Source: Australian Financial Review
Published: November 17, 2019
For investors spooked by WeWork's failed IPO, Allan Goldstein of Cooper Investors has some red flags to watch for on management. But, he also points out that, if it gets it right, good leadership can take a firm from average to extraordinary.
Markets were rocked in September, when embattled co-working space provider WeWork pulled its IPO, valued by some at almost $US50 billion ($73 billion), amid growing doubts over governance and finances.
Allan Goldstein's "avoid" list includes firms that view their shareholders as obstacles rather than partners. Louie Douvis
Adam Neumann, co-founder of WeWork, stepped down as chief executive and the company has just revealed a $US1.25 billion net loss for the third quarter. Its largest investor, SoftBank, has stepped in to try to support the firm.
"There are a lot of war stories out there," says Goldstein, who is now managing a new fund specifically to hunt out companies with superior managers that are closely tied to their businesses.
Companies where management are interested in paying themselves more than perhaps they should either through salary, options, or equity are among those to avoid, according to Goldstein.
Then there are the firms that view their shareholders as obstacles rather than partners, which are also on Goldstein's "avoid" list.
It's important to keep a close eye on management through time, he says.
"The humility, the hubris cycle – we are there watching management teams play out. When do they act rationally or when do they get overconfident and do acquisitions that don't make sense to drive earnings per share?"
Goldstein runs the new Cooper Investors Family and Founder Fund and co-manages the Cooper Investors Global Equities Fund which is approaching $2.3 billion under management.
Travelling to invest
With his focus on North America, the fund manager spends up to three months of the year travelling through the United States and Canada.
Goldstein estimates he holds between 25 and 30 meetings with management and people connected to a potential investment, such as ex-employees, suppliers and customers, before making the decision to buy in.
"The best part of the job is walking through a facility or meeting with the CEO or founder and hearing about plans for the business. You can't get that feeling from sitting at a desk in Melbourne," Goldstein says.
But he tends to avoid the major metropolitan areas such as New York and San Francisco to focus on regional and national firms in some of the more remote parts of the US and smaller cities in his hunt for potential investments.
"We are talking middle of nowhere Florida, middle of nowhere Pennsylvania, Illinois, Wisconsin," says the manager. "There are so many companies that have a [decent-sized] market cap located in the middle of nowhere and that aren't well known but which really relate to who we are."
It's our job to analyse the engagement of management in the business. Some CEOs might be going off buying a soccer team. — Allan Goldstein
The global fund of 40 companies invests for the long term, with an average turnover of 20 per cent to 25 per cent, or four to five years, although some stocks have been part of the 13-year-old global equities fund for almost 10 years.
A thematic winner for the fund has been investing in companies that are the incumbent industry players but have added technology and data to their existing businesses, Goldstein says. "That have been able to make the pivot."
S&P Global, spun out from McGraw Hill, and the former IMS Health, Iqvia, are among the companies that have been able to transition from yesterday's businesses to modernise. They had the management ability to jump on growth options, Goldstein says.
"If you’ve got good management with a good track record of capabilities, you’ve got more confidence in their ability to execute on options and opportunities. Someone with a poor track record – how do you have confidence that they can do that?"
Management in action
Goldstein highlights American conglomerate Danaher Corp, which invests in science and technology innovation. He says visiting the business is seeing management strategy in action. "Some of the most basic things are on show. They are trying to make complicated businesses simpler."
For example, the company has drawn outlines showing where tools are supposed to be placed and lines on the floor to show the best route from one machine to another, measures all designed to enhance productivity and cut down on waste, he says.
While the fund isn't generally keen on investing in initial public offerings, it did invest in Danaher's dental spin off Envista last quarter, its first IPO participation in five years.
"The dental business has been underperforming inside Danaher, they have been focused on other areas," says Goldstein. "But they are the number two dental business globally. It was priced at 14 times cash flow and we think that there are huge opportunities in their margins."
Spin-offs have been a favourite for the fund. "We look at a lot of spin-offs because they can give that release of energy and focus."
However, Goldstein says he has been a bit more cautious about investing in spin-offs over the past 12-18 months due to some poor performances. "We have witnessed a lot being spun out underprepared and overgeared. And we haven’t been willing to invest in a number of them."
The Global Fund differs from the new wholesale Family and Founder Fund in portfolio size and expected market sensitivity.
"It is likely to be less correlated to broad market moves," Goldstein says about the Family and Founder Fund. "It's a 20-stock portfolio – it's going to be moving more to its own beat."
It has a target of "attractive" returns over the long term and a criteria of 20 per cent company insider ownership.
"It's our job to analyse the engagement of management in the business. Some CEOs might be going off buying a soccer team," he says. " Or they are are still involved in the business and spending their time there."
Goldstein flags up Australian-born Colliers International, which is now run out of Canada, as an example of a firm where a founder has led a huge transformation of the business.
"CEO Jay Hennick bought the company over 15 years ago. Colliers was a fiefdom of franchises so he's acquired the franchises and installed an entrepreneurial culture," says the fund manager.
"He's grown a business that was buying and selling property transactions and related services to a more diversified property services group."
Goldstein gives $US21 billion Canadian software company Constellation Software, started 25 years ago by CEO Mark Leonard, as another example of a founder-led firm he likes.
"He saw an opportunity. There were these small software services companies serving specific industries. They were subscale on their own and he could buy them for one times sales.
"They have bought into other industries, but the concept is the same –buying these underappreciated quality software business which are very sticky, very stable businesses.
The next Constellation?
"We think we have found a $1 billion version out in Austin, Texas, that is doing a similar thing in cloud software.
"They are buying up all these cloud businesses which are growing at 10 to 15 per cent and might only have $US5 million of revenue.
These companies are "not big enough for private equity and they are not sexy enough for venture capital", Goldstein notes. "So they are able to buy these companies for low multiples and do a similar thing."
The Global Equities Fund is up 15.65 per cent year-to-date on a hedged basis, outperforming its benchmark by 3.3 per cent. On a three-month rolling basis, performance has lagged the benchmark by 0.6 per cent. Cooper Investors has about $13.5 billion under management in total.
By Sarah Turner, Reporter, Australian Financial Review