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Pavel Begun presentation 3G Capital

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La presentación corresponde al evento:
English version: https://youtu.be/JxOIJmCO1Ao
Versión española: https://youtu.be/owp_txi4erU

Pavel Begun (cofundador de 3G Capital Management) es entrevistado en Value School por Carmen Pérez Baguena, analista senior de Cobas Asset Management.


Pavel y su socio conforman el equipo de análisis de 3G Capital, porque afirma que cuantos menos sean en el proceso de investigación, más pueden controlar el núcleo de decisión.

El entrevistado nos cuenta su trayectoria profesional, que empezó a los 11 años vendiendo fresas y manzanas en un mercado. Después emprendió varios proyectos, hasta llegar a Estados Unidos con 20 años, donde además de continuar con sus iniciativas empresariales se introdujo en el mundo de la inversión. Pavel asegura que simultanear ambas cosas le ha permitido mejorar en los dos campos.

También nos desvela que su filosofía principalmente se centra en buscar las 3G (Good): “buen negocio, buena gestión y buen precio”. Parece una máxima muy sencilla, pero realmente “es un trabajo muy duro y complejo”.

¿Cómo define un buen negocio? Negocios sencillos de entender, con una trayectoria registrada de sostenibilidad en liderazgo, negocios que den buenos retornos sobre el capital invertido (15-20% o superiores). Esto puede aplicarse a cualquier sector, con algunas excepciones. Por ejemplo, las prendas de moda, porque es un sector muy cambiante.

¿Cuál sería el buen precio de compra y de venta? ¿Cómo intentan minimizar el riesgo? Carmen Pérez Baguena no se deja nada en el tintero a la hora de preguntar. Al finalizar su entrevista, comienza la ronda de preguntas de los asistentes y de los conectados vía streaming.

Libros recomendados:

Armas, Gérmenes Y Acero (ENSAYO-CIENCIA) (Jared Diamond)
What Intelligence Tests Miss: The Psychology of Rational Thought (Keith E. Stanovich)
La riqueza y la pobreza de las naciones (David Landed)

Published in: Economy & Finance
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Pavel Begun presentation 3G Capital

