Its Lonely


Issue 1

Howard S. Marks (the famous investor whose memos Warren Buffet said always teach him something) has a history of investing in companies ignored by the market. These Investments have done Marks, who is now worth over $2.2bn, rather well.

Marks cut his teeth as an investor in the 60’s and 70’s. During this time, everyone was investing in ‘Nifty Fifty’ stocks (so called because they represented 50 buy and hold blue chip companies that people felt could never lose money). It was common for people to pay over the odds for these stocks as the common thinking was even if they were over-priced they would grow into their value and continue to grow always bringing a profit. However, the 1973 stock market crash put paid to this thinking, with most of them falling over 80%. Marks first lesson was that investing where everyone thinks ‘nothing can go wrong’ is both a hard place to find an edge and a hard place to find a bargain.

Marks was then put in a quiet basement to analyse investments which no one cared about at the time – which happened to be non-investment grade debt (junk bonds). Being stuck in a basement by himself had its advantages – he had very little competition and noise. He could focus on carefully selecting from all these assets that were totally out of favour. He knew that there were gems hidden amongst all the ‘junk’ and with careful analysis he found incredible bargains, that set him up for a brilliant career and track record.

Marks believes, as do we, that when you buy assets people are turning their backs on, you can find investments at bargain prices. Some of the reasons for this are: 1. There are simply far less people looking at them and taking the best ones before you can. 2. You are less likely to be rushed in your decision making and 3. You can drive or at least carefully observe the pricing process.

In the African and Latin American sectors where we operate, we can take a lot from these lessons. We sit in markets where banks are currently inward-looking and holding back on investing or lending. Just yesterday we spoke with a major global bank who has been active in Africa and told us they are not looking at any more deals that are not “multi-nationals”.

Of course, plenty of private equity players are active in our markets, and we work with them all the time, but genuinely bottom-up lenders to small and medium players are few and far between. This allows us to take our time, think about risks, thoroughly understand the underlying business, and propose pricing that makes sense – rather than getting caught up in tenders, pitches and bidding wars.

A friend of mine is a well-known stock analyst and is in regular conversation with several global money managers. None of them have any interest in emerging markets right now. None. We feel, like Marks at the start of his career, we are alone in that quiet basement, which is a perfect place to think. Maybe one day capital will come rushing back in with people allocating huge numbers in a top-down fashion and driving pricing down to unsustainable levels… in which case I hope you will find us sitting on our hands.

For now, there is a void, a disconnect and an opportunity. There are well run, real businesses in these markets that are feeding, connecting and supplying to millions of people that are struggling to access the right capital. The main job we have, much like Marks, is to find the gems amongst the junk.

We’ll write a lot more here about how we do that, but honest, competent management is a great start. Part of the culture we want to instil is to be proud of the deals we did NOT do for the right reasons. There are a lot of those, and I am yet to regret any of them. Time and again, personal networks have proven to be an invaluable edge.

For those rare management teams that are doing things the right way, we want to be there for them now, truly understand their businesses and build long term relationships that can sustain both us and them through the cycle.