#62 - The Gentleman Activist: Alex Roepers explains how he extracts better stock performance from overlooked mid-caps

Speaker A: Hi, I'm Steve Clapham and welcome to the behind the Balance Sheet podcast where we meet leading investors and commentators and educate ourselves about the world of investing and the world. Our mission is to remove some of the mystique around investing and improve our understanding of successful investors strategies and tactics. Behind the Balance Sheet is an investment training consultancy. We help professional investors up their game in financial analysis and we have an online school. Over a thousand students, professional and amateur, have taken our courses. Our flagship analyst academy helped one young analyst land a dream job as the partner of a major London hedge fund and helped another, a successful entrepreneur, improve his investing confidence. He made a seven figure sum in year one. Check out the school on our website BehindTheBalance Sheet.com where you can also find the show notes to this podcast and and while you're there, don't forget sign up for our popular and free weekly substack. Hit the sign up button on the top right of the homepage. Most AI tools today are very good at sounding right. The summary is clean, but can you actually trace it back to the filing, the transcript, the specific passage that drove the answer? Or are you just trusting the confidence of the output? For investors, that's not a minor concern. A missed filing? A misweighted source context that got lost somewhere in the retrieval chain? Those aren't edge cases, they're how decisions go wrong. AlphaSense is the AI platform built specifically for this. They own the content, over 500 million curated documents, from broker research and expert transcripts to filings and earnings calls. And they own the retrieval layer on top of it. That means every answer links back to an exact verifiable source, because the answer is only as good as what's underneath it. And with AlphaSense, you know exactly what that is. See it for yourself. Get a free trial@alphase.uh dashensense.com BTBS that's alpha AlphaSense.com BTBS behind the balance Sheet this month I talked to Alex Rippers, who was once dubbed the gentleman activist for his behind the scenes approach to shaking up investee companies. Once a long short manager, now long only. He manages three regional funds and one global fund on the same investing flow philosophy. Find deeply undervalued traditional businesses which could be an acquisition target for private equity. Suggest capital allocation improvements to management and hold until they're revalued. Ripper's main US fund has delivered 12.3% per annum compound since inception in 1992. That's turned $100 into $4800 after fees or 11,000 before fees, if my sums are correct. We talk about his unconventional journey from Dutch engineering intern to activist fund manager in New York. Alex walks through his formative experiences in industrial manufacturing, then conglomerates and M and A, which generated his investment modus operandi. He explains his philosophy of conspiracy, constructive activism, how to engage with boards and management without being a corporate raider caricature. He explains how he evaluates management quality, capital allocation and operational improvement opportunities. Alex has decades of business experience and there is a lot of detail in this discussion and I'm sure you'll enjoy it.

Speaker B: So, Alex.

Speaker A: Hi.

Speaker B: Thank you so much. I'm looking forward to talking to you. We met, um, oh, a couple of years ago from the Value Investing conference. I always start by asking guests, did you always want to be an investor? I know you didn't because you started in the corporate world. So what first attracted you to equity investing and starting up? Atlantic.

Speaker C: Great. Well, thanks first of all for having me. Pleasure to be here. Um, started off working, uh, in a corporation. It, uh, was my internship 19, uh, 79. And that led to a, uh, two year stint with that company. It was in upstate New York. It's a electronic manufacturing company. Was m. Really in the trenches in the factory, dealing with spare parts, dealing with manufacturing and engineers and uh, helping um, you know, sell uh, machinery. Uh, at that time in the early 80s, a, uh, company called Universal Instruments. That experience, um, was very different than many of my students that I met later on at Harvard Business School who were in investment banking. But you're Dutch though. Yeah, I grew up in the Netherlands. Did my undergraduate degree at the Netherlands School of business called 9Rota University. And so the internship in the States in 1979 between junior and senior was kind of pivotal.

Speaker A: Oh, I see.

Speaker C: And that then led, uh, me to apply to MBAs. Uh, I was lucky enough to get into Harvard with a deferred admission. And from there, you know, two years of work back to the same company because they were growing very fast. They were helping automate, uh, IBM, Texas Instruments, Motorola, Philips, all these companies that were automating the printed circuit board assembly process, which made the price of the PC in the television much lower. Of course, Apple, which started in a, In a garage.

Speaker B: Yeah, yeah.

Speaker C: Was, uh, able to automate the print circuit board assembly with machines that we sold and got a much lower price

Speaker B: for the Macintosh because originally they hand assembled PCBs.

Speaker C: Exactly. So we would be coming into a factory of say, Western Electric, which was the manufacturing arm of the telephone, uh, company at&t and uh, there would be 2,000 people working, uh, assembling printed circuit boards. By the time we left with the machinery sold, there were maybe 50 people left. So at the time GE, Western Electric, IBM were all uh, talking about automate or die. Yeah, very interesting today with AI and with other um, automation going on, uh, robots, everything they're talking about and the worry about employment, uh, I've seen for over 40 plus years massive amounts of productivity through automation. Uh, that has led to tremendous amount of unemployment. But yet Here we are 40 years later at full employment.

Speaker B: Yeah, sure.

Speaker C: So human society has a way of reinventing himself. So from that experience went to Harvard, uh, while most went back to investment banking consulting, uh, during the summer jobs. I just knocked on the door of the owner of Universal Instruments, which is a conglomerate publicly traded called Dover Corporation. Still publicly traded.

Speaker B: Still around, right?

Speaker C: Still around. A very well managed company over the years. And so I was lucky enough to well present myself first and then lucky enough that they called me back and said why don't you come and work for us in the summer in 1983. And uh, so this was a corporate headquarters with six executives, 10 support people running at the time a multi billion dollar conglomerate of which Universal Instruments was um, a Shining Light subsidiary. They bought it for $50 million in 1979 and it was already worth 300 million in terms of sales and growth. So I was doing very well. So I was known as the little Flying Dutchman over there. And I was in the corporate development office which is consisting of one gentleman, uh, the vp. And he was not there on my first day. And there was a big pile of documents, basically prospectuses or books on companies that investment bankers and others wanted Dover to take a look at because that's what the corporate development guy supposed to do, look at the deal flow. And so I came there, got a cup of coffee and the chairman of the company walked in, said oh, you're the Dutch guy, right? So why don't you uh, why don't you go through that pile on your desk and at 4 o' clock come to my office and tell me which one you like and which one we should take a look at. Yes sir. So I dug through about 15 documents and I ended up liking a company called Pathway Bellows, which is an expansion joint business where they make these joints that go between pipelines, high pressure, uh, pipelines and it allow for flexibility so they don't crack, um, and pop those companies. In San Diego I made my case to the chairman, okay, first day on the job as an intern.

Speaker B: And you're how old at this point?

Speaker C: I'm 19. 83. I'm 24. 23. 24.

Speaker B: Okay.

Speaker C: And um, I make the case and he says that sounds very good. I said why don't you go see them? So what do you mean sir? Well, they're in San Diego. There's a flight leaving at, I presume at 8 o'. Clock. Why don't you jump on that and go see them? Said okay. So I was on a plane to San Diego by myself, um, meeting with the management of a $40 million company. Um, they spent the whole day with me. I went through their uh, factory, I had conversations with them, wrote up all the kind of notes, flew back with the red eye. So it was just a one day visit. San Diego that led to meetings of that management in New York. At the end of my nine week internship we bought the company.

Speaker A: Oh wow.

Speaker C: So I got very interested in the process of M and A and buying and selling companies from the principal perspective, not the investment banker perspective. And so with that uh, I started looking for my job after Harvard and my boss at ah, Dover, my corporate development VP used uh, to work for a group called the Thyssen Bornemisa Group. Uh, Thyssen. Bornemisa is a. Thyssen is from the German Thyssen family and Bornemisa is a Hungarian family. Before World War II one part of the family married into a Hungarian family, made a group that inherited part of the Thyssen uh, fortune which included Dutch, uh, Harbor Works, Dutch uh, banks, the Bremen Harbor Works, a whole bunch of things. And so this company had grown through acquisition, including an aggressive uh, acquisition of a company called Indian head in the 70s which owned foot of the loom, glass bottle manufacturing gaskets, uh, for cars, very wide, broad, uh, based conglomerate. So that was put together with the European conglomerate to become the Thyssen Bon Misa Group. Uh, my boss at Dover used to work for them. So he said well, why don't you go visit the guys in Monaco? My parents lived in the south of France, so that was easy. So I flew to the south of France um, after I graduated from Harvard, actually after my internship and had an interview with the top people at decent Border Music Group set up by my boss at Dover. Anyway, long story, I got the job right there. They were just expanding in the U.S. about 200 people in the headquarters, three corporate development people. I was the junior guy then coming in right after Harvard and uh, 17,000 employees, 80 companies in 40 industries. And it was a bloody mess and it needed to be Cleaned up. I sell a lot of companies. So I joined in June of 84, right after I graduated as a corporate development guy. And, and within six months, the two top people above me were let go because they were not happy with them over in Monaco. And I kind of floated upward to become director of corporate development at age 25.

