Tresor Capital Partner Michael Gielkens in podcast The Dutch Investors
Relying on standard financial screeners or a quick glance at traditional key figures carries the risk of making a crucial error: assessing all companies using the same yardstick. This 'one-size-fits-all' approach is particularly misleading when analyzing serial acquirers and family holding companies. This is because these are not traditional companies, but essentially investment machines. Their success depends on the art of capital allocation, a discipline that requires a different, deeper analysis than the usual ratios suggest.
Tresor Capital partner Michael Gielkens recently shared insights that underscore the principles we apply when selecting these exceptional value creators. It's about finding the right partners for the long term, not speculating on short-term market movements.
The selection process: what we look for
Identifying a superior investment holding company requires a rigorous and disciplined process. A large part of the investment universe is already eliminated for us based on a few fundamental criteria:
- Skin in the Game: It is essential for us that the management, the founder, or the (founding) family has a significant personal stake in the company. This ensures a parallel alignment between the interests of the insiders and those of us, the fellow shareholders.
- High Return on Invested Capital (ROIC): A consistently high return demonstrates the management's ability to profitably (re)invest capital, which is the engine of compounding.
- A Strong Balance Sheet: We avoid companies with a high debt burden. A conservative balance sheet provides flexibility and allows a company to seize opportunities, especially in difficult times.
Equally important are the factors we see as warning signs. A lack of 'skin in the game' by management, a strategy focused on buying low-quality companies with too much debt, a high degree of cyclicality in business operations, or frequent changes in management filled with many external directors instead of internal talent, are reasons for us to look further.
A different view on goodwill and the discount at family holdings
Traditional accounting metrics can distort the picture for investment holdings. Two concepts deserve special attention.
For a serial acquirer, a significant item of goodwill on the balance sheet is not a red flag, but a logical consequence of its business model. The question is not whether there is goodwill, but what management does with it. Does the acquisition generate a sustainable and high return on the total investment? That is the only question that matters.
The size of the discount at which a family holding is listed relative to its intrinsic value is not a simple buy indicator. It is better to regard it as the grade the market assigns to the quality of the portfolio and the capital allocation ability of the management. A high discount may be entirely justified if management has destroyed value in the past. Conversely, a company trading at a low discount can still be an attractive investment if management has proven to be an exceptional value creator.
The most important measure: the power of incentives
Ultimately, everything can be traced back to one fundamental principle, perfectly worded by Charlie Munger: "Show me the incentive and I'll show you the outcome." The way a management team is rewarded determines their behavior and thus the fate of the company.
We analyze the reward structures closely. Is management rewarded for long-term sustainable value creation, such as growth in free cash flow per share, or for short-term metrics such as absolute revenue growth? The answer to that question is often the most reliable predictor of future success. In combination with 'skin in the game', this forms the basis for a partnership in which we as shareholders can thrive.
All these topics are discussed extensively in the English-language podcast of The Dutch Investors, which you can listen to by clicking on the button below.
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