#62 – The Gentleman Activist

BOOK RECOMMENDATIONS

Alex recommended Billion Dollar Whale: the bestselling investigation into the financial fraud of the century by Tom Wright and Bradley Hope. It’s the story of how 27 year old Jho Low stole billions of dollars from a Malaysian investment fund.

Get it on Amazon and donate to our featured charity.

How Steve Knows the Guest

Steve met Alex when he spoke at an investment conference and has been wanting to get Alex on the podcast for a while. Steve liked the idea of buying boring businesses on the cheap and then juicing the investment story – it’s a very simple philosophy, albeit difficult to execute consistently, as Alex has done. Luckily, Alex was speaking at another conference in London and they arranged to meet up and record in person.

Chapters

From Engineering Intern to Activist Investor                     

Overcoming Market Crashes to Build a Fund                          15:50

Atlantic’s Outperformance During Dot-Com Mania               24:47

Parallels Between Dot-Com and Today’s Tech Valuations   32:46

Finding Value in Overlooked Industrial Businesses                40:39

The Art of Judging CEOs and Capital Allocation                       51:51

Real-World Activism Stories                                                             1:00:45

Transcript

STEPHEN CLAPHAM: Hi, I’m Steve Clapham, and welcome to the Behind the Balance Sheet podcast, where we meet leading investors and commentators and educate ourselves about the world of investing and the world. Our mission is to remove some of the mystique around investing and improve our understanding of successful investors’ strategies and tactics.

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STEPHEN CLAPHAM: This month, I talked to Alex Roepers, who was once dubbed the gentleman activist for his behind-the-scenes approach to shaking up investee companies. Once a long-short manager, now long-only, he manages three regional funds and one global fund on the same investing philosophy. Find deeply undervalued traditional businesses which could be an acquisition target for private equity. Suggest capital allocation improvements to management and hold until they’re revalued. Roeper’s main U. S. Fund has delivered 12.3% per annum compound since inception in 1992. That’s turned $100 into $4,800 after fees, or $11,000 before fees if my sums are correct.

STEPHEN CLAPHAM: We talk about his unconventional journey from Dutch engineering intern to activist fund manager in New York. Alex walks through his formative experiences in industrial manufacturing, then conglomerates and M&A, which generated his investment modus operandi.

STEPHEN CLAPHAM: He explains his philosophy of constructive activism, how to engage with boards and management without being a corporate raider caricature. He explains how he evaluates management quality, capital allocation and operational improvement opportunities. Alex has decades of business experience and there is a lot of detail in this discussion and I’m sure you’ll enjoy it.

STEPHEN CLAPHAM: So, Alex, hi. Thank you so much. I’m looking forward to talking to you. We met a couple of years ago from the Value Investing Conference. I always start by asking guests, did you always want to be an investor? I know you didn’t because you started in the corporate world. So what first attracted you to equity investing and starting up Atlantic?

ALEX ROEPERS: Great. Well, thanks, first of all, for having me. Pleasure to be here. I started off working in a corporation. It was my internship in 1979, and that led to a two-year stint with that company. It was in upstate New York. It’s an electronic manufacturing company.

ALEX ROEPERS: It was really in the trenches, in the factory, dealing with spare parts, dealing with manufacturing and engineers, and helping sell. Machinery at that time in the early 80s, a company called Universal Instruments. That experience was very different than many of my students that I met later on at Harvard Business School who were in investment banking.

STEPHEN CLAPHAM: But you’re Dutch though.

ALEX ROEPERS: Yeah, I grew up in the Netherlands, did my undergraduate degree at the Netherlands school business called Nijmegen University. And so the internship in the States in 1979 between junior and senior year was kind of pivotal.

STEPHEN CLAPHAM: Oh, I see.

ALEX ROEPERS: And that then led me to apply to MBAs. I was lucky enough to get into Harvard with a deferred admission. And from there, you know, two years of work back to the same company because they were growing very fast. They were helping automate IBM, Texas Instruments, Motorola, Philips, all these companies that were automating the printed circuit board assembly process.

ALEX ROEPERS: All right. Which made the price of the PC and the television much lower. Of course. In fact, Apple, which started in a garage. Was able to automate the printed circuit board assembly with machines that we sold and got a much lower price for the Macintosh.

STEPHEN CLAPHAM: Because originally they hand assembled PCBs. Yes, exactly.

ALEX ROEPERS: So we would be coming into a factory of say Western Electric, which was the manufacturing arm of the telephone company AT&T. And there would be 2000 people working, assembling printed circuit boards. By the time we left with the machinery sold, there were maybe 50 people left. At the time, GE, Western Electric, IBM were all talking about automate or die.

ALEX ROEPERS: Very instinct today with AI and with other automation going on, robots, everything they’re talking about and the worry about employment. I’ve seen for over 40 plus years, massive amounts of productivity through automation that has led to tremendous amount of unemployment. But yet we’re here we are 40 years later at full employment.

STEPHEN CLAPHAM: Yeah, sure.

ALEX ROEPERS: So, human society has a way of reinventing himself. So, from that experience, went to Harvard. While most went back to investment banking consulting during the summer jobs, I just knocked on the door of the owner of Universal Instruments, which is a conglomerate, publicly traded, called Dover Corporation. Still publicly traded.

ALEX ROEPERS: It’s still around, right? Still around. Very well managed company over the years. And so, I was lucky enough to, well, present myself first. And then lucky enough that they called me back and said, why don’t you come and work for us in the summer in 1983?

ALEX ROEPERS: And so this was a corporate headquarters with six executives, 10 support people running at the time a multi-billion dollar conglomerate of which Universal Instruments was a shining light subsidiary. They bought it for $50 million in 1979, and it was already worth $300 million in sales and growth. So it was doing very well. So I was known as the little flying Dutchman over there. And I was in.

ALEX ROEPERS: The corporate development office, which is consisting of one gentleman, the VP, and he was not there on my first day. And it was a big pile of documents, basically prospectuses or books on companies that investment bankers and others wanted Dover to take a look at, because that’s what the corporate development guy is supposed to do, look at the deal flow.

ALEX ROEPERS: And so I came there, got a cup of coffee and the chairman of the company walked in and said, oh, you’re the Dutch guy, right? So why don’t you… Why don’t you go through that pile on your desk and at four o’clock come to my office and tell me which one you like and which one we should take a look at? Yes, sir.

ALEX ROEPERS: So I dug through about 15 documents and I ended up liking a company called Pathway Bellows, which is an expansion joint business where they make these joints that go between pipelines, high pressure pipelines, and it allow for flexibility so they don’t crack and pop. This company is in San Diego. I made my to the chairman, okay, first day on the job as an intern.

STEPHEN CLAPHAM: And you’re how old at this point?

ALEX ROEPERS: I’m 1983. I’m 24.

STEPHEN CLAPHAM: 23, 24.

ALEX ROEPERS: Okay. And I make the case. And he says, that sounds very good. I said, why don’t you go see them? So what do you mean, sir? Well, in San Diego, there’s a flight leaving, I presume, at 8 o’clock. Why don’t you jump on that and go see them? I said, okay. So I was on a plane to San Diego by myself, meeting with the management of a $40 million company.

ALEX ROEPERS: They spent the whole day with me. I went through their factory. Conversations with him, wrote up all the kind of notes, flew back with the red eye. So it was just a one-day visit to San Diego. That led to meetings of that management in New York. At the end of my nine-week internship, we bought the company.

ALEX ROEPERS: Oh, wow. So I got very interested in the process of M&A and buying and selling companies from the principal perspective, not the investment banker perspective. And so with that, I started looking for my job after Harvard. And my boss at Dover, my corporate development VP, I used to work for a group called the Thyssen-Bornemisza Group.

ALEX ROEPERS: Thyssen-Bornemisza is a… Thyssen is from the German Thyssen family. Bornemisza is a Hungarian family. Before World War II, one part of the family married into a Hungarian family, made a group that inherited part of the Thyssen Fortune, which included…

ALEX ROEPERS: Dutch Harbor Works, Dutch Banks, the Bremen Harbor Works, a whole bunch of things. And so this company had grown through acquisition, including an aggressive acquisition of a company called Indian Head in the 70s, which owned Fruit Of The Loom, glass bottle manufacturing, gaskets for cars, a very wide, broad-based conglomerate. So that was put together with the European conglomerate to become the Thyssen-Bornemisza Group.

ALEX ROEPERS: My boss at Dover used to work for them. So he said, well, why don’t you go visit the guys in Monaco? My parents lived in the south of France, so that was easy. So I flew to the south of France after I graduated from Harvard, actually after my internship, and had an interview with the top people at Decent Bonamese Group set up by my boss at Dover.

ALEX ROEPERS: Anyway, long story, I got the job right there. They were just expanding in the U. S. There were about 200 people in the headquarters, three corporate development people. I was the junior guy then coming in right after Harvard. And 17,000 employees, 80 companies and 40 industries. And it was a bloody mess. And it needed to be cleaned up. I sell a lot of companies.

