Alexander Roepers on constructive activism and concentrated value in $KEX, $AXTA, and $FLS | S08 E09
Summary
Value Rotation: The guest argues value and midcaps are set for a multi-year upswing as AI froth fades and investors refocus on real cash flows and reasonable valuations.
Kirby (KEX): Largest U.S. barge operator with tight supply/utilization and a fast-growing engine services arm supplying standby power to data centers, positioning it as a discreet data center power beneficiary.
Oilfield Services: Weatherford (WFRD) is highlighted as an undervalued global player with improving balance sheet, buybacks, and potential strategic interest from larger peers.
Coatings Consolidation: The Axalta (AXTA) and Akzo Nobel (AKZA) tie-up offers scale and synergy potential; after a pullback, the guest sees renewed value with a view that AXTA can approach $42 pre-close.
Europe Opportunities: Elis (ELIS) trades at low multiples versus U.S. comps like Cintas, while Vopak (VPK) offers durable midstream-like cash flows and buybacks, both exemplifying European midcap value.
M&A Cycle: Stabilizing rates and policy should catalyze M&A, lifting private market value signals into public midcaps and supporting re-ratings across value names.
Regional Focus: Japan and Europe are emphasized as fertile hunting grounds due to governance reforms (Japan) and persistent pessimism (Europe) creating mispriced midcap industrials.
Process & Risk: He stresses concentrated, constructive activism and dynamic sizing to harvest volatility, focused on $2–$20B industrials/services while avoiding high-tech/biotech and opaque financials.
Transcript
And we're live. This is Value After Hours. I'm Tobias Carile, joined as always by my co-host Jake Taylor. Our special guest today is Alexander Rous, the founder and chief investment officer of Atlantic. Alex, welcome. How are you? >> I'm good. Thank you for having me. >> Uh, absolute pleasure. I've been following you. I said this before we went on live. I've been following you since 2010 when I saw you speak at a value investing congress in New York. Um, tell us a little bit about the strategy that you have at Atlantic. >> Yeah, my pleasure. So I started Atlantic uh over 30 years ago uh initially just in the US and the idea was to concentrate capital and research on high conviction public equities and if you concentrate capital you have to be careful um and you need to go into areas that are in the area of competence and that have good margin of safety. So we started with a u a universe definition uh that excludes areas that we are uncomfortable with or that present idiosyncratic risks such as uh technological obsolescence risk. That's a mouthful, I realize, but it has to do with the fact that certain companies do high-tech stuff that is subject to, you know, either their own uh fantastic developments in high-tech, making certain projects or products obsolete or somebody else doing that for them. So, for us, it's very important that a service or product uh is really not subject to that risk to a large extent. And so, we steer clear of high-tech and biotech companies for that reason. uh there's a lot of money that you can make in those areas and we know people that can do that or you can as a retail investor you can buy ETFs or the individual stocks but Atlantic will not do that. So that's one aspect. The second one is areas that lack transparency. So banks, insurance companies, brokerage firms uh again can be many great companies but we think there's a lack of transparency that makes us uncomfortable to be highly concentrated in any of those names. So we basically have decided to be in this midsize at least two billion and up. Again, we're in the public market putting up with marktomarket. So, the last thing we want is to be illquid. So, two billion is for us a fairly arbitrary but common sensical point below which we really don't look in terms of our targets. And then above 20 billion, it's not really interesting because we want to have top level management access, reasonable liquidity, of course, you would get that in very large caps as well, but also the potential for all three catalysts for unlocking value to be present. The first one is corporate action. I'll elaborate that a little bit more later. That's everything management can do to improve the value of a company. Then there's activism, which is more likely to be successful in midsize companies than in very large companies. And then thirdly, takeover. And takeover, we'd like to have both strategic and financial buyers potentially looking at a company when it becomes very attractive or when it goes into play. And if you look at financial buyers, private equity firms for instance, they typically would like an eight or$10 billion deal at the high end, not too much larger. Hard to finance. Typical big private equity fund is 2025 billion. $2 billion equity check is big. Uh plus leverage, you get to six, seven, eight billion. So we've had since inception, which is a long time ago now, companies in that sweet spot where uh if they don't perform well and they're undervalued, they're going to attract attention by either strategic and or financial buyers. So that's the reason we've chosen all the way back to the $20 billion. Exclude high-tech and biotech, exclude financial service and and uh you know insurance companies for the transparency issue and then focus on industrial products services companies and then you know being Dutch uh they're pretty known to be stingy. We like to uh there's a joke as to how how many Dutch people you can get into a Volkswagen. All you need to do is flick a dime in there, they'll get in there. Um, you know, I'm all over something that is very inexpensive and yet solid. So, we want always money-making companies with solid balance sheets in our little universe of two to 20 billion dollar industrial products and services companies that are down. You know, we're basically lying in weight. You know, I have all these analogies, you know, like a sniper lying in weight. I'm not a hunter. I'm not a sniper. But you just imagine, you know what your target looks like. You wait. You wait. You wait. And then when you see it, you strike. And we know our targets. And the targets are about 500 companies publicly traded in the US. Uh after about 12 13 years of doing that well enough, we got to level of uh self-imposed capacity limit in 2003. Uh by which we basically say okay, we want to beat about 10 companies in our portfolio. We want them to be an average 5 to8 billion and we don't want to be more than four or five% of these companies. So then you're at about a billion and a half. you're you're maxed out in your capacity. So with that we were strict we hard and soft closed our funds which is basically the US fund and then set up our capability to do the same in Japan and in Europe and in Japan there's about 250 companies that fit our bill in terms of size and industry focus and you have Europe uh about 300 companies western Europe um where you know have a little bit of an advantage have grown up in Holland speaking four languages and so we went over and became very active in Europe starting 2004 as well. So that's in a nutshell what we do. We have three funds uh that are regional and then one global fund that captures the top names in these three regional funds and we keep doing the same thing and we're doing that now for like almost 35 years and when you saw me in 2010 I was probably proclaiming the same strategy which I tried to do in a nutshell here. Um and you know we don't try to stray from that. I mean markets go through you know momentum plays, growth cycles, value cycles. We just had the most amazing growth and momentum cycle that started uh after the great financial crisis in '09. Uh we had a good run too but by 2015 it became almost all growth and momentum and then magnificent 7 and uh you know where that led and then eventually with co it became even more pronounced. There was a detour in 2022, but then AI, the narrative there picked up and it was unstoppable until about three or four months ago when people started to scratch their heads on the actual, you know, who's the beneficiary, who's the the one hurt by AI. And in some cases, they're the same company and people don't know yet. It's very unclear. What we do know is there's a lot of spending going on and a lot of overvalued companies and people are starting to really uh worry and and do a little second guessing on that. All that is somewhat helpful for people like us who are in the forgotten corner of the market where there's real companies with real profits with real benefits from AI. All our companies are not to get railroaded because they're not tech companies. They are benefiting from this productivity tool that is AI. So uh we've seen a very good returns relative returns as well in the last four months and uh I think it's the beginning of what may be hopefully a long cycle for improved performance relative performance as well for value. >> Alex, I'm glad you narrated that uh period from 2015 to date because that was going to be my next question. But I was just wondering from 20 sometime after the pandemic there was some stimulus around 22 and I I've observed that midcap and small cap have been pretty weak on an earnings basis since 22. I'm not sure where that picks up. It looks to me like we're still we're close to the bottom close to troughing. But do you think that uh that pick up over the last 3 to four months is that the equity getting in front of the earnings releases that are coming or how do you how do you view that? >> It's a good point. Um I think there's a little bit of that going on because the uh a lot of value names including some in our portfolio are struggling with earnings still because their end markets have been people you know worry about a recession for the overall economy. Uh I'm sorry automotive, construction, chemicals, packaging are all in a recession full-blown for four years. You know it's unbelievable. And these companies are blocking and tackling to rightsize their footprint to uh to to to get the overhead down to maybe buy back shares, bring the debt down in order to get earnings per share growth and some have done a very commendable job and some are trading now at trough multiples on what we can still consider to be trough uh industry conditions. Now, what will the chemical and the automotive market need for a pickup or the housing market? I'd say lower rates are helpful, less uncertainty in the world. Of course, a whole bunch was just created with the Iran conflict, but it that comes and goes. We had the Ukraine. Um, you know, we're we're a little bit, you know, looking at this from the 40,000 foot view and not get, you know, as a as a Yasman, I don't really get concerned about any wave in particular crushing over the bow of the boat. I'm I'm particularly looking at the horizon so to avoid being seasick and also keep your bearing. Um and so I think the geopolitical noise comes and goes. I think it's important for M&A to pick up. Uh M&A picks up when board of directors and private equity uh principles are more comfortable and they get more comfortable when they see a certainty in the interest rate environment. I think we have some of that. We see more certainty in the domestic economic policy environment. Got the big beautiful bill. We got Trump there. We know what that means. And then you need a little bit more certainty in the geopolitical environment. And of course that is right now tumultuous. The tariff environment was also tumultuous. A little less issue now. So I think with the midterms coming up and the incentive for the current government to get a little bit more calm waters um I think we're going to see some faster than expected resolutions to the turmoil in geopolitics as well as in tariffs coming up. Uh and then you have the stability in uh economic and and fed policy to to some you know larger degree. And that again is going to give impetus to more M&A. And as M&A happens, it shows private market values which are quite often mark to mark uh you know they they're quite high into the public equity market where they're often quite low because of all these uncertainties. So M&A is clearly positive certainly for small midcap and value stocks and we've seen that also being an underpinning for what we're doing. But overall earnings need to improve. uh we're obviously, you know, picking through that field uh for very individual cases. Uh I'd like to think that we have quite a few that have very strong earnings growth stories already and some that are sitting there with a lot of promise uh at a low multiple and that could give a lot of upside if things improve. Alex, I know one u one common lament that we've heard from a lot of value managers over the last decade at various points was that in order to kind of get the same prices that they and valuations that they felt comfortable paying, they had to sometimes sacrifice a little bit on business quality and maybe cyclicality of the business. And how how have you thought about that trade-off over the last decade? >> Yeah. No, I mean this is a uh that comes with the territory. I mean, if you're a a real value investor and you're sticking to your guns on like I don't want to pay more than five or six times EBA or no more than 10 Ford PE on a stock, then in a certain markets you're getting driven into certain areas. You got to be very careful not to own all tire and automotive parts companies and you have this industry concentration. So we we make sure that we have an eclectic bunch of companies as concentrated as we are with multiple drivers and never have any industry be more than 20 or 22% of the total capital and that would then be a number of companies in that 20 or 22% with very different drivers but yes you could say they're in the same bucket say chemical companies or automotive. Yes. So you get driven in a corner. There is a chance of course that you uh step into what's called a value trap and uh some and there we need to make sure that as a constructively engaged shareholder uh we work with management to see how can we enhance and accelerate share of value and be in a quote unquote pole position uh as an really concentrated active researcher and serious investor that we can see these opportunities and not stay around too long in something that's not going to go anywhere and so that's our job right I mean it's it's dead wood in the portfolio for something that can eventually fall down further is uh is not what you want. So >> what what do you make of private equity spending over the last 5 years? So there's they tended to trade between themselves, create continuation vehicles, which means that they're probably not as active in the public markets as they have been in the past. Does that impact your strategy? And and do you see any way of them sort of working their way through that? because it seems to me that the private marks are much higher than what the public markets are giving them which sort of means that public market exit is is an issue maybe public market acquisition is attractive but I don't see a lot of activity >> one in the funds as well that