Speaker B: Wow.

Speaker C: In New York. And that was cool. And I was reporting to two gentlemen in Monaco. Uh, one was called Dr. Tony Kirk and the other one Dr. Manfred Kimler. Uh, what has happened is that the Baron, the owner of the firm, had got so fed up with how the company was being run, he went to the head of McKinsey, said, How much are you making? X I'll pay you 2 or 3x you come to Monaco. Head of BCG Pulse Consulting Group. How much are you making? So These are the two heads of BCG and McKinsey who are my bosses in Monaco. Oh, wow. And so these are my mentors. And then, uh, above them was a 32 year old son of the Baron who was the CEO of the company. It's a very interesting setup. So I was 25, the CEO was 32. My bosses were in their high 40s, early but brilliant, uh, gentlemen. And I spent four years in New York going back and forth a lot to Monaco, et cetera, uh, being busy helping divest companies, but also acquire companies. And along the way they asked me to look for new acquisitions, uh, including larger ones. And so I screened, which is hard at the time in 1986 to screen public companies. You had to really go to a data service to do a screen. Now you can do it on Bloomberg like this.

Speaker B: But I mean, this was a very early age of the personal computer.

Speaker C: You should just explain. Well, the personal computer, uh, 1982, when I came into Harvard Business School, uh, the cost of education there was about $12,000 a year. Tuition is much higher now, of course, uh, but the PC costs about $1,200. So 10% of your. Yeah, you know, imagine tuition today is 75,000 at Harvard. Would, uh, you buy a computer for seven and a half thousand dollars? No, it's a lot cheaper. Yeah, of course. But anyway, so we had to buy a computer. We, uh, were the first class to have to do so. We had Lotus 1, 2, 3 software. And, uh, we were quite advanced, you know, uh, we came from the slide rule and the HP12C computer, uh, calculator calculation. So I've joined TBG. We, uh, the decent Border Music Group. We ended up looking at acquisitions. I promoted 26 publicly traded companies as potential acquisition candidates. The issue is, however, that they needed to be either hostile deals to get them because we're not for sale, and then require a huge premium. And as a result, none of these 26 deals happened, even though I worked them out, put them on paper, made documents, made presentations in most cases. And so along the way, tracking what happened to the share prices of these companies that I promoted for potential acquisition. And we didn't do anything. Turned out that a lot of them ended up being very good investments where they were undervalued. Companies with lots of potential that other people would see that basically private equity already at the time, but also corporate, uh, buyers would buy. And there's a lot of hostile, uh, takeovers in the 80s with Michael Milken, the junk bond market, et cetera. So I started to track the performance of all the proposals I made. And so this, uh, pro forma track record of if we would have bought shares, never mind buying the company. Yeah, ah, let's buy 2 or 3% of the company within the open market. And, um, I presented the results of that and I said, we should do that. You know, as a company. Yes, we're industrial conglomerate, but we now have paid down the debt. We have cash. They were investing in hedge funds at the time. And, uh, Michael Steinhardt, George Soros, Judy Robertson started Paul Tudor Jones. We had about $300 million in the mid-80s in hedge funds. So we were on the larger hedge fund allocators. I became familiar with how those were set up, which was helpful. Um, and there was one group they invested in called Coniston Partners, which a group of three gentlemen who did concentrated activism in the 80s, got even on the front cover of Fortune magazine. Uh, they had several hundred million, 6,700 million on the management. Huge amount at the time. And they were, you know, very visible as a fund doing this. At the same time you had Carl Icahn, you had many other, uh, you know, raiders out there that, backed by Michael Milken's junk bond debt, were doing takeovers. So that is the environment in which, uh, a light bulb went off in my head where I said, okay, we should do this within the company, this beachhead program of concentrated investments. And they said, a good idea, but I wanted to run it. It's quite ballsy for a 27, 28 year old at the time. Um, and that was not possible within the company where I would have the performance fee and all that. So I said, then I'll start my own company. That's how Atlantic started. So I Had no background in money management, but I had a background for six years with Dover and with ThiessenBournemisan in evaluating companies, analyzing them, doing due diligence. And with that, uh, I started. But first I needed money. I had no money family. I have no money of my own. And so I basically went to my bosses at Dover, at Thiessenborne Museum for help. And that was not so easy. You know, I was lucky that Tony Kirk left the company to run out of Geneva, the investment, uh, company for Carlo de Benedetti. All right, uh, Carlo Benedetti at the time was very well known. Benedetti, uh, family still well known in Italy, but at the time he was the chairman of Olivetti. Olivetti was the second largest computer company manufacturer in Europe after IBM, which of course American company, but Olivetti was Italian based. Uh, he also had this investment office in Geneva called Societe Finacher de Geneve, which was raiding and doing hostile deals on Belgian, um, banks, French automotive parts companies. And my boss, Tony Kirkman, became head of that company. And he liked a lot what I was doing. He knew me. And uh, so they backed me. Then the 32 year old, now 36 year old CEO of Thiessen Montemisa backed me against the wishes of their general counsel and other people in the company, backing a young guy who goes on his own. But he, he and I had a good rapport. So I had massive for me to get his uh, you know, some venture capital money to help me start the company. Uh, and to cold calling, um, back in the day, just for the younger viewers, uh, there were no cell phones, uh, I was standing quite often in the rain, uh, with coins in pay phones, calling, you know, uh, ABN Amro or Bank national de Paris and saying, um, you know, in Dutch or in French. We fortunately had the language trying to get to the person in charge of investments to get a meeting. And then of course I end up maybe with a meeting but in the wrong spot. And then they felt a little sorry for me and they said, well, could you help me, you know, to redirect me. And so with cold calling and doing 12 trips from the United States with almost no money back and forth to Europe, driving a car around, I was able to build up a network and raised money. And I got a Dutch bank, a, uh, division of ABN Amro to back me.

Speaker A: Oh wow.

Speaker C: So I had very famous backers, you know, the Benedetti Tisa, Mona Misa and ABN Amro's private bank. And with that, you know, ABN Amro organized conferences at Hotel Europe in Amsterdam. Uh, an Atlantic investment, or Atlantic fund at the time was started with about $8 million.

Speaker B: $8 million.

Speaker C: $8 million from, in 25,000 to $100,000 pieces, two $1 million pieces from the sponsors, and the rest was all small, uh, denominations. And that's how I got started.

Speaker B: Different world. And it wasn't a good time to start, was it?

Speaker C: No, I basically went flat on my face almost immediately because once I got the money deployed six months later, the, um, subordinated debt market, which was very important as the ammunition for companies and private equity firms to acquire the kind of companies that I was going after completely failed and came apart. Drexel Burnham was behind it. They went bankrupt. Uh, Mike Milken got in trouble. Uh, it's pretty well documented. Then you had the savings and loan crisis, the recession of 1990, first Iraq war. Uh, I mean, you can make a worse mix. Although we've had bad periods in the last 35 years, too. Uh, but it was, for a startup fund, pretty, uh, tough time. Uh, I was down for the stock year of 89. I was down 20% in 1990. And if you're down the first year and a half, people say, alex, well, uh, we like you and you try hard, but we're going to pull our money. And so the 8 million went 3 million.

Speaker B: Well, you still kept 3 million.