ALEX ROEPERS: So I joined in June of 84, right after I graduated as a corporate development guy. And within six months, the two top people above me were let go because they were not happy with him over in Monaco. And I kind of floated upward to become director of corporate development at age 25 in New York. And that was cool. And I was reporting to two gentlemen in Monaco. One was called Dr. Tony Kirk and the other one, Dr.

ALEX ROEPERS: Manfred Kimmler. What has happened is that the Baron, the owner of the firm, had got so fed up with how the company was being run. He went to the head of McKinsey, said, how much are you making? X. I’ll pay you two or three X. You come to Monaco. Head of BCG, Paul’s Consulting Group. How much are you making? So these are the two heads of BCG and McKinsey, who are my bosses in Monaco.

ALEX ROEPERS: And so these are my mentors. And then above them was a 32-year-old son of the Baron, who was the CEO of the company. It’s a very interesting setup. So I was 25. The CEO was 32. My bosses were in their high 40s, early but brilliant gentlemen.

ALEX ROEPERS: And I spent four years in New York, going back and forth a lot to Monaco, et cetera, being busy helping divest companies, but also acquire companies. And along the way, they asked me to look for new acquisitions.

ALEX ROEPERS: Including larger ones. And so I screened, which is hard at the time, in 1986, to screen public companies. You had to really, you know, go to a data service to do a screen. Now you can do it on Bloomberg like this.

STEPHEN CLAPHAM: But, I mean, this was very early days of the personal computer. You should just explain. Well, the personal computer.

ALEX ROEPERS: 1982, when I came into Harvard Business School, the cost of education there was about $12,000 a year. Tuition is much higher now, of course. The PC costs about $1,200. So 10% of your, you know, imagine tuition today is $75,000 at Harvard. Would you buy a computer for $7,500? No, it’s a lot cheaper.

STEPHEN CLAPHAM: Yeah, of course.

ALEX ROEPERS: But anyway, so we had to buy a computer. We were the first class to have to do so. We had Lotus 1-2-3 software. And we were quite advanced, you know.

ALEX ROEPERS: We came from the slide rule and the HP 12C computer calculator.

STEPHEN CLAPHAM: Calculator, yeah.

ALEX ROEPERS: So anyway, so I joined TBG. We the TBT Supporting Music Group, we ended up looking at acquisitions. I promoted 26 publicly traded companies as potential acquisition candidates. The issue is, however, that they needed to be either hostile deals to get them because they’re not for sale, and then it required a huge premium.

ALEX ROEPERS: And as a result, none of these 26 deals happened, even though I worked them out, put them on paper, made documents, made presentations in most cases.

ALEX ROEPERS: And so along the way, tracking what happened to the share prices of these companies that I promoted for potential acquisition, and we didn’t do anything, turned out that a lot of them ended up being very good investments, where they were undervalued companies with lots of potential that other people would see. That basically private equity already at the time, but also corporate buyers would buy.

ALEX ROEPERS: And there’s a lot of hostile takeovers in the 80s with Michael Milken, the junk bond market, etc. So. I started to track the performance of all the proposals I made. And so this pro forma track record of if we would have bought shares, never mind buying the company.

ALEX ROEPERS: Let’s buy two or three percent of the company in the open market. And I presented the results of that. And I said, we should do that, you know, as a company. Yes, we’re an industrial conglomerate, but we now have paid down the debt. We have cash.

ALEX ROEPERS: They were investing in hedge funds at the time, in Michael Steinhardt, George Soros. Judy Robertson started, Paul Tudor Jones. We had about $300 million in the mid-’80s in hedge funds. So we were on the larger hedge fund allocators. I became familiar with how those were set up, which was helpful.

ALEX ROEPERS: And there was one group they invested in called Coniston Partners, which is a group of three gentlemen who did concentrated activism in the 80s. Got even on the front cover of Fortune magazine. They had several hundred million, six, seven hundred million on the management, a huge amount at the time. And they were, you know, very visible as a fund doing this. At the same time, you had Carl Icahn.

ALEX ROEPERS: You had many other, you know, raiders out there that backed by Michael Milken’s junk bond debt were doing takeovers. So that is the environment in which a light bulb went off in my head where I said, okay, we should do this within the company, this beachhead program of concentrated investments. And they said, good idea. I said, but I wanted to run it. It was quite ballsy for a 27, 28-year-old at the time.

ALEX ROEPERS: And that was not possible within the company where I would have the performance fee and all that. So I said, then I’ll start my own company. That’s how Atlantic started. So I had no background in money management, but I had a background for six years with Dover and with ThyssenBornemisza in evaluating companies, analyzing them, doing due diligence.

ALEX ROEPERS: And with that, I started, but first I needed money. I had no money in family. I have no money of my own. And so I basically went to my bosses at Dover, at ThyssenBornemisza for help. And that was not so easy. You know, I was lucky that Tony Kirk left the company. To run out of Geneva, the investment company for Carlo De Benedetti.

ALEX ROEPERS: Carlo De Benedetti at the time was very well known. Benedetti family is still well known in Italy. But at the time, he was the chairman of Olivetti. Olivetti was the second largest computer company manufacturer in Europe after IBM, which of course is an American company, but Olivetti was Italian based.

ALEX ROEPERS: He also had this investment office in Geneva called Societe Financiere De Genève, which was raiding. And doing hostile deals on Belgian banks, French automotive parts companies. And my boss, Tony Kirkman, became head of that company. And he liked a lot what I was doing. He knew me. And so they backed me.

ALEX ROEPERS: Then the 32-year-old, now 36-year-old CEO of Thyssen-Bornemisza backed me against the wishes of their general counsel and other people in the company. Backing a young guy who goes on his own, but he and I had a good rapport. So I had massive…

ALEX ROEPERS: For me to get his, you know, some venture capital money to help me start a company, Associated Financial Of Genève, and through cold calling, back in the day, just for the younger viewers, there were no cell phones. I was standing quite often in the rain with coins in pay phones calling, you know, ABN AMRO or Banque Nationale De Paris and saying, you know, in Dutch or in French, we’re fortunate at the language.

ALEX ROEPERS: Trying to get to the person in charge of investments to get a meeting. And then, of course, I end up maybe with a meeting, but in the wrong spot. And then they felt a little sorry for me.

ALEX ROEPERS: And I said, well, could you help me, you know, to redirect me? And so with cold calling and doing 12 trips from the United States with almost no money, back and forth to Europe, driving a car around, I was able to build up a network and raise money. And I got a Dutch bank, a division of ABN Emerald to back me.

STEPHEN CLAPHAM: Oh, wow.

ALEX ROEPERS: So I had very famous backers. The Benedetti, Tisa Bonamisa, and ABN AMRO’s private bank. And with that, ABN AMRO organized conferences at Hotel Europe in Amsterdam.

ALEX ROEPERS: An Atlantic Investment or Atlantic Fund at the time was started with about $8 million.

STEPHEN CLAPHAM: $8 million?

ALEX ROEPERS: $8 million from in $25,000 to $100,000 pieces and two $1 million pieces from the sponsors and the rest was all small denominations. And that’s how it got started.

STEPHEN CLAPHAM: Different world. And it wasn’t a good time to start, was it?

ALEX ROEPERS: No. I basically went flat on my face almost immediately because once I got the money deployed, six months later, the subordinated debt market, which was very important as the ammunition for companies and private equity firms to acquire the kind of companies that I was going after, completely failed and came apart. You know, Drexel Burnham was behind it. They went bankrupt. Mike Milken got in trouble.

ALEX ROEPERS: It’s pretty well documented. Then you had the savings and loan crisis, the recession of 1990, first Iraq War. I mean, you can make a worse mix, although we’ve had bad periods in the last 35 years too. But it was for a startup fund, pretty tough time.

ALEX ROEPERS: I was down for the stop year of 89. I was down 20% in 1990. And if you’re down the first year and a half, people say, Alex, well, We like you and you try hard, but we’re going to pull our money. And so the $8 million went to $3 million.

STEPHEN CLAPHAM: Well, you still kept 3 million, right?

ALEX ROEPERS: I still kept 3 million, but very hard to run my tiny office in New York. And I had to scramble to find a way to stay alive as a firm, as a little business. And so I was cold calling again.

ALEX ROEPERS: I mean, I was cold calling all the time and trying to make connections. And I was lucky enough to find a family office, a trust out of Monaco, to back me with a managed account for $2 million. I restructured my fund to become a hedge fund, long short.

ALEX ROEPERS: It was kind of my way or the highway. Most people took the highway. And I was left with $750,000. The $3 million went to $750,000 when I started the hedge fund. And then I had a $2 million managed account in my restart in 1992, October 92. And from there, the record started getting good. The times were a bit better. Good results. People coming back. Some new people coming in. So by… 1996, I was at about 40 million.