if there's no DPI behind it that next fund needs to get funded from somewhere and one argument we've heard is that that might actually come out of the public market liquidity in order to meet capital calls for the private uh commitments. >> Let me first say I have a lot of friends who are principles in private equity firms. Some of them are clients and I only want to say nice things for all of them. But let let it be stated that I came out of an environment before I started Atlantic uh where I was a corporate development guy in a conglomerate, an industrial conglomerate involved in buying and selling companies. And that job is not that different other than you get paid a lot less than being in a private equity firm where you're buying and selling companies. And I learned to dislike two things which made me start Atlantic. Uh which is I I hate to to pay premium for something when I buy something. And then I don't like the liquidity of owning something outright. Want to be able when I see dark clouds gathering. I want to be able to get out of a stock. You know, you can't do that with a stock. You can't do that with a company own. And then I don't like leverage. So here you go. So I don't like paying premiums. I don't like >> liquidity and I don't like uh leverage. So I said, "Well, how do I solve that problem?" So, I'll take my little private equity toolbox in the public market and I'll do the same thing in the public market. So, we have put together almost a 35 year record with no leverage, full transparency, uh, quarterly liquidity to our clients, uh, paying, you know, under, you know, low multiples because we're buying when things are out of favor with no premium. and we put together you know a gross record that is um you know I'm not supposed to talk about these numbers online so I won't say but many multiples of the index and the net return as well so uh I think that and that's without IPOs without high-tech without leverage with transparency liquidity for our clients so we've proven that with concentrated disciplined stock picking with constructive activism liquid activism we can talk about that later because there's you know That's an important thing where you can add additional alpha by dynamic sizing your positions and getting out at will. And with that we've been able to put up this record. Now not every year, every period we've outperformed obviously because we are so uh focused on our universe and we're not participating for instance in the whole growth momentum and tech things that are going on. But that was the same in uh you know way before we met uh you know in 2010 in 1999. I was getting questions from my DEN LLPs, some of them are still with me. Uh like, why don't you invest in tech? Why don't you do this? Why don't you do that? And I'm like, you know, uncomfortable, not doing it, not our strategy. It would be style drift. We're sticking with these midsize industrial products and services companies at low multiples. And everybody's like, you know, yawn yawn. We're doing so well in the the tech area and having this big party. Well, then it all turned as we know in March of 2000. And we went from, I think, minus 10 that year to two months to plus 50. and the market went from plus 20 to -40 and the rest is history. That gap was so enormous in terms of outperformance that contained in 20 2001 and 2002 and that's where we went from a couple million out of management to much bigger and had to close it for um for being you know disciplined on our strategy self-imposed closing it for new investors I should say not closing the firm then opening up the European and Japanese activities. Alex, uh you've been described as a gentleman activist or the gentleman activist and you you've got uh this approach, this sort of constructive uh activism. Sometimes it's called constructivism. That means no public proxy battles, no sort of uh 13D letters, that sort of stuff. H how do you implement the strategy behind the scenes? And >> yeah, >> does not having those sort of other tools. Does that >> do you find that that limit my original >> uh point of like what got me to set up Atlantic, you know, looking from the the private equity industrial buyer and seller of company perspective, don't like ili liquidity, don't like paying premiums, don't like leverage. And so now you're in the public market. You're putting up with marktom market with a concentrated portfolio, midcaps. So you're going to have higher volatility, you know, and that makes it, you know, perhaps less appealing to some investors or consultants that look at your returns. The higher volatility, as Warren Buffett will say, doesn't matter at all. It really matters what you own terms of a business. But the the point back to activism is on the uh staying liquid. you know what's the point of going in the public market and putting up with mark tom market which is that volatility and maybe the stomach turns you and your your investors may get uh but for that you get the gift of being able to buy a whole range of companies at any given time uh without a premium at the point you want right so I don't want to get illquid so my activism was designed not to be illquid at any given time so there is liquid and illquid activism people like to put a spectrum hard to soft activism useless activism is a tool just like universe definition exposure management due diligence uh by self discipline these are all tools to get to what do you want to get to compounding net at a high level to your clients over time and outpouring the market so the activism should be yet another tool it should not be a detriment so it's not a uh you know it's it's a means to an end not not the end itself for the aggressive overt activist Sometimes the publicity and the instant gratification that comes with shooting off your mouth and doing a proxy battle and trying to replace the whole board. Uh first of all, we love all these guys, mind you, because they they really make our life easier. Uh they're like the the bad cops and we're the good cops. So, we're always staying liquid because I look at return generation as three components. One is Warren Buffett statement, time in the market. You want to do a return be 100 for your equity 100% invested. don't have 20% in cash. I mean, this is for a money manager, right? The client can do that. An investor can be in cash and bonds and real estate. Once you come to like us or to another manager, I'm not going to run the cash. I'm going to be 100% invested. You know, it's like sailing with you're sail flopping. Trim the darn thing in. Okay? You're sailing for performance. It's like being on a bicycle in the two of funds and you're you're hanging back for a while, you know, taking it easy. No, it's full on. So, time in the market. second then it's >> Alex could I ask and what about if you're you know you see a storm coming don't you want to reef your sales a little bit >> no >> okay >> no I um I go in as full on in this point because you know this basically we're in company the storm that's coming quite often is getting reflected very quickly in your public equity portfolio and to then pull back like for instance recently we just had that with the first week of March you know you can see this whole year on war you don't know what's going happen the next day or the day after. Uh so now we don't pull back. Clients can redeem, clients, clients can pull back. We are maybe shifting between companies a little bit but not really pulling back and going into cash. That's not our style. So back to the need for liquidity, the the third piece besides sort of the time in the market, stock picking, and then there's exposure management and dynamic sizing. Stocks fluctuate. And so we look at the the 10 companies we have, particularly the top five, which may be 70% of the portfolio, as let's say five Formula 1 cars on the track. You don't go full speed with each car all the time because there are straightaways, there curves, there's traffic, there's wet spots, whatever. You want to just slow down. Same with the stock. If you buy a stock that went from 50 to 30, you love it at 30, start buying from 35 to 25, averaging 30, have a $50 target. 12 to 18 months. Now it goes to 38 in a matter of three months. And by the way, for private equity, it would be almost a 30% return in three months. That's 120% IRRa. Okay, just to take a little knock at our friends in private equity. But anyway, so you have that. I will take money off the table first. I say it's 15% of capital. I will trim it to keep it at 15%. I don't let it grow to 22. So keep selling. So we're selling stock for that $30 stock up to 38. We will be selling it every day. But then at some point we say, you know, the riskreward is not as good at 38 as it was at 30 obviously. So we're going to bring it down from 15 to 10%. And then at 42 we bring it down to 5%. And at 45 or out even though we have $50 target. Why? Because that was a 12 to 18month target. And we're getting that. So then guess what? Stock comes down from 38 back to 32. Hammer down again. You accelerate out of the curve. So we are very actively dynamically sizing the positions of our core holdings while we own them for one or two years. And so the activism needs to allow that. And if you look at um you know at public you know a professionally managed equity uh there's only about 0.5% of all of that is in portfolios with less than 30 names. Let that sink in because 99 and a half% of all professionally managed money that's ETFs that is Fidelity that's Torric Black Rockck is in portfolios that are hundreds of companies or 100 companies. The S&P 500 is 500 companies and NASDAQ 100 is 100 companies. So to be in 10 or 15 stocks you're in a very small group. You know you got the Nelson Pels, the Bill Amans, the Chris Hans, people like that that are very concentrated. Most of those uh would have a benefit of dynamic sizing, but they typically throw it away. Either they're too large and they become too illquid to really make that a difference or they're too overtly activist on the board doing a proxy battle going on TV that doesn't allow them to trade basically. Maybe they they do it, but then they could be accused of pumping and dumping and who knows what. So, we've always said let's stay a little bit below the radar. Typically don't have 13Ds, although we've had 13s in the past. We don't shy away from that. Uh but no board seats, no illquid activism in order to capture the alpha that is available in dynamic sizing a position. Long answer, but hopefully that explains it. >> The gentleman activist moniker I got was um you know surprise because I was doing a an interview uh for an was Alpha magazine at the time before the 08. it was in a way that came out I think and it's always a good sign by the way if you're on the cover of the the leading hedge fun magazine you probably should sell everything and go take a rest but that was I think it featured in July of08 Alpha magazine I was on the cover I didn't even know that would be the case and it said gentleman activist on it >> and it was the the late bless her heart uh or soul Jay Schaw who um who's a you know famous writer for Barren she did the article and came up with that so it could have been worse I mean when came out. I'm like, okay, you know, we'll take that. >> Been called worse. >> Yeah, exactly. >> Uh, Alex, could you take us through uh one or two names in your portfolio or names that you have had held in the past just so we can understand the application of the strategy to an individual name? >> Well, uh, today we, uh, we have in the US our largest holding is a company called Kirby Corporation. Nobody knows Kirby, I think, less the people that are immediately involved with Kirby. Symbol KE X $128 stock right now. Kirby is the largest owner and operator of barges in the United States. There's about 4,000 barges floating around the the Mississippi and coastal areas transferring bulk goods, mostly oil, chemicals, uh things like that. um the rates of and I've known this company since the mid 80s by the way when the company I worked for before I started Atlantic owned 5% as a minority holding in Kirby. So I already studied it back in ' 85. Date myself a little bit. Uh I've not in held it at any time for Atlantic until just about four months ago when uh it fell down in my lap. I've known it for a long time. It was always zooming around the universe. cut into our top 30 which is our bench for interesting names and names to study closely in the US. We have the same in Europe and Japan by the way. So we always have this bench of 30 companies that we're very actively work working on. And then we decided to pull the trigger and get into it. And so Kirby has two stories to it. One is the barge business which um as I mentioned they have about 1,200 out of 4,000 barges. Uh the day rates right now because of a recession in chemicals and things are not that good in the end markets uh the day rates are about 40% below where it makes economic sense to build another barge. So guess what? There's not a lot of barge building going on. Okay. Little fact that just happened is that Venezuela is getting all this oil to our refineries in Houston. net net. That's going to mean a pick up in barge usage there to get transfers of oil tankers to the refineries. Nice little pickup there. Chemicals are looking a little bit better. Either way, doesn't matter. They're they're about 94% utilized. They're making very good money at the current rates, but I'm sensing there's something good going on in terms of no, you know, a new barge takes two years to build anyway. uh there's not a lot of new barge building going on and there is seems some pickup in the areas that matter to them. Then over time they found that with not only barges but they have tugboats and what have you. They know a few things about engines and they started taking their engine expertise outside and that became a division called distribution and services which is mostly engine repair for other people as well as their own. And then they got involved years ago in the uh fracking and the power um pressure pumping area again engines repair service. Now something new happened. Data centers um they are uh distributing units or putting together units with industrial gas turbines and generators in 40ft container like structures that are then delivered to Volto Grid, a company that will go public soon and will shine a bigger light on this whole thing. Uh and they are basically like a United rental kind of company for standby power for the oracles and for these data centers. So it's a very quick solution for power. Of course, you need to to do much bigger things long term like nuclear power plants, etc. to get the power that you need for the electricity grid. But these standby power units are very needed. Uh and voltage grid is going public on that subject. So Kirby is a very uh subdued play on that area. Not so subdued. The power generation piece that is now 40% of distribution services just grew 47% in revenues in the last quarter. So people are starting to figure out that this distribution service business can have some very spectacular growth numbers in the years to come. >> And so >> the thesis is is the just a general uptick in the performance of the underlying business rather than any sort of catalytic event from you don't expect anyction. >> One can imagine a number of things. Uh it is a potential takeover candidate. They could split the business. they could separate it. I mean, uh, that is still in the offing, but for now, both areas are looking very solid. Uh, and it's still quite underdiscovered at this point. >> Do you track any macro factors like do do you watch the oil price as a as it's exploded over the weekend with with Iran? See that as a knock on impact that seems to have impacted the the industries that you listed before, chemicals, automotive, and so on. they seem to be they're at the tail end of that uh oil price [snorts] sparking like that. >> Yeah. Know we we of course we track all the commodities and and what's going on there the the mining sector copper uh there's so much need with the electricity growth you know in mining. So we've played the the mining equipment area quite a bit. Uh we're in the oil service area and a few companies here and there. uh in particular Weatherford WFRD is the smaller one of the four big ones. You have Sloomer, Hallebertton, and Baker Huges. Weatherford went through a uh a very tough period. They had to restructure their debt and came out of near bankruptcy. We waited until their balance sheet got in good order and uh picked it up, you know, and we've been involved with Federford for for a while now. Um that I think eventually is a company that's likely to get bought by Hallebertton or somebody else, most likely Hallebertton. But even if it doesn't uh it's very well managed. They're doing share buybacks. They are you know very active. 