Chit Chat Stocks - Chuck Akre: Betting Big On Quality Stocks ($AMT, $CSU, And?)

Episode Date: June 10, 2026

On this episode of Chit Chat Stocks, Brett and Ryan discuss Chuck Akre and Akre Capital Management in the latest edition of their super investor series. We discuss: (00:00) Introduction (02:48) Chuck Akre's Unconventional Journey to Investing (06:36) Akre Capital Management's Performance and Transition (10:57) The Three-Legged Stool Investment Philosophy (16:50) Case Studies: American Tower and Private Equity Investments (35:03) Trimming Positions and Opportunity Costs (36:46) Case Study: O'Reilly Automotive's Reinvestment Moat (42:45) Constellation Software: A Long-Term Holding (51:16) Akre's Portfolio Performance and the SaaS Pivot (57:59) Lessons from Akre Capital Management ***************************************************** Subscribe to our newsletter, Emerging Moats: emergingmoats.com  ********************************************************************* Chit Chat Stocks is presented by Interactive Brokers. Get professional pricing, global access, and premier technology with the best brokerage for investors today:  https://www.interactivebrokers.com/  Interactive Brokers is a member of SIPC.  ********************************************************************* Check out Value Spotlight: Stockwriteup.com  ********************************************************************* Fiscal.ai is building the future of financial data. With custom charts, AI-generated research reports, and endless analytical tools, you can get up to speed on any stock around the globe. All for a reasonable price.  Use our LINK and get 15% off any premium plan: ⁠https://fiscal.ai/chitchat  ********************************************************************* Disclosure: Chit Chat Stocks hosts and guests are not financial advisors, and nothing they say on this show is formal advice or a recommendation. Learn more about your ad choices. Visit megaphone.fm/adchoices

Will the Fed raise rates 25 basis points in June 2026? IBKR prediction markets let you trade the outcome alongside your stocks and options. Earn interest, get it right, and earn $1 per contract at ibkr.com slash predictions. Last trading day, June 17th. Welcome to Chit Chat Stocks. On this show, hosts Ryan Henderson and Brett Schaefer analyze businesses and riff on the world of investing. As a quick reminder, Chitchat Stocks is a CCM Media Group podcast. Anything discussed on Chitchat Stocks by Ryan, Brett, or any other podcast guest is not formal advice

or recommendation. Now, please enjoy this episode. welcome into chit chat stocks a podcast to help you find your next great investment my name is brett schaefer and i will be joined by my co-host ryan henderson today to discuss another super investor chuck ackrey and ackrey capital management what we can learn from them as individual investors in 2026 chuck ackrey started cap ackrey capital management i think well ryan as the background, which he'll get into. A couple of decades ago, he recently retired. So it's run by people that have now similar philosophies. It seems like the portfolio and investing philosophy has been similar over the last five years. But we're going to get into all that. But first,

you can find episodes of the Chit Chat Stocks podcast on YouTube, Spotify, and Apple Podcast. I would say give us a five-star review on Spotify or Apple if you enjoy the show. That is the best way to support us and help us grow. Subscribe to the Emerging Mode Stock Research Service on Substack and join its free chat community to talk all things written about on the newsletter or podcast topics as well. We're talking about that constantly every week. The link for that will be in the show notes. You can find all those there. I'm going to give it over to you, Ryan, to talk Chuck Ackrey's background and career. But first, I noticed looking on Google that Ackrey Capital Management in the middle of nowhere, Virginia, Middleburg, Virginia,

has one Google Maps review, and it's one star. Not a happy customer. I don't think I'm giving them my pension fund allocation anymore. Yeah. First off, who is writing reviews on asset management companies on Google Maps? Maybe they threw some loud parties that were late, which doesn't sound like them at all, and it was a neighbor. Neighbor's not happy, something like that.

Or, you know, maybe someone invested with them at the wrong time and they got a bad, the returns haven't been so hot and they're taking it out on the gold master view. But let's get into it. Ryan, Chuck Ackrey, who is he, his background, and what's his investing career look like? Yeah. Charles Zachary, a.k.a. Chuck, he's probably had one of the most unorthodox routes to investing fame of all the investors we've studied. So he was born in 1942. He grew up in Washington, D.C. and did not attend a big, notable business Ivy League school or anything like that. He attended American University where he started as a pre-med student but eventually switched and earned a bachelor's in English literature. So really no traditional business school background at all. He is to me kind of a good example of how much being a great investor just comes down to understanding people and being an avid reader because it seems like that's pretty much how he's built his career. anyways he's in 1968 in his mid-20s ackrey joined a company called johnston lemon and co as a stockbroker so i guess this was maybe at the time when you could start as a stockbroker without really knowing what you were doing nifty 50 market top that's a good time to get in yeah

