By James Thomson
A new fund that will exclusively target companies run by “obsessive” founders also has a long list of danger signs that it is watching for.
Skin in the game. An owner’s mindset. There are lots of phrases to describe what makes founder-led companies special, but Oscar Oberg and Tobias Yao prefer to sum it up with one word: obsession.
The fund managers from Wilson Asset Management are the brains behind a new Founders Fund that will exclusively invest in companies where the founder owns a stake of at least 10 per cent or $20 million in equity, and has an active role in the business.
Oberg and Yao, who are portfolio managers for the WAM Capital, WAM Microcap, WAM Research and WAM Active listed investment companies, would sit down after every reporting season for a debrief, including a review of their top performers and their biggest laggards. The top 10 stocks would always include at least six or seven founder-led companies, while the list of battlers would invariably be founder free.
That founders obsession was delivering for investors.
“We see it within our organisation with Geoff,” Yao says, referring to WAM founder Geoff Wilson. “And we are both pretty obsessed ourselves.”
A look at the numbers provided more evidence. Over the past seven years, founder-led companies have made up 20 per cent of the holdings in the WAM Microcap and WAM Research listed invested companies, but have generated 64 per cent of investment portfolio returns. More broadly, founder-led companies have outperformed the ASX All Ordinaries Accumulation Index by 12.5 per cent over the past seven years.
About 18 months ago, Oberg and Yao decided to work towards starting the fund, which will be unlisted and will cater to both retail and wholesale investors. As the pair has started discussing the new vehicle in the market over the past three months, one of the strongest areas of support has been from founders themselves. They have interest and financial commitment from this group.
Follow the money
Of course, obsession can cut both ways in a founder-led company, and occasionally stray into hubris or arrogance that leads to poor decision-making and pain for shareholders. The scandals that plagued Mineral Resources founder and talisman Chris Ellison, and WiseTech Global founder Richard White, are perfect examples.
Oberg and Yao hope to counter this by backing founders who can match their obsessive natures and align them with minority shareholders. Which is where their list of founder red flags comes in.
First, sudden strategy changes where the founder takes the business away from its core competitive advantage.
Second, the introduction of complexity into a simple business, particularly through what Yao calls non-core initiatives.
But to spot the biggest red flag of all, Oberg and Yao will follow the money.
“Every time a founder sells, that is going to be a red flag for us,” Oberg says. While the fund will assess each sell-down on a case-by-case basis, there will be a golden rule: the fund will sell out of a company where the founder sells 25 per cent of their stake in a 12-month period.
WAM expects the fund will hold between 30 and 40 founder-led companies across a range of market cap sizes. Expect to see Solomon Lew’s Premier Investments among the fund’s initial holdings; Oberg describes the billionaire as the best retailer in Australia, and he is also excited about the influence Lew can have at Myer following the merger of the department store giant with a group of apparel brands previously owned by Premier.
Seven Group, founded by Kerry Stokes and overseen by his son Ryan, is another favourite for Oberg.
Yao’s top pick is Tuas, formerly known as TPG Singapore. The company, founded by genius telecommunications veteran David Teoh, has doubled its share price in the past year and is a core holding across several WAM funds.
While Oberg and Yao are big believers in the power of founders to drive returns, they also believe that the fund will get an extra push along if the IPO market reopens as they expect this year. The pair says a lot of the IPOs in the pipeline are founder-led and the chance to find the next Afterpay is tantalising.
“This fund won’t effectively sell the stock unless the founder sells, or there is a drastic change in the strategy or the outlook for the company,” Oberg says. “What we’re hoping is some of our really small positions on day one will be very large positions in three to five years’ time.”
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