Speaker C: 3 million. But, uh, very hard to run my tiny office, uh, in New York. And I had to scramble to find a way to, uh, stay alive as a firm, as a little business. And so I was cold calling again. I mean, I was cold calling all the time and trying to make connections. And I was lucky enough to find a family office, uh, a trust out of, uh, Monaco to back me with a managed account for $2 million. Uh, I restructured my fund to become a hedge fund. Long, short. Um, it was kind of my way or the highway. Most people took the highway. And I was left with 750,000. The 3 million went to 750,000, uh, when I started the hedge fund. And then I had a $2 million managed account in my restart in 1992, October 92. And from there the record started getting good. The times were a little bit better. Good results, uh, people coming back, some new people coming in. So by 1996, I was at about 40 million.

Speaker B: Oh, wow.

Speaker C: And we had some really good returns and I was making performance fees, so that helped. 97 was a 60% year.

Speaker B: Really.

Speaker C: That was really good.

Speaker B: So how did you manage to deliver 60% um, the markets were pretty strong

Speaker C: but you know we started having some really good uh, concentrated bets that were working out. One in 1995 for instance was Chicago Northwestern Railroad. At the time the freight railroad industry in the United States was still quite fragmented. Yeah, uh, the big guys that are still there today is Union Pacific and the csx and then you have in Canada, Canadian, uh, national, but Chicago Northwestern Railroad, as the name says, there was a line, several lines of freight in the Chicago area and in the Northwestern area there was a 200 mile line that connected the Powder river basin with the east west Union Pacific line. And you know, know Burlington Northern was also in the Powder River Basin. For those who don't know, it's surface uh, mining of coal, low sulfur coal. All the coal that comes high, uh, sulfur is in the Appalachian and in the east side the low sulfur coal is so much easier to mine because you don't need mine shafts. It's just like digging up dirt, throwing it into um, railroad cars and then shipping it to Atlanta for the utility. So the cost of the coal is one tenth of the high sulphur coal. But then the transportation costs were high. The, the Chicago Northwestern, uh, 200 mile line was critical, was only one of two coming out of that whole area. And there was an issue of capacity and I saw that. So this is very simple for anybody. A railroad train, uh, full of cars, very long one say a mile long with locomotives going up a hill goes slow, downhill goes fast. So they had, and then he had to build more bridges over canyons and he had to triple track the uphill. And so there was overtime, there was capital spending, all that's needed to remove the bottlenecks. So that picture was very clear. And then uh, Blackstone, in fact in the book of uh, Steve Schwarzman that he wrote not that long ago about his life and the buildup of Blackstone good book. Uh, Chicago Northwestern was a very important deal for them and they own 70% of the company and they brought in Union Pacific for 30%. And I watched this as it went public and Blackstone's largely out of it, but Union Pacific was still sitting there with non voting shares. And so we made uh, we saw two things happening. One, Union Pacific had asked for the International Rail Commission to get approval for voting rights, which is like a prelude to a takeover. Right. So then I was following that legal process in the railroad, uh, and the inter, in um, ir. We just need uh, Interstate Rail Commission publications, uh, so you can follow that process and you say, well that's a Two year process. So that's almost like a pretty clear. Then there was the earnings decline due to the um, uh, the fact that was inefficiencies on the 200 mile line was so critical. But you could see those bottlenecks getting removed after a certain amount of time and spending. So I just was so sure of this thing. So I made it you know, 35% of our capital, uh, very high. I wouldn't go that high these days. I'd go 15 to 20% but at the time was smaller. I was very convinced the managed account, it became 35, 40%. And I remember getting a call on March 10th, 1995 from my uh, trader at Jeffries. He said Alex, today is your lucky day. Said, what's happening? Well you've been talking about this for a while, but Union Pacific just made a cash bid for the rest of Chicago, uh, Northwestern. So that was uh, a huge gain. Uh, we sold all the stock in the open market very quickly. Uh, we own 2% of the stock of Sky Novice. As small as I was at the time. But it was a huge position for us. Uh, that led to a 40% quarter and a 60, 70% year in 1995. So uh, that starts triggering uh, people's attention and so that's how Atlantic started taking off.

Speaker B: And how did you cope in the dot com boom?

Speaker C: I mean were you.

Speaker B: Because that was quite a difficult time for people operating yourself.

Speaker C: Well actually uh, it's a great similarities to today because you had in 1998 the growth of Intel, Cisco, Microsoft, uh, Apple, Amazon was all happening in 1998. In 1998 there was also a global crisis in emerging market debt. And uh, it was very, very difficult, ah that period. And we had a, after a really good run through 97 and early 98, suddenly we had a big drawdown in our funds. There was a systemic risk fear crisis that needed the Federal Reserve and the banks of New York to help bail out. There uh, was the collapse of the Long Term Capital Management Fund which was a $4 billion hedge fund that failed. And the $4 billion hedge fund had $100 billion of emerging market debt. That all turned out to be illiquid. And the Federal Reserve had to step in to save the markets. That led to a uh, crazy drawdown, like really like a crash of 08. But there was in 1998 the high tech guys did very well through that. They were up 25%. Most everybody was down 10%. I was down 10% in 98. So it was the first black eye but very much macro market related. And then in 99 everybody was allocating to those who made money in 98, which was the Amazons, the Ciscos, the Intels. So that is when the tech bubble really took off. I think the NASDAQ and the average tech fund was up 140% in 1999. My fund was up 33% and that was number one in about 800 value funds. Because the value funds and normal industrial funds, non tech were flat in 99 and they were down in 98. I was down in 98, I was up 33 in 99. And it was impossible to raise money. Oh really? Yeah, impossible. Because everybody's making so much money over there.

Speaker B: Yeah.

Speaker C: People saying, why don't you do some tech? I mean, we're making 5, 10% a month. What's wrong with you sitting in, you know, glass bottle manufacturing companies and pump and valve companies. So I said, okay, early 2000, guess who's raising money? Not me. Uh, who's down? We are down 10% down in the first two months of 2000. In January of 2000, Time Warner is being taken over by America Online. America Online was the, you know, the Nvidia of the day. And it was like the hottest stock and they used their funny money, which was incredibly overinflated stock, to buy a real company called Time Warner, which owns cnn, Bugs Bunny, whole bunch of, uh, movie studios, cartoon characters. And it was a real company for $80 billion of stock that was super inflated on an Internet, uh, provider. I wrote in my January report, I recently just reminded people of that because I wrote something similar in my May report of this year when SpaceX IPO went out, said if there's ever a bell at the top of this tech bubble, it's the SpaceX IPO. I'll come back to that maybe later. Uh, but I wrote in January of 2000 that the AOL Time Warner merger was a bell at the top of the tech bubble. I was very close to being right. I was right. But it was about another month.

Speaker B: Yeah, six weeks.

Speaker C: And it was in March of 2000. It all turned. And so to give you an idea, what happened to our performance, it really launched Atlantic. We were down 10% through February. The Nasdaq, which is the indicator, the index for large cap tech, uh, back then and today was up 25%. So we were down 10. They were day, not the enemy. But the other side of market was up 25%. By the end of the year we were up 50%. And day, the NASDAQ was down 40. So they went from plus 25 to minus 40. We went from minus 10 to plus 50. That's stunning relative performance.

Speaker B: Yeah.

Speaker C: And in fact, in 2001, uh, we were up 20% despite 9, 11, which was a huge, uh, debacle and terrible, uh, drama, of course. And that happened to all of us. But to the markets, uh, the NASDAQ was down another 20 or 30% and we were up 20. So, you know, unbelievable outperformance. And that really brought our AUM from like 100 million bucks or so at the time, uh, to 5 billion, uh, by 2005.

Speaker B: Oh, wow.

Speaker C: And we got to about 1, um,.3 billion by 2003. And we, that was all us. We had the long short fund in long only, uh, as two products, if you will, two funds. And we closed at that level for new investments. So we had promised ourselves and our investors that we would be style pure. And I made that point yesterday at the Elvic, the London Value investment conference, where, you know, very smart people talk about great stocks, but they, they run a lot of money. And I said, value investing is about stock picking. For stock picking to matter, you need high levels of concentration. Otherwise, you know, if you have 100 stocks, you know, of course it's 1% each. Who cares about the story about that one stock? So that is how, uh, we stayed limited in our aum, um, because we wanted reasonable liquidity on our positions. We wanted to pick stocks in the mid cap range of 2 to 10 billion, 2 to $15 billion names, and we wanted to own like 1, 2, 3, 4, 5% max in order to have reasonable liquidity to trade out of them. So if you want to do that, you have a limited capacity. And so uh, we stayed around the, uh, $1.2 billion mark where we closed and then took a year, uh, of like, oh, wow, we don't have to do marketing, relax, just run the fund. But I started immediately working on the international side. So I started hiring people, started going to Asia, going to Europe. And a year later we launched our international hedge fund.