STEPHEN CLAPHAM: Oh, wow.

ALEX ROEPERS: And we had some really good returns, and I was making performance fees. So that helped. 97 was a 60% year.

STEPHEN CLAPHAM: Really?

ALEX ROEPERS: It was really good.

STEPHEN CLAPHAM: How did you manage to deliver at 60%? I mean, the markets were pretty strong.

ALEX ROEPERS: Yeah, the markets were good, but we started having some really good concentrated bets that were working out. One in 1995, for instance, was Chicago Northwestern Railroad. At the time, the freight Railroad industry in the United States was still quite fragmented.

STEPHEN CLAPHAM: Yeah.

ALEX ROEPERS: The big guys that are still there today is Union Pacific and CSX, and then you have Canada, Canadian National. But Chicago Northwestern Railroad, as the name says, there was a line, several lines of freight in the Chicago area and in the Northwestern area.

ALEX ROEPERS: There was a 200 mile line that connected the Powder River Basin with the East-West Union Pacific line. And So Burlington Northern was also in the Powder River Basin. For those who don’t know, it’s surface mining of coal, low sulfur coal. All the coal that comes high sulfur is in the Appalachian and in the east side.

ALEX ROEPERS: The low sulfur coal is so much easier to mine because you don’t need mine shafts. It’s just like digging up dirt, throwing it into Railroad cars, and then shipping it to Atlanta for the utility. So the cost of the coal was one-tenth of the high sulfur coal, but then the transportation costs were high.

ALEX ROEPERS: The Chicago Northwestern 200-mile line was critical. It was only one of two coming out of that whole area. And there was an issue of capacity. And I saw that. So this is very simple for anybody. A Railroad train full of cars, very long one, say a mile long, with locomotives going up a hill goes slow, down a hill goes fast.

ALEX ROEPERS: And then you had to build more bridges over canyons. And you had to triple track the uphill. And so there was overtime, there was capital spending, all that’s needed to remove the bottlenecks. So that picture was very clear. And then Blackstone, in fact, in the book of Steve Schwarzman that he wrote not that long ago about his life and the buildup of Blackstone.

ALEX ROEPERS: Chicago Northwest was a very important deal for them. And they own 70% of the company and they brought in Union Pacific for 30%. And I watched this as it went public. And Blackstone was largely out of it, but Union Pacific was still sitting there with non-voting shares. And so we saw two things happening.

ALEX ROEPERS: One, Union Pacific had asked for the International Rail Commission to get approval for voting rights, which is like a prelude to a takeover. So I was following that legal process in the Railroad and the Interstate Rail Commission publications. So you can follow that process and you say, well, that’s a two-year process. So that’s almost like a pretty clear.

ALEX ROEPERS: Then there was the earnings decline due to the fact there was inefficiencies on that 200-mile line was so critical. But you could see those bottlenecks getting removed after a certain amount of time and spending. So I just was so sure of this thing. So I made it 35% of our capital, very high. I wouldn’t go that high these days. I’d go 15% to 20%. But at the time, it was smaller.

ALEX ROEPERS: I was very convinced. The managed account became 35, 40%. And I remember getting a call on March 10th, 1995 from my trader at Jefferies. He said, Alex, today is your lucky day. I said, what’s happening? Well, you’ve been talking about this for a while, but Union Pacific just made a cash bid for the rest of Chicago Northwestern.

ALEX ROEPERS: So that was a huge gain. We sold all the stock in the open market very quickly. We own 2% of the stock of Chicago Northwestern, as small as I was at the time, but it was a huge position for us. That led to a 40% quarter and a 60, 70% year in 1995. So that starts triggering. People’s attention. And so that’s how Atlantic started taking off.

STEPHEN CLAPHAM: And how did you cope in the dot-com boom? I mean, were you, because that was quite a difficult time for people operating your site.

ALEX ROEPERS: Well, actually, it’s a great similarity to today because you had in 1998, the growth of Intel, Cisco, Microsoft, Apple, Amazon was all happening in 1998. In 1998, there was also a global crisis in emerging market debt. And it was very, very difficult that period. And we had, after a really good run, through 97 and early 98, suddenly we had a big drawdown in our funds.

ALEX ROEPERS: And there was a systemic risk-fair crisis that needed the Federal Reserve and the banks of New York to help bail out. There was the collapse of the Long-Term Capital Management Fund, which was a $4 billion hedge fund that failed.

ALEX ROEPERS: And the $4 billion hedge fund had $100 billion of emerging market debt that all turned out to be illiquid. And the Federal Reserve had to step in to save the markets. That led to a crazy drawdown, like really like a crash of 08, but it was in 1998. The high-tech guys did very well through that. They were up 25%. Most everybody was down 10%. I was down 10% in 98.

ALEX ROEPERS: So it was the first black eye, but very much macro market related. And then in 99, everybody was allocating to those who made money in 98, which was the Amazons, the Ciscos, the Intels. So that’s just when the tech bubble really took off. I think the NASDAQ and the average tech fund was up 140% in 1999. My fund was up 33%.

ALEX ROEPERS: And that was number one in about 800 value funds. Because the value funds and normal industrial funds, non-tech, were flat in 1999. And they were down in 1998. I was down in 1998. I was up 33% in 1999. And it was impossible to raise money. Oh, really? Yeah, impossible because… Everybody’s making so much money over there. People are saying, well, why don’t you do some tech?

ALEX ROEPERS: I mean, we’re making 5%, 10% a month. What’s wrong with you sitting in glass bottle manufacturing companies and pump and valve companies? So I said, okay. Early 2000, guess who’s raising money? Not me. Who’s down? We are down. 10% down in the first two months of 2000. In January of 2000, Time Warner is being taken over by America Online. America Online was the…

ALEX ROEPERS: You know, the Nvidia of the day. It was like the hottest stock. And they used their funny money, which was, you know, incredibly overinflated stock to buy a real company called Time Warner, which owns CNN, Bugs Bunny, whole bunch of movie studios, cartoon characters. And it was a real company for $80 billion of stock that was, you know, super inflated on an internet provider.

ALEX ROEPERS: I wrote in my January report, I recently just reminded people of that because I wrote something similar in my May report of this year when SpaceX IPO went out, said if there’s ever a bell at the top of this tech bubble, it’s the SpaceX IPO.

ALEX ROEPERS: I’ll come back to that maybe later. But I wrote in January of 2000 that the AOL Time Warner merger was a bell at the top of the tech bubble. I was very close to being right. I was right, but it was about another month.

STEPHEN CLAPHAM: Yeah, six weeks later.

ALEX ROEPERS: And it was in March of 2000, it all turned. And so to give you an idea what happened to our performance, it really launched Atlantic. We were down 10% through February. The NASDAQ, which is the indicator, the index for large cap tech back then and today, was up 25%. So we were down 10%.

ALEX ROEPERS: They, not the enemy, but the other side of the market, was up 25%. By the end of the year, we were up 50%. And they the NASDAQ was down 40. So they went from plus 25 to minus 40. We went from minus 10 to plus 50. That’s stunning relative performance.

ALEX ROEPERS: And in fact, in 2001, we were up 20% despite 9-11, which was a huge debacle and terrible drama, of course, and that happened to all of us, but to the markets, the NASDAQ was down another 20 or 30% and we were up 20. So, you know, unbelievable outperformance. And that really brought our AUM from like 100 million bucks or so at the time to 5 billion by 2005.

STEPHEN CLAPHAM: Oh, wow.

ALEX ROEPERS: And we got to about 1.3 billion by 2003. And that was all US. We had the long short fund and long only as two products, if you will, two funds. And we closed at that level for new investments. So we had promised ourselves. And our investors that we would be style pure.

ALEX ROEPERS: And I made that point yesterday at the Elvick, The London Value Investment Conference, where very smart people talk about great stocks, but they run a lot of money. And I said, value investing. Is about stock picking. For stock picking to matter, you need high levels of concentration. Otherwise, you know, if you have 100 stocks, and it’s 1% each, who cares about the story about that one stock?

ALEX ROEPERS: So that is how we stayed, you know, limited in our AUM because we wanted reasonable liquidity on our positions. We wanted to pick stocks in the mid-cap range of 2 to 10 billion, 2 to $15 million names. We want to own like 1, 2, 3, 4, 5% max in order to have reasonable liquidity to trade out of them. So if you want to do that, you have a limited capacity.

ALEX ROEPERS: And so we stayed around the $1.2 billion Mark where we closed and then took a year of like, oh, wow, we don’t have to do marketing. Relax, just run the fund. But I started immediately working on the international side. So I started hiring people, started going to Asia, going to Europe. And a year later, we launched our international hedge fund.

