you find out by meeting
38:18people um so you have meetings with them
38:21uh you you do that without
38:22having invested so you can avoid any
38:26kind of concultation
38:28issues um in this particular
38:31case um we um we got the green light so
38:36to speak um and we knew that from our
38:39analysis that most other shareholders um
38:44known shareholders large shareholders uh
38:48um once the lead investor the then lead
38:52investor got the ball rolling that they
38:54would follow soup and so what we we did
38:57um we we invested and we asked the first
39:00thing we did we asked the chairman to
39:03resign uh privately obviously this is
39:05not uh we didn't have no
39:08intention per se to to do this uh in in
39:11the public realm there's no reason to
39:15and U well he resisted and we had to
39:19escalate the matter um which is also U
39:24you know rare but I will I would say
39:27this to anybody who is in in uh you know
39:31the business of ownership there too you
39:33have to give yourself the means to act
39:37um and the moment
39:40you you're uh your
39:42counterpart notices that you are limited
39:45in some way uh you lose your ability to
39:47change the company so well we we uh we
39:52we we obviously have the ability
39:55to um to uh to take this
40:00public and there was a basically an
40:05outcry um in in the Press uh saying that
40:09the chairman should resign U there too
40:13it's very rare that we had to do
40:15something like that but we had prepared
40:17it because we could not be sure whether
40:20he would resign privately which then
40:23would have created less of a public
40:26debate but we also prepared
40:30obviously ourselves in very much detail
40:33for this public debate and we have the
40:35arguments which had nothing to do with
40:38the person as such but I mean we had the
40:40arguments as
40:42to uh the numbers the arguments as
40:45to um why this company had not done well
40:50over not over two years over 10
40:53years so uh we had
40:58a situation
41:00where the chairman who had taken the
41:02wrong decision to resist was in a no way
41:05win situation from from the start so and
41:08then obviously what what usually happens
41:11is they will talk to the incumbent
41:15shareholders asking them would they
41:17support would they support him and they
41:19all said no and he was not wise enough
41:23to do these calls before he outed
41:26himself uh you know uh as as resisting
41:29the resignation but but in the end uh
41:31you know that's tactics all I'm saying
41:34is give yourself the means to go all the
41:36way if if you do it privately uh if you
41:40have to take a step like that but the
41:43moment um you are openly seen as being
41:46limited to a private debate uh you will
41:48not there's a risk that you will not get
41:51get what what you want so anyway we uh
41:53he resigned we we got an AGM an egm
41:56sorry in a an extraordinary sharehold
41:58meeting um our our candidate was elected
42:02um um no opposition
42:04obviously and we got uh the board was
42:08renewed the non-executive board was
42:10renewed entirely um and within about 6
42:14months um the CEO CFO um many of the
42:20top um group management was was changed
42:24and uh we we then put in which is
42:27important part um a compensation scheme
42:31which we devised ourselves obviously in
42:35cooperation with the chairman but both
42:37this
42:38is you know ownership investing uh you
42:41know you don't leave it up
42:43to some committee that you don't control
42:47um you control it you you device it you
42:50engage with management but uh you you
42:53play that role very actively and we then
42:56you know if it was quite easy in the
42:58sense that uh conceptually easy not easy
43:02to do but what had to be done in terms
43:04of the operations I mean there was there
43:06were issues
43:08with that are probably in this context
43:11that are not so interesting but it was
43:13clear that it just had to be managed
43:15more professionally and um you know I
43:17can take one example
43:19which which was in a way shocking it was
43:23there had no link
43:24between um uh uh inventory uh control
43:29and uh and no Erp link that is between
43:33inventory control and and
43:36finance uh not no no functioning and you
43:40know that led to a lot of problems in
43:42inventory control and uh and finance and
43:45you know they were they were there were
43:47issues of uh of that nature um which
43:52which are obviously only
43:53symptomatic of even deeper issues and
43:56you know that that's another thing I
43:59said you know time has to be your friend
44:01this company could not be turned around
44:04fast because it had cultural Legacy of
44:08underperforming it had a cultural Legacy
44:10of middle management actually not
44:13trusting top management middle
44:16management was capable very capable and
44:19they were just used to 10 years
44:22of well to put it mindly um uh subar
44:27uh um
44:29superiors and so they were used to doing
44:32their own thing the best way they could
44:34and they would you know it was very hard
44:36for for New Management to actually uh
44:40gain credibility internally and uh you
44:43know these things take time so it you
44:45know gives you a bit of a flavor in a
44:47way what so valora you know went it was
44:5120 we talking 2007