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Speaker B: Just let's cover the SpaceX point because otherwise I forget to come back to it. Um, clearly one of the features of the top of the market is you get a lot of IPOs and so SpaceX is clearly. But there are others coming down the pine. Um, I mean, well, I mean obviously SpaceX is overvalued. I mean, I mean everybody knows that it's still there. I mean what do you think is happening and where do you see the parallels with the.com era? Because I remember in the dot com era it was like the suspension of disbelief. Mhm. People just wanted to believe and there's a little bit of that now, but it's not as mad as it was then in my view. I mean back then you could, you know, there were companies that really didn't have a hope of getting anywhere that were crazily valued. I mean SpaceX, you could say Tesla has been crazily valued and it been crazily valued for the last 10 years and we all know that. Just talk me through what, what your perspective is, is on this.

Speaker C: Yeah, well, um, as much as I and many others admire Elon Musk for his energy and for his vision and for his ability to create companies that are real like Starlink and Tesla and what he's done to the automotive market and to the um, you know, the satellite communication Market. So hats off to him. And I'm a huge, um, you know, admirer of that.

Speaker B: Yeah, me too.

Speaker C: Um, however, one can put that aside and then look at a Tesla separately and say, okay, what's Tesla? How is it valued? Right. We know how BMW and Mercedes are valued, and they make, you know, millions of cars. Very well, very profitable. Okay. They're struggling going to the EV now because of Tesla and others, but either way, they're still very profitable. Uh, Tesla, you know, even compared to Toyota, any of these companies, Tesla, should be valued at maybe 100 million, 200 billion or 100 billion. 200 billion, maybe at the most, given their profitability in the car company, etcetera, Then they got some energy, some solar. Fine, they can value these things. But the company's valued at 1.5 billion, and that is based on the promise of, uh, the Optimus robot and robo taxis. Okay. Um, and a lot of promises are made in order to sustain that valuation. Yeah, and very little proof so far, but again, people don't need that right now. They believe in musk. They believe that that will happen. Um, I'm a skeptic. Uh, maybe just uh, my value bent and being a, ah, Dutch. I don't know what it is, but there's a lot of Dutch people who believe in companies like Tesla as well. But, uh, Tesla, while it has done very well up to a certain point, I mean, I've been very actively shorting it, whether it was in the fund or doing it personally, uh, ever since. And I'm short Tesla right now. I think it's ridiculously overvalued. Uh, but I'm not short, you know, and hold. It's not like, you know, buy and hold. Uh, shorting. It needs to be trading quite a bit. And if you look at the share price of Tesla for the last five years, it's gone between $400 and $150 five times. So it's perfect thing to trade. Uh, you definitely don't want to be too greedy. So say bulls make money, bears make money, and pigs get slaughtered. That goes both for longs and for shorts. So you got to be careful, uh, with that. But I would say Tesla is a definite short right now.

Speaker B: SpaceX.

Speaker C: Um, okay, so we've all watched what, uh, he's been able to do, launching rockets into space, most importantly getting the cost down by reusing the, uh, boosters and catching them, which is, uh, phenomenal to watch. Um, you know, I've been offered to invest in SpaceX a, um, number of times. In the last three years and at valuations of, you know, 180 billion, say, which is a tenth of where it is today. And I would ask for information. I got some information on the side where I knew Starlink was doing say 10, 12 billion of revenues and making money and the rest was losing money. Fine. I said, I'm, um, just not interested. You know, this is evaluation 10 times revenues and, and a lot of uncertainties. No, thank you. Um, and actually have no regret yet, because I doubt that I would have made money by the time I could sell the stock that people that bought in those offerings. Uh, because it's gone public at $135 a share, at a $1.7 trillion market cap, it's traded up to, uh, $2.5 trillion market cap. And because it's a squeeze situation, right, they're only offering 4% of the float. Uh, it's already oversubscribed. Uh, it goes public, it immediately goes up. I'm short, uh, uh, SpaceX since $200 and I think it's worth probably $40 or $50. So I think it's going to come down. And what's in it is a massive amount of corporate governance violations. Uh, in my view, the first one started with um, I mean, already at Tesla he showed that when he just merged, without really asking anybody, the money losing SolarCity into it now he m. Merged the money losing Xai, where Grok is losing, uh, altitude compared to Entropic and uh, uh, OpenAI, um, and then Twitter, which was a questionable acquisition that he actually regretted the moment he did it. Uh, but he had to do it because he made these statements. And uh, so okay, fine, he wrote the $40 billion check, selling a lot of Tesla stock by the way, to pay for it and borrowing money which was way underwater, and write offs for everybody who got involved with it. So Twitter was a disaster. He sold, I uh, mean fired. A lot of people said F you to the, uh, advertisers. Anyway, so that is X today, which maybe as a platform can work one day. And then you have Grok that got valued by himself, wet finger in the air at 250 billion. That's a great trick earlier this year. So as a SpaceX shareholder, if I were in it, I would be enormously pissed that he would bring that in. But of course they all think it's great because now you have the whole data center and AI side of it.

Speaker B: Well, I mean, that's created the valuation, right? Because about a trillion of the valuation is down to the if you look

Speaker C: at the 10, total addressable market is 26 trillion they come up with.

Speaker B: I think it's fascinating to watch because you know, if you, if you think about, you start a business, there were 11 co founders of XAI and 10 of them have gone or 12 co found. I mean he's only one left. And um, somehow it was, it was worth 250 and now it's worth a trillion. Anyway, we want to talk about real companies. There's no um, I wish everybody well,

Speaker C: let's put it that way. And I wish Mr. Musk well, don't get me wrong. But uh, I think it's massively overvalued and time uh, will tell. But so far the idea is One of his KPIs is to put a million people on Mars, okay? To get another trillion dollar pay package, which is all crazy. I mean he's living inside of a Star wars movie. This is according to Mr. Isaacson who wrote a biography on him. Said he's not like you and me. He thinks he's, it doesn't faze him that he's quote unquote on paper a trillionaire. He's just inside of a Star wars movie, like a super Mario running around getting coins. Um, but to put a million people on Mars, we've, all we've been able to achieve is fly some rocket around the moon to take pictures of the moon and the earth. We haven't landed anybody on the moon yet, let alone Mars. I mean, so it's so much pie in the sky so far out that uh, we'll see how it goes now that it's a public company.

Speaker B: None of this by the way is investment advice,

Speaker C: just personal opinion.

Speaker B: But let's go back to the real world. So you've long focused on industrial and cyclical businesses. Um, obviously your background, you've explained that might be why that hunt hunting ground is attractive to you, but it's pretty inefficient. I mean you've been able to find some pretty lowly valued companies. Why do you think that is? I mean, do you think, you know the, the change in market structure? I mean you, you've seen a lot over the last three decades. Uh, um, why is that area? It's more, is it more inefficient now than it was? And why do you think, why do you think that is?

Speaker C: No, the beauty of the public markets is it's mark to market and it only takes a few incremental sellers to bring a stock down. Disproportionately so some bad news about a company will bring down you know, buyers hands off until they can evaluate it. Sellers like shoot first, ask questions later, I. E. Shoot meaning sell.

Speaker B: Yeah.

Speaker C: And uh, if you do that say in a, in a tough market, uh you get declines of 20, 30% in a stock that maybe deserved a 5% decline. And private equity lives in this world where there's no mark to market, it's mark to model. And pension uh, funds love it and endowments love it because illiquidity hides volatility. The volatility is in the public market and particularly if you go to small mid cap, the range I'm in two to $10 billion companies. If there is a dislocation in the market, a real bad market, two things happen. Money comes out of the market and the next thing that happens is money that stays in market goes to the very large caps because of safety of liquidity and larger cap names or say just growth names that are not affected by economic uh, downturns. So you've seen it in 08, you've seen it in the COVID period where the initial reaction is very sharp down but doubly down in small mid caps particularly industrials. And then there's the recovery. So there's a lot of market related uh, effect but it's really um, you know, liquidity mark to market and just human nature to knock things down. And it really accentuates itself in this small mid cap range of a couple billion dollar companies.