80% of their business is in the outside the US. A lot of it in the Middle East and of course with this hiccup there's been some issues there but still uh you'll see the last year the stock is up 80% and it's still trading at about a five timesa. So >> let me just go around the horn a little bit and then we'll come back with jokes veggies Paris St. Germaine Goththingberg, Sweden, Val Parareeso, what's up? Limmerick City, Ireland, Orlando, Florida, Snomish, Cleveland, Tombble, Texas, Toronto, Jupiter, Tallahassee, Sacramento, JT, someone nearby. Uh, vegetables with Jake. It's 1 hour, folks. Market. So, uh, with with Alex coming on the show and knowing he has a very long-term record of terrific compounding, we're going to have a little segment today that that gets at compounding a little bit more. And so, [clears throat] there's something that's kind of deeply reassuring about growth. You know, we grow crops, we grow cities, we grow companies, we grow investment accounts, and growth feels like health. Like, it feels like we're moving in the right direction. But compound growth also has a geometry all of its own. And in any bounded physical system, a constant percentage rate eventually becomes a very large claim on reality. And you could see that in a very flattering financial case in Berkshire Hathaway. So just to rewind the clock, 1965, Buffett takes over the reigns. Bergkshire's reported about 49 million in sales at that point and 2 million of earnings. Uh and it did not necessarily look like this imbrio of a financial colossus. I mean, it was a small textile business with small business numbers really. And you know, and later in the segment, we'll cover what that compounding turned into uh from the latest annual report that came out recently. But first, here's a little quiz. Imagine a civilization that lasts for 3,000 years. And that's about how long the span of ancient Egypt was. I think it's actually a little bit underrated uh when we talk about, you know, historical longevity of of civilizations. uh you know 3 US we're at like 250 years. We got a ways to go before we get to 3,000. Uh but at the beginning this very early civilization let's just imagine and there's one cubic meter of material stock in this civilization. So tools infrastructure whatever one cubic meter of organized matter. And now let's let that stock of atoms compound at a 4.5% per year growth rate. All right. By the end, are you looking at A something that's city like the size of a city? B something the size of an entire planet, C something just bigger than our entire solar system, or D something bigger than billions of solar systems. >> So that's three or 4% compounded for 3,000 years going from a square meter. Was it >> correct? That's right. >> Alex, you want to take a shot at that one? >> Oh, that's not fair. That's [laughter] That's not fair. I I'm I'm all with you, Jake, on the value of compounding. And I like the Birkshire Haway example a lot better. But going back 3,000 years, >> got to be the biggest number. >> I have a feeling it's whatever the largest number is that you have. >> Yeah, that's what I think, too. >> You [clears throat] gentlemen are intelligent because that is the correct answer. uh 1 cubic meter compounded at 4 and a.5% for 3,000 years becomes a number with 10^ the 57th power of cubic meters which is bigger than billions of solar systems. >> So even a 1% for 30,000 gives you a multiplier of 9.2 trillion. So there's there's an absurdity that happens in all of these exponentials. And the trick is is that they're really they're so backloaded and the human mind did not evolve for any intuition around how this works. Uh so [clears throat] for a very long stretch this curve always looks quite civilized. And that shape has this strange parallel in theoretical physics called vacuum decay. Uh and this vacuum is doesn't mean empty space necessarily. It means the energy state where of the fields that fill that space. And so the [clears throat] question of does our universe today and this is all theoretical physics don't ask me to explain very deeply but does it sit at the truest low energy state as hypothesized or in we in a temporary state that only looks like the fully stable version and which physicists would call like metastable. So there's like a simple analogy to im imagine this. Imagine a ball that's resting in a valley and it sits in the deepest part of the valley and it's truly stable. Okay. But if it sits in a shallower valley, it can and it can stay there for a really long time, like unimaginably long. Uh even if there's a deeper valley that exists somewhere else in the landscape. Uh and usually [clears throat] uh it can mean that like this is we're talking about like time scales that you know stretch on into longer than the universe has been around so far. But if there was to be a transition to a lower energy state that ever occurred, it would begin locally there and then spread outward as a bubble and change that vacuum state of regions all around it. And this this thought experiment is really just to show like the value in the analogy is the structure and kind of relating to exponentials long apparent calmness forever and then this kind of hidden instability in it really and then this discontinuity feeling where it really ramps up. So Berkshire is kind of the benevolent version of this this exponential force. So by 2025, remember those early numbers I gave you, which sounded like a small business, uh reported over 370 billion of revenue, 67 billion of net earnings, uh and really something like 45 billion of operating earnings, let's call it. That's like 7500 times revenue and 29,000 times earnings. Uh so and [clears throat] of course that equated into a 19.7% uh annualized return since then. So fair play to the old guy there running it. Um but what it shows is that a small base can compound so long that the that the end state it barely resembles anything about the beginning and it also shows this other side which is that scale changes the character of compounding. You know, Warren has said for years that Bergkshire is going to eventually get too big where we're never going to be able to keep up the pace of compounding and and of course, Greg in the the latest letter said the same thing like at Berkshire scale, the math of compounding works against us. So once this base becomes enormous, maintaining that old percentage becomes almost impossible. Uh and there's kind of this broader tension in finance that might be a little bit underappreciated. You know, financial claims can compound on paper for a very long time. stocks, bonds, budgets, pension funds, asset prices all lean on these growth assumptions. But underneath those claims sits a physical system, energy, materials, land, labor, time, ecological carrying capacity. And there's a real question, you know, if like does the paper always match up to be able to be filled? Like you're writing a check on the future, can you cash that check in reality later? U so it's not that, you know, is is growth good or bad? You know growth can be fantastic. The real question is like growth of what at what rate how long against what constraints and Bergkshire shows you know how quietly compounding can begin and then physics kind of gave us a little bit of a language about this sort of delayed instability of it but you put them together and you get to this deeper point which is the first half of compounding feels harmless feels like you can't even see it and then the second half is where this base gets really heavy and all the results are. And so hopefully maybe that builds a little bit more intuition for you. Good stuff, JT. Uh, Alex, um, we've had a request from the crowd and it was my next question anyway. Could you tell us a little bit of the about the Exonobo Exalta merger and what you see happening there? >> Yeah. Okay. Um, may I quickly respond to Jake's uh, >> Yeah, please. >> I would love to hear it. >> Very interesting 10 minutes. Thank you for that, Jake. And very, I think, instructive anybody on the call. Um, you know, my entire professional goal is to compound, you know, at a very attractive, you know, that's not called superior, but very attractive absolute and relative return against the market. And in order to not have scale work against me, we control the size of our AUM, which is not that typical. There's some managers that do that and they return money to investors or they close it. And we've always been aware of the fact that scale is an enemy of compounding. Of course, Burks Headway is a corporation. They grew as they did. And it's been harder and harder for Burks Headway to look much different than the market over time. Uh but in our case, I'm only 33 35 years into my record. Uh I think Mr. Buffett Mr. Buffett decided to retire at 94. Uh I got close to 30 years more to go. uh wouldn't mind to have a 63 year record, which first of all sets you apart from a lot of people. I'd say already 33 years does. Most people don't want to do it that long or can't do it that long or whatever. Uh I'm on this mission to really compound at a very attractive rate with the same strategy, controlling my uh scale uh in order to do that. And so uh all these points well noted about compounding, the the importance of compounding, sticking to something over time and and controlling scale. back to uh your your uh the question from the um the participant on the call uh Axon Nobel and Exalta. So we liked Exalta a lot. We invested in Exalta uh for the third time in 10 years uh recently in October or something like that uh $28 and we thought that uh it was both at a trough multiple and trough conditions in the refinishing they do automotive coatings refinishing coatings. Uh we like the management of Exalta and lo and behold here comes Oxonobel Dutch company also codings company. Um, I'm particularly wellversed as a Dutch American to to comment on this Dutch American intended merger, I thought. But anyway, so Oxin Nobel comes in. We've known Oxobel. We felt that they were not as well managed, a little bit more expensive, but when they put them together, you create a 17 billion company with um, you know, 600 million of synergies and that all makes a lot of sense to us. And so we were very much after we listened to both management teams in late November uh became very promotional of uh this deal and it actually worked out because we owned both we ended up buying Ox Nobel stock um and we we had of course Exalta and um it worked out pretty well and we got into January with the kind of runup in small midcaps and value and we decided to uh to say goodbye for a little bit uh because it is still about a year until the closing happens. and we had captured you know the line share of what we expected to capture in that 12 18month period fairly quickly. So we actually sold out of both stocks um in January and February and that looked you now looks certainly with the noise out of Iran and and what have you and uh the hit in the market it looks pretty good. Uh we're actively looking at them again. Uh I think it's probably at a very good level right here. Uh but I think it's a good merger. it will make sense. Uh but probably there's still a bit of a long runway to get it closed. But in our view, Exalta should be worth 42 bucks. We made that clear to management. Uh we think they can get there before the closing because both stocks will go up as people get excited about the merger benefits. Uh but you know, it was at 34 34 and a half that was high enough for us and now it's I think it's uh back at 29. So, um, at at around this level, it's a very good buy, I think. >> Alex, you've been involved in Japan since 2003. Um, what have you seen in that market since then? There have been some initiatives by Tokyo Stock Exchange to encourage companies to get their price earnings above one. And there have been some other Sorry, price book. Thank you. Yeah. And some uh price earnings above one price book. >> Cheap companies. >> Yeah. And uh there's some there's some discussion of them sort of opening themselves up a little bit to a more perhaps American approach. But when we were there, I I think it's fair to say that we were pretty hot talking to the funds and then we when we spoke to some of the companies, we understood the challenge perhaps that activists in Japan face. So can you talk to your experience? >> Yeah. So first of all, Japan is a a market not to be overlooked. Uh it's a very important developed economy. It's probably the most relevant developed economy in Asia, which is the most the largest most promising growth continent as far as I can tell. Um, and so it's really a preferred area that over a long period of time suffered not only from uh zero interest rates, no inflation, and uh some anti- or non-shareholder friendly policies, but also from a loss of market share within Asia that's less published. But China and Indonesia and Vietnam grew so much in terms of market cap that if you think about somebody allocating say a shell pension fund gives $10 billion to Goldman Sachs to manage in Asia uh they would cover the indexes and it used to be 70% in Japan in 2000 that as a market cap and it became only 20 25% by 2020. So there was constant like market share loss for Japanese companies, lack of interest. But then when Abbe came around in 2014, I think uh he had the three arrows of of economic growth as well as uh improving you know public company