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STEPHEN CLAPHAM: One of the features of the top of the market is you get a lot of ipos and and so SpaceX is clearly but there are others coming down the pipe. I mean…

STEPHEN CLAPHAM: I mean, obviously, SpaceX is overvalued. I mean, everybody knows that. It’s still there. I mean, what do you think is happening? And where do you see the parallels with the dot-com era? Because I remember in the dot-com era, it was like the suspension of disbelief. People just wanted to believe. And there’s a little bit of that now.

STEPHEN CLAPHAM: But it’s not as mad as it was then, in my view. I mean… Back then, you know, there were companies that really didn’t have a hope of getting anywhere that were crazily valued. I mean, SpaceX, you could say Tesla has been crazily valued and been crazily valued for the last 10 years. And we all know that. Just talk me through what your perspective is.

ALEX ROEPERS: Yeah, well, as much as I. And many others admire Elon Musk for his energy and for his vision and for his ability to create companies that are real, like Starlink and Tesla and what he’s done to the automotive market and to the satellite communication market. So hats off to him. And I’m a huge admirer of that.

STEPHEN CLAPHAM: Yeah, me too.

ALEX ROEPERS: However, one can put that aside and then look at the Tesla. Separately and say okay what’s Tesla how is it valued right we know how bmw and mercedes are valued and they make you know millions of cars very well very profitable okay they’re struggling going to the ev now because of Tesla and others but either way they’re still Very profitable.

ALEX ROEPERS: Tesla, you know, even compared to Toyota or any of these companies, Tesla should be valued at maybe 100 million, 200 billion, sorry, 100 billion, 200 billion maybe at the most, given their profitability in the car company, et cetera. Then they got some energy, some solar, fine, they can value all these things, but the company’s valued at 1.5 billion. And that is based on the promise of the Optimus robot and robo-taxis. Okay.

ALEX ROEPERS: And a lot of promises are made. In order to sustain that valuation.

STEPHEN CLAPHAM: Yeah.

ALEX ROEPERS: And very little proof so far. But again, people don’t need that right now. They believe in Musk. They believe that that will happen.

ALEX ROEPERS: I’m a skeptic. Maybe just my value bent and being a Dutch. I don’t know what it is, but there’s a lot of Dutch people who believe in companies like Tesla as well. But Tesla, while it has done very well up to a certain point, I mean, I’ve been very actively shorting it, whether it was in the fund or doing it personally.

ALEX ROEPERS: Ever since and i’m sure Tesla right now i think it’s ridiculously overvalued but i’m not short you know and hold it’s not like you know buying hold shorting you needs to be trading quite a bit and if you look at the share price of Tesla for the last five years it’s gone between 400 and 150 five times so it’s perfect thing to trade you definitely don’t want to you know be too greedy so say bulls make money bears make money and pigs get slaughtered.

ALEX ROEPERS: That goes both for longs and for shorts. So you got to be careful with that. But I would say Tesla is a definite short right now.

ALEX ROEPERS: SpaceX. Okay, so we’ve all watched what he’s been able to do, launching rockets into space. Most importantly, getting the cost down by reusing the boosters and catching them, which is phenomenal to watch.

ALEX ROEPERS: You know, I’ve been offered to invest in SpaceX a number of times in the last three years.

ALEX ROEPERS: At valuations of 180 billion, say, which is a tenth of where it is today. And I would ask for information. I got some information on the site where I knew Starlink was doing, say, 10, 12 billion in revenues and making money and the rest was losing money. Fine. I said, I’m just not interested. You know, there’s a valuation 10 times revenues and a lot of uncertainties. No, thank you.

ALEX ROEPERS: And I actually have no regret yet because I doubt that I would have made money by the time I could sell the stock that…

ALEX ROEPERS: People that bought in those offerings because it’s gone public at 135 a share at a 1.7 trillion dollar market cap it’s traded up to 2.5 trillion dollar market cap and because it’s a squeeze situation right they’re only offering four percent of the float it’s already oversubscribed it goes public it immediately goes up we’re short i’m short SpaceX since 200 and i think it’s worth probably 40 or $50.

ALEX ROEPERS: So I think it’s going to come down and What’s in it is a massive amount of corporate governance violations, in my view. Yeah. The first one started with, I mean, already at Tesla, he showed that when he just merged, without really asking anybody, the money-losing SolarCity into it.

ALEX ROEPERS: Now he merged the money-losing XAI, where Grok is losing altitude compared to Entropic and OpenAI. And then Twitter, which was a… Questionable acquisition that he actually regretted the moment he did it.

ALEX ROEPERS: But he had to do it because he made these statements. And it’s okay, fine. He wrote the $40 billion check, selling a lot of Tesla stock, by the way, to pay for it and borrowing money, which was way underwater and write-offs for everybody who got involved with it.

ALEX ROEPERS: So Twitter was a disaster. He sold, I mean, fired a lot of people, said F you to the advertisers. Anyway, so that is X today, which maybe as a platform can work one day. And then you have Grok.

ALEX ROEPERS: That got valued by himself, you know, wet finger in the air, at $250 billion.

STEPHEN CLAPHAM: That’s a great trick.

ALEX ROEPERS: Earlier this year. So as a SpaceX shareholder, if I were in it, I would be enormously pissed that he would bring that in. But, of course, they all think it’s great because now you have the whole data center and AI side of it.

STEPHEN CLAPHAM: Well, I mean, that’s created devaluation, right? Because about a trillion of devaluation is down to the… Yeah, if you look at the TAM.

ALEX ROEPERS: The total addressable market is 26. Trillion they come up with.

STEPHEN CLAPHAM: I think it’s fascinating to watch because, you know, if you think about, you start a business, there were 11 co-founders of XAI and 10 of them have gone, or 12 co-founders. I mean, he’s only one left. And somehow it was worth 250 and now it’s worth a trillion. Anyway, we want to talk about real companies. So there’s no…

ALEX ROEPERS: I wish everybody well, let’s put it that way. And I wish Mr. Musk well, don’t get me wrong. But I think it’s massively overvalued and time will tell. But so far, the idea is one of his KPIs is to put a million people on Mars.

ALEX ROEPERS: Okay, to get another trillion dollar pay package, which is all crazy. I mean, he’s living inside of a Star Wars movie. This is according to Mr. Isaacson, who wrote a biography on him. So he’s not like you and me. He thinks he’s, it doesn’t phase him.

ALEX ROEPERS: That he’s quote-unquote on paper a trillionaire. He’s just inside of a Star Wars movie like a Super Mario running around getting coins. But to put a million people on Mars, all we’ve been able to achieve is fly some rocket around the moon to take pictures of the moon and the Earth.

ALEX ROEPERS: We haven’t landed anybody on the moon yet, let alone Mars. I mean, so it’s so much pie in the sky, so far out, that we’ll see how it goes now that it’s a public company.

STEPHEN CLAPHAM: None of this, by the way, is investment advice. No, exactly.

ALEX ROEPERS: Just personal opinion.

STEPHEN CLAPHAM: But let’s go back to the real world. So you’ve long focused on industrial and cyclical businesses.

STEPHEN CLAPHAM: Obviously, your background, you’ve explained that might be why that hunting ground is attractive to you. But it’s pretty inefficient. I mean, you’ve been able to find some pretty lowly valued companies. Why do you think that is? I mean, do you think, you know, the change in market structure? I mean, you’ve seen a lot over the last three decades. Why is that area?

STEPHEN CLAPHAM: Is it more inefficient now than it was? And why do you think that is?

ALEX ROEPERS: No, the beauty of the public markets is it’s Mark to market. And it only takes a few incremental sellers to bring a stock down disproportionately. So some bad news about a company will bring down buyers’ hands off until they can evaluate it. So I was like, Shoot first, ask questions later, i. e.

ALEX ROEPERS: Shoot meaning sell. And if you do that, say, in a tough market, you get declines of 20%, 30% in a stock that maybe deserved a 5% decline. And private equity lives in this world where there’s no market to market, it’s market to model. And pension funds love it and endowments love it because illiquidity hides volatility.

ALEX ROEPERS: The volatility is in the public market. And particularly if you go to small mid-cap, the range I’m in, two to $10 billion companies. If there is a dislocation in the market, a real bad market, two things happen. Money comes out of the market.

ALEX ROEPERS: And the next thing that happens is money that stays in the market goes to the very large caps because of safety of liquidity and larger cap names or say just growth names that are not affected by economic downturns. So you’ve seen it in 08. You’ve seen it in the COVID period where the initial reaction is very sharp down but doubly down in small mid caps, particularly industrials.

ALEX ROEPERS: And then. Just to recover. So there’s a lot of market related effects, but it’s really, you know, liquidity, Mark to market, and just human nature to knock things down. And it really accentuates itself in the small mid cap range of, you know, a couple billion other companies.

STEPHEN CLAPHAM: And you have this sort of constructive activist approach. Talk a little bit about that.