Speaker B: And you have this sort of constructive activist approach. Talk a little bit about that.

Speaker C: Well I mean to be concentrated means you have to do your homework. That means you have to meet with the management, uh, see the plan, see the uh, company up close and personal as if you're going to buy it. Basically you have to really dig in as a business owner. So as you engage these in the conversations, um, can't help myself to come up with a bunch of ideas that would make sense to pay attention to for the management. And so we will discuss those ideas. A lot of them are not novel. They're stuff that they are working on already. Some may be more urgent in our view. And so we go through that with the management and then we follow up our conversation saying you know, if you don't mind, we're going to, we're polite people, we will say thank you in a letter and then in the letter we'll reiterate some of the ideas that we've discussed including the things we would like you to discuss at the board. You know for, uh, for potential, uh, adoption. And, uh, so we do that. And so they know letters coming. It's, uh, a constructive letter following a conversation. It's, um, it's very polite. And we don't want them to tell us what they're going to do because that would mean insider trading. Uh, we just say, uh, we trust you'll share this letter with the board of directors and that you'll do you and the board what is right for all shareholders. Sincerely, us. Attachments, you know, whatever's needed for share buybacks or whatever we put in there. So those letters do get discussed at the board level. And at that point, you're kind of in pole position, you know, that they're seriously thinking about this or that. I don't know if they're going to do it until they do it right. But now we have started a paper trail. Three months later, say they report earnings. There's nothing that they've done that we suggested. Stock is still down. We call them upset. So, uh, here we are again. Um, I'm sure you're working on something much better than what we can possibly come up with, because you're running the company. Maybe you're working on a great acquisition. Of course you cannot tell us about it, but unless you're working on something much better than what we have proposed, the stock is down. You don't control the company. You really ought to get on with these things. And if you don't get on with it, um, we're going to be forced to maybe write the next letter to the chairman of the board, reiterating the conversations and the letters we've had with you, which they've already seen, and then ask for all the same things that we've asked for from you, including one more, which is whether you should run this company or somebody else. So we are constructive, but we're not pushovers either, and we will in some cases. And Again, this is 1 in 10 case where we need to use that stick where we push on it like that. Um, sometimes the CEO says, okay, well, first of all, I appreciate you telling me this. Secondly, uh, you know, why don't you wait with the letter because, you know, I can't tell you anything. But give me some more time. And we, uh, say, okay, fine, we'll do that. In the case, uh, that he doesn't ask that we will send it. And then we get a call from the lead director or the chairman saying, thank you so much for doing it this way and not doing it on CNBC out in Public. So this approach has earned us the title constructive or gentleman Activist.

Speaker B: Gentleman activist.

Speaker C: Gentleman activist. Uh, that was given to me, uh, unbeknownst to me. But I knew there was a big profile being written. I contributed to that, uh, for Alpha Magazine. This is a long time ago in 2008, but when it came out, I was on the COVID with the, the title Gentleman Exorvist.

Speaker B: How funny I am. Um, have you ever been forced to give up in the face of recalcrant management? I mean, I can remember one situation we were involved with where the, there was a property that was worth more than the market cap of the company and the management just refused to sell it. And you kind of think, okay, well, we're not going to, we're not going to get anywhere. It was a good idea. We'll just give up. I mean, have you.

Speaker C: Oh, yeah, no, we've had situations like that. I mean, we'll try to push on something and if it doesn't work, you know, we can sell and we get out. You know, so that's the key about our activism, besides being respectful, constructive, uh, is that it's liquid. So there's. People have a spectrum on activism from soft to hard activist. And the hard activists would be the ones you read about that are really, you know, pushing on it on TV in proxy battles and try to get on the board, get the management or the board changed. I, uh, call it illiquid activism. It's very satisfying, it's very time consuming. It is, uh, creating an instant pop, but it also creates 40 activist illiquidity because you can't do pump and dump. You can't just sell the stock. Uh, I looked at that in the 80s and I saw a number of, you know, including the constant Partner group, get in trouble by being illiquid after they got success in a, in a firm in terms of going on the board but then not being able to sell the stock. Yeah, when they wanted to. And so we wanted to make sure we could always sell.

Speaker B: And uh, I mean, how does the macro play into your sort of assessment? I mean, you know, we've got potentially higher inflation, potentially higher interest rates. Does that affect the way you think about the portfolio when you look to do?

Speaker C: Well, certain industries, certain industries, certain companies are clearly more affected by macro trends like, uh, whether it's tariffs or interest rates or economic conditions, uh, if you take housing materials, uh, they are tremendously under pressure under the fact that in the US and many other countries, housing, um, existing home sales are just not moving at the lowest level since 08. That's because we had 10 years of low mortgage rates and people are trapped in their own homes. They can't sell uh, a home that they're in when it has a 2 1/2% mortgage. As nice as the 2 1/2% mortgage is, they want to move, they sell their home, then the next home they have to finance at 6%. And so there's very little turnover. And existing home sales which used to run like more at 6 million a year in the United States are more like 4 million right now. And that Delta is huge in terms of bathrooms, carpets, paint. You know, people do stuff when they move homes.

Speaker B: Yeah, yeah.

Speaker C: And uh, so, so we look at that and uh, we're very keen on going back into housing, uh, material type companies that are at low multiples on low earnings right now, the moment there's a pickup, for instance in existing home sales. So we look at that, we look at the automotive markets, the chemical markets, uh, to see what the demand supplies. But quite often we will buy into these companies on low multiples and low earnings when there's not only restructuring and corporate uh, action going on, company specific, but also you can get a big tailwind of an economic uh, pickup in that industry.

Speaker B: What would cause that um, tailwind in the case of the housing market in the States?

Speaker C: Well it's a passage of time is the fact that the very low mortgages, a lot of them are adjustable rate mortgages, are five and seven year mortgage, mortgage they get reset so it becomes less and less of an issue. So you're going to see in 27, 28 already, uh, much more mobility for people because the rates are going up. So might as well then sell this home and get, and move on to another one because the new mortgage rate will be very similar to what I'm paying now. So that would be a uh, key telltale.

Speaker B: But of course they'll be under pressure because they won't be able to afford the mortgage. Right?

Speaker C: Well they gradually will have to find a way to afford it either through paying down the mortgage or you know, going to a smaller home.

Speaker B: And are there particular areas that you think are fertile ground for this constructive activist approach? I mean there are geographies or sectors. Large cap, mid cap.

Speaker C: Yeah, well first of all mid uh, cap more than very uh, large cap. First of all, given not just our size but it's, we want to be able to make a difference as a shareholder in these mid sized companies where less attention is being paid. Managements uh, may uh, not own or control the company, but they own 1, 2, 3%. We may own the same amount. And we come in there and uh, they have very little attention. They get because 99.6% of all public equity, uh, that's being managed is in portfolios of less than 30 names. So we talk about active and passive management in the public markets. People say, well it's maybe 60% passive like ETFs and 40% active. Well, I'm sorry, a portfolio with more than 30 names is not an active fund anymore. They can talk about it for marketing purposes that they stock pick, but they really are not. I mean the real active management Is in the 10 to 20 stocks per portfolio range. And that's where all the activists are. That's where Chris Hahn is. That's where Bill Ackman is. That's where uh, Nelson Peltz is. And well known activists are in that category. And um, so we show up, um, and we own 10 or 15% of that company. Of our. No, of our fund is that company. We own maybe 2 or 3%. So we really engage with our experience and with our focus with top management to help them uh, do the right thing. So I think a lot of companies in this space, particularly mid cap 2 to 10 to 20 billion, are very uh, vertical ground for that. On top of that, they're also in the sweet spot for both private equity and strategic buyers. You know, $80 billion company can only be bought by a much bigger company stock for stock deal. If you go into the 5, 6, 7, $8 billion company range, suddenly you have a $25 billion private, uh, equity fund like CVC or KKR or Blackstone. They'll write a $2 billion equity check, borrow 3 or 4 or 5 billion and you have your $8 billion purchase price. So private equity can go into this space as well as strategic.