44:53so he had ups and downs we had lemman uh
44:57you know
44:59better in our business is uh you know is
45:02not something we hatch beta is something
45:05you you know you just succumb to uh it's
45:08important that the value of the business
45:11as opposed to the value of uh share is
45:14improving constantly and uh you know in
45:17the midst of Leman post Leman uh we we
45:21know we had no thatb we had
45:24um increasing free cash flow we had
45:27visibility we had everything you want
45:30except the high share price but that's
45:32not something that bothered us uh very
45:35much no leverage in our portfolio no
45:38leverage in the company uh and you know
45:42we knew that there was marching
45:44expansion and in the end uh we we it was
45:47a happy happy story and we
45:50exited was a big game but but
45:54so um that that's uh you know that g see
45:57one one um sort of um case study which
46:05which is only atypical in that it was
46:07extreme that we invested knowing that we
46:10had to change management that's that's
46:12rare in a way I would not advise anybody
46:14to do it because if you if you can you
46:17should go the easier way with the
46:20management that you can engage with now
46:23the reason why we did it remember it was
46:25two it was 2007 seven and many share
46:29prices were very
46:30high um so usually or still too high
46:34anyway and
46:36you you know these cases you get them
46:39usually at the end of a
46:41cycle when uh when a lot of mediocre
46:45companies or companies that could should
46:48be developed are simply too expensive
46:50and this one was just a glaring case
46:53because of the profit warning when it
46:55happened uh it got to to a price level
46:58where um where it was just the the the
47:03risk um um opportunity tradeoff was was
47:07so good that
47:09we we did it but um we we one should
47:12hesitate I think it's also a mistake
47:15that a lot of activist investors make
47:18that they actually choose
47:20companies whose management they want to
47:23fight from the beginning and fight is
47:27definitely not what we want I mean we
47:30want influence and
47:31control and uh we want to engage and yes
47:34if there is a fight as shown in in
47:38Bora uh we want to be sure to win
47:42it so when did you actually get involved
47:45or rather your your client as as a
47:48shareholder in in the company at
47:512007 in in which point in the terms of
47:54the timeline that you describe oh uh
47:56it's just the after we talk to basic
48:00tactically after you talk to the other
48:02shareholders and then you you buy the
48:04and then you talk to the chairman you
48:06obviously have to talk to the chairman
48:07having the position otherwise you're not
48:10credible and so uh we talk to the
48:12chairman about resignation that was
48:17the can you give us um perhaps um an
48:22example of something that didn't work
48:24quite as you had expected
48:27um to give us a flavor of some of the
48:30challenges of U of taking control in in
48:36a European country what are some of the
48:39issues that you have to deal with the
48:41big issue is and that is very different
48:43to the American activist scene we as I
48:46said before you need for for many
48:49reasons that I hardly explained you need
48:52uh large positions you can't just go for
48:551% and then take it to the Press it's
48:59not effective so large positions means
49:02usually IL liquidity and it means that U
49:07you're engaged uh on a one-way Street I
49:10mean you're not allowed the retreat is
49:13not a
49:14possibility uh because then obviously
49:16you lose uh you know you lose your
49:20money and so what it means is two mainly
49:24two things one um you really have to
49:28make a very very big effort on uh
49:32industry analysis um this
49:35industry if you in addition to all the
49:38other exposure you take if you have
49:42sudden changes in the industry to the
49:45detriment let's say of the competitive
49:48Dynamics I.E if you have margin erosion
49:51in the in the industry that is not just
49:52on the company level if you have uh uh
49:56you know substitution issues
49:58technological change that um that can
50:02destroy your return or turn it turn into
50:06a loss in no time and you can the
50:09problem is you finding the exit uh in uh
50:13in in this sort of strategy is is very
50:17difficult uh you know another fallacy
50:20is you know that people I've seen
50:24investors saying well we can invest in
50:27this company because there's some event
50:30going to happen take over or an industry
50:33consolidation
50:34ET you
50:36know you have to be absolutely sure and
50:40it's it's not just on an intellectual
50:42level but also on the psychological even
50:44emotional level that you don't invest on
50:48the conviction or even the beginning of
50:51a conviction that some event will bail
50:54you out whatever the event
50:57is uh what you have to be sure is that
51:01you drive the event you
51:04control and you're not going to be event
51:07driven very is crucial because event
51:11driven investing is is is a discipline
51:15um that works but only if you have
51:18liquid positions and if you have a
51:20measure of diversification we are the
51:23contrary of that we're not Diversified
51:25we're not really liquid so to be non-
51:28Diversified illiquid in an event driven
