Most market participants would prefer to invest in a business with limited competition, meaning others have left the market or have great difficulty entering, thus establishing a protective ‘moat’ providing an attractive rate of return. While this concept is seemingly straight forward, we find few investors practically apply this thinking in relation to the capital markets. The vast majority of institutional capital crowds into the same markets and the largest, most popular liquid securities. We prefer to invest in smaller, capital constrained markets with far more inefficiencies due to a lack of institutional competition.
We focus on capital constrained markets where we have years of analytical experience, a local network of contacts, and corporate governance and transparency is robust.
Capital Constrained Markets
- Current focus
- Potential future focus
Types of Capital Constrained Markets
Depressed Markets – ‘Everyone has Left’
We search intensively in countries undergoing temporary economic stress, circumstances that often lead to significant under investment by local and foreign investors alike. Inevitably, capital eventually returns. We prefer investing in geographies where economic and political conditions are stabilizing, and there is an identifiable inflection point that can lead to recovery.
Overlooked Markets – ‘Few have Arrived’
With the vast majority of institutional capital focused on the U.S., China, and a few other large developed markets, there is a glaring lack of focus on smaller countries, typically found among the emerging and frontier economies. As these markets tend to be smaller either in population size or GDP per capita, many institutions ignore these geographies which frequently leaves a ‘shortage’ of capital and the potential for higher long-term returns. We prefer to invest in countries that are liberalizing their markets, where rule of law is relatively strong, private and public debt levels are relatively low, and there is a strong independent central bank with a reasonable track record of monetary policy management.
Local Network Overlay
The world is a big place to search and resources for any investment firm are limited. Proper analysis requires comprehensive on the ground due diligence with multiple levels of business, industry, and reputational channel checks. We therefore focus on countries where we have spent an extended amount of time, developed a robust local network of analysts, investors, company executives, and where communication with management is common. Therefore, most of our time is currently spent in Europe and the Western Hemisphere, along with South Africa and Australia. We are continuing to opportunistically expand our ‘circle of competence’ to include select countries in the Middle East, Asia, and Africa over time.
Exploiting Multi-Layer Inefficiencies
‘Inefficient markets’ are not only found in depressed and overlooked geographies. We target small companies with market capitalizations of typically between $100 million to $1 billion, that remain too illiquid for most institutional capital, yet liquid enough for smaller Partnerships. We also typically find companies with high insider ownership attractive due to better alignment with shareholders, yet most institutional capital ignores these opportunities due to limited public float and investor relations. Thanks to our long-term approach, we are able to exploit these attractive investments that other institutions often pass over for non-fundamental reasons.
Geography and Market Capitalization allocations are as of September 30, 2019.