Speaker B: What, what are the things you look for when you meet management teams? I know you're meeting the Nomad Foods CEO tomorrow.

Speaker C: I mean today actually.

Speaker B: Today. Well, what you look for when, when you go into that.

Speaker C: Well, he's a, a new CEO. He was appointed uh, by the top management because they are dissatisfied with the results. It's been very, very difficult for them. He comes from Imperial Brands, some other areas. So first I need to understand him and meet him face to face, See his background, his motivation. He's only been there for six months now or so. And so it really is a get to know me meeting. I have a whole list of questions. I have a prep book. I've gone through it. So I try to use the time I have with him as well as I can to get an understanding of what drives him, where the pressure points are for him in the coming six to 12 months and uh, to see if he can keep the conviction of where we are with our position, which is a medium sized position in Nomad that we've recently taken. It's slightly underwater but not much. Could have been averaging down and uh, you know, it's a 6% dividend yield and 6 PE. And so it really has huge potential. But today will be a key meeting to find out if that's well, uh, placed at conviction and what would be

Speaker B: the sort of path you. So you'll have the first meeting with the management and then do you have a, like a standard routine that you'll try and visit them every six months? And how does it, how does it.

Speaker C: Well, there's definitely. The rapport has to be established in his meeting. From there, uh, we will ask them to visit us when they come to New York, you know, to carve us out, or we'll meet them at their hotel or the conference. Uh, my analysts will follow up literally every month with the IR guy. And uh, after earnings we'll definitely have a call with the CFO maybe and the CEO, depending how it goes every quarter, and then meetings when we can. And depending, uh, on the conviction level, we will make it a big position. The bigger the position, the more the activism, the more the inter. Inter exchange with the company.

Speaker B: So how well you get on with the guy will dictate partly whether you, I mean obviously share price as well, but that will also dictate, well, getting on.

Speaker C: And obviously as you get on you, you have a good exchange and you get uh, an ability to get all your questions across and to, to test all the things that we want to clear up. We've uh, had it recently with another company where we just met with the CEO, Dentsplice, uh, Simona, uh, Sonoma, sorry. It's a dental orthodontic equipment and services company that has gone down from 30 bucks to 10 bucks. All very similar to Nomad. And we met with the new CEO and we hit it up really well. And we immediately doubled the position after that meeting and ended up, um, you know, it's still very early days. It's just uh, like Nomad is basically on the tarmac, uh, at cost, meaning, uh, taxiing to find a way to take off, which we think it will eventually, but uh, it's early stages for those ones.

Speaker B: What have you learned over the years about judging CEOs. I mean, are there tricks that people should use?

Speaker C: Yeah, absolutely. I mean, um, there are CEOs who uh, are grandstanding, uh, who are saying things and doing things that are just uh, very quickly, uh, irk you and make you concerned what they're likely to do. For instance, if they're talking grandiose about uh, acquisitions or plans, and we much rather have them block and tackle what they have, do small add on acquisitions, do a combination of debt repayment, share buybacks, dividend, I mean, do it a little bit more balanced and don't shock us with suddenly boom, uh, transformational acquisition. So that's the biggest risk that we always have in our companies. And uh, we want to really assess that with the CEO, what they're likely to do or not do.

Speaker B: I was watching the World cup and you know, France came out the second half against Senegal and it was like it was a different team. And you thought, what has the manager said to them at halftime? And I thought, you know, I hope the manager's as well paid as some of the French players. And England was a bit similar against Croatia. So, uh, do you think a really good CEO can justify a bigger market cap than investors assume? Do you think it's an underrated skill?

Speaker C: Well, I mean some CEOs are phenomenal at storytelling. I mean, Elon Musk is the ultimate. We just went, I don't want to go back there again. But uh, that is, you know, it's Silicon, uh, Valley always says fake it until you can make it. Uh, and the storytelling is unbelievably strong on the west coast, particularly over another area. If you go to most of our companies, they can't work their way out of a paper bag in most cases. They are pretty good operators. They're maybe in somewhat boring businesses and on top of that their investor relations side of things, whether it's the investor relations department. But the tone comes from the CEO is quite very challenged and our constructive activism very often has to do with helping them with the messaging. And so we very often, like we would get into a company like this, say Nomad or uh, Dentsply, where, you know, we would like the new CEO as soon as possible, once he's in place with the C of C to come up with a capital market, say, you know, six months from now, in which they lay out a credible roadmap to substantially higher earnings and say, don't make it a bloody treasure hunt. I don't like treasure hunts. Besides that, you know, 99.6% of all the money in the public equity has no interest in that. They, they, they'll send an MBA to your investor day, but they want to come away with one sound bite. This company is going to earn $3 per share in 2028 and it's trading at $18. If it's at 10 PE, we're going to make 50%. Okay. How uh, credible is that? 3%, the $3 per share. So make it very clear, this is your target earnings per share is important. Why? Because it takes both sides, both the P and L and the balance sheet to get there. You know, if you just say like the Japanese companies very often do, but also US and European companies say, I want to be so much in sales, uh, who cares about sales? Want to be so much in earnings. That's all very nice. What do you do with the cash flow that comes out of these earnings? I said it's a two fisted boxing fight. Okay. The left hand says P and L um on it. The right hand says balance sheet on it. And if you put one hand behind your back and you try to do a boxing fight, you're going to get smacked in the face. It's not going to work. In fact, with the Japanese I came up with a little boxing glove set to remind them of that. So you basically need to, you cannot just say, well we're going to be so much in sales and so much in earnings and you think you're done. No, that's half the job. The other job is what do you do with the cash? And most analyst reports amazingly sell side will say, well this company is going to earn $2, $250, $3. Okay. In the meantime they have like six, seven dollars of free cash flow that can be used to buy back shares and pay down debt. And therefore the value is very different. In your cash flow models. You use that cash to buy back shares or pay down debt or do uh, accretive acquisitions and you get a much higher value and most people ignore that and company management needs to put it out there and instead pending any great acquisitions as a default setting, you can buy back your own shares. Okay, so just do that and let's see what happens with all free cash flow deployed to uh, share buybacks and see what that does to earnings per share. And you should accelerate that quite highly. So we push on that.

Speaker B: Why do you think that your sectors are bad at storytelling? I mean this is, this isn't complicated, right? Uh, I mean not all of them,

Speaker C: but a lot of them are challenged in that department. And that's because, uh, quite often the CEOs of these companies, um, either have not been CEOs before or they're, you know, they're just in the midsize range, uh, where they're, you know, they're not grandstanding and they're not really, uh, raising money or things like that. So they're not of that ilk. And of course we're looking at undervalued companies, so we're self selecting the ones who are not good at it, you know, if they're really good at it. There's many companies in my size range and industries that are good at. They're trading at 15, 18, 20 and we're not going to go there. So we're self selecting now to the ones who are not very good at it.

Speaker B: It's interesting and that's a, that's a very good point. Um, and it's, it's amazing how much of a difference that can make actually having the right, having the right messaging. And I suppose for many of these, um, executives, they've come up through the ranks. So they are not finance people. They're not. And they're not market people. So that explains it. To talk a bit about the, how you build your portfolios, I mean, how concentrated are they and what's the optimum number of positions and how have you got to that?

Speaker C: So we have four funds, US Concentrated Fund, Europe and Japan. So three regional funds each have 10 names. And we've come to that because we like concentration of capital and highest conviction ideas. The 10 names are not equally balanced in the portfolio and they may fluctuate during the one or two year ownership period that we might have. So they can go from 5 to 15%, sometimes 18% down to 5% and out. So we are actively sizing the exposure depending on the conviction level and what, what's happening to the share price and the news flow. Okay, so it's not a static situation at all. In fact, our turnover in the regional funds is typically 150% a year. But the name turnover is only 50%. And the difference can be explained by dynamic sizing the position. Think of a, uh, Formula one race car around the track. You don't drive the car at full speed the whole time. You can't. There are curves, there are other cars around, there may be a wet surface. Uh, this is the way I look at, uh, an ownership period that we have in a company. We will go full out if we have the conviction level and may not be Immediately, like we might have, say, in a Nomad or Dentsply, we might have a 5% position. We then have the meeting. We then start writing letters. Then we start getting a sense that they're on the right path. They're likely to adopt some of the things. They're going to do the right thing. They're going to have the capital markets a. I think that's a positive catalyst for a stock. I want to be fully loaded. Before that, do I have any inside information? No. Did they announce the public market? Of course they did. The public event. So it's at that moment that we step on the gas, literally, and make it a larger position.