51:30strategy is a recipe for disaster and I
51:33have seen the disasters uh we are I have
51:36to say we have never had a problem like
51:39that um um the other so the fallacy
51:42number one be sure that your business
51:45model your
51:46industry um does not all of the
51:49sudden um require
51:53Retreat because that Retreat is going to
51:55be very costly
51:57so make more than an effort more effort
52:01than let's say a common even highly
52:03professional value investor on that
52:05industry analysis you have to be
52:08sure to the extent possible paranoid
52:12almost uh to eliminate
52:16most risk on that side so reasonably I
52:21mean obviously there's always risk but I
52:23mean there there's it's important very
52:25important second thing is they do not
52:27rely on any sort
52:28of you know Redemption by events not
52:33even in a Cy because many of those
52:35companies are takeover targets by by
52:38definition the way I described but do
52:40not even think of being tempted
52:44by uh thirdly um and that is probably
52:47where we made mistakes as
52:49well uh when when it comes to changing a
52:52CEO
52:54specifically uh in the companies that we
52:57look at usually it's an outside invest
53:01it's an outside recruitment um do not
53:06underestimate the risk of a of a of a
53:09new CEO of an unproven unproven in that
53:13company um of having an
53:17outsider become the CEO of this company
53:21um the the risk in terms of the
53:23recruiting risk the symmetry of
53:25information you have
53:27and then the risk of you know the first
53:30year of of his or her
53:33tenure I can only say I used to
53:37be probably a little bit brush uh saying
53:40that I was better than you know I had a
53:42better better chance 50 50% chance to to
53:47find the right uh
53:48CEO uh if I had to and I I'm not so sure
53:53anymore so how do you it's very very
53:57difficult and
53:58and and I think in the end uh the best
54:01thing is to to avoid the problem all
54:04together if you can't try to find an
54:08neor person from within the company and
54:11if that doesn't work find some person
54:14you personally have worked
54:17with uh as a CEO uh
54:21uh and that you know intrinsically uh
54:24well I mean not through a recruitment
54:28process not through um executive Search
54:31somebody you know yourself so that's
54:34very I mean that is hard to do and I'm
54:36not saying that that one has to
54:38compromise in the end probably but um
54:40and I can give you an example where we
54:43where we made a mistake uh
54:45which again was a CEO
54:49appointment uh from the outside mistake
54:52number one and that one I will never do
54:54again we compromised
54:58on my rule always was and with that one
55:01exception and uh was that we wanted
55:05proven CEOs meaning no learning on the
55:09job we want if you have to appoint CEO
55:12in a in a difficult
55:14situation where you know there is a
55:16value Gap there is an ownership Gap the
55:18company has to develop you want somebody
55:20who has been CEO of a company before
55:23because the last step from being let's
55:27say U you know division head or uh to
55:31actually BEC the CEO is a huge step and
55:34U you cannot the track record of a
55:38division head is not in any way you know
55:42read my lips in any way relevant for uh
55:46you know the qualification or the track
55:49recet that person will have when they
55:51become a CEO well that one time we made
55:54the compromise we took um a very able uh
55:57division head from a very large company
56:00am CEO of that company wrong it's just
56:04simply wrong uh and it turned out to be
56:07a mistake and and um I can tell you why
56:10because this particular
56:12person was not able at least at this
56:15stage in in his career um to to take
56:19those
56:20uh lonely
56:23decisions that you have to take as a CEO
56:26that in the end U it was a person who
56:30performed very very well with in the
56:32context of that Corporation he had a
56:35very good references from his
56:38boss who uh we were very impressed by
56:41and um obviously in a way not seeing
56:45that part of the performance that this
56:48division had was able to deploy was also
56:50because he had a very good boss and so
56:53uh in in this in the context of this
56:56company and I won't mention the name
56:58because the person
57:00still um um still is a CEO now of
57:04another company and and I think
57:07hopefully it does better there but it
57:08was clear to me already and that that
57:11now I'm coming to the second mistake the
57:13first one was obvious I I should not
57:16have done that and we we we made an
57:18exception for certain reasons and that I
57:20will never do again so it turned out
57:23very soon uh we could see it by his
57:26behavior more than anything else
57:29that that he he had to be led by
57:33somebody very experienced and he could
57:35not be the leader of this company on a
57:37CEO level so we had a problem U now
57:42second mistake in a in a way
57:44was um or rather it's maybe a lesson
57:49also in that we
57:52were we were able to after about six
57:55months months um of his tenure we we we
57:59were convinced that we had made a
58:02mistake the problem was it didn't show
58:06up in the
58:08numbers and it didn't show up in the
58:10share
58:13price the the the capital Market gave