behavior getting more independent directors improving roe uh you know through share buybacks and acquisitions etc. So things have improved quite a bit on that front on the governance front and on how Japanese corporate managements are more aware and more well-versed in uh you know also being a good uh steward of shareholder money. You know they they are stewards of being wellness for society, wellness for workers, wellness for everybody and those are important constituents. they should not be ignored in any continent or country but shareholders were kind of forgotten and that has changed marketkedly I think with Abbe and it's now continuing under the new prime minister Sane Takichi who is very much a um disciple of his whole philosophy on in that account but you know we've been there as you mentioned since 2003 or four I started investing in four started analyzing in 03 and uh been very successful actually there are doing our constructive behind-the-scenes activism respectful genuinely if there's any form of activism exportable to Japan that would be the one and not the overt you know proxy battle guns blazing one in fact I had to defend myself in almost every meeting that um with all the due respect to a very nice guy Warren Likenstein who was there early uh steel partners uh who is not very well there and in general but you know are you like steel partners they were asking so no we're not from the US, but I played my Dutch card. I said, you know, I'm Dutch, you know, and the Dutch have 400 years of uninterrupted trade relations and they care about that stuff. So, I say, "Hazy, master, which is nice to meet you, and a couple other things that it makes you show you that you are interested in speaking some Japanese." And so, with all the kind of charm and laughing and this and that, we're able to get pretty far with our due diligence. But then also, you know, we make our proposals of share buybacks and dividends and some portfolio rationalization and we write that up and then we write it up again in letters to them. And if if they don't really act on it, said, "Yeah, now you're you know, we're giving you all these nice proposals. You can do them. We don't want any credit. It's all you. Um but if you're not going to do anything and and the stock is still going sideways, we really you're forcing us to broaden the conversation, you know, with with other constituents." So, what do you mean with that? Well, we could uh file a proposal for the annual meeting to put it to a vote and that means there's publicity with the financial press which we know well and you know it's not good because then we talk about the fact that we do this against our will not the way we like to do it and we're doing it because you are not acting. You're lethargic. Oh, and so that kind of pressure very much verbal behind the scenes has caused some changes in a number of companies where we had to do it. Not too many. Most of them started to adopt some of these proposals and we were happy with the share price and then we left and we came back later. Some it got a little bit more confrontational and those we actually uh we had some success rate applying some more subtle pressure if you will behind the scenes. We actually never had to file an actual proposal which we didn't want to do anyway but we we had a fairly credible uh threat and some good arguments that convince them to to act. Put it that way. Can I change to uh Chart Industries has a uh had a major mer merger agreement with Flowserve that ultimately fell apart before they acquired by Baker Hughes. >> Yeah. Oh, so happy with all that. Uh so Chard Industries, we followed it for quite a while. Uh Jill Vanco, CEO, uh who came from Dover Corporation, in fact the company I worked for way back when and so I have some affinity that way even though it was many years in between. So I got to know Jill who was ambitious and she took this $1.5 billion dollar hydrogen uh renewable new energy LG related company uh into a much broader space by buying a $4 billion company in Scotland called Hen in one fell swoop. You go from debtree to four billion in debt and you go from a high growth story with high growth investors and high multiple to suddenly being a more diversified company. more legs on your chair better from my perspective, but the current crop of investors back in 2022 hated it. And so that made it a value proposition for us. We waited for a while and we got involved I think in 2004 24 and immediately met with Jill a bunch of times and they she had to really improve her messaging because she was still talking about growth and all that but the cash flow was a problem and the debt repayment was a problem and the whole uh notion in the market was you need to bring that debt down before anybody starts paying attention to the growth again. So that messaging and behind the scenes work worked and she had a really good capital markets day. Stock flew up, but it still was quite volatile because it's a midcap, it's a growth story here and there and it's too much debt. Anyway, so through all the hoops and downs, a lot of dynamic sizing, we eventually got to the point where in um it was in 2020 five. Yeah, it was in yeah 2025 where flows showed up. Flowserf I mean flows we've known for 30 years $5 billion pump and valve maker uh with really good end markets lots of maintenance repair and overall it was in fact in our top 30 is ready to go into the portfolio at the moment they decided to do a merger of equals a marriage if you will with our beloved largest holding chart which has given us some indigestion but a lot of trading opportunity and already good gains. The moment the merger was announced, both stocks went down 10 10% in June of 2025. Didn't make any sense to us. So, we bought a lot more chart made it even bigger. Um, didn't touch flows at the time. Um, and we figured that would improve and it did. You know, once the management went on the road, looked at the synergies, all good, but we always felt there was a chance of an over bit because it was really not what we wanted originally. But, okay, we were going to stay with it. It was a stock for stock deal. We like both companies. Fine. So then two months later, Baker Hukes comes in with 200 $210. You know, to put in perspective, it was at 160 before flow server dropped to 140, went back to 170 shortly thereafter, and then Baker comes in with 210. Okay, cash stock goes up to 195 on that. We're happy. It's our largest position. We're doing really well with this. But I immediately go to CEO of Chart saying, "What are you doing? You can't do that. I mean, now you're forcing me in a short-term massive capital gains. Uh, I have to pay tax on that. In New York, that's 55%, you know, between state, city, all that stuff and federal. Uh, and I rather own the upside of the company. Why don't you do a a share deal with Baker?" Because this is not better in my view than the flow deal. Anyway, so went back and forth. They couldn't recut the deal. We tried to push our rights uh which you can do the as a as a shareholder but it was too much of an uphill battle. We ended up selling the stock in the low 200s with a huge gain u and that was the end of chart and so chart will be soon part of Baker. I think it's still publicly traded. Uh great deal for Baker. Uh Baker stock has gone since then from 45 to whatever it is 65 now. And so clearly she should have taken stock uh and not cash. Uh, so it's really not the best deal in my view for chart shers, but they did what they did. They thought it was the right thing. Uh, interesting. Side note is that flows we bought with with chart money in October of last year. Flowserf somehow they got the $250 million breakup fee from Baker. So that was nice, not insignificant for a $5 billion company. And then they got out of favor with a whole bunch of other uh companies in their space. So, we got into Flow Surf and there too, we had to take a short-term gain. We went from 80, sorry, from 50 to $87 a share in four months. I mean, that was a little too much for us. So, we had to sell that. Again, a lot of people would hold that because it's a great company, nothing wrong. They played up their nuclear angle. Uh they do a lot of work on nuclear facilities and they put a slide up saying that 75% of the 400 nuclear facilities around the world have their pumps and valves. whatever on it and so they in a pole position to do well there. So flow service is a great story. Too expensive right now but and chart is out and baker's too expensive. So that's where we are on those names. >> Sounds like an unmitigated disaster. >> Sorry. >> Sounds like an unmititigated disaster. >> Uh you're uh you're active in Europe, Alex. What do you make of uh the goings on in Europe presently? >> Yeah. Well, Europe is again a wonderful large candy store full of candy to grab at because it's also full of uh storekeepers who are sour and pessimistic and um don't think they have a lot of good stuff. But there is a lot of good stuff in Europe. I don't invest in the European economy or any country just like I don't invest in the Japanese or US economy. investing companies that are headquartered in these uh local and they trade typically or do business worldwide. Um within Europe you have fabulous publicly traded companies and particularly in my size range away from the the obvious large names in uh in luxury LVMH, Novo, Nordisk, ASML. Uh those are not the names we play of course you can just buy the index funds and being exposed to them and um you can also go into midcap value stocks. I mean an example um Cintas which does uniform cleaning and linen cleaning and and it's a service business in the US. It's now an 8090 billion market cap trading at 25 times or more earnings. It's the largest player of its kind in the US. It's consolidated a mom and pop business into something large industrial for them. Well, there's a few other players. In fact, Universe uh is a company that's being taken over by Cintas. Now, in Europe, there's only one really big one that's publicly traded. It's a French company called Ellis. E L I S. Space FP is the symbol. It's a French company with a 25 euro share price. And, you know, it's a 56 billion type of name. 400,000 customers, huge renewal, uh, you know, retention rates, one to fiveyear contracts. Largest customers one and a half%. It's the AOR hotel chain or something. Um, trading at five times EBA. I mean, this is like a private equity gi giant candy for private equity if they can get their hands on it, you know, with a big premium. Um, we got in at 18 because uh now it's at 25. So, it's about seven, eight months ago. Uh, this will go much higher. there will be a 34 to 40 euro stock in about a year at very reasonable multiples and they're executing very nicely. They're automating things. They're benefiting from all the techn technological developments and they're they're gaining share and they're buying companies are small. They're integrating them. So an example is Ellis. Another example is a company called VOPEC. VOPE VPK Space NA. It's a Dutch-based company out of Rotterdam. They're the largest independent tank terminal operator in the world. Sounds like a mouthful. Think of an aerial shot of a harbor and you see all these round drums full of oil or gas or chemicals because ships come in, they put them in there, then they get offloaded either into a pipe system or trucks or what have you, barges maybe. And so they have 77 of these tank storage terminals with multiple uh tanks uh many multiple tanks in all over the world. Oman, Shanghai, Andor, Roterdam, Hamburg, all over the US, etc. Um, the replacement value of that is hard to estimate. I can give you that they're spending 4 billion euros over the next three years to do three new terminals. They got 77 of them. I'm not saying they can multiply it like that. The market value is ridiculously low right now. People have forgotten that this should be trading on a cap rate because it's a 95% utilization long, you know, contract business with high retention rates. Again, you can see some similarities in what I'm looking for. And uh so VPC is trading at a very low multiple, good dividend yield. It's 52% owned by a uh Bergkshire Headway like company, publicly traded company called Hull Trust, which we know very well. We've had a long relationship with them. uh they have in the past made a full bid for the remaining shares. They did it with the largest dredging company in the world, company called Boscalis. Uh that happened three or four years ago. I'm not saying that I have any knowledge of them wanting to do this. I'm just saying they own 52%. They are encouraging the company to buy back shares which means that it goes from 50 to 52 to 54 to 55. Uh you do the math from there. We are happy to be in the this ever shrinking public float. Uh I think it's going to be very good and it's our largest European position right now. >> Think about uh if we have time for one more question. Um [clears throat] >> you know in these kind of family dynamic situations where you you know if you vote with the family then you guys both control it. Um, but how do you think about uh what you know who you're getting in bed with and like if you are going to be a minority obviously like how do you make sure that you don't get taken advantage of? >> Well, first of all, if we have any notion that we might be taken advantage of, we would sell. Uh that's the beauty. We're not stuck. We're not in partnership. We have no agreements. Uh we have public shares that are reasonably liquid and we can sell. Um it is very helpful having done this for a very long time and knowing for inance the the family behind um Hull and the executives for for decades uh as I mentioned before we got started. We have a a number of investments in Germany on and off and again today and they're all related to what the Shefflla family is doing including the Sheffller company, Continental, Omovio, Prior Vesco Technologies. It's all related to the same family and we we have some familiarity with the managements and the family and uh we feel it's uh from time to time a good moment to be with them. Um you know we rather avoid insider controlled companies. We just happen to somehow because of vote pack come to that subject. I would say that is maybe 10% of our names over time have been inside of controlled companies. But then for sure we want to have a good understanding of who the controlling shareholder is. >> Alex vulnerability right I mean if management and family or whoever owns less than 10% they're vulnerable. If their quality company is undervalued that means that this is vulnerability. And we like to point out in one of our first meetings, welcome to the vulnerability zone management. It's time to get active here on everything from messaging, corporate action, shelter friendly activities to get out of this zone because somebody can come in tomorrow, bid 40, 50% over your share price and you suddenly are on your back foot, hire an investment bank to deal with it. So why we do this now ourselves before we get quote unquote attacked? >> So we like vulnerability. So that's 90% of our cases. Alex, uh, we're coming up on time. If, uh, folks want to follow along with what you're doing or get in contact, what's the best way of doing that? >> Well, we have a website, atlanticinvestment.net, and that would be one good way to see some information on us and to um, you know, to send us an email. >> Uh, JT, any final words? No, just uh thanks Alex for coming on and uh you know it's not too often that Toby fanboys as much as he uh as he was doing before we started this one. So it was that was fun for me to watch. >> It's true. I'm very I'm very grateful to >> both of you and and all of them on the program. >> Thanks very much. Alexander Roers, Atlantic Investment Management. Thank you very much, folks. We'll be back next week. Same bat time, same bat channel. We'll say everybody