ALEX ROEPERS: Well, I mean, to be concentrated means you have to do your homework. That means you have to meet with the management, see the plan, see the company up close and personal as if you’re going to buy it. Basically, you have to really dig in as a business owner. So as you engage these in the conversations, I can’t help myself to come up with a bunch of ideas that would make sense to pay attention to for the management.

ALEX ROEPERS: And so we will discuss those ideas. A lot of them are not novel. There’s stuff that they are working on already. Some may be more urgent in our view. And so we go through that with the management and then we follow up our conversation saying, you know, if you don’t mind, we’re going to, we’re polite people.

ALEX ROEPERS: We will say thank you in a letter and then in the letter we’ll reiterate some of the ideas that we’ve discussed, including the things we would like to discuss at the board, you know, for potential adoption. And so we do that. And so they know a letter is coming. It’s a constructive letter following a conversation.

ALEX ROEPERS: It’s very polite and we don’t want them to tell us what they’re going to do because that would mean. Insider trading. We just say, we trust you’ll share this letter with the board of directors and that you’ll do, you and the board, what is right for all shareholders. Sincerely, us. Attachments, you know, whatever’s needed for share buybacks or whatever we put in there. So those letters do get discussed at the board level.

ALEX ROEPERS: And at that point, you’re kind of in poll position. You know that they’re seriously thinking about this or that. I don’t know if they’re going to do it until they do it. Right. And so, but now we have started the paper trail. Three months later, they report earnings. There’s nothing that they’ve done that we suggested. Stock is still down.

ALEX ROEPERS: We call them upsets. So here we are again.

ALEX ROEPERS: I’m sure you’re working on something much better than what we can possibly come up with because you’re running the company. Maybe you’re working on a great acquisition. Of course, you cannot tell us about it.

ALEX ROEPERS: But unless you’re working on something much better than what we’ve proposed, the stock is down. You don’t control the company. You really ought to get on with these things. And if you don’t get on with it, we’re going to be forced to maybe write the next letter to the chairman of the board.

ALEX ROEPERS: Reiterating the conversations and the letters we’ve had with you, which you’ve already seen, and then ask for all the same things that we’ve asked for from you, including one more, which is whether you should run this company or somebody else. So we are constructive, but we’re not pushovers either. And we will, in some cases, and again, this is one in 10 case where we need to use that stick, where we push on it like that.

ALEX ROEPERS: Sometimes the CEO says, okay, well, first of all, I appreciate you telling me this. Secondly, you know, why don’t you wait with the letter? Because, you know, I can’t tell you anything, but give me some more time. And we said, okay, fine, we’ll do that.

ALEX ROEPERS: In the case that he doesn’t ask that, we will send it. And then we get a call from the lead director or the chairman saying, thank you so much for doing it this way and not doing it on CNBC or in public. So this approach has earned us the title constructive gentleman activist. Gentleman activist.

ALEX ROEPERS: Gentleman activist. That was given to me unbeknownst to me, but I knew there was a big profile. Being written, I contributed to that for Alpha Magazine. This was a long time ago, in 2008. But when it came out, I was on the cover with the title, Gentleman ExoVist.

STEPHEN CLAPHAM: How funny.

STEPHEN CLAPHAM: Have you ever been forced to give up in the face of recalcitrant management? I mean, I can remember one situation we were involved with where there was a property that was worth more than the market cap of the company, and the management just refused to sell it. And you kind of think, okay, well, we’re not going to get anywhere. It was a good idea.

STEPHEN CLAPHAM: We’ll just give up. I mean, have you?

ALEX ROEPERS: Oh, yeah. No, we’ve had situations like that. I mean, we’ll try to push on something. And if it doesn’t work, you know, we can sell and we get out. So that’s the key about our activism. Besides being respectful, constructive, is that it’s liquid. So people have a spectrum on activism from. Soft to hard activists.

ALEX ROEPERS: And the hard activists would be the ones you read about that are really pushing on TV, in proxy battles, and try to get on the board, get the management or the board changed. I call it illiquid activism. It’s very satisfying. It’s very time-consuming. It is creating an instant pop, but it also creates for the activist illiquidity because you can’t do pump and dump.

ALEX ROEPERS: You can’t sell the stock. I looked at that in the 80s, and I saw a number of… You know, including the constant partner group, get in trouble by being illiquid after they got success in a firm in terms of going on the board, but then not being able to sell the stock.

STEPHEN CLAPHAM: Yeah.

ALEX ROEPERS: When they wanted to. And so we wanted to make sure we could always sell.

STEPHEN CLAPHAM: And I mean, how does the macro play into your sort of assessment? I mean, you know, we’ve got potentially higher inflation, potentially higher interest rates. Does that affect the way you think about this.

ALEX ROEPERS: Portfolio when you look to do well certain industries certain companies are clearly more affected by macro trends like whether it’s tariffs or interest rates or economic conditions if you take housing materials they’re tremendously under pressure under the fact that in the us and in many other countries housing existing home sales are just not moving at the lowest level since 08 that’s because we’ve had 10 years of low mortgage rates And people are trapped in their own homes.

ALEX ROEPERS: They can’t sell a home that they’re in when it has a 2.5% mortgage. As nice as the 2.5% mortgage is, they want to move. They sell their home. Then the next home they have to finance at 6%. And so there’s very little turnover. And existing home sales, which used to run like more at 6 million a year in the United States, are more like 4 million right now. And that delta is huge in terms of bathrooms, carpets.

ALEX ROEPERS: Paint you know people do stuff when they move homes yeah yeah and so so we look at that and we’re very keen on going back into housing material type companies that are at low multiples on low earnings right now the moment there’s a pickup for instance in existing home sales so we look at that we look at the automotive markets the chemical markets to see what the man supplies but quite often we will buy into these companies on low multiples and low earnings when there’s Not only restructuring and corporate action going on company specific but also you can get a big tailwind of an economic pickup in that industry what what would cause that tailwind in the case of the housing market in the States i mean well it’s a passage of time is the fact that the very low mortgages a lot of them are adjustable rate mortgages are five and seven year mortgage they get reset so it becomes less and less of an issue so you’re going to see in 27-28 already.

ALEX ROEPERS: Marshmallow mobility for people because the rates are going up so might as well then sell this home and get and move on to another one because the new mortgage rate will be very similar to what i’m paying now so that would be a key telltale of course but of course there’ll be.

STEPHEN CLAPHAM: Under pressure because they won’t be able to afford the mortgage, right?

ALEX ROEPERS: Well, they gradually will have to find a way to afford it, either through paying down the mortgage or going to a smaller home.

STEPHEN CLAPHAM: And are there particular areas that you think are fertile ground for this constructive activist approach? I mean, there are geographies or sectors, large cap, mid cap.

ALEX ROEPERS: Yeah, well, first of all, mid cap more than… A very large gap. First of all, given not just our size, but we want to be able to make a difference as a shareholder in these mid-sized companies where less attention is being paid. Managements may not own or control the company, but they own 1%, 2%, 3%. We may own the same amount and we come in there.

ALEX ROEPERS: And they have very little attention they get because 99.6% of all public equity, That’s… Being managed is in portfolios of less than 30 names. So we’re talking about active and passive management in the public markets. People say, well, it’s maybe 60% passive like ETFs and 40% active. Well, I’m sorry, a portfolio with more than 30 names is not an active fund anymore.

ALEX ROEPERS: They can talk about it for marketing purposes that they stock pick, but they really are not. I mean, the real active management is in the 10 to 20 stocks per portfolio range. And that’s where all the activists are. That’s where Chris Hahn is. That’s where Bill Ackman is. That’s where you know, Nelson Peltz’s and well-known activists are in that category. And so we show up and we own 10 or 15% of that company.

ALEX ROEPERS: Of our fund is in that company, we own maybe 2 or 3%. So we really engage with our experience and with our focus with top management to help them do the right thing. So I think a lot of companies in this space, particularly mid-cap, 2 to 10, 2 to 20 billion are very fertile ground for that. On top of that, They’re also in the sweet spot for both private equity and strategic buyers.

ALEX ROEPERS: You know, $80 billion company can only be bought by a much bigger company, stock for stock deal. If you go into the $5, $6, $7, $8 billion company range, suddenly you have a $25 billion private equity fund like CVC or KKR or Blackstone. They’ll write a $2 billion equity check, borrow $3 or $4 or $5 billion, and you have your $8 billion purchase price. So private equity can go into this space as well as strategic.

STEPHEN CLAPHAM: What are the things you look for when you meet management teams? I know you’re meeting the Nomad Foods CEO tomorrow.

ALEX ROEPERS: Today, actually.

STEPHEN CLAPHAM: Today. What do you look for when you go into that?

ALEX ROEPERS: Well, he’s a new CEO. He was appointed by the top management because they are dissatisfied with the results. It’s been very, very difficult for them. He comes from Imperial Brands, some other areas. So first I need to understand him and meet him face to face. See his background, his motivation.