58:16this new management a lot of credibility
58:20uh it looked good the other shareholders
58:23whom we had talked to and we privately
58:26um shared our concerns with simply
58:30didn't believe
58:31us and we had the big problem that why
58:35we usually could count on on you know
58:38the the support of other shareholders
58:40because the stock price went up and
58:42there was no evidence in the
58:44numbers they
58:47decided to
58:50have not to
58:52act so it was a terrible situ sitation
58:57where I knew it was just a matter of
59:01time
59:03until you know we would we would lose uh
59:05uh uh value or you know we would we
59:08would have a
59:09problem uh uh we had a problem that was
59:12obvious but where the problem was going
59:13to show and
59:15then I knew that this was also going to
59:18have an impact on the share price ET ET
59:21so lesson uh there
59:24is you know you should should you should
59:28be do never you know we should not have
59:30hired this person in the first place
59:32because it was the first time CEO
59:33learning on the job no learning on job
59:35lesson number
59:37two when you have to do uh when you have
59:41to change uh a second
59:43time uh it's much harder to
59:46do because you have to act before it
59:50shows up in the numbers so you have this
59:53credibility
59:55boost by the market and you have to act
59:59against that based on your judgment that
1:00:01you made a mistake and the lesson there
1:00:03is you
1:00:05can't and and so which which is again
1:00:09saying that you know how difficult it is
1:00:13to or how risky it is to to change
1:00:17uh especially you see I mean some
1:00:20other management issues are much less
1:00:23risky but uh so not only are you very
1:00:26accident prone in choosing the person
1:00:28but if you have to exchange if you have
1:00:31to replace the person again you often
1:00:34can't or not in time then you have to
1:00:37wait until and so it happened we had uh
1:00:39it took us I think his tenure at the
1:00:42company instead of 6 months which it
1:00:44should have been was one and a half
1:00:46years and um and
1:00:49um there there were um there were U
1:00:52management issues which in the end
1:00:53showed up and uh shareholders were
1:00:56disaffected and um stock price went down
1:01:00and we had to find um a new Co which
1:01:04which we did which then was the right
1:01:06one and in the end it was
1:01:09painful uh we um made a very good return
1:01:13on investment uh
1:01:16but with a 2-year
1:01:18delay
1:01:20so um you know choosing CEOs uh I think
1:01:25one has to assume that that one makes
1:01:27mistakes anyway but don't force them by
1:01:29taking
1:01:31unproven uh or by thinking that they can
1:01:34learn on a
1:01:35job you mentioned that you've uh been
1:01:38involved in about 20
1:01:41um situations Investments uh over the
1:01:45last 10 years that you U had your firm U
1:01:48Can you give our audience just a bit of
1:01:50a flavor for uh perhaps mention a few
1:01:53other companies names that you've been
1:01:55involved in and what the just briefly
1:01:58what was the specific U um angle or I
1:02:03guess um what was interesting about the
1:02:06situation if you could just name a few
1:02:08um to give us a sense of the range of
1:02:10experience you've you've had yeah well
1:02:13the range is from we usually shy of you
1:02:16know going for hard
1:02:18restructurings uh but we had maybe one
1:02:21that was quite
1:02:24um was almost a hard restructuring where
1:02:28we had operational issues financial
1:02:31distress and management issues which is
1:02:34rare but we we did it for certain
1:02:36reasons there was a Dutch company called
1:02:39tlan which uh it's was back in uh I
1:02:44think our entry point was in 2004 or
1:02:47something and there was exit later um so
1:02:52that was I mentioned that because that's
1:02:54probably the most
1:02:57um the most the most complex
1:03:00restructuring because it was on all
1:03:02levels at the same time and um we
1:03:05wouldn't go any further than that I
1:03:07would think the
1:03:10company um it was not it was distressed
1:03:13almost and then at the other end of the
1:03:17spectrum um uh
1:03:20probably siba uh which is bought by uh B
1:03:26F which was our exit Zeba was very
1:03:32big uh I mean obviously a
1:03:35multi-billion company we had a
1:03:38relatively small stake but
1:03:41um um we we had a a very solid uh
1:03:46support by all the
1:03:48shareholders um and um siba
1:03:53was was um very interesting in that
1:03:58um there too we
1:04:02had we we had a management CEO situation
1:04:06basically and the board
1:04:08situation where middle management where
1:04:12other industry observers where peers
1:04:15competitors they looked at siba
1:04:18as as undermanaged to put it again a
1:04:23little bit euphemistically and um
1:04:27there we
1:04:28had
1:04:31um it was a company that um that um was
1:04:35overvalued for in our view we knew what
1:04:39the issues were everybody knew if you
1:04:42had the time and if you had the time and
1:04:45made the effort to find out you could
1:04:46find out what the issues were but um the
1:04:50company was very very overvalued for
1:04:53almost 10 years
1:04:56eight years or so and then uh only when
1:04:59when uh again when The credibility was
1:05:01gone we we got involved and there we