Alexander Roepers on constructive activism and concentrated value in $KEX, $AXTA, and $FLS | S08 E09
Summary
Transcript
And we're live. This is Value After Hours. I'm Tobias Carile, joined as always by my co-host Jake Taylor. Our special guest today is Alexander Rous, the founder and chief investment officer of Atlantic. Alex, welcome. How are you? >> I'm good. Thank you for having me. >> Uh, absolute pleasure. I've been following you. I said this before we went on live. I've been following you since 2010 when I saw you speak at a value investing congress in New York. Um, tell us a little bit about the strategy that you have at Atlantic. >> Yeah, my pleasure. So I started Atlantic uh over 30 years ago uh initially just in the US and the idea was to concentrate capital and research on high conviction public equities and if you concentrate capital you have to be careful um and you need to go into areas that are in the area of competence and that have good margin of safety. So we started with a u a universe definition uh that excludes areas that we are uncomfortable with or that present idiosyncratic risks such as uh technological obsolescence risk. That's a mouthful, I realize, but it has to do with the fact that certain companies do high-tech stuff that is subject to, you know, either their own uh fantastic developments in high-tech, making certain projects or products obsolete or somebody else doing that for them. So, for us, it's very important that a service or product uh is really not subject to that risk to a large extent. And so, we steer clear of high-tech and biotech companies for that reason. uh there's a lot of money that you can make in those areas and we know people that can do that or you can as a retail investor you can buy ETFs or the individual stocks but Atlantic will not do that. So that's one aspect. The second one is areas that lack transparency. So banks, insurance companies, brokerage firms uh again can be many great companies but we think there's a lack of transparency that makes us uncomfortable to be highly concentrated in any of those names. So we basically have decided to be in this midsize at least two billion and up. Again, we're in the public market putting up with marktomarket. So, the last thing we want is to be illquid. So, two billion is for us a fairly arbitrary but common sensical point below which we really don't look in terms of our targets. And then above 20 billion, it's not really interesting because we want to have top level management access, reasonable liquidity, of course, you would get that in very large caps as well, but also the potential for all three catalysts for unlocking value to be present. The first one is corporate action. I'll elaborate that a little bit more later. That's everything management can do to improve the value of a company. Then there's activism, which is more likely to be successful in midsize companies than in very large companies. And then thirdly, takeover. And takeover, we'd like to have both strategic and financial buyers potentially looking at a company when it becomes very attractive or when it goes into play. And if you look at financial buyers, private equity firms for instance, they typically would like an eight or$10 billion deal at the high end, not too much larger. Hard to finance. Typical big private equity fund is 2025 billion. $2 billion equity check is big. Uh plus leverage, you get to six, seven, eight billion. So we've had since inception, which is a long time ago now, companies in that sweet spot where uh if they don't perform well and they're undervalued, they're going to attract attention by either strategic and or financial buyers. So that's the reason we've chosen all the way back to the $20 billion. Exclude high-tech and biotech, exclude financial service and and uh you know insurance companies for the transparency issue and then focus on industrial products services companies and then you know being Dutch uh they're pretty known to be stingy. We like to uh there's a joke as to how how many Dutch people you can get into a Volkswagen. All you need to do is flick a dime in there, they'll get in there. Um, you know, I'm all over something that is very inexpensive and yet solid. So, we want always money-making companies with solid balance sheets in our little universe of two to 20 billion dollar industrial products and services companies that are down. You know, we're basically lying in weight. You know, I have all these analogies, you know, like a sniper lying in weight. I'm not a hunter. I'm not a sniper. But you just imagine, you know what your target looks like. You wait. You wait. You wait. And then when you see it, you strike. And we know our targets. And the targets are about 500 companies publicly traded in the US. Uh after about 12 13 years of doing that well enough, we got to level of uh self-imposed capacity limit in 2003. Uh by which we basically say okay, we want to beat about 10 companies in our portfolio. We want them to be an average 5 to8 billion and we don't want to be more than four or five% of these companies. So then you're at about a billion and a half. you're you're maxed out in your capacity. So with that we were strict we hard and soft closed our funds which is basically the US fund and then set up our capability to do the same in Japan and in Europe and in Japan there's about 250 companies that fit our bill in terms of size and industry focus and you have Europe uh about 300 companies western Europe um where you know have a little bit of an advantage have grown up in Holland speaking four languages and so we went over and became very active in Europe starting 2004 as well. So that's in a nutshell what we do. We have three funds uh that are regional and then one global fund that captures the top names in these three regional funds and we keep doing the same thing and we're doing that now for like almost 35 years and when you saw me in 2010 I was probably proclaiming the same strategy which I tried to do in a nutshell here. Um and you know we don't try to stray from that. I mean markets go through you know momentum plays, growth cycles, value cycles. We just had the most amazing growth and momentum cycle that started uh after the great financial crisis in '09. Uh we had a good run too but by 2015 it became almost all growth and momentum and then magnificent 7 and uh you know where that led and then eventually with co it became even more pronounced. There was a detour in 2022, but then AI, the narrative there picked up and it was unstoppable until about three or four months ago when people started to scratch their heads on the actual, you know, who's the beneficiary, who's the the one hurt by AI. And in some cases, they're the same company and people don't know yet. It's very unclear. What we do know is there's a lot of spending going on and a lot of overvalued companies and people are starting to really uh worry and and do a little second guessing on that. All that is somewhat helpful for people like us who are in the forgotten corner of the market where there's real companies with real profits with real benefits from AI. All our companies are not to get railroaded because they're not tech companies. They are benefiting from this productivity tool that is AI. So uh we've seen a very good returns relative returns as well in the last four months and uh I think it's the beginning of what may be hopefully a long cycle for improved performance relative performance as well for value. >> Alex, I'm glad you narrated that uh period from 2015 to date because that was going to be my next question. But I was just wondering from 20 sometime after the pandemic there was some stimulus around 22 and I I've observed that midcap and small cap have been pretty weak on an earnings basis since 22. I'm not sure where that picks up. It looks to me like we're still we're close to the bottom close to troughing. But do you think that uh that pick up over the last 3 to four months is that the equity getting in front of the earnings releases that are coming or how do you how do you view that? >> It's a good point. Um I think there's a little bit of that going on because the uh a lot of value names including some in our portfolio are struggling with earnings still because their end markets have been people you know worry about a recession for the overall economy. Uh I'm sorry automotive, construction, chemicals, packaging are all in a recession full-blown for four years. You know it's unbelievable. And these companies are blocking and tackling to rightsize their footprint to uh to to to get the overhead down to maybe buy back shares, bring the debt down in order to get earnings per share growth and some have done a very commendable job and some are trading now at trough multiples on what we can still consider to be trough uh industry conditions. Now, what will the chemical and the automotive market need for a pickup or the housing market? I'd say lower rates are helpful, less uncertainty in the world. Of course, a whole bunch was just created with the Iran conflict, but it that comes and goes. We had the Ukraine. Um, you know, we're we're a little bit, you know, looking at this from the 40,000 foot view and not get, you know, as a as a Yasman, I don't really get concerned about any wave in particular crushing over the bow of the boat. I'm I'm particularly looking at the horizon so to avoid being seasick and also keep your bearing. Um and so I think the geopolitical noise comes and goes. I think it's important for M&A to pick up. Uh M&A picks up when board of directors and private equity uh principles are more comfortable and they get more comfortable when they see a certainty in the interest rate environment. I think we have some of that. We see more certainty in the domestic economic policy environment. Got the big beautiful bill. We got Trump there. We know what that means. And then you need a little bit more certainty in the geopolitical environment. And of course that is right now tumultuous. The tariff environment was also tumultuous. A little less issue now. So I think with the midterms coming up and the incentive for the current government to get a little bit more calm waters um I think we're going to see some faster than expected resolutions to the turmoil in geopolitics as well as in tariffs coming up. Uh and then you have the stability in uh economic and and fed policy to to some you know larger degree. And that again is going to give impetus to more M&A. And as M&A happens, it shows private market values which are quite often mark to mark uh you know they they're quite high into the public equity market where they're often quite low because of all these uncertainties. So M&A is clearly positive certainly for small midcap and value stocks and we've seen that also being an underpinning for what we're doing. But overall earnings need to improve. uh we're obviously, you know, picking through that field uh for very individual cases. Uh I'd like to think that we have quite a few that have very strong earnings growth stories already and some that are sitting there with a lot of promise uh at a low multiple and that could give a lot of upside if things improve. Alex, I know one u one common lament that we've heard from a lot of value managers over the last decade at various points was that in order to kind of get the same prices that they and valuations that they felt comfortable paying, they had to sometimes sacrifice a little bit on business quality and maybe cyclicality of the business. And how how have you thought about that trade-off over the last decade? >> Yeah. No, I mean this is a uh that comes with the territory. I mean, if you're a a real value investor and you're sticking to your guns on like I don't want to pay more than five or six times EBA or no more than 10 Ford PE on a stock, then in a certain markets you're getting driven into certain areas. You got to be very careful not to own all tire and automotive parts companies and you have this industry concentration. So we we make sure that we have an eclectic bunch of companies as concentrated as we are with multiple drivers and never have any industry be more than 20 or 22% of the total capital and that would then be a number of companies in that 20 or 22% with very different drivers but yes you could say they're in the same bucket say chemical companies or automotive. Yes. So you get driven in a corner. There is a chance of course that you uh step into what's called a value trap and uh some and there we need to make sure that as a constructively engaged shareholder uh we work with management to see how can we enhance and accelerate share of value and be in a quote unquote pole position uh as an really concentrated active researcher and serious investor that we can see these opportunities and not stay around too long in something that's not going to go anywhere and so that's our job right I mean it's it's dead wood in the portfolio for something that can eventually fall down further is uh is not what you want. So >> what what do you make of private equity spending over the last 5 years? So there's they tended to trade between themselves, create continuation vehicles, which means that they're probably not as active in the public markets as they have been in the past. Does that impact your strategy? And and do you see any way of them sort of working their way through that? because it seems to me that the private marks are much higher than what the public markets are giving them which sort of means that public market exit is is an issue maybe public market acquisition is attractive but I don't see a lot of activity >> one in the funds as well that if there's no DPI behind it that next fund needs to get funded from somewhere and one argument we've heard is that that might actually come out of the public market liquidity in order to meet capital calls for the private uh commitments. >> Let me first say I have a lot of friends who are principles in private equity firms. Some of them are clients and I only want to say nice things for all of them. But let let it be stated that I came out of an environment before I started Atlantic uh where I was a corporate development guy in a conglomerate, an industrial conglomerate involved in buying and selling companies. And that job is not that different other than you get paid a lot less than being in a private equity firm where you're buying and selling