Speaker B: And what's the maximum?

Speaker C: You have, uh, 20% in a regional fund. So then we have the Global fund, which is, uh, 15 to 18 positions. And they basically take the top names of each one of our regional funds. So every name in the global fund is somewhere in one of the regional funds. And typically we have 40 to 50 in either Europe or Japan. For Europe and the US, Japan is between 5 and 15%. That's kind of the way we like to balance that. And there the positions range from 3% to 12 in the global fund. And in the regionals, more like 5 to 18 or 20.

Speaker B: And your largest position, I mean, you talked about the. The railroad, 35%. Is that the most you've ever had?

Speaker C: That was by far the most we've ever had. And it was very temporary and it was very early in my career, so we're not doing that anymore.

Speaker B: And you've met a lot of CEOs over the years. I mean, who stood out. I mean, you told me a couple of stories when we last met.

Speaker C: Yeah, no, I mean, we've had, uh. There's so many stories, uh, I can tell, but there's a lot of folks that, um, CEOs that we've had where, you know, we've had war stories we can tell. But it's a company called Harman International, which makes, um, speakers like jbl Harman Kardon speakers for consumer purposes, but also for cars. And, uh, they got through an acquisition of a company in Germany, Becker, involved in the whole infotainment systems in the cars and software related to that. And anyway, so we got involved with Harman and in the 90s, when Sydney Harmon was still running it, he was the founder of the company. And, you know, he passed away in 2008. Uh, but we were involved in the 90s. He was actually also famous. His wife, Jane Harmon, is a senator from California. But Anyway, Sidney Harmon is a phenomenal guy. I met with him in the late 90s. We, uh, had a very good investment then. Then I went back in. Ten years later, um, kkr, uh, made a bid on the company that fell apart and the crash happened. I mean so many things went back and forth and he passed away. Then we got back involved again in 2013 and, uh, a guy called Dinesh Paliwal, who was hired by KKR after the sale of the company and then went public again and, uh, he was there. And so we got very close to the Nish Paliwal, pushing on a variety of things, wrote the stock from 70 to 150, got out of it, it dropped to 80. We were very good on our cell discipline. Dropped to 80. Couldn't help but notice it. Got back involved in it. And I remember being in Hong Kong on a business trip and the news came to me that, uh, Samsung had offered to buy the company. And the company had agreed to be sold to Samsung for $110 a share, which was a nice 20% pop in the share. But I said, everybody's full of joy in my company because it was a huge win. It was our largest position. Again. First we clocked it before and then we got back in at 80. Now it was going to 110. In fact above 110 because folks were thinking that was too low. And I was in that group, said, this is crazy. I went to Mr. Uh, Pollywell. We own 2% of the company, but for us it was like 15% of our fund. And I said, well, congratulations on convincing Samsung to buy the company and for you to crystallize all your options and all your shares and all that. But as a shareholder, I'm just not happy with this because we, we think on your own you can go to $200 a share. In fact, we went through the capital markets day that we literally laid out what we wanted them to present. They did that very well, very convincing. And the stock was on its own, on its way in our view, to $200 a share. So anyway, we ended up fighting a battle with, uh, with Harman, with, uh, the lawyers. We perfected our appraisal rights. So a whole new thing that I got involved with, which was after the annual general meeting to approve the merger, Everybody approved except 2%, which is Atlantic Investment. And we basically, like a Chihuahua hanging onto the pants of somebody, we would not let go. And so we went right through, uh, to the closing and we had lawyers that helped us with this and we were able to and you can do this if you perfect your appraisal rights, which means you vote no against the merger. Um, you've had the stock for a certain period of time. And you have a argument that it should be worth quite a bit more. You can make a negotiated deal with the buyer to. They can buy you out at a price well above what others got.

Speaker B: Oh, wow.

Speaker C: They didn't do that. That's called perfecting your appraisal rights. Very hard to do. But we did it, and we got quite a bit more money out. Can't disclose what it is, but it was enough for them to get rid of us and for us to say that was worth it. So, uh, that was the Harman situation. But, um, we've had situations like I, uh, told you earlier about Schindler. And, um, you know, Schindler is a phenomenal company. It's an elevator company that has 80% of their earnings coming from the installed base, which makes it very predictable, non cyclical. Uh, the cyclical part, of course, installation of new elevators, which is tied to office buildings and hotels and residential towers, et cetera. And, uh, this was back in 06 or 05. Um, or maybe 07. And, uh, we were respectfully meeting with the CFO and the treasurer of the company numerous times. We were probably the second largest shareholder after the Schindler family, which controlled 6% of the company. And, uh, we asked for a meeting with Mr. Schindler. And Mr. Schindler was, uh, according to them, not available. Said, really? Well, you're a public company. He's the CEO of a public company. We're a public shareholder. We're respectful. We're large. And we were asking for a meeting. I said, you know, that, uh, if he does five of those meetings a year, it wouldn't be too much to ask for. And in fact, five hours, you know, five times one hour. I spent a lot more time waiting for goddamn elevators than those five hours. So I can tell you, uh, he should take, uh, that meeting. M. Because, you know, we'll otherwise make some noise. We got the meeting, so we ended up having a meeting. The meeting was a very productive meeting. It was not 45 minutes. It was two and a half hours in his office in Switzerland. And thereafter we proposed a couple things, including buy back some shares. And they ended up doing that. So, uh, it took a little pushing and shoving to get the meeting in the first place. Uh, in the end, I wrote it, or I had an interview. Uh, maybe I'll read this again. I get another nasty letter. But, uh, he didn't like, uh, hearing about that. Um, but your CEO of a public company, you take a certain amount of responsibility and to meet with shareholders, um, you'll probably say, of course I meet with shareholders. But it was a struggle to get that meeting interesting.

Speaker B: And your business, I mean, you used to run a long short fund and you're now long only. You didn't like shorting?

Speaker C: No, it's not to do with that. I uh, think shorting is uh, fantastic to be able to do it. Uh, I learned the importance of that in 1990 when I didn't have the ability to shorten. And so I set up the long short fund in 1992, uh, together with the long only I already had. So people could choose concentrated, uh, long only or concentrated long plus a short book. Um, and so those are the Coke and Diet Coke offerings that I had. And when I set up the international fund, it was immediately a long short fund as well for Europe and Japan. By that time we grew, we had 30 people on staff. The shorting opposite to the long is highly diversified and short term in trading, uh, you gotta have stop losses. So it's a very different activity, very, ah, time, uh, consuming. We did this well for quite a long time. Um, it helped us in the crash, although we were down a lot in the crash of 08, uh, come out of it, uh, you get into 2015, 2016, 17, 18, 19. By that time it's such a growth market. It's all growth tech stocks. Uh, mid cap value is already underperforming. So we, with our underperformance starting to lose aum. Um, and on top of that, the shorting you're doing in the overvalued momentum markets, and that was tough too. So the shorts were negative attribution, the longs were underperforming. And that period from 2015 to 2020, including Covid, the shock of COVID uh, led to an erosion in our aum. Um, uh, people were quite happy to go just to the ETFs of the public market, which, uh, put up pretty good numbers, which were obviously very much driven by the magnificent seven large cap tech, which we didn't have by definition. And so this is the fact of life, that's what happens. You underperform and the AUM comes down. AUM come down a lot harder in the hedge funds which underperformed the long only funds. And so eventually we decided, and our clients decided for us frankly, that we should fold that into the long only. So for the firm to create Runway to keep Doing this, uh, we had to reduce cost, uh, obviously, uh, and we rationalized the firm by going back to long only reduce the staff levels and be able to do this well for a long period of time. And uh, we're quite content and happy, uh, and able to run the firm and put up really good numbers, which we are at the lower AUM UM level. And that eventually. The goal of course is with growth, um, in the value of our current investors money and our own money, it will attract outside money again. And that's uh, what we're working hard for.