1:05:05could not we could not build a large
1:05:07position simply because we were Capital
1:05:09constrainted um but uh we found that
1:05:14some of the very large shareholders were
1:05:16were so disaffected and they there were
1:05:19actually some value investors in there
1:05:22who who had realized that um
1:05:26that they had the choice between a value
1:05:29trap or
1:05:31or some form of support mostly passive
1:05:35but still some sort of support for for
1:05:38coo change for chairman and Co
1:05:42change and um Zeba was um a very
1:05:47prominent case uh because it was large
1:05:53because also because it was very in a
1:05:55way way easy because it
1:05:57was we were just saying what everybody
1:06:02thought and somebody had to say it and
1:06:05so management
1:06:07reacted uh in this particular case it
1:06:10didn't come to a public or not to public
1:06:14dispute at least but they reacted simply
1:06:17by uh by selling the company so they
1:06:19went off
1:06:21to um to um to BF who who was known to
1:06:29renew again to come back to to my Mantra
1:06:33not to invest event D in event driven
1:06:36way but we knew in that event that there
1:06:38were uh CA was a very very um valuable
1:06:43asset in some divisions a must have
1:06:46asset and so did did management and so
1:06:49instead of resigning uh they decided to
1:06:52sell the company and end their career
1:06:54that way uh which we couldn't foresee I
1:06:58mean but it brought resolution to to the
1:07:02issue uh through the Takeover
1:07:04premium now we were disappointed I tell
1:07:08you that the company was taking over
1:07:10because the the share price we regarded
1:07:13that the share price as very very low
1:07:17and um the premium was okay but in terms
1:07:20of the the actual value of the company
1:07:23we preferred we would have preferred to
1:07:26develop it and there again we we had we
1:07:30had actually this time around done a
1:07:33global
1:07:34search uh in this particular case with a
1:07:38with an executive Search
1:07:40firm for for uh for uh new management
1:07:45for chairman CEO and we had very very
1:07:48good people who wanted to take the job
1:07:51and we knew
1:07:53already you know which direction to take
1:07:55the company after many many months of of
1:07:58man months of
1:08:00work and so we were disappointed that
1:08:04well it gave a shortterm kick to to
1:08:07everybody and some people applauded
1:08:09obviously uh we were disappointed and um
1:08:12some of the value investors in there
1:08:14were also disappointed to their credit
1:08:15they said you know okay we have a
1:08:18short-term gain on our portfolio but in
1:08:20fact this company is worth much more and
1:08:23um BF being very sophisticated had
1:08:27realized that and uh so they got a very
1:08:29good deal having said that and that's
1:08:32just a little
1:08:33anecdote the bid was announced on uh
1:08:36September 15th of 2008 which was the day
1:08:41of of Leman and siba was the only stock
1:08:44in the entire world that went up that
1:08:47day so I guess
1:08:51uh um it was uh we were not bailed out
1:08:54by the event that's not what I'm trying
1:08:56to say but I'm
1:08:57saying uh it was uh it sweetened U
1:09:02um on a psychological level at least it
1:09:05sweetened our exit which was involuntary
1:09:08we didn't want and we actually um we you
1:09:12know it was absurd I mean the fairness
1:09:16opinion uh in the in the in the
1:09:18perspectives uh gave a value much higher
1:09:21than uh than the actual
1:09:23bid and they got away with it
1:09:26because the capital markets were in such
1:09:29disarray after after
1:09:31Leman uh that uh BSF got away with it
1:09:34you know to tell the CEO of BSF
1:09:39uh who has acted very
1:09:42smartly uh you know they
1:09:44were they were uh issues about should
1:09:48they call the the so-called
1:09:51um
1:09:54um uh what do you call it the this the
1:09:58Clause allow them to withdraw from the
1:10:01from
1:10:02the bre the break Clause because of
1:10:06disorderly uh disorderly U events in in
1:10:09the market etc
1:10:11etc and um the CEO uh stood firm but he
1:10:16was very internally criticized for
1:10:19having stood firm on the on the
1:10:21bid and just for anecdote sake you know
1:10:25for for a long time there was no um
1:10:27Arbitrage in the or not sufficient
1:10:30Arbitrage and the the stock continue to
1:10:33trade at a discount to the to the bid
1:10:35price because some people
1:10:37thought um it's called the Mac Clause
1:10:41um
1:10:43um
1:10:45um some people thought they would they
1:10:47would uh withdraw from the bit which
1:10:49they did and and obviously uh why the
1:10:51price looked high compared to what
1:10:54happened the the story was that um BSF
1:10:59stock price if you if you looked at it
1:11:01it was uh highly beneficial uh to the
1:11:04shareholders of BSF and frankly not so
1:11:07beneficial in the end not so beneficial
1:11:10for siba so it's in a
1:11:12way sometimes events can be a good and a
1:11:15bad thing at the same
1:11:17time now for our audience uh who is um
1:11:22from the US let's say looking at Europe
1:11:24and
1:11:25sometimes hesitant to
1:11:28um to get involved in some of these um
1:11:32corporate governance uh aspects and they
1:11:35hesitant to invest um in in some parts