  1. 1. 1November 14th Pavel Begun, Co-founder at 3G Capital Management
  2. 2. 3G Capital Partners, LP Concentrated Global Value Investors _______________________________________________________________________________________________________________________ Investor Presentation _______________________________________________________________________________________________________________________ October 2017 3G Capital Partners LP is managed by 3G Capital Management LLC as the General Partner
  3. 3. Disclosures • This information is provided for informational purposes only and does not constitute an offer to sell or a solicitation of an offer to purchase an interest in the Partnership managed by 3G Capital Management LLC (“3G Capital”). Such an offer, if made, would be made solely to prospective investors whose suitability has been established and solely by way of a confidential private placement memorandum. This material is intended for informational purposes only. Neither the information contained herein nor any opinion expressed shall be construed to constitute investment advice • This material contains certain forward-looking statements and projections. Such statements and projections are subject to a number of assumptions, risks and uncertainties which may cause actual results, performance or achievements to be materially different from future results, performance or achievements expressed or implied by these forward-looking statements and projections • The views expressed herein are those of 3G Capital investment professionals at the time the comments were made and are subject to change without notice • 3G Capital relies on third-party vendors to provide certain data presented or derived herein. Although 3G Capital uses third-party vendors that it believes are reliable, it cannot guarantee the accuracy of such information and does not represent that such information is accurate or complete • The investment performance figures for 2017 are unaudited estimates based on the best information available at the time of the presentation, and are subject to subsequent revision by the Partnership’s auditors • Past results are not necessarily indicative of future performance • The S&P 500 Index and the MSCI ACWI ex USA Index (“Indices”) returns are provided solely because they are believed to be widely used performance benchmarks. 3G Capital traded securities that are not included in the Indices and an investment in the Partnership should not be construed as an investment in the Indices or a program that seeks to replicate, or correlate with, the Indices. The Indices include dividends reinvested • The returns for 3G Capital and for the MSCI ACWI ex USA Index are presented before foreign dividend tax withholding 3
  4. 4. 3G Capital at a Glance  Concentrated global value long-only equity fund  Over 13 years in business – established in July 2004  3G’s philosophy is centered around capital preservation – investments must have a high margin of safety and minimal risk of permanent capital loss  We demand attractive absolute valuation levels leading to high current cash-on-cash returns that are intelligently utilized by management teams  We are averse to financial leverage – look for financially solid companies  “No mistakes” philosophy  Private equity approach – seek absolute returns and invest as though there is no liquid market and trading out of mistakes is not an option  Bottom up focused and research-intensive investment process to uncover undervalued, free cash generating great business  Principals – Pavel Begun and Cory Bailey come from valuation-based investing  We are opportunistic within a strict set of investment criteria and a broad investment universe  We go wherever we can find exceptional bargains, business models and management teams – not deterred by geography, market capitalization, or industry, provided we can understand the business 4
  5. 5. Investment Philosophy – 3Gs  We look to invest in:  Good Business • High return cash generative • Competitively entrenched • Solid financial condition  Good Management • Skillful operators and capital allocators • Shareholder-friendly • Properly incentivized and have a skin in the game  Good Price • Available at 2/3 of intrinsic (private market) value • Intrinsic value based on Free Cash Flow 5
  6. 6. Investment Philosophy – Good Business  Valuation is not the only ingredient of our investment philosophy – rather it is a crucial first test  In addition to low absolute valuation we demand that portfolio companies be high quality businesses  Key attributes of quality to us are:  Sustainable competitive positions and identifiable barriers to entry – the existence of a formidable “competitive moat” exists (demonstrable evidence of leadership longevity)  High returns on invested capital (15% or more)  Conservative balance sheet (debt payback of less than 3 years or net cash position)  We tend to be attracted to easy-to-understand niche businesses that hold leadership positions in fragmented markets so that they have a substantial and easily-assessed advantage vs. competition  Current look-through ROE for the portfolio exceeds that of the average American business by over 50%; two-thirds of non-financial portfolio holdings have excess cash on their balance sheets, the remaining third have debt paybacks below 3 years 6