Speaker B: But you run a much smaller amount of money than I would have thought given your track record and your performance. But you've got very high fees. And I just wondered, can you just talk about that? Because a lot of professional investors listen to this podcast. How do you make that decision, uh, about the level of fees versus raising the aum um, because your high fees discourage uh, a lot of investment.

Speaker C: I didn't really make much of a decision about the fees because they've been the same for 35 years. 1% management fee and 15% of the net new annual profits. It is a very differentiated, idiosyncratic strategy. It's very labor intensive, very hands on and very capacity constrained. M and I'm not interested in asset gathering because it would dilute my strategy, my ability to put up the numbers. So I've been lucky to have done very well for a long period of time.

Speaker B: It's not luck.

Speaker C: Right, sorry.

Speaker B: It's not luck.

Speaker C: Well, it can be because, uh, we've done this. You know, the record that we have. If you take the gross numbers of our U.S. fund, um, you know, just gross, okay. And the net will come in a second. But the net number means that $1 million invested in our fund in 1992, in October of 92, in May of 2026 or June is worth $50 million. That's 5,000% net of fees. Now you could put that million dollars in the S&P 500 total return, including dividends invested. It would have been worth showing the value of compounding to everybody listening. $33 million. It's 3,300% return on the S&P 500 from over almost 34 years that I've been in business. So we have outperformed that. You can say, well, why don't you raise money? And you should be raising money. Well, that outperformance gets me meetings everywhere. Doesn't uh, mean people write checks right away. Okay. They um, they will say, oh, the fees are too High. So. Well, uh, okay, the GROSS Performance is 10,000%. The net performance is 5,000. I'm not going to do this again to do it for low fees. So um, that's the stubbornness perhaps that I have. But I'm also very content running small amount of money, doing it really well and having investors involved who are fine with paying 1 in 15. Because the 1 in 15 results uh, have been uh, competitive. Now they have not been competitive for five and 10 years from the last five or 10 years. Why? Because of that period from 2015 and onward through the COVID crash where we've just underperformed the NASDAQ and the S&P 500. And people basically say, well, I have full transparency. I mean with us as well, liquidity, uh, daily intraday with the ETFs, I pay 5 basis points which is uh, 1/20 of our management fee and it's done better. So I know that that's fine. But I'm highly confident that oh, in the fullness of time we will outperform substantially with our approach and that the underperformance we've had of recent, that is included in the long term record I just gave you, uh, will go back to a period of major outperformance. We had a momentum and growth market for almost 15 years. Yeah, we had a few detours in 20, 21, 22. Ah, we're starting to get a detour hopefully now. But the AI story has been explosive and I think back to the space, uh, SpaceX, uh, thing and soon entropic and uh, OpenAI. These are $3 trillion plus IPOs. It is very much market toppy and I think there's a likelihood of much more value fundamental market. And in that case we can have some very substantial outperformance and then marketability comes back.

Speaker B: Yeah, I know, sure.

Speaker C: And, and that's what we're fighting for. So, but in the meantime we're here chipping away, trying to put, put up numbers that are really attractive to our clients and for ourselves. And um, and with that, you know, eventually money raising will come again.

Speaker B: I mean my personal view is the open AI IPO will be the thing that cracks the market. But I, I, I don't even think that, I don't even know if they can do an ipo. We'll see. Um, so just as we finished, I mean you've been doing this for 35, 40 years. What's changed the most and what stayed the same?

Speaker C: Uh, what stayed the same is that uh, no matter how many computers and fast trading is going on. Uh, it's humans and human emotion that drive public equity markets. Um, and there's a lot of overvaluation. Uh, people now call it meme stocks. People call it, uh, whatever they want. But there's a lot of emotion in the market. And at the end of the day, I'm sailing my course straight through an ocean that's full of choppiness and squalls and high waves. And I feel very comfortable with the approach. We have the universe definition, uh, staying in areas, uh, that we know well. The concentration we do, the activism we do with that, we can put a very good number. So I don't think anything has changed in that regard. I think we're very seasoned and experienced to sail our boat through the crazy ocean. Whereas a lot of people get extremely whipped around by the next wave and they don't keep their eye on the horizon. And we're very determined to produce extraordinary, absolute and relative performance numbers. Uh, we want to be known for that. Not if it's on my tombstone it says, this Tenderfoot, uh, produced 60 year CAGR of 16%. Much, uh, rather have that than saying, well, at one point I ran $80 billion or something, or 50 billion.

Speaker B: How long do you want to do this for? How old are you? You're in your.

Speaker C: I'm 67.

Speaker B: Yeah.

Speaker C: Warren, uh, Buffett just retired, uh, his job at Berkshire at 94. I see Nelson Pels, I see Carl Icahn, I see other activist investors, um, doing this. As long as they're able to move around and think and walk and talk. And, um, I love doing this. Uh, I love working with my team. I love working with the CEOs I'm working with. I like the fact that we have outside money because there's been the temptation perhaps to make this a family office and not deal with it. We've kept our institutional capability, SEC registered cfo, the whole office. We can take on money from institutions like tomorrow, it's fine. You know, we've had that. We had billions under management. We can easily do that again. And I like the idea of making money and raising money. You know, when my kids were younger, you know, what does daddy do so well? He's not a fireman, he's not this or that. He's a hedge fund manager. Well, that's like, really unexplainable. Just make money and raise money. You know, that's really what our job is primarily making money on. Um, the money that we've been entrusted and our own money. So,

Speaker B: so Um, I always ask people to recommend a book.

Speaker C: I do have one for you and your listeners. It is called Billion Dollar Whale. It's written by Tom Wright and Bradley Hope. It's the story about jh. He's a Malaysian fraudster who fooled Wall Street, Hollywood and the world. It's a great read.

Speaker B: Cool.

Speaker C: And uh, it will be a movie one day.

Speaker B: I'm going to, I'm going to get that myself actually. I, I'm, I haven't, I haven't read that book and that sounds, that's. I know the story, but, um, I haven't, I haven't read the book yet and just, um, where can people find you?

Speaker C: Atlantic investment dot net. Uh, I mean it's our Atlantic investment on the website. We are in New York and so it's easy to find.

Speaker B: Alex, thanks so much.

Speaker C: Thank you very much.

Speaker A: I hope you enjoyed that deep dive into how a real world operator and dealmaker has translated decades of experience into a concentrated activist equity strategy. Alex's perspective on automation productivity was interesting. He's been watching factories replace workers with machines for more than 40 years, yet we still find ourselves at or near full employment. It's a useful reminder when we talk about AI and the future of work markets and societies adapt, even if the transition isn't always comfortable. And his explanation of, uh, behavior behind the scenes activism was fascinating. He seems very nice, but if I were a CEO, I, uh, wouldn't want to get on the wrong side of him. I hope you enjoyed our conversation as much as I did. You can find more resources, courses and analysis@uh, behindthebalance sheet.com and you can follow the podcast on substack and on YouTube where we post additional content.

Speaker B: Thanks for listening and um, hang on

Speaker A: for a new short feature if you enjoy the show. The best way of helping me spread the word is leaving a review or even just a five star rating. It gives the podcast social proof and helps me attract new listeners. I'm continuing my experiment of reading out two listener reviews each month. Here's one from Missing61 titled Decent Podcast, Some good guests, but the host talks way too much. Instead of asking short questions and letting guests be the first focus, don't interrupt your guests. Good potential here. I'll check back in six months and try again. Tough, uh, but fair. I'll take that as a reminder to shut up a bit more and let my guests do the talking. And I appreciate your planning to come back and see if I've improved. And here's a review from Captain Mainwaring in the UK store titled Genuine. I like the way Steve is transparently genuine and thinks through the guest process. The guest in turn is more relaxed. I often have to replay parts, so it must be good. So one listener wants shorter questions, fewer interjections. Another likes I think things through. I'll tell you the guests will always be the focus of this show, but if you'd like your review read out on the show, whether you're in the Talk Less camp or the Keep Thinking camp, leave a rating and review. Every month I'm going to pick a winning review for a polo shirt and a runner up for a baseball cap. All you need to do Leave the review and email me. Thanks as ever for your support behind

Speaker C: the balance sheet and affiliates. Um and Podcast guests may own shares or have an economic interest in securities discussed in this podcast, which is aired for your education and entertainment only. Nothing in this podcast should be construed as investment advice or relied upon for investment decisions. Always do your own research. Sam.