1:11:39of Europe what what advice would you
1:11:42have for them or what sort of are some
1:11:44of your if you had to draw a bottom line
1:11:48when it comes to your type of investing
1:11:50in Europe uh
1:11:52uh what advice would you have to
1:11:56Outsiders well it's it's clear that as I
1:11:59said you cannot in my view you cannot
1:12:02limit yourself to governance to formal
1:12:05governance so to legal and institutional
1:12:08and um um it has to be an
1:12:11approach is the possible exception of
1:12:14the
1:12:15UK uh because of the institutional
1:12:18cultural framework has to be approach
1:12:19that goes beyond formal governance to
1:12:22governance in fact and that means means
1:12:26you need a larger position you'll be to
1:12:28be successful you probably by definition
1:12:31will be somehow IL
1:12:33liquid which means that you ought to
1:12:36have captive money not extend one of the
1:12:39worst things you can do is engaged in a
1:12:42story like Sia or others that I
1:12:45mentioned and everybody knowing that
1:12:47you're subject to Redemption imagine
1:12:51what you know in lemon what would
1:12:54happen uh you know it happened to us in
1:12:57the sense that you know if if you were
1:13:00exposed to redemptions you could have
1:13:02lost your position and with that your
1:13:05your influence on the company at the
1:13:08totally wrong moment and you know it
1:13:10destroys your your performance it
1:13:12destroys your reputation you you only do
1:13:14that once and you cannot go and
1:13:18say you're an owner an active owner a
1:13:21credible owner a legitimate owner when
1:13:23everybody knows that you
1:13:26you know your money could be gone
1:13:27tomorrow through
1:13:29redemptions so I think if you look at
1:13:32the
1:13:33landscape especially of the funds which
1:13:36funds have have done well and or have
1:13:39survived I could say or more than
1:13:43survived it's people like seon it's
1:13:45people like night night
1:13:47winky um who in that space who who
1:13:50obviously uh had the foresight of um of
1:13:55uh having locked in money of U of
1:13:58moderate or No Redemption risk and the
1:14:01other big advice is no no leverage
1:14:04obviously
1:14:06which those two funds also respect um
1:14:10because again leverage exposes you to to
1:14:13better it exposes you
1:14:16to um to obviously uh uh time and time
1:14:21is your enemy when you're leveraged you
1:14:23should know so
1:14:25uh so go for governance in
1:14:29fact go on the boards usually in a
1:14:33Germanic context uh UK is bit different
1:14:37um and then
1:14:40obviously in order to do that you need a
1:14:43larger position I just said that which
1:14:45means you need logged in money so that's
1:14:47that's already sort of uh gives you a
1:14:49little bit of a picture um and then uh
1:14:51you know you're in in terms of your
1:14:54subjective qualities that you
1:14:56need um you need uh you need to have the
1:15:01real ability to engage with management
1:15:04uh effectively
1:15:08meaning in
1:15:10both consensual situations and
1:15:12conflictual situations and uh and that
1:15:17means you need to to have a very deep
1:15:22understanding of obviously the industry
1:15:25uh um but also uh U of the the cultural
1:15:31biases let's
1:15:33say of the management team that you're
1:15:35faced with and that is very different
1:15:37from country to Country and
1:15:40so I would think uh both down to even
1:15:44even issues like
1:15:47language I uh
1:15:50personally I work with advisers in every
1:15:56country um but where in countries where
1:15:59for instance in Netherlands where I
1:16:01don't
1:16:02understand uh the language I make I
1:16:06always make sure that I have a local at
1:16:07least a local
1:16:09advisor who speaks the language and who
1:16:12can give me the the inuendos
1:16:15of of whatever statement was made
1:16:19uh um in in um in in the in the local
1:16:24language that's very important
1:16:26um I would not rely on
1:16:29uh every CEO I know speaks English but I
1:16:33would not
1:16:34rely uh on just you know my my
1:16:39engagement strategy would not rely on my
1:16:41ability to communicate in English I
1:16:43would say I would say it's important
1:16:47that you know either you you you you
1:16:50have the ability to address the most the
1:16:53key decision makers in their Lang in
1:16:55their modern language or if you don't
1:16:57have that at least
1:16:59have have advisors close to you that
1:17:02that have disability it's it's very
1:17:05important um language culture
1:17:09um so so it's a in a way a local game I
1:17:15would say to quite an extent also to
1:17:18extract information in during your
1:17:20research
1:17:22processes um you don't want to extract
1:17:25you know in know sensitive information
1:17:29or anything like that but to get a real
1:17:32feel of how the company
1:17:35thinks it's very useful and we do that
1:17:38systematically to engage with middle
1:17:39management now how do you engage with
1:17:41middle management you can't really do
1:17:44that in a formal way I mean that you
1:17:47will not get past investor relations so
1:17:51what you do you have a network around
1:17:52the company that network is based again
1:17:55locally usually or at least industrywide
1:17:59and and U you go to
1:18:02fairs and uh you know how you how do you