  7. 7. Investment Philosophy – Good Management  We look for management teams that are great operators, strategic thinkers, and visionaries – but equally important we want them to be intelligent capital allocators  Return money to shareholders through dividends or share repurchases when attractive return projects are not found  Intelligent capital allocation ensures that as the intrinsic value of the business grows, the cash-on-cash return ends up in our pockets or is reinvested only in high return projects  Mitigates risk in the event that the market does not recognize the rising intrinsic value of the business  Avoid empire builders who chase growth for growth’s sake  We favor managers who are shareholder-friendly, properly-incentivized, and preferably own shares themselves 7
  8. 8. Investment Philosophy – Good Price  Low absolute valuation – typically under 4-10x Free Cash Flow – is the key ingredient of our investment philosophy  Relative valuations do not provide a sufficient margin of safety and are inappropriate when pursuing a strategy of absolute returns  Exact multiple depends on the growth profile and returns on capital of the underlying business  For valuation purposes use “normalized sustainable” FCF rather than “current period” FCF  FCF normalized to reflect mid-cycle economic conditions  Items that are one-time in nature – whether positive or negative – are excluded  Do not need a lot of growth in profitability to achieve an attractive absolute return  Generally, we do not like to pay up for future growth, as we know well enough that high growth projections rarely get realized  Our target valuation range tends to deliver attractive long-term equity-like rates of return – 15-17% – with low single digit growth rates in FCF  Current look-through FCF multiple for the portfolio is approximately 6X with a corresponding dividend yield of over 5% vs. 20X and 2%, respectively, for the S&P 500 8
  9. 9. Portfolio Construction  Long only and typically unleveraged  We typically strive to maintain conservative stance to ensure additional protection from permanent loss of capital  The Fund has between 10 and 15 positions  Top 5 holdings generally make up 60%-70% of the Fund’s assets  Maximum position size at purchase is 25% of the Fund’s assets  The average expected holding period is about 3 to 5 years for core positions  Sell discipline – we normally sell a stock if:  Price of the security reaches or exceeds its intrinsic value  Better investment opportunities become available  The original characteristics of the security, such as underlying business and/or management are no longer present 9
  10. 10. Historical Investment Record  The Fund’s cumulative performance net of fees since inception on July 1, 2004 through September 30, 2017 vs. MSCI All-Country ex-USA (US$) and S&P 500 is presented below: 10 3G Capital MSCI ACWI x USA S&P500 Total 342.5% 117.8% 191.3% Annual 11.9% 6.1% 8.4% 2017 YTD 28.9% 21.6% 14.2% 2016 46.3% 5.0% 12.0% 2015 -5.0% -5.3% 1.4% 2014 -26.4% -3.4% 13.7% 2013 33.6% 15.8% 32.4% 2012 25.4% 17.4% 16.0% 2011 2.1% -13.3% 2.1% 2010 17.8% 11.6% 15.1% 2009 75.5% 42.1% 26.5% 2008 -24.5% -45.2% -37.0% 2007 4.4% 17.1% 5.5% 2006 19.3% 27.2% 15.8% 2005 -2.5% 17.1% 4.9% 2004 (from July 1) 3.5% 4.5% 7.2%
  11. 11. Tax Profile  3G Capital produced its performance in a tax-efficient manner  Historical portfolio turnover of less than 32%  Since inception in 2004 approximately 60% of the fund’s net profit was derived from unrealized appreciation of securities  Long-term capital gains and dividends made up approximately 80% of the fund’s cumulative realized net profit from inception 11
  12. 12. Research Process – Qualitative  Due to our private equity orientation our research process tends to be very intensive  Our approach is to become “local experts” before investing in a market  We use our extensive network of on-the-ground contacts around the world in order to gain unique insights into various businesses available in a given market  We regularly speak with customers, distributors, suppliers, competitors, and industry insiders related to various businesses in Asia, North and South America, Eastern and Western Europe, Middle East, and Russia  We get to know management, either through local sources or personal contact, and we carefully examine their track record with the help of our on-the-ground network  Our multi-geographic approach of studying a given industry across a number of countries provides us with a better sense of analytical perspective compared to “purely local” fund managers  For example, having in-depth knowledge about the economics of banking businesses in Canada, Brazil, Russia, and the United States helped us develop a better understanding of strengths and weaknesses of banking businesses in other geographies, such as China and Turkey 12