similar to the dot-com bubble and maybe similar to today yeah and i mean i guess a stockbroker at the time you know doesn't necessarily mean you're an asset manager or anything like that you're literally a broker so that's how he started but he even says you know i had very little knowledge of the securities world at the time so he was reading whatever he could get his hands on and one of the books that really sparked his interest was called the money masters by john train which among other things included a long section about warren buffett he's now talked uh a number of times about how Buffett was a big inspiration for him. Side note, we actually met Chuck Ackroyd, shook his hand at a private party that I guess

we sort of crashed at one of the Berkshire Hathaway shareholder meetings. Yeah, I am 100% confident he doesn't remember us. Maybe he would if we told him we're the people that crashed the party that were way younger than everyone else. But it was a memorable experience for us to see him and a lot of the other people in the flesh. Yeah, I'd say probably much more memorable for us than it was for him. But nonetheless, the other books that he has said really helped shape him as an investor beyond traditional value investing books were just plain old business biographies. He said it helped specifically helped him gauge how management teams thought. And I guess I would say to people starting in the investment world, do your – eat your vegetables with a couple of the value investing books.

But then I would start digging into the business biographies because I think you get a lot more value out of understanding how a business is run and what a good business looks like doing that than rereading the same old value investing principles. the uh awkward acree worked his way up at the brokerage firm apparently seemed like he was pretty promising at this company and he joined uh or he got several different management positions and he actually ended up staying there for 21 years it wasn't until 1989 when he was almost 50 years old that he decided to start acree capital management for 11 years acree acm acree Capital Management, was a part of a company called Friedman Billings Ramsey and Company. A lot of these just last name type asset managers, which was headquartered in Arlington, Virginia. But in 2000, it seems they sort of spun Ackrey off to do his own thing.

It was technically still, it was still the Friedman Billings Ramsey, like it was a part of that company, but he was allowed to run things independently. So he moved to Middleburg, Virginia, where he's now at, which, as Brett mentioned, is kind of the middle of nowhere. It's an hour outside of Washington, D.C. and sort of nowhere, Virginia, to manage what was then called the FBR Focus Fund, which was a mutual fund specializing in small and mid-cap companies. So this is kind of where we get the actual history from ACRI. This is where we start to learn about some of his investments. They're a little more public. He starts writing letters and actually writing about his frameworks and his investing approach. So from 2000 to 2009, the FBR focused mutual fund was in the top 1% of small mid cap performance. So he crushed it from 2000 to 2009. And that's kind of where he made a name for himself. And then finally, in 2009, he broke away from FBR and started the modern Acre capital management that we know today. So while Acre has been basically managing private funds for about 50 years, Acre Capital, in its current structure, has only existed for 17 years. And the funny part is he spun it off and became his own management firm in 2009 when he must have been almost 70 years old. so he he almost it feels like he kind of got a late start into the asset management business but

again he was managing it sort of behind other names for almost 50 years if we go to his performance take a look at it since 2009 the acri focus fund has generated 12.9 annual return since inception. So that's since 2009. The S&P 500 over that same timeframe has delivered 14.8% annual returns. So they've slightly underperformed. But still, I mean, if you were just looking at if someone promised you 13% returns over 17 years, I think you'd be pretty happy with that annual returns, I should say. There's also some important context here. If you asked about the returns a year ago, things would have looked very different. But in the last 12 months, the ACRI Focus Fund is down 20%, while the S&P 500 total return is almost 30% for the year.

So it's kind of interesting timing. Spoiler alert, I think things could look potentially very different in a year, looking at total returns. And you think about the S&P 500, The primary contributors there, very different than what the ACRI top holding. So anyway, a bit of a timing effect. He's generated solid returns, I would say, prior to this last year, slightly outperformed the S&P 500, which the S&P 500 has had exceptional returns as well. One other important note you alluded to it, Brett, the fund is now run by John Neff. So Chuck has stepped away from active management. He stepped away in 2020. So John Neff's been running it along with two analysts for more than five years now. This is a pretty small investment team, just three people. I don't think Chuck has much involvement anymore, but we can look at some of his frameworks that his protégés still use and some of his famous investments as well. The one thing I'll add there for anyone that, and again, we're not recommending,

we've never bought or sold the Accra Focus Fund ETF, but it's much more accessible now for individual investors because they made a transition from a mutual fund to an ETF. I think it was last year they did that, I believe almost entirely for tax reasons and probably because it gives more flexibility where you had a lot of unrealized gains. And then under the ETF tax structure if they buy and sell holdings there's a much better tax advantage so just a note there i don't know exactly what the ticker is i probably should have had that pulled up but if you look up back refocus fund etf you'll be able to look at the holdings it's updated daily something like that and yeah i might have a similar ticker to arc but uh it's it's different it's run by basically