1:18:06approach middle management at a Trade
1:18:08Fair
1:18:10um it's it's frankly not by introducing
1:18:14yourself as the most intelligent uh
1:18:18hedge fund manager out of New York that
1:18:20doesn't
1:18:22work even if you are
1:18:26so so we we collect we are able to
1:18:29collect a lot of
1:18:31information from uh let's say the
1:18:34environment around the company through
1:18:35our networks because we very wired
1:18:39culturally
1:18:41uh uh also from from an industry point
1:18:44of view um also frankly through many
1:18:47many often through as you've noticed
1:18:49during the course of the interview
1:18:51sometimes years of observation it's
1:18:54doesn't take a lot of time to observe
1:18:56but it's it's also the the length of the
1:19:00observation period that gives
1:19:02you a very very good feel about you know
1:19:06things you can't read in the anual
1:19:07report
1:19:09so I guess one would have to be very
1:19:11rooted is what I'm
1:19:13saying in the particular environment
1:19:15that you
1:19:17operate now there's a lot of noise in
1:19:20Europe um around the crisis and uh what
1:19:24um people are focused on the on the
1:19:28risks and U only may see some uh
1:19:32negative uh consequences I'm curious
1:19:35from your perspective uh what
1:19:38opportunities do you see in the current
1:19:40environment in Europe and uh if you
1:19:42could talk about perhaps some areas of U
1:19:46potential opportunity for for your
1:19:50investment style as a result of the
1:19:53crisis well generally obviously we we
1:19:56the good thing about the crisis is that
1:19:59European stocks in general with
1:20:01exceptions um are in the process of um
1:20:04of a multiple
1:20:05erosion uh so um you know whatever you
1:20:10think of earnings in the future you have
1:20:12you have a multiple erosion
1:20:14now um that helps that helps greatly uh
1:20:18to
1:20:19uh you know now obviously one can say
1:20:23you know should should we forecast
1:20:26multiples which way would they go up or
1:20:28down we never do that what we do is we
1:20:34look it's basically the margin of safety
1:20:36concept I mean we we we would never buy
1:20:39companies that that multiples that we
1:20:41think are high now having said that
1:20:44because in general the multiples come
1:20:46down we have more opportunities quite
1:20:49simple uh but it's not I'm not making
1:20:51the case that multiples will not go down
1:20:54further
1:20:55we we have kind of almost like an
1:20:57absolute standard throughout time when
1:21:00models are high we still look for X now
1:21:04models are low we still look for X now
1:21:07they're more
1:21:08x's and uh that's the immediate effect
1:21:11of of the crisis I think
1:21:14um you know
1:21:17the other than that I mean we don't have
1:21:20to really there's no change in our
1:21:22approach crisis or not crisis we were
1:21:24able you know we're talking 10 years
1:21:26we're talking
1:21:272002 to 2012 you know we it's been a
1:21:32rather um mixed bag of booms and busts
1:21:37and we were able to invest in in booms
1:21:39as in busts it's been always been much
1:21:41more difficult in in booms um you know
1:21:45valora example I made uh you know it
1:21:48forces you maybe to go into a more
1:21:51aggressive way exchanging managements
1:21:53Etc to be more of whereas investing now
1:21:57you can you can basically you get to the
1:22:01easier cases at good prices at better
1:22:04prices so en larges Z Universe other
1:22:07than that I mean I can say you know
1:22:10reinforce um you know what what we what
1:22:14we always uh we always profess I mean
1:22:17we're
1:22:18going we almost never invest in in a
1:22:23company uh in comp companies that have
1:22:25you know excessive exposure to any sort
1:22:27of risk uh and obviously you have to
1:22:30watch your currencies better you have to
1:22:34look at the Southern versus Northern you
1:22:37know are you investing in the northern
1:22:39Euro are you investing in the southern
1:22:40Euro uh all of these things they play
1:22:43the role but I mean I and these are just
1:22:47variations of the same theme I mean it's
1:22:50not uh
1:22:52particularly decisive for our investment
1:22:55uh investment side what what generally
1:22:57also obviously in times of
1:23:00Crisis weaknesses show
1:23:03up it's much easier in a way also to see
1:23:06the weaknesses of of of certain
1:23:09companies you know and one thing I can
1:23:12say also which which is more like a
1:23:14don't do than a
1:23:15do it's not because uh some cyclical uh
1:23:19stocks are are now cheap that we would
1:23:21invest in them given our investment sty
1:23:25it may be tactically the right thing to
1:23:27do um and then you know by definition
1:23:31looking at
1:23:32sectors um probably the most I'm saying
1:23:35that in a neutral way the most
1:23:37interesting
1:23:38sector intellectually at least uh or the
1:23:42banks the European
1:23:43Banks U short or long uh we have no I
1:23:48mean we would we have never uh over the
1:23:5110 years even closely considered to to
1:23:54invest in in a bank and the reason is
1:23:56simple it's uh you know the the industry
1:23:59criteria that I mentioned before I
1:24:01simply don't apply you have you have so
1:24:04many risks regulatory at the moment um
1:24:08uh we have uh information a symmetry to