  13. 13. Research Process – Quantitative  A basic financial model is prepared for each investment  GAAP or IFRS reported results are reconciled to free cash flows  Free cash flows are the primary determinant of true economic profitability  “Normalized sustainable” FCF rather than “current period” FCF is used  Cash flows are adjusted to reflect mid-cycle economic conditions  Items that are one time in nature are excluded  Err on the side of conservatism at each step of the adjustment process  Three scenarios are modeled  Worst case – assumes every variable moves against the company  Base case – reasonable, conservative best guess projections  Best case – still typically below average historical earnings power  In most cases our companies surprise us on the upside  Target returns  Mid teens or better long-term IRR in Base Case  Capital preservation in Worst Case 13
  14. 14. How We Find Ideas that fit 3G Criteria • Our opportunistic mandate allows us to “go where the value is”  Despite elevated valuations levels in the United States, we are still finding companies that fit our strict criteria – most are domiciled overseas and have market capitalizations of less than $2 billion  The size of our fund allows us to take advantage of mispricings that are below most market participants’ radar screens  Going through country-specific stock manuals from A to Z to pick out the gems  Generally focus on markets in turmoil  Professional relationships  We use our extensive network of on-the-ground contacts around the world to locate attractive businesses  Voracious reading – leading business publications, trade magazines, etc.  Coverage universe  A constantly growing database comprising hundreds of global companies that we would love to own at the right price  Periodic screens  Significant decliners, discount to cash, low valuations, attractive ROE parameters  Tracking the holdings of intelligent value investors 14
  15. 15. Risk Management  We define risk as the permanent loss of capital  We believe that buying with a large margin of safety is the best way to mitigate risk  We believe this approach is very effective in minimizing the risk of permanent capital loss and does not necessitate stop loss orders or other such risk management techniques  We do not equate risk to short-term fluctuations in the market quotes for our portfolio  Risk management techniques include:  Focus on buying simple easy-to-understand businesses at a discount to value  Position size  Industry and country exposure limits  Monitoring correlations between positions  Typically don’t use leverage  Constantly monitor and update the gap between the price of our holdings and their respective intrinsic values 15
  16. 16. Past Investments – AG Growth Income Fund  Ag Growth is a leading Canadian manufacturer of portable grain handling and aeration equipment  Attraction: – Valuation – In April 2006 the company traded at 13% FCF Yield and 10% Dividend Yield – Business model – Largest grain auger manufacturer in North America; stable business selling small ticket items tied to grain volumes as opposed to farmer profitability, 25%+ EBIT margins, substantial advantages over competition in terms of scale, brand name, selection, and cost structure; little debt – Management – CEO started the company from scratch and built it into one of the leading North American short line agricultural equipment manufacturers; has 80% of his net worth tied up in the stock – Margin of safety – Little financial leverage at the time of investment, 10% dividend yield, stable business  Divergence of market value and intrinsic value: – Concerns over potential changes to tax legislation that would impose taxes on income trusts such as Ag Growth  Outcome – In April 2006 we purchased the equity at CAD14 and closed out of the position in a little over a year at an annualized gain of over 100% 16
  17. 17. Past Investments – AmorePacific (non-voting)  AmorePacific is the largest South Korean cosmetics company  Attraction:  Valuation – In July 2008 the company traded at a 20% FCF Yield  Business Model – 35% overall market share – 3X larger than the next competitor; 4 out of the country’s 5 top-selling cosmetics brands; large advantage over competition due to brand name, marketing and R&D scale, product range, and distribution  Management – Cornell-education CEO Kyung-Bae Suh has worked in the current capacity since 1997 and was behind turning AmorePacific from a debt-laden bloated conglomerate into a focused cosmetics company with a fortress like balance sheet; owns 30% of outstanding shares; allocates capital to towards growing the business and paying a dividend, no history of capital-wasting  Margin of Safety – No financial leverage at time of investment  Divergence of market value and intrinsic value  Concerns about a global economic slowdown  Low liquidity of non-voting class of shares  Outcome – In July 2008 we purchased the equity at KRW165,000 and closed out of the position in approximately 18 months at an annualized gain of over 55% 17