companies. And I learned to dislike two things which made me start Atlantic. Uh which is I I hate to to pay premium for something when I buy something. And then I don't like the liquidity of owning something outright. Want to be able when I see dark clouds gathering. I want to be able to get out of a stock. You know, you can't do that with a stock. You can't do that with a company own. And then I don't like leverage. So here you go. So I don't like paying premiums. I don't like >> liquidity and I don't like uh leverage. So I said, "Well, how do I solve that problem?" So, I'll take my little private equity toolbox in the public market and I'll do the same thing in the public market. So, we have put together almost a 35 year record with no leverage, full transparency, uh, quarterly liquidity to our clients, uh, paying, you know, under, you know, low multiples because we're buying when things are out of favor with no premium. and we put together you know a gross record that is um you know I'm not supposed to talk about these numbers online so I won't say but many multiples of the index and the net return as well so uh I think that and that's without IPOs without high-tech without leverage with transparency liquidity for our clients so we've proven that with concentrated disciplined stock picking with constructive activism liquid activism we can talk about that later because there's you know That's an important thing where you can add additional alpha by dynamic sizing your positions and getting out at will. And with that we've been able to put up this record. Now not every year, every period we've outperformed obviously because we are so uh focused on our universe and we're not participating for instance in the whole growth momentum and tech things that are going on. But that was the same in uh you know way before we met uh you know in 2010 in 1999. I was getting questions from my DEN LLPs, some of them are still with me. Uh like, why don't you invest in tech? Why don't you do this? Why don't you do that? And I'm like, you know, uncomfortable, not doing it, not our strategy. It would be style drift. We're sticking with these midsize industrial products and services companies at low multiples. And everybody's like, you know, yawn yawn. We're doing so well in the the tech area and having this big party. Well, then it all turned as we know in March of 2000. And we went from, I think, minus 10 that year to two months to plus 50. and the market went from plus 20 to -40 and the rest is history. That gap was so enormous in terms of outperformance that contained in 20 2001 and 2002 and that's where we went from a couple million out of management to much bigger and had to close it for um for being you know disciplined on our strategy self-imposed closing it for new investors I should say not closing the firm then opening up the European and Japanese activities. Alex, uh you've been described as a gentleman activist or the gentleman activist and you you've got uh this approach, this sort of constructive uh activism. Sometimes it's called constructivism. That means no public proxy battles, no sort of uh 13D letters, that sort of stuff. H how do you implement the strategy behind the scenes? And >> yeah, >> does not having those sort of other tools. Does that >> do you find that that limit my original >> uh point of like what got me to set up Atlantic, you know, looking from the the private equity industrial buyer and seller of company perspective, don't like ili liquidity, don't like paying premiums, don't like leverage. And so now you're in the public market. You're putting up with marktom market with a concentrated portfolio, midcaps. So you're going to have higher volatility, you know, and that makes it, you know, perhaps less appealing to some investors or consultants that look at your returns. The higher volatility, as Warren Buffett will say, doesn't matter at all. It really matters what you own terms of a business. But the the point back to activism is on the uh staying liquid. you know what's the point of going in the public market and putting up with mark tom market which is that volatility and maybe the stomach turns you and your your investors may get uh but for that you get the gift of being able to buy a whole range of companies at any given time uh without a premium at the point you want right so I don't want to get illquid so my activism was designed not to be illquid at any given time so there is liquid and illquid activism people like to put a spectrum hard to soft activism useless activism is a tool just like universe definition exposure management due diligence uh by self discipline these are all tools to get to what do you want to get to compounding net at a high level to your clients over time and outpouring the market so the activism should be yet another tool it should not be a detriment so it's not a uh you know it's it's a means to an end not not the end itself for the aggressive overt activist Sometimes the publicity and the instant gratification that comes with shooting off your mouth and doing a proxy battle and trying to replace the whole board. Uh first of all, we love all these guys, mind you, because they they really make our life easier. Uh they're like the the bad cops and we're the good cops. So, we're always staying liquid because I look at return generation as three components. One is Warren Buffett statement, time in the market. You want to do a return be 100 for your equity 100% invested. don't have 20% in cash. I mean, this is for a money manager, right? The client can do that. An investor can be in cash and bonds and real estate. Once you come to like us or to another manager, I'm not going to run the cash. I'm going to be 100% invested. You know, it's like sailing with you're sail flopping. Trim the darn thing in. Okay? You're sailing for performance. It's like being on a bicycle in the two of funds and you're you're hanging back for a while, you know, taking it easy. No, it's full on. So, time in the market. second then it's >> Alex could I ask and what about if you're you know you see a storm coming don't you want to reef your sales a little bit >> no >> okay >> no I um I go in as full on in this point because you know this basically we're in company the storm that's coming quite often is getting reflected very quickly in your public equity portfolio and to then pull back like for instance recently we just had that with the first week of March you know you can see this whole year on war you don't know what's going happen the next day or the day after. Uh so now we don't pull back. Clients can redeem, clients, clients can pull back. We are maybe shifting between companies a little bit but not really pulling back and going into cash. That's not our style. So back to the need for liquidity, the the third piece besides sort of the time in the market, stock picking, and then there's exposure management and dynamic sizing. Stocks fluctuate. And so we look at the the 10 companies we have, particularly the top five, which may be 70% of the portfolio, as let's say five Formula 1 cars on the track. You don't go full speed with each car all the time because there are straightaways, there curves, there's traffic, there's wet spots, whatever. You want to just slow down. Same with the stock. If you buy a stock that went from 50 to 30, you love it at 30, start buying from 35 to 25, averaging 30, have a $50 target. 12 to 18 months. Now it goes to 38 in a matter of three months. And by the way, for private equity, it would be almost a 30% return in three months. That's 120% IRRa. Okay, just to take a little knock at our friends in private equity. But anyway, so you have that. I will take money off the table first. I say it's 15% of capital. I will trim it to keep it at 15%. I don't let it grow to 22. So keep selling. So we're selling stock for that $30 stock up to 38. We will be selling it every day. But then at some point we say, you know, the riskreward is not as good at 38 as it was at 30 obviously. So we're going to bring it down from 15 to 10%. And then at 42 we bring it down to 5%. And at 45 or out even though we have $50 target. Why? Because that was a 12 to 18month target. And we're getting that. So then guess what? Stock comes down from 38 back to 32. Hammer down again. You accelerate out of the curve. So we are very actively dynamically sizing the positions of our core holdings while we own them for one or two years. And so the activism needs to allow that. And if you look at um you know at public you know a professionally managed equity uh there's only about 0.5% of all of that is in portfolios with less than 30 names. Let that sink in because 99 and a half% of all professionally managed money that's ETFs that is Fidelity that's Torric Black Rockck is in portfolios that are hundreds of companies or 100 companies. The S&P 500 is 500 companies and NASDAQ 100 is 100 companies. So to be in 10 or 15 stocks you're in a very small group. You know you got the Nelson Pels, the Bill Amans, the Chris Hans, people like that that are very concentrated. Most of those uh would have a benefit of dynamic sizing, but they typically throw it away. Either they're too large and they become too illquid to really make that a difference or they're too overtly activist on the board doing a proxy battle going on TV that doesn't allow them to trade basically. Maybe they they do it, but then they could be accused of pumping and dumping and who knows what. So, we've always said let's stay a little bit below the radar. Typically don't have 13Ds, although we've had 13s in the past. We don't shy away from that. Uh but no board seats, no illquid activism in order to capture the alpha that is available in dynamic sizing a position. Long answer, but hopefully that explains it. >> The gentleman activist moniker I got was um you know surprise because I was doing a an interview uh for an was Alpha magazine at the time before the 08. it was in a way that came out I think and it's always a good sign by the way if you're on the cover of the the leading hedge fun magazine you probably should sell everything and go take a rest but that was I think it featured in July of08 Alpha magazine I was on the cover I didn't even know that would be the case and it said gentleman activist on it >> and it was the the late bless her heart uh or soul Jay Schaw who um who's a you know famous writer for Barren she did the article and came up with that so it could have been worse I mean when came out. I'm like, okay, you know, we'll take that. >> Been called worse. >> Yeah, exactly. >> Uh, Alex, could you take us through uh one or two names in your portfolio or names that you have had held in the past just so we can understand the application of the strategy to an individual name? >> Well, uh, today we, uh, we have in the US our largest holding is a company called Kirby Corporation. Nobody knows Kirby, I think, less the people that are immediately involved with Kirby. Symbol KE X $128 stock right now. Kirby is the largest owner and operator of barges in the United States. There's about 4,000 barges floating around the the Mississippi and coastal areas transferring bulk goods, mostly oil, chemicals, uh things like that. um the rates of and I've known this company since the mid 80s by the way when the company I worked for before I started Atlantic owned 5% as a minority holding in Kirby. So I already studied it back in ' 85. Date myself a little bit. Uh I've not in held it at any time for Atlantic until just about four months ago when uh it fell down in my lap. I've known it for a long time. It was always zooming around the universe. cut into our top 30 which is our bench for interesting names and names to study closely in the US. We have the same in Europe and Japan by the way. So we always have this bench of 30 companies that we're very actively work working on. And then we decided to pull the trigger and get into it. And so Kirby has two stories to it. One is the barge business which um as I mentioned they have about 1,200 out of 4,000 barges. Uh the day rates right now because of a recession in chemicals and things are not that good in the end markets uh the day rates are about 40% below where it makes economic sense to build another barge. So guess what? There's not a lot of barge building going on. Okay. Little fact that just happened is that Venezuela is getting all this oil to our refineries in Houston. net net. That's going to mean a pick up in barge usage there to get transfers of oil tankers to the refineries. Nice little pickup there. Chemicals are looking a little bit better. Either way, doesn't matter. They're they're about 94% utilized. They're making very good money at the current rates, but I'm sensing there's something good going on in terms of no, you know, a new barge takes two years to build anyway. uh there's not a lot of new barge building going on and there is seems some pickup in the areas that matter to them. Then over time they found that with not only barges but they have tugboats and what have you. They know a few things about engines and they started taking their engine expertise outside and that became a division called distribution and services which is mostly engine repair for other people as well as their own. And then they got involved years ago in the uh fracking and the power um pressure pumping area again engines repair service. Now something new happened. Data centers um they are uh distributing units or putting together units with industrial gas turbines and generators in 40ft container like structures that are then delivered to Volto Grid, a company that will go public soon and will shine a bigger light on this whole thing. Uh and they are basically like a United rental kind of company for standby power for the oracles and for these data centers. So it's a very quick solution for power. Of course, you need to to do much bigger things long term like nuclear power plants, etc. to get the power that you need for the electricity grid. But these standby power units are very needed. Uh and voltage grid is going public on that subject. So Kirby is a very uh subdued play on that area. Not so subdued. The power generation piece that is now 40% of distribution services just grew 47% in revenues in the last quarter. So people are starting to figure out that this distribution service business can have some very spectacular growth numbers in the years to come. >> And so >> the thesis is is the just a general uptick in the performance of the underlying business rather than any sort of catalytic event from you don't expect anyction. >> One can imagine a number of things. Uh it is a potential takeover candidate. They could split the business. they could separate it. I mean, uh, that is still in the offing, but for now, both areas are looking very solid. Uh, and it's still quite underdiscovered at this point. >> Do you track any macro factors like do do you watch the oil price as a as it's exploded over the weekend with with Iran? See that as a knock on impact that seems to have impacted the the industries that you listed before, chemicals, automotive, and so on. they seem to be they're at the tail end of that uh oil price [snorts] sparking like that. >> Yeah. Know we we of course we track all the commodities and and what's going on there the the mining sector copper uh there's so much need with the electricity growth you know in mining. So we've played the the mining equipment area quite a bit. Uh we're in the oil service area and a few companies here and there. uh in particular Weatherford WFRD is the smaller one of the four big ones. You have Sloomer, Hallebertton, and Baker Huges. Weatherford went through a uh a very tough period. They had to restructure their debt and came out of near bankruptcy. We waited until their balance sheet got in good order and uh picked it up, you know, and we've been involved with Federford for for a while now. Um that I think eventually is a company that's likely to get bought by Hallebertton or somebody else, most likely Hallebertton. But even if it doesn't uh it's very well managed. They're doing share buybacks. They are you know very active. 