the this team of three people akre right akre there we go there we go that's a good name all All right. Let's get into the philosophy. They have what they call the three-legged stool framework. I will say personally that I stole this philosophy, kind of did it in my own spin for my own criteria for finding stocks, although it's slightly different. But for anyone that's heard me talk about that, this short checklist for looking at every business I think is helpful because it gives you a sort of grounding, kind of cardinal rules, things that you're looking for, or pretty much basic red flags that make you go immediately, okay, we're moving on from this business. We're going to go to the next one to look at because

there are thousands and thousands of public companies to check out. They have this all over their website. I have a screenshot of one of their basically graphics, and they have a pretty simple definition of their three-legged stool investment approach, business, management, and reinvestment. Business means sustainable competitive advantages and the ability to compound free cash flow per share at high rates. Management means integrity-driven, shareholder-aligned leadership focused on long-term value creation. And reinvestment means extensive opportunities to reinvest free cash flow, supporting long-term above-average returns. And I think where Acree, I get it wrong. I don't know.

ACRI, I believe. ACRI. Focus is a ton of attention compared to other investors is reinvestment opportunity. This is where their focus may be more than others. Many of you will have heard us talk about, you know, other investors or even ourselves on many shows. We want to partner with a good business and a management team with high integrity. I mean, you look back at some of our old episodes, but generally you want quantifiable, which

is good cash flow generation and qualitative business model factors driving a business that can get you comfortable to invest in. You know, management is, again, qualitative, but we generally look for, and I think the same thing here, integrity, rational, frugal, understands return on invested capital, and has a good existing track record. Now, we go to reinvestment runaway. That's where I want to spend a little bit more time today focusing on this Chuck Ackrey. It's a nice way to connect the stool together because it allows a good management team to pour money into a business with a nice return on invested capital, or cash flow characteristics. Without the three, it doesn't really make sense

because if you have a long reinvestment runway into a poor ROIC business with a bad management team, well, that doesn't really matter much. Sometimes one, and I might argue this as well, the best businesses are ones that grow free cash flow per share without having to reinvest much at all into their existing business. Visa, MasterCard, FICO, Microsoft in the old days, Oracle in the old days, I think are good examples here. And we can maybe talk about that later in the episode when we get to kind of the SaaS stocks or whether there are any flaws in their philosophy, which again, we're just two people in the peanut gallery and they have a long-term track record, but we like to analyze everything about these investors. But if we look at back to the reinvestment runway,

an example of an attractive reinvestment runway would have been an Amazon in 2011, where you had the ability to pour hundreds of billions of dollars, maybe trillions when it's all said and done, into the North American e-commerce and cloud computing businesses, which have proven to have good ROIC. I think other popular examples from their investment universe would be Copart, Constellation Software, and the private equity businesses. I think an example of an unattractive reinvestment runway to kind of do the inverse here would be a retailer with a physical footprint close to saturation in its home market or domestic market with no examples of success internationally or even one with a global saturation. I think of examples here, you have McDonald's, Walmart, things like that. Ackroyd wants to find the Walmart in the 1980s, not 2026.

And of course, it's much harder to identify the moat or attractiveness of Walmart in 1980 than in 2026. But when you do, it is when the magic of the 100-bagger can appear. Let's see. Interestingly, I think valuation is not talked about at all in the three-legged stool philosophy. I think we can discuss this maybe at the close of the episode. of whether this could have been a good part of the fourth leg of the stool. There are other notes that he has in a 1988 letter to shareholders. And as you mentioned, Ryan, this was right at

the beginning of the launch of the fund, where he says he's looking for businesses that see their profits in cash are not natural targets of competition. This is something that Buffett talks about as well, where, for example, in software right now, anything AI is just there's so much competition across the board. But for, and we'll talk about, they've invested in Constellation Software for a long time. Some of the niche players serving very niche opportunities in unsexy industries aren't going to attract 10 new startups out of Y Combinator every year trying to steal your lunch. Now, other things they're looking at, they have freedom to price their products. So good pricing power without impacting demand. They're easy to understand.