ALEX ROEPERS: He’s only been there for six months now or so. And so it really is a get-to-know meeting. I have a whole list of questions. I have a prep book. I’ve gone through it.

ALEX ROEPERS: So I try to use the time I have with him as well as I can to get an understanding of what drives him, where the pressure points are for him in the coming six to 12 months, and to see if we can keep the conviction of where we are with our position, which is a medium-sized position in Nomad that we’ve recently taken. It’s slightly underwater, but not much. Could have been averaging down.

ALEX ROEPERS: You know it’s a six percent dividend yield and six pe and so it really has huge potential but today will be a key meeting to find out if that’s well placed at conviction and what what would be the sort of path you so you’ll have the first meeting with the management no and then do you have a like a standard routine that you’ll try and visit them every six months and how does it how does it well there’s definitely the rapport has to be established in this meeting from there We We’ll ask them to visit us when they come to New York, you know, to carve us out or we’ll meet them at their hotel or the conference.

ALEX ROEPERS: My analysts will follow up literally every month with the IR guy. And after earnings, we’ll definitely have a call with the CFO, maybe and the CEO, depending how it goes, every quarter and then meetings when we can. And depending on the conviction level, we will make it a big position. The bigger the position, the more the activism, the more the inter exchange with the company.

STEPHEN CLAPHAM: So… How well you get on with the guy will dictate partly whether you, I mean, obviously the share price as well, but that will also dictate.

ALEX ROEPERS: Well, getting on and obviously as you get on, you have a good exchange and you get an ability to get all your questions across and to test all the things that we want to clear up. We’ve had it recently with another company where we just met with the CEO, Dentsply Sonoma. It’s a dental orthodontic equipment and services company.

ALEX ROEPERS: That is gone down from 30 bucks to 10 bucks or very similar to Nomad and we met the new CEO and we hit it off really well and we immediately doubled the position after that meeting And ended up, you know, it’s still very early days. It’s just like Nomad. It’s basically on the tarmac at cost, meaning taxiing to find a way to take off, which we think it will eventually. But it’s early stages for those ones.

STEPHEN CLAPHAM: I mean, what have you learned over the years about judging CEOs? I mean, are there tricks that people should use?

ALEX ROEPERS: Yeah, absolutely. I mean, there are CEOs who are grandstanding.

ALEX ROEPERS: Who are saying things and doing things that are just very quickly irk you and make you concerned what they’re likely to do. For instance, if they’re talking grandiose about acquisitions or plans and we much rather have them block and tackle what they have, do small add-on acquisitions, do a combination of debt repayment, share buybacks, dividend.

ALEX ROEPERS: I mean, do it a little bit more balanced and don’t shock us with suddenly boom, transformational acquisition. So that’s the biggest risk. That we always have in our companies and they want to really assess that with the CEO, what they’re likely to do or not do.

STEPHEN CLAPHAM: I was watching the World Cup and you know France came out the second half against Senegal and it was like it was a different team and you thought what has the manager said to them at half time and I thought you know I hope the manager’s as well paid as some of the French players and England was a bit similar against Croatia.

STEPHEN CLAPHAM: Do you think a really good CEO can justify a bigger market cap than investors assume? Do you think it’s an underrated skill?

ALEX ROEPERS: Well, I mean, some CEOs are phenomenal at storytelling. I mean, Elon Musk is the ultimate. We just went, I don’t want to go back there again. But that is, you know, Silicon Valley always says, fake it until you can make it. And the storytelling is unbelievably strong on the West Coast, particularly over in that area. If you go to most of our companies, they…

ALEX ROEPERS: They can’t work their way out of a paper bag in most cases. They are pretty good operators. They’re maybe in somewhat boring businesses. And on top of that, their investor relations side of things, whether it’s the investor relations department, but the tone comes from the CEO is quite very challenged. And our constructive activism very often has to do with helping them with the messaging.

ALEX ROEPERS: And so we very often, like we would get into a company like this, say Nomad or Dentsply, where we would like the new CEO. As soon as possible, once he’s in place with the CFO, to come up with a capital markets day, you know, six months from now, in which they lay out a credible roadmap to substantially higher earnings and say, don’t make it a bloody treasure hunt.

ALEX ROEPERS: I don’t like treasure hunts. Besides that, you know, 99.6% of all the money in the public equity has no interest in that. They’ll send an MBA to your investor day, but they want to come away with one soundbite. This company is going to earn $3 per share in 2028, and it’s trading at $18. If it’s at 10 PE, we’re going to make 50%.

ALEX ROEPERS: Okay, how credible is that $3 per share? So make it very clear. This is your target. Earnings per share is important. Why? Because it takes both sides, both the P&L and the Balance Sheet to get there. You know, if you just say, like the Japanese companies very often do, but also US and European companies say, I want to be so much in sales. Who cares about sales?

ALEX ROEPERS: I want to be so much in earnings. That’s all very nice. What do you do with the cash flow that comes out of these earnings? I said, it’s a two-fisted boxing fight. Okay? The left hand says P&L on it. The right hand said Balance Sheet on it. And if you put one hand behind your back and you try to do a boxing fight, you’re going to get smacked in the face. It’s not going to work.

ALEX ROEPERS: In fact, with the Japanese, I came up with a little boxing glove to remind them of that. So you basically need to… You cannot just say, well, we’re going to be so much in sales and so much in earnings, and you think you’re done. No, that’s half the job. The other job is, what do you do with the cash? And most analyst reports, amazingly, sell side, will say, well, this company is going to earn $2, $2.50, $3.

ALEX ROEPERS: Ok. In the meantime, they have like $6, $7 of free cash flow. That can be used to buy back shares and pay down debt. And therefore, the value is very different. In your cash flow models, you use that cash to buy back shares or pay down debt or do accretive acquisitions. And you get a much higher value. And most people ignore that.

ALEX ROEPERS: And company management needs to put it out there. And instead, pending any great acquisitions, as a default setting, you can buy back your own shares. Okay? So just do that. And let’s see what happens with all free cash flow deployed to share buybacks and see what that does to earnings per share. And you should accelerate that quite highly. So we push on that.

STEPHEN CLAPHAM: Why do you think that your sectors are bad at storytelling? I mean, this is… This isn’t complicated, right? I mean…

ALEX ROEPERS: Not all of them, but a lot of them are challenged in that department. And that’s because quite often the CEOs of these companies…

ALEX ROEPERS: Either have not been CEOs before, or they’re just in the mid-size range where they’re not grandstanding and they’re not really raising money or things like that. So they’re not of that ilk. And of course, we’re looking at undervalued companies. So we’re self-selecting the ones who are not good at it.

ALEX ROEPERS: If they’re really good at it, there’s many companies in my size range and industries that are good at it. They’re trading at 15, 18, 20 multiples. That’s a good point. And we’re not going to go there. So we’re self-selecting down to the ones who are not very good at it.

STEPHEN CLAPHAM: It’s interesting.

STEPHEN CLAPHAM: That’s a very good point. And it’s amazing how much of a difference that can make, actually, having the right messaging. And I suppose for many of these executives, they’ve come up through the ranks. So they’re not finance people.

STEPHEN CLAPHAM: And they’re not market people. So that explains it. Talk a bit about how you build your portfolios. I mean, how concentrated are they? What’s the optimum number of positions and how have you got to that?

ALEX ROEPERS: So we have four funds, a US concentrated fund, Europe and Japan, so three regional funds. Each have 10 names. And we’ve come to that because we like concentration of capital and highest conviction ideas. The 10 names are not equally balanced in the portfolio and they may fluctuate during the one or two year ownership period that we might have.

ALEX ROEPERS: So they can go from 5% to 15%, sometimes 18% down to 5% and out. So we are actively sizing the exposure depending on the conviction level and what’s happening to the share price and the news flow. Okay, so it’s not a static situation at all. In fact, our turnover in the regional funds is typically 150% a year, but the name turnover is only 50%.

ALEX ROEPERS: And the difference can be explained by dynamic sizing the position. Think of a Formula One race car. Around the track. You don’t drive the car at full speed the whole time. You can’t. There are curves. There are other cars around. There may be a wet surface. This is the way I look at an ownership period that we have in a company.

ALEX ROEPERS: We will go full out if we have the conviction level. It may not be immediately, like we might have, say, in a Nomad or a Dentsply, we might have a 5% position. We then have the meeting. We then start writing letters. Then we start getting a sense that they’re on the right path. They’re likely to adopt some of the things. They’re going to do the right thing.

ALEX ROEPERS: They’re going to have the capital market. I think that’s a positive catalyst for the stock. I want to be fully loaded before that. Do I have any inside information? No. Did they announce the public market? Of course they did. The public event. So it’s at that moment that we step on the gas, literally, and make it a larger position.

STEPHEN CLAPHAM: And what’s the maximum you have?