80% of their business is in the outside the US. A lot of it in the Middle East and of course with this hiccup there's been some issues there but still uh you'll see the last year the stock is up 80% and it's still trading at about a five timesa. So >> let me just go around the horn a little bit and then we'll come back with jokes veggies Paris St. Germaine Goththingberg, Sweden, Val Parareeso, what's up? Limmerick City, Ireland, Orlando, Florida, Snomish, Cleveland, Tombble, Texas, Toronto, Jupiter, Tallahassee, Sacramento, JT, someone nearby. Uh, vegetables with Jake. It's 1 hour, folks. Market. So, uh, with with Alex coming on the show and knowing he has a very long-term record of terrific compounding, we're going to have a little segment today that that gets at compounding a little bit more. And so, [clears throat] there's something that's kind of deeply reassuring about growth. You know, we grow crops, we grow cities, we grow companies, we grow investment accounts, and growth feels like health. Like, it feels like we're moving in the right direction. But compound growth also has a geometry all of its own. And in any bounded physical system, a constant percentage rate eventually becomes a very large claim on reality. And you could see that in a very flattering financial case in Berkshire Hathaway. So just to rewind the clock, 1965, Buffett takes over the reigns. Bergkshire's reported about 49 million in sales at that point and 2 million of earnings. Uh and it did not necessarily look like this imbrio of a financial colossus. I mean, it was a small textile business with small business numbers really. And you know, and later in the segment, we'll cover what that compounding turned into uh from the latest annual report that came out recently. But first, here's a little quiz. Imagine a civilization that lasts for 3,000 years. And that's about how long the span of ancient Egypt was. I think it's actually a little bit underrated uh when we talk about, you know, historical longevity of of civilizations. uh you know 3 US we're at like 250 years. We got a ways to go before we get to 3,000. Uh but at the beginning this very early civilization let's just imagine and there's one cubic meter of material stock in this civilization. So tools infrastructure whatever one cubic meter of organized matter. And now let's let that stock of atoms compound at a 4.5% per year growth rate. All right. By the end, are you looking at A something that's city like the size of a city? B something the size of an entire planet, C something just bigger than our entire solar system, or D something bigger than billions of solar systems. >> So that's three or 4% compounded for 3,000 years going from a square meter. Was it >> correct? That's right. >> Alex, you want to take a shot at that one? >> Oh, that's not fair. That's [laughter] That's not fair. I I'm I'm all with you, Jake, on the value of compounding. And I like the Birkshire Haway example a lot better. But going back 3,000 years, >> got to be the biggest number. >> I have a feeling it's whatever the largest number is that you have. >> Yeah, that's what I think, too. >> You [clears throat] gentlemen are intelligent because that is the correct answer. uh 1 cubic meter compounded at 4 and a.5% for 3,000 years becomes a number with 10^ the 57th power of cubic meters which is bigger than billions of solar systems. >> So even a 1% for 30,000 gives you a multiplier of 9.2 trillion. So there's there's an absurdity that happens in all of these exponentials. And the trick is is that they're really they're so backloaded and the human mind did not evolve for any intuition around how this works. Uh so [clears throat] for a very long stretch this curve always looks quite civilized. And that shape has this strange parallel in theoretical physics called vacuum decay. Uh and this vacuum is doesn't mean empty space necessarily. It means the energy state where of the fields that fill that space. And so the [clears throat] question of does our universe today and this is all theoretical physics don't ask me to explain very deeply but does it sit at the truest low energy state as hypothesized or in we in a temporary state that only looks like the fully stable version and which physicists would call like metastable. So there's like a simple analogy to im imagine this. Imagine a ball that's resting in a valley and it sits in the deepest part of the valley and it's truly stable. Okay. But if it sits in a shallower valley, it can and it can stay there for a really long time, like unimaginably long. Uh even if there's a deeper valley that exists somewhere else in the landscape. Uh and usually [clears throat] uh it can mean that like this is we're talking about like time scales that you know stretch on into longer than the universe has been around so far. But if there was to be a transition to a lower energy state that ever occurred, it would begin locally there and then spread outward as a bubble and change that vacuum state of regions all around it. And this this thought experiment is really just to show like the value in the analogy is the structure and kind of relating to exponentials long apparent calmness forever and then this kind of hidden instability in it really and then this discontinuity feeling where it really ramps up. So Berkshire is kind of the benevolent version of this this exponential force. So by 2025, remember those early numbers I gave you, which sounded like a small business, uh reported over 370 billion of revenue, 67 billion of net earnings, uh and really something like 45 billion of operating earnings, let's call it. That's like 7500 times revenue and 29,000 times earnings. Uh so and [clears throat] of course that equated into a 19.7% uh annualized return since then. So fair play to the old guy there running it. Um but what it shows is that a small base can compound so long that the that the end state it barely resembles anything about the beginning and it also shows this other side which is that scale changes the character of compounding. You know, Warren has said for years that Bergkshire is going to eventually get too big where we're never going to be able to keep up the pace of compounding and and of course, Greg in the the latest letter said the same thing like at Berkshire scale, the math of compounding works against us. So once this base becomes enormous, maintaining that old percentage becomes almost impossible. Uh and there's kind of this broader tension in finance that might be a little bit underappreciated. You know, financial claims can compound on paper for a very long time. stocks, bonds, budgets, pension funds, asset prices all lean on these growth assumptions. But underneath those claims sits a physical system, energy, materials, land, labor, time, ecological carrying capacity. And there's a real question, you know, if like does the paper always match up to be able to be filled? Like you're writing a check on the future, can you cash that check in reality later? U so it's not that, you know, is is growth good or bad? You know growth can be fantastic. The real question is like growth of what at what rate how long against what constraints and Bergkshire shows you know how quietly compounding can begin and then physics kind of gave us a little bit of a language about this sort of delayed instability of it but you put them together and you get to this deeper point which is the first half of compounding feels harmless feels like you can't even see it and then the second half is where this base gets really heavy and all the results are. And so hopefully maybe that builds a little bit more intuition for you. Good stuff, JT. Uh, Alex, um, we've had a request from the crowd and it was my next question anyway. Could you tell us a little bit of the about the Exonobo Exalta merger and what you see happening there? >> Yeah. Okay. Um, may I quickly respond to Jake's uh, >> Yeah, please. >> I would love to hear it. >> Very interesting 10 minutes. Thank you for that, Jake. And very, I think, instructive anybody on the call. Um, you know, my entire professional goal is to compound, you know, at a very attractive, you know, that's not called superior, but very attractive absolute and relative return against the market. And in order to not have scale work against me, we control the size of our AUM, which is not that typical. There's some managers that do that and they return money to investors or they close it. And we've always been aware of the fact that scale is an enemy of compounding. Of course, Burks Headway is a corporation. They grew as they did. And it's been harder and harder for Burks Headway to look much different than the market over time. Uh but in our case, I'm only 33 35 years into my record. Uh I think Mr. Buffett Mr. Buffett decided to retire at 94. Uh I got close to 30 years more to go. uh wouldn't mind to have a 63 year record, which first of all sets you apart from a lot of people. I'd say already 33 years does. Most people don't want to do it that long or can't do it that long or whatever. Uh I'm on this mission to really compound at a very attractive rate with the same strategy, controlling my uh scale uh in order to do that. And so uh all these points well noted about compounding, the the importance of compounding, sticking to something over time and and controlling scale. back to uh your your uh the question from the um the participant on the call uh Axon Nobel and Exalta. So we liked Exalta a lot. We invested in Exalta uh for the third time in 10 years uh recently in October or something like that uh $28 and we thought that uh it was both at a trough multiple and trough conditions in the refinishing they do automotive coatings refinishing coatings. Uh we like the management of Exalta and lo and behold here comes Oxonobel Dutch company also codings company. Um, I'm particularly wellversed as a Dutch American to to comment on this Dutch American intended merger, I thought. But anyway, so Oxin Nobel comes in. We've known Oxobel. We felt that they were not as well managed, a little bit more expensive, but when they put them together, you create a 17 billion company with um, you know, 600 million of synergies and that all makes a lot of sense to us. And so we were very much after we listened to both management teams in late November uh became very promotional of uh this deal and it actually worked out because we owned both we ended up buying Ox Nobel stock um and we we had of course Exalta and um it worked out pretty well and we got into January with the kind of runup in small midcaps and value and we decided to uh to say goodbye for a little bit uh because it is still about a year until the closing happens. and we had captured you know the line share of what we expected to capture in that 12 18month period fairly quickly. So we actually sold out of both stocks um in January and February and that looked you now looks certainly with the noise out of Iran and and what have you and uh the hit in the market it looks pretty good. Uh we're actively looking at them again. Uh I think it's probably at a very good level right here. Uh but I think it's a good merger. it will make sense. Uh but probably there's still a bit of a long runway to get it closed. But in our view, Exalta should be worth 42 bucks. We made that clear to management. Uh we think they can get there before the closing because both stocks will go up as people get excited about the merger benefits. Uh but you know, it was at 34 34 and a half that was high enough for us and now it's I think it's uh back at 29. So, um, at at around this level, it's a very good buy, I think. >> Alex, you've been involved in Japan since 2003. Um, what have you seen in that market since then? There have been some initiatives by Tokyo Stock Exchange to encourage companies to get their price earnings above one. And there have been some other Sorry, price book. Thank you. Yeah. And some uh price earnings above one price book. >> Cheap companies. >> Yeah. And uh there's some there's some discussion of them sort of opening themselves up a little bit to a more perhaps American approach. But when we were there, I I think it's fair to say that we were pretty hot talking to the funds and then we when we spoke to some of the companies, we understood the challenge perhaps that activists in Japan face. So can you talk to your experience? >> Yeah. So first of all, Japan is a a market not to be overlooked. Uh it's a very important developed economy. It's probably the most relevant developed economy in Asia, which is the most the largest most promising growth continent as far as I can tell. Um, and so it's really a preferred area that over a long period of time suffered not only from uh zero interest rates, no inflation, and uh some anti- or non-shareholder friendly policies, but also from a loss of market share within Asia that's less published. But China and Indonesia and Vietnam grew so much in terms of market cap that if you think about somebody allocating say a shell pension fund gives $10 billion to Goldman Sachs to manage in Asia uh they would cover the indexes and it used to be 70% in Japan in 2000 that as a market cap and it became only 20 25% by 2020. So there was constant like market share loss for Japanese companies, lack of interest. But then when Abbe came around in 2014, I think uh he had the three arrows of of economic growth as well as uh improving you know public company behavior getting more independent directors improving roe uh you know through share buybacks and acquisitions etc. So things have improved quite a bit on that front on the governance front and on how Japanese corporate managements are more aware and more well-versed in uh you know also being a good uh steward of shareholder money. You know they they are stewards of being wellness for society, wellness for workers, wellness for everybody and those are important constituents. they should not be ignored in any continent or country but shareholders were kind of forgotten and that has changed marketkedly I think with Abbe and it's now continuing under the new prime minister Sane Takichi who is very much a um disciple of his whole philosophy on in that