  18. 18. Past Investments – Silvano Fashion Group  The largest branded mass-market underwear company in Eastern Europe  Attraction:  Valuation – Purchased at 4X 2015 EPS (or 2X net of excess cash) and 14% Dividend Yield  Business Model – Silvano’s brands, Lauma and Milavitsa, occupy #1/#2 market positions across Eastern Europe. The Company’s brands and distribution system represent significant barriers to entry, suggesting excessive cost to a potential entrant. As a result, Silvano is able to generate 25% returns on equity despite a sizeable cash position. Silvano boasts significant growth potential due to the extremely fragmented nature of the market  Management – Management owns over 40% of the Company and treats shareholders well as evidenced by substantial dividend payments and aggressive share repurchases when the stock is undervalued  Margin of safety – cash comprised nearly 50% of market cap, sizeable dividend yield  Divergence of market value and intrinsic value  Concerns over the state of the Eastern European economies and the geopolitical situation in the region  Low liquidity of the shares  Outcome – purchased the equity in late 2014/early 2015 for approximately EUR1.10 (dividend-adjusted); currently trading at approximately EUR2.90 18
  19. 19. Current Holding – Turkiye Bank Halkasi AS  Turkiye Bank Halkasi (aka Halkbank) is one of Turkey’s ‘Big Seven’ banks  Attraction:  Valuation – Purchased at 50% of Book Value, 4X EPS (3X norm EPS), and 3% Dividend Yield  Business Model – Member of a tightly-regulated banking oligopoly comprised of the seven largest banks of Turkey collectively controlling 75% of the country’s deposits. Halkank enjoys stable low-cost deposit base by virtue of its leading status within the pack. In addition, Halkbank compliments its low-cost deposit franchise advantage by conservative underwriting practices. As a result Halkbank produces above-average profitability performance in a low- risk manner (1.9% LT AVG ROA vs. 0.8-1.6% for peers, 1.2% LT AVG Cost of Risk vs. 1.5%- 2%+ for peers – while maintaining CAR of 14% and 100% LDR).  Management – Long-term track record of growing intrinsic value (in USD) at a 10% clip in a low-risk manner. Developed complimentary fee streams which have grown at the rate double the industry average.  Margin of safety – loans are fully funded by deposits + equity capital, CAR is 40% above global minimums, government ownership reduces political risk  Divergence of market value and intrinsic value  Concerns over the state of Turkish economy  Geopolitical situation in the Middle East 19
  20. 20. Summary Terms of Investment • LEGAL STRUCTURE: 3G Capital Partners LP is a Delaware limited partnership • MINIMUM INVESTMENT: US$500,000 • FEE STRUCTURE: Management Fee 1.5% Performance Allocation 20% (over 6% hurdle) High Water Mark Yes Contributions Monthly Withdrawals Once every 2 years on Dec 31 Early Withdrawal Fee 10% 20
  21. 21. Administrative Information  Administrator: Liccar & Company 231 South LaSalle Street Suite 650 Chicago, IL 60604  Auditor: McGladrey and Pullen LLP One South Wacker Drive Suite 800 Chicago, IL 60606  Prime Broker: Cowen Group 1633 Broadway 48th Floor New York, NY 10019  Legal Counsel: Barack Ferrazzano LLP 200 West Madison Street Suite 3900 Chicago, IL 60606 21
  22. 22. 3G Capital Investment Professionals  PAVEL BEGUN, CFA has over seventeen years of experience in valuation-based investing. Prior to co-founding 3G Capital he worked as a research analyst for Fiduciary Asset Management and also for A.G.Edwards & Sons where he was responsible for equity research across multiple sectors. From 2010 through 2017 Mr. Begun sat on the Board of Directors of AlarmForce Industries Inc, a leading North American residential alarm monitoring company, whose shares are traded on the Toronto Stock Exchange. From 2012 through 2017 Mr. Begun was a Non-Executive Director at Grafenia PLC, a leading British provider of software and service solutions to the graphic design industry, whose shares are traded on the London Stock Exchange. Mr. Begun graduated with Honors from the University of Chicago with an M.B.A. in Accounting and Finance and he also graduated valedictorian from Western Kentucky University with a B.S. in Finance. He is a Chartered Financial Analyst and a member of the Toronto Society of Financial Analysts. Mr. Begun has been a guest speaker at a number of universities and also at various investing conferences giving lectures on the topic of investments since 2001. He was named the recipient of CFA Magazine’s annual Most Driven honor in 2007  CORY BAILEY has over seventeen years of experience in valuation-based investing. Before co- founding 3G Capital he was a research analyst with Fiduciary Asset Management responsible for equity research. Prior to his tenure with Fiduciary Asset Management Mr. Bailey worked as an analyst in the investment banking group at Robert W. Baird & Co. providing analytical support on mergers and acquisitions, public offerings, and other financial advisory services. Mr. Bailey graduated from St. Louis University with a B.S. in Finance and a minor in Accounting 22

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