1:24:11a point
1:24:13that to to be an owner to play an
1:24:17ownership role in in a
1:24:19bank uh the way we we WEA in other
1:24:22companies is impossible because you
1:24:25even if you're on the board there is
1:24:26information symmetry the boards don't
1:24:28know what the risks are in the in the
1:24:31balance sheet so I mean I you know I
1:24:37probably at some point I will miss 100
1:24:39or 200%
1:24:41performance on the part of some of these
1:24:43Bank stocks but uh that's that's just
1:24:46something our style can you know we
1:24:49cannot
1:24:50stomach companies of that nature where
1:24:53where you don't know know what is going
1:24:55on inside even if you if you were on the
1:24:57board you wouldn't know and then even if
1:25:00you knew could you influence it probably
1:25:02not so you know we we don't
1:25:06really yeah so so in a sense we we
1:25:09welcome uh the crisis as as as it
1:25:13enlarges our investment um opport
1:25:16opportunities um you know but but then
1:25:18again you
1:25:20know our our point of entry is not the
1:25:24determined by whether there is a crisis
1:25:25or
1:25:28not can you just give us a sense of some
1:25:31of the resources and uh for somebody
1:25:34interested in getting their arms around
1:25:38um long-term investing in Europe and
1:25:41some of the corporate governance issues
1:25:43and um where where could one get some
1:25:47good material or perhaps some case
1:25:50studies of past
1:25:52Investments or perhaps some people or
1:25:54funds to to uh keep an eye out on you
1:25:58mentioned uh Tito tanti in Switzerland
1:26:02and I'm curious perhaps if you could
1:26:04talk briefly about about what what he
1:26:07has achieved in in Switzerland and
1:26:10perhaps some other people that you uh
1:26:12follow and and admire yeah I mean
1:26:15basically dto de Monti was a pioneer of
1:26:18active investing he was deced in the 80s
1:26:20as a as a Raider obviously um
1:26:25which uh in his case uh you know I I
1:26:27don't know I don't know what the term
1:26:29Raider I means it probably means that
1:26:31you that you invest in a company U
1:26:34Uninvited and then uh um as they call it
1:26:38strip assets or basically liquidate the
1:26:40company and you get some spread between
1:26:43your price at entry and at Exit through
1:26:46liquidation I know that's that's not
1:26:48something he ever did so uh okay
1:26:52uh uh so he he yeah he he uh he he
1:26:56really was a Pioneer he also went on the
1:26:59board of a company when very in the 80s
1:27:03already and uh surely his I admire
1:27:06him he's one of the shrewdest he's now
1:27:0980 plus he's one of the
1:27:12shest most intell not only shrewd intell
1:27:15intelligent uh uh investors uh I I know
1:27:19of and U and uh you know what I learned
1:27:23from him is a ultimate
1:27:26caution in terms of the margin of safety
1:27:31obviously the valuation to multiple if
1:27:33you will also
1:27:35in one of the things he understood
1:27:37particularly well he was always willing
1:27:40to go the extra mile in in gathering
1:27:45information in analyzing the industry
1:27:48the company going way way way uh farther
1:27:53than any kind kind of financial analysis
1:27:56valuation is only one part it's
1:27:59analyzing the industry the business
1:28:01model and he understood that it
1:28:04pays to invest
1:28:07in in uh in investigation in research U
1:28:12um in a very broad way invest time
1:28:16invest money you know we we had the we
1:28:19always had a budget to to hire industry
1:28:22experts um
1:28:25and he understood that all of this had
1:28:26to be done by yourself you can't some of
1:28:31these tasks
1:28:33are like Warren Buffett you know there
1:28:3515 people at headquarters you cannot
1:28:37delegate something to you and that again
1:28:40limits your ability to to manage your
1:28:43portfolio meaning you will only have a
1:28:46few cases at any given time so certainly
1:28:49one of the best I think Sean as a fun is
1:28:51a I can highly recommend and um I think
1:28:56they have a very good team and a very
1:28:59good approach to to active
1:29:02investing night wiy a bit different they
1:29:05sort
1:29:06of uh maybe more the the Anglo Saxon or
1:29:09even us Style with taking relatively
1:29:12small stakes in larger firms but
1:29:17certainly in many ways um groundbreaking
1:29:22uh research
1:29:25um very smart um and uh and very well
1:29:28backed also by by U serious investors um
1:29:34thank
1:29:35you other than that
1:29:38um you know there are a number of
1:29:41um of uh investors out there um um but
1:29:46um I have to say that you know active
1:29:49investing in that sense U the community
1:29:52uh after even has shrunk
1:29:55for many of the reasons that I mentioned
1:29:57you
1:29:58know uh too much leverage involved uh
1:30:01Too much exposure to
1:30:04Redemption
1:30:05um not enough emphasis on uh on industry
1:30:11research and you know what is the
1:30:13underlying business
1:30:14model implicit event
1:30:19orientation um these were were killers
1:30:23in know manyy uh funds or
1:30:26individuals I know off in the space uh
1:30:29never
1:30:30recovered never
1:30:33recover well on that note uh Peter thank
1:30:36you so much for your
1:30:41[Music]
1:30:48time

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