ALEX ROEPERS: 20% in a regional fund. So then we have the global fund, which is 15 to 18 positions. And they basically take the top names of each one of our regional funds. So every name in the global fund is somewhere in one of the regional funds. Yeah, of course. And typically we have 40 to 50 in either Europe or Japan, or sorry, Europe and the US. Japan is between 5 and 15%. That’s kind of the way we like to balance that.

ALEX ROEPERS: And there the positions range from 3% to 12 in the global fund. And in the regionals, more like 5 to 18 or 20.

STEPHEN CLAPHAM: And your largest position, I mean, you talked about the Railroad, 35%. Is that the most you’ve ever had?

ALEX ROEPERS: Yeah, that was by far the most we’ve ever had. And it was very temporary and it was very early in my career. So we’re not doing that anymore.

STEPHEN CLAPHAM: And you’ve met a lot of CEOs over the years. I mean, who’s stood out? I mean, you told me a couple of stories when we last met.

ALEX ROEPERS: Yeah. I mean, we’ve had so many stories I can tell, but there’s a lot of… A lot of folks that, CEOs that we’ve had, where, you know, we’ve had war stories we can tell, but there’s a company called Harman International, which makes speakers like JBL, Harman Kardon, speakers for consumer purposes, but also for cars.

ALEX ROEPERS: And they got through an acquisition of a company in Germany, Becker, involved in the whole infotainment systems in the cars and software related to that. And anyway, so we got involved with Harman. In the 90s when Sidney Harmon was still running it. He was the founder of the company.

ALEX ROEPERS: And, you know, he passed away in 2008. But we were involved in the 90s. He’s actually also famous. His wife, Jane Harmon, is a senator from California. But anyway, Sidney Harmon is a phenomenal guy. I met with him in the late 90s. We had a very good investment then. Then I went back in 10 years later, KKR.

ALEX ROEPERS: Made a bid on the company that fell apart and the crash happened. I mean, so many things went back and forth and he passed away. Then we got back involved again in 2013. And a guy called Dinesh Palewal, who was hired by KKR after the sale of the company and then went public again. And he was there.

ALEX ROEPERS: And so we got very close to Dinesh Palewal pushing on a variety of things. Wrote the stock from 70 to 150, got out of it. It dropped to 80. You know, we were very good on our sell discipline. Dropped to 80, couldn’t help but notice it, got back involved in it. And I remember being in Hong Kong on a business trip and the news came to me that Samsung had offered to buy the company.

ALEX ROEPERS: And the company had agreed to be sold to Samsung for $110 a share, which was a nice 20% pop in the share. But I said, you know, everybody’s like full of joy in my company because it was a huge win. It was our largest position again. First, we clocked it, you know, before and then we got back in at 80.

ALEX ROEPERS: Now it was going to 110. In fact, above 110 because folks were thinking that was too low. And I was in that group. So this is crazy. I mean, so we, I went to Mr. Pali. Well, we own 2% of the company, but for us, it was like 15% of our fund. And I said, well, congratulations on convincing Samsung to buy the company and for you to crystallize all your options and all your shares and all that.

ALEX ROEPERS: But as a shareholder, I’m just not happy with this because we think on your own, you can go to $200 a share. In fact, we went through the capital markets that we literally laid out what we wanted them to present. They did that very well, very convincing.

ALEX ROEPERS: And the stock was on its own. On its way, in our view, to $200 a share. So anyway, we ended up fighting a battle with Harmon, with the lawyers. We perfected our appraisal rights. It’s a whole new thing that I got involved with, which was after the annual general meeting to approve the merger, everybody approved except 2%, which is Atlantic Investment.

ALEX ROEPERS: And we basically like a chihuahua hanging on to the pants of somebody. We would not let go. And so we went right through to the closing, and we had lawyers that helped us with this. And we were able to, and you can do this if you perfect your appraisal rights, which means you vote no against the merger.

ALEX ROEPERS: You’ve had the stock for a certain period of time and you have an argument that it should be worth quite a bit more. You can make a negotiated deal with the buyer to, they can buy you out at a price well above what others got.

STEPHEN CLAPHAM: Oh, wow.

ALEX ROEPERS: They didn’t do that. That’s called perfecting your appraisal rights. Very hard to do, but we did it and we got quite a bit more money out. I can’t disclose what it is, but it was enough. For them to get rid of us and for us to say, hey, that was worth it. So that was the Harmon situation. But we’ve had situations like I told you earlier about Schindler.

ALEX ROEPERS: And Schindler is a phenomenal company. It’s an elevator company that has 80% of their earnings coming from the installed base, which makes it very predictable, non-cyclical. The cyclical part is, of course, installation of new elevators, which is tied to office buildings and hotels and residential towers, et cetera. And this was back in 06 or 05, or maybe 07.

ALEX ROEPERS: And we were respectfully meeting with the CFO and the treasurer of the company numerous times. We were probably the second largest shareholder after the Schindler family, which controlled 6% of the company. And we asked for a meeting with Mr. Schindler. And Mr. Schindler was, according to them, not available. I said, really? Well, you’re a public company. He’s the CEO of a public company. We’re a public shareholder.

ALEX ROEPERS: We’re respectful. We’re large. And we were asking for a meeting. I said, you know, if he does five of those meetings a year, it wouldn’t be too much to ask for. And in fact, five hours, you know, five times one hour, I spent a lot more time waiting for goddamn elevators than those five hours. So I can tell you he should take that meeting because, you know, we’ll otherwise make some noise.

ALEX ROEPERS: We got the meeting. So we ended up having a meeting. The meeting was a very productive meeting. It was not 45 minutes. It was two and a half hours in his office in Switzerland. And And thereafter, you know, we proposed a couple of things, including buybacks from shares, and they ended up doing it. So it took a little pushing and shoving to get the meeting in the first place.

ALEX ROEPERS: In the end, I wrote it or I had an interview. Maybe I’ll read this again. I’ll get another nasty letter. But he didn’t like hearing about that. And but, you know, you’re CEO of a public company. You take a certain amount of responsibility. And to meet with shareholders, you know, you’ll probably say, of course, I meet with shareholders. But, you know, it was a struggle. To get that meeting.

STEPHEN CLAPHAM: Interesting. And your business, I mean, you used to run a long short fund and you’re now long only. You didn’t like shorting?

ALEX ROEPERS: No, it’s not to do with that. I think shorting is fantastic to be able to do it. I learned the importance of that in 1990 when I didn’t have the ability to short. And so I set up the long short fund in 1992 together with the long only I already had so people could choose. Concentrated long only or concentrated long plus a short book.

ALEX ROEPERS: And so those are the Coke and Diet Coke offerings that I had. And when I set up the Intansha fund, it was immediately a long short fund as well for Europe and Japan. By that time we grew, we had 30 people on staff. The shorting opposite to the long is highly diversified and short term in trading. You got to have stop losses. So it’s a very different activity. Yeah. Very time consuming. We did this well for quite a long time.

ALEX ROEPERS: It helped us in the crash, although we were down a lot in the crash of 08. Come out of it, you get into 2015, 2016, 17, 18, 19. By that time, it’s such a growth market. It’s all growth tech stocks. Mid-cap value is already underperforming. So we, with our underperformance, starting to lose AUM.

ALEX ROEPERS: And on top of that. The shorting you’re doing in the overvalued momentum markets. And that was tough too. So the shorts were negative attribution. The longs were underperforming. And that period from 2015 to 2020, including COVID, the shock of COVID, led to an erosion in our AUM.

ALEX ROEPERS: People were quite happy to go just to the ETFs of the public market, which put up pretty good numbers, which were obviously very much driven by the Magnificent Seven. Large-gap tech, which we didn’t have by definition. And so this is the fact of life. That’s what happens. You underperform and the AUM comes down. AUM comes down a lot harder in the hedge funds, which underperformed the long-only funds.

ALEX ROEPERS: And so eventually we decided, and our clients decided for us, that we should fold that into the long-only. So for the firm to create runway to keep doing this, we had to reduce cost. Obviously… And we rationalized the firm by going back to long only, reduce the staff levels, and be able to do this well for a long period of time.

ALEX ROEPERS: And we’re quite content and happy and able to run the firm and put up really good numbers, which we are at the lower AOM level. And that eventually the goal, of course, is with growth in the value of our current investors’ money and our own money, we’ll attract outside money again.

ALEX ROEPERS: That’s what we’re working hard for.

STEPHEN CLAPHAM: But you run a much smaller amount of money than I would have thought, given your track record and your performance.

STEPHEN CLAPHAM: But you’ve got very high fees. And I just wondered, can you just talk about that? Because a lot of professional investors have listened to this podcast. How did you make that decision about the level of fees versus raising the AUM? Because your high fees… Discourage a lot of investment.

ALEX ROEPERS: Yeah, so I didn’t really make much of a decision about the fees because they’ve been the same for 35 years. 1% management fee and 15% of the net new annual profits. It is a very differentiated, idiosyncratic strategy.