account but you know we've been there as you mentioned since 2003 or four I started investing in four started analyzing in 03 and uh been very successful actually there are doing our constructive behind-the-scenes activism respectful genuinely if there's any form of activism exportable to Japan that would be the one and not the overt you know proxy battle guns blazing one in fact I had to defend myself in almost every meeting that um with all the due respect to a very nice guy Warren Likenstein who was there early uh steel partners uh who is not very well there and in general but you know are you like steel partners they were asking so no we're not from the US, but I played my Dutch card. I said, you know, I'm Dutch, you know, and the Dutch have 400 years of uninterrupted trade relations and they care about that stuff. So, I say, "Hazy, master, which is nice to meet you, and a couple other things that it makes you show you that you are interested in speaking some Japanese." And so, with all the kind of charm and laughing and this and that, we're able to get pretty far with our due diligence. But then also, you know, we make our proposals of share buybacks and dividends and some portfolio rationalization and we write that up and then we write it up again in letters to them. And if if they don't really act on it, said, "Yeah, now you're you know, we're giving you all these nice proposals. You can do them. We don't want any credit. It's all you. Um but if you're not going to do anything and and the stock is still going sideways, we really you're forcing us to broaden the conversation, you know, with with other constituents." So, what do you mean with that? Well, we could uh file a proposal for the annual meeting to put it to a vote and that means there's publicity with the financial press which we know well and you know it's not good because then we talk about the fact that we do this against our will not the way we like to do it and we're doing it because you are not acting. You're lethargic. Oh, and so that kind of pressure very much verbal behind the scenes has caused some changes in a number of companies where we had to do it. Not too many. Most of them started to adopt some of these proposals and we were happy with the share price and then we left and we came back later. Some it got a little bit more confrontational and those we actually uh we had some success rate applying some more subtle pressure if you will behind the scenes. We actually never had to file an actual proposal which we didn't want to do anyway but we we had a fairly credible uh threat and some good arguments that convince them to to act. Put it that way. Can I change to uh Chart Industries has a uh had a major mer merger agreement with Flowserve that ultimately fell apart before they acquired by Baker Hughes. >> Yeah. Oh, so happy with all that. Uh so Chard Industries, we followed it for quite a while. Uh Jill Vanco, CEO, uh who came from Dover Corporation, in fact the company I worked for way back when and so I have some affinity that way even though it was many years in between. So I got to know Jill who was ambitious and she took this $1.5 billion dollar hydrogen uh renewable new energy LG related company uh into a much broader space by buying a $4 billion company in Scotland called Hen in one fell swoop. You go from debtree to four billion in debt and you go from a high growth story with high growth investors and high multiple to suddenly being a more diversified company. more legs on your chair better from my perspective, but the current crop of investors back in 2022 hated it. And so that made it a value proposition for us. We waited for a while and we got involved I think in 2004 24 and immediately met with Jill a bunch of times and they she had to really improve her messaging because she was still talking about growth and all that but the cash flow was a problem and the debt repayment was a problem and the whole uh notion in the market was you need to bring that debt down before anybody starts paying attention to the growth again. So that messaging and behind the scenes work worked and she had a really good capital markets day. Stock flew up, but it still was quite volatile because it's a midcap, it's a growth story here and there and it's too much debt. Anyway, so through all the hoops and downs, a lot of dynamic sizing, we eventually got to the point where in um it was in 2020 five. Yeah, it was in yeah 2025 where flows showed up. Flowserf I mean flows we've known for 30 years $5 billion pump and valve maker uh with really good end markets lots of maintenance repair and overall it was in fact in our top 30 is ready to go into the portfolio at the moment they decided to do a merger of equals a marriage if you will with our beloved largest holding chart which has given us some indigestion but a lot of trading opportunity and already good gains. The moment the merger was announced, both stocks went down 10 10% in June of 2025. Didn't make any sense to us. So, we bought a lot more chart made it even bigger. Um, didn't touch flows at the time. Um, and we figured that would improve and it did. You know, once the management went on the road, looked at the synergies, all good, but we always felt there was a chance of an over bit because it was really not what we wanted originally. But, okay, we were going to stay with it. It was a stock for stock deal. We like both companies. Fine. So then two months later, Baker Hukes comes in with 200 $210. You know, to put in perspective, it was at 160 before flow server dropped to 140, went back to 170 shortly thereafter, and then Baker comes in with 210. Okay, cash stock goes up to 195 on that. We're happy. It's our largest position. We're doing really well with this. But I immediately go to CEO of Chart saying, "What are you doing? You can't do that. I mean, now you're forcing me in a short-term massive capital gains. Uh, I have to pay tax on that. In New York, that's 55%, you know, between state, city, all that stuff and federal. Uh, and I rather own the upside of the company. Why don't you do a a share deal with Baker?" Because this is not better in my view than the flow deal. Anyway, so went back and forth. They couldn't recut the deal. We tried to push our rights uh which you can do the as a as a shareholder but it was too much of an uphill battle. We ended up selling the stock in the low 200s with a huge gain u and that was the end of chart and so chart will be soon part of Baker. I think it's still publicly traded. Uh great deal for Baker. Uh Baker stock has gone since then from 45 to whatever it is 65 now. And so clearly she should have taken stock uh and not cash. Uh, so it's really not the best deal in my view for chart shers, but they did what they did. They thought it was the right thing. Uh, interesting. Side note is that flows we bought with with chart money in October of last year. Flowserf somehow they got the $250 million breakup fee from Baker. So that was nice, not insignificant for a $5 billion company. And then they got out of favor with a whole bunch of other uh companies in their space. So, we got into Flow Surf and there too, we had to take a short-term gain. We went from 80, sorry, from 50 to $87 a share in four months. I mean, that was a little too much for us. So, we had to sell that. Again, a lot of people would hold that because it's a great company, nothing wrong. They played up their nuclear angle. Uh they do a lot of work on nuclear facilities and they put a slide up saying that 75% of the 400 nuclear facilities around the world have their pumps and valves. whatever on it and so they in a pole position to do well there. So flow service is a great story. Too expensive right now but and chart is out and baker's too expensive. So that's where we are on those names. >> Sounds like an unmitigated disaster. >> Sorry. >> Sounds like an unmititigated disaster. >> Uh you're uh you're active in Europe, Alex. What do you make of uh the goings on in Europe presently? >> Yeah. Well, Europe is again a wonderful large candy store full of candy to grab at because it's also full of uh storekeepers who are sour and pessimistic and um don't think they have a lot of good stuff. But there is a lot of good stuff in Europe. I don't invest in the European economy or any country just like I don't invest in the Japanese or US economy. investing companies that are headquartered in these uh local and they trade typically or do business worldwide. Um within Europe you have fabulous publicly traded companies and particularly in my size range away from the the obvious large names in uh in luxury LVMH, Novo, Nordisk, ASML. Uh those are not the names we play of course you can just buy the index funds and being exposed to them and um you can also go into midcap value stocks. I mean an example um Cintas which does uniform cleaning and linen cleaning and and it's a service business in the US. It's now an 8090 billion market cap trading at 25 times or more earnings. It's the largest player of its kind in the US. It's consolidated a mom and pop business into something large industrial for them. Well, there's a few other players. In fact, Universe uh is a company that's being taken over by Cintas. Now, in Europe, there's only one really big one that's publicly traded. It's a French company called Ellis. E L I S. Space FP is the symbol. It's a French company with a 25 euro share price. And, you know, it's a 56 billion type of name. 400,000 customers, huge renewal, uh, you know, retention rates, one to fiveyear contracts. Largest customers one and a half%. It's the AOR hotel chain or something. Um, trading at five times EBA. I mean, this is like a private equity gi giant candy for private equity if they can get their hands on it, you know, with a big premium. Um, we got in at 18 because uh now it's at 25. So, it's about seven, eight months ago. Uh, this will go much higher. there will be a 34 to 40 euro stock in about a year at very reasonable multiples and they're executing very nicely. They're automating things. They're benefiting from all the techn technological developments and they're they're gaining share and they're buying companies are small. They're integrating them. So an example is Ellis. Another example is a company called VOPEC. VOPE VPK Space NA. It's a Dutch-based company out of Rotterdam. They're the largest independent tank terminal operator in the world. Sounds like a mouthful. Think of an aerial shot of a harbor and you see all these round drums full of oil or gas or chemicals because ships come in, they put them in there, then they get offloaded either into a pipe system or trucks or what have you, barges maybe. And so they have 77 of these tank storage terminals with multiple uh tanks uh many multiple tanks in all over the world. Oman, Shanghai, Andor, Roterdam, Hamburg, all over the US, etc. Um, the replacement value of that is hard to estimate. I can give you that they're spending 4 billion euros over the next three years to do three new terminals. They got 77 of them. I'm not saying they can multiply it like that. The market value is ridiculously low right now. People have forgotten that this should be trading on a cap rate because it's a 95% utilization long, you know, contract business with high retention rates. Again, you can see some similarities in what I'm looking for. And uh so VPC is trading at a very low multiple, good dividend yield. It's 52% owned by a uh Bergkshire Headway like company, publicly traded company called Hull Trust, which we know very well. We've had a long relationship with them. uh they have in the past made a full bid for the remaining shares. They did it with the largest dredging company in the world, company called Boscalis. Uh that happened three or four years ago. I'm not saying that I have any knowledge of them wanting to do this. I'm just saying they own 52%. They are encouraging the company to buy back shares which means that it goes from 50 to 52 to 54 to 55. Uh you do the math from there. We are happy to be in the this ever shrinking public float. Uh I think it's going to be very good and it's our largest European position right now. >> Think about uh if we have time for one more question. Um [clears throat] >> you know in these kind of family dynamic situations where you you know if you vote with the family then you guys both control it. Um, but how do you think about uh what you know who you're getting in bed with and like if you are going to be a minority obviously like how do you make sure that you don't get taken advantage of? >> Well, first of all, if we have any notion that we might be taken advantage of, we would sell. Uh that's the beauty. We're not stuck. We're not in partnership. We have no agreements. Uh we have public shares that are reasonably liquid and we can sell. Um it is very helpful having done this for a very long time and knowing for inance the the family behind um Hull and the executives for for decades uh as I mentioned before we got started. We have a a number of investments in Germany on and off and again today and they're all related to what the Shefflla family is doing including the Sheffller company, Continental, Omovio, Prior Vesco Technologies. It's all related to the same family and we we have some familiarity with the managements and the family and uh we feel it's uh from time to time a good moment to be with them. Um you know we rather avoid insider controlled companies. We just happen to somehow because of vote pack come to that subject. I would say that is maybe 10% of our names over time have been inside of controlled companies. But then for sure we want to have a good understanding of who the controlling shareholder is. >> Alex vulnerability right I mean if management and family or whoever owns less than 10% they're vulnerable. If their quality company is undervalued that means that this is vulnerability. And we like to point out in one of our first meetings, welcome to the vulnerability zone management. It's time to get active here on everything from messaging, corporate action, shelter friendly activities to get out of this zone because somebody can come in tomorrow, bid 40, 50% over your share price and you suddenly are on your back foot, hire an investment bank to deal with it. So why we do this now ourselves before we get quote unquote attacked? >> So we like vulnerability. So that's 90% of our cases. Alex, uh, we're coming up on time. If, uh, folks want to follow along with what you're doing or get in contact, what's the best way of doing that? >> Well, we have a website, atlanticinvestment.net, and that would be one good way to see some information on us and to um, you know, to send us an email. >> Uh, JT, any final words? No, just uh thanks Alex for coming on and uh you know it's not too often that Toby fanboys as much as he uh as he was doing before we started this one. So it was that was fun for me to watch. >> It's true. I'm very I'm very grateful to >> both of you and and all of them on the program. >> Thanks very much. Alexander Roers, Atlantic Investment Management. Thank you very much, folks. We'll be back next week. Same bat time, same bat channel. We'll say everybody