ALEX ROEPERS: It’s very labor intensive, very hands-on and very capacity constrained. And I’m not interested in asset gathering. Because it would dilute my strategy, my ability to put up the numbers. So I’ve been lucky to have done very well for a long period of time.

STEPHEN CLAPHAM: It’s not luck, right?

ALEX ROEPERS: Sorry?

STEPHEN CLAPHAM: It’s not luck.

ALEX ROEPERS: Well, it can be because we’ve done this, you know, the record that we have, if you take the gross numbers of our U. S. Fund, you know, just gross, okay? And the net will come in a second. But the net number means that $1 million invested in our fund in 1992, in October of 92. In May of 2026 or June is worth $50 million. That’s 5,000% net of fees.

ALEX ROEPERS: Now, you could put that million dollars in the S&P 500, total return, including dividends invested, it would have been worth, show you the value of compounding to everybody listening, $33 million. It’s 3,300% return on the S&P 500 from over almost 34 years that I’ve been in business. So we have outperformed that. You can say, well, Why don’t you raise money? You should be raising money.

ALEX ROEPERS: Well, that outperformance gets me meetings everywhere. Doesn’t mean people write checks right away. Okay, they will say, oh, the fees are too high. So, well, okay. The gross performance is 10,000%. The net performance is 5,000. I’m not going to do this again to do it for low fees. So that’s the stubbornness perhaps that I have, but I’m also very content.

ALEX ROEPERS: Running small amount of money doing it really well and having investors involved who are fine with paying 1 in 15 because the 1 in 15 results have been competitive now they have not been competitive for for five and ten years from the last five or ten years why because of that period from 2015 and onward through the covert crash where we’ve just underperformed the the NASDAQ and the s p 500 and people basically say well i have full transparency i mean with us as well liquidity daily, you know, intraday with the ETFs.

ALEX ROEPERS: I pay five basis points, which is one twentieth of our management fee, and it’s done better. So I know that, that’s fine. But I’m highly confident that, oh, in the fullness of time, we will outperform substantially with our approach.

ALEX ROEPERS: And that the underperformance we’ve had of recent that is included in the long-term record I just gave you, will go back to a period of major outperformance. We had a momentum and growth market for almost 15 years. We had a few detours in 2021, 22. We’re starting to get a detour hopefully now, but the AI story has been explosive. And I think…

ALEX ROEPERS: Back to the SpaceX thing, and Entropic and OpenAI, these are $3 trillion plus IPOs. It is very much market-toppy, and I think there’s a likelihood of much more value fundamental market. And in that case, we can have some very substantial outperformance and then marketability comes back.

STEPHEN CLAPHAM: Yeah, I know, sure.

ALEX ROEPERS: And that’s what we’re fighting for. So, but in the meantime, we’re here chipping away, trying to put up numbers that are really attractive to our clients and for ourselves.

STEPHEN CLAPHAM: And with that you know eventually money raising will come again i mean my personal view is the open AI ipo will be the thing that cracks the market but i i don’t even think that i don’t even know if they can do an ipo we’ll see so just as we finished i mean you’ve been doing this for 35 40 years what’s changed the most and what stayed the same what stayed the same is that.

ALEX ROEPERS: No matter how many computers and fast trading is going on, it’s humans and human emotion that drive public equity markets.

ALEX ROEPERS: And there’s a lot of overvaluation.

ALEX ROEPERS: People now call it meme stocks. People call it whatever they want. But there’s a lot of emotion in the market. And at the end of the day, I’m sailing my course straight through an ocean that’s full of choppiness and squalls.

ALEX ROEPERS: You know, high waves. And I feel very comfortable with the approach we have, the universe definition, staying in areas that we know well, the concentration we do, the activism we do. With that, we can put a very good number. So I don’t think anything has changed in that regard.

ALEX ROEPERS: I think we’re very seasoned and experienced to sail our boat through the crazy ocean, whereas a lot of people get extremely whipped around by the next wave and they don’t keep their eye on the horizon. And we’re very determined to produce. Extraordinary absolute and relative performance numbers.

ALEX ROEPERS: We want to be known for that.

ALEX ROEPERS: If it’s on my tombstone, it says, this tenderfoot produced 60-year CAGR of 16%.

ALEX ROEPERS: I’d much rather have that than saying, well, at one point I ran $80 billion or something, or $50 billion.

STEPHEN CLAPHAM: And how long did you want to do this for?

STEPHEN CLAPHAM: How old are you? You’re in your 60s.

ALEX ROEPERS: I’m 67.

STEPHEN CLAPHAM: Yeah.

ALEX ROEPERS: Warren Buffett just retired his job at Berkshire Hathaway at 94. I see Nelson Pels, I see Carl Icahn, I see other activist investors doing this as long as they’re able to move around and think and walk and talk. And I love doing this. I love working with my team.

ALEX ROEPERS: I love working with the CEOs I’m working with. I like the fact that we have outside money because there’s been the temptation perhaps to make this a family office and not. Deal with it. We’ve kept our institutional capability, SEC registered, CFO, the whole infrastructure.

ALEX ROEPERS: We can take on money from institutions like tomorrow. It’s fine. You know, we’ve had that. We had billions under management. We can easily do that again. And I like the idea of making money and raising money. You know, when my kids were younger, you know, what does daddy do?

ALEX ROEPERS: So, well, he’s not a fireman. He’s not this or that. He’s a hedge fund manager. Well, that’s like really unexplainable. Just make money and raise money. You know, that’s really what our job is, primarily making money. On the money that we’ve been entrusted and our own money.

STEPHEN CLAPHAM: So it’s interesting. So I always ask people to recommend a book.

ALEX ROEPERS: I do have one for you and your listeners. It is called Billion Dollar Whale.

ALEX ROEPERS: It’s written by Tom Wright and Bradley Hope.

ALEX ROEPERS: It’s the story about Jolo.

ALEX ROEPERS: He’s a Malaysian.

STEPHEN CLAPHAM: Fraudster who fooled wall street hollywood and the world it’s a great read cool and it will be movie one day i’m going to i’m going to get that myself actually i i haven’t i haven’t read that book and i sense that i know the story but i haven’t i haven’t read the book yet and just where can people find you atlanticinvestment.net.

ALEX ROEPERS: I mean, it’s our Atlantic Investment on the website. We are in New York. And so it’s easy to.

STEPHEN CLAPHAM: Alex, thanks so much. Thank you very much.

STEPHEN CLAPHAM: I hope you enjoyed that deep dive into how a real-world operator and dealmaker has translated decades of experience into a concentrated activist equity strategy. Alex’s perspective on automation and productivity was interesting. He’s been watching factories replace workers with machines for more than 40 years, yet we still find ourselves at or near full employment.

STEPHEN CLAPHAM: It’s a useful reminder when we talk about AI and the future of work. Markets and societies adapt, even if the transition isn’t always comfortable. And his explanation of behind-the-scenes activism was fascinating.

STEPHEN CLAPHAM: He seems very nice, but if I were a CEO, I wouldn’t want to get on the wrong side of him. I hope you enjoyed our conversation as much as I did. You can find more resources, courses, and analysis at BehindTheBalanceSheet. Com, and you can follow the podcast on Substack and on YouTube, where we post additional content.

STEPHEN CLAPHAM: Thanks for listening, and hang on for a new short feature. If you enjoy the show, the best way of helping me spread the word is leaving a review or even just a five-star rating. It gives the podcast social proof and helps me attract new listeners. I’m continuing my experiment of rooting out two listener reviews each month.

STEPHEN CLAPHAM: Here’s one from Missing61 titled Decent Podcast. Some good guests, but the host talks way too much instead of asking short questions and letting guests be the focus. Don’t interrupt your guests. Good potential here. I’ll check back in six months and try again.

STEPHEN CLAPHAM: Tough but fair I’ll take that as a reminder to shut up a bit more and let my guests do the talking and I appreciate your planning to come back and see if I’ve improved and here’s a review from Captain Mainwaring in the UK store titled Genuine I like the way Steve is transparently genuine and thinks through the guest’s process the guest in turn is more relaxed I often have to replay parts, so it must be good.

STEPHEN CLAPHAM: So one listener wants shorter questions, fewer interjections, another likes that I think things through.

STEPHEN CLAPHAM: I’ll tell you, the guests will always be the focus of this show, but if you’d like your review read out on the show, whether you’re in the Talk Less camp or the Keep Thinking camp, leave a rating and review. Every month I’m going to pick a winning review for a polo shirt and a runner-up for a baseball cap. All you need to do, leave the review and email me. Thanks, as ever, for your support.

SPEAKER 7: Behind the Balance Sheet and affiliates and podcast guests may own shares or have an economic interest in securities discussed in this podcast, which is aired for your education and entertainment only. Nothing in this podcast should be construed as investment advice or relied upon for investment decisions. Always do your own research.