They don't take a genius to run and they earn very high returns on capital. You know, Buffett-like, a little bit different, focusing on that reinvestment runway. Ryan, we're going to go through four different case studies, two that you researched, two that I researched. But before we get into it, any other thoughts on the three-legged stool and the general philosophy of accurate capital management? I really like the focus on the reinvestment runway. And that's probably one of the areas where I think they distinguish themselves a little

bit compared to other investment firms like every investment firm talks about wide mo quality all that good stuff but not a lot of them optimize for a big reinvestment runway like you look at some of the really successful investments that he's had and we're going to talk about some of these it's not just that they were quality businesses or that they had you know some sort of durability or some sort of advantage it's that they had the they were generating good returns on invested capital and had the ability to deploy tons and tons of capital there are a lot of businesses like we can even take the ones that like let's say moody's for example obviously great returns on invested capital but they've owned it they have been they have actually owned moody's

but i kind of use this as an example of like where where can moody's invest capital there isn't necessarily a way for them to like they don't have to but there won't argue it's a better business because they can grow their cash flow per share without pouring more or they can outgrow their earnings per share however you want to slice it they don't need to pour in 100 billion dollars in capex like amazon where i think like old style google was a better business than new style google or alphabet however you want to call it because true you grow 20 a year with no incremental barely any incremental infrastructure spent i mean on the google side we'll see but i guess maybe a better analogy would be like the railroads railroad very high quality business

but is there that much room versus their current size for them to deploy capital not really point Yeah. Maybe acquiring other railroads or merging. That's what we're seeing for the most part. But there's not really the ability to lay down enough tracks to double their footprint or something like that. So it's the fact that he focused on some of these businesses that had that big reinvestment runway, I think, is why we look at some of these home run investments and talk about them as home runs. It's not like, oh, they just generated great returns. It's they were able to expand so much. Will the Fed raise rates 25 basis points in June 2026? At IBKR Prediction Markets, the yes recently traded at $0.05, while the no traded at $0.90. But the markets can change quickly. Trade prediction markets on political, climate, and economic events with simple yes or no prediction-style contracts where prices reflect probability. Explore trending data, spot the trends, and if you get your prediction right, you earn $1 per contract at settlement. Plus, you'll earn a 3.14% APY on your investment with an interest-like incentive coupon,

and you'll get $3 for signing up with IBKR Prediction Markets, which you can use for any purpose or to start trading. Prediction contracts are not suitable for all investors. Go to ibkr.com slash predictions and turn your views into IBKR Prediction Contracts today. Last trading day for this contract is June 17th. The question is, why no Amazon or Costco? They seem to fit the three-legged stool perfectly back when they were getting off the ground. It can't be perfect, but I just wonder why.

I would love to ask them why they passed on them over the years. Yeah. I mean, obviously, you can't invest in everything, but those do seem to kind of fit the criteria. Let's talk some case studies here. I'll go first. This is probably his most famous investment ever. I don't think it's technically his best returns, but it's by far very exemplary of the three-legged stool philosophy. So the company is American Tower.

Acree initially bought shares in American Tower during the 1998 IPO, but really he started adding aggressively after the dot-com bust. So for those unfamiliar with the business, American Tower operates, develops, and owns cell phone towers. uh i might explain this wrong because i don't know the engineering world as well but so bear with me a little bit but a cell phone tower is basically just a vertical piece of real estate with an antenna on top or multiple antennas uh you've definitely seen them all over the place if you've ever driven a car anywhere uh and those antennas receive radio waves from cell phones or data centers and send those signals along to whatever the next end devices the antennas need to be high in the air so that the radio waves aren't blocked by trees or buildings or hills

etc so anyway it's a sort of a difficult physical structure you have to know how to build it and it's not one where someone could just put something up on their home if they're in a forest or whatever so you get why it needs to be tall when mobile phones started taking off in the mid 1990s, it was really more the late 90s, American Tower, which was a subsidiary of American Radio Systems, saw the opportunity that cell phones presented. So all carriers like AT&T and Verizon, they knew they were going to need this. And each tower had sort of a geographic moat. So because apparently overlapping signals interferes with connection, towers had to be spaced certain distances apart so then you automatically kind of have your you know uh little geographic moat

there importantly it didn't make much sense for the carriers to build these towers themselves that was the big question i was asking is why didn't at&t do this why didn't they go out and just do it all on their own and the reality is it would have just been costly it would have been expensive for them to build and they already have enough capex yeah yeah and they can go out and get they can rent these from a third party and they can spend their money going out and getting more cell phone customers so it's it was logical that there had to be sort of an independent player even though it was expensive to get these towers up initially and here's where it i think uh sort of the unique insight came from acri once they were in place it cost very little

to add a new tenant i assume you just literally send one guy up the cell phone tower maybe you've seen those videos of people climbing cell phone towers that kind of gone viral on youtube they place maybe a specific antenna whatever's needed and then all of a sudden that cell phone tower that you built for at&t uh you're doubling the revenue at very little cost and you've got verizon on there also. So it ends up being very high incremental margins once those cell phone towers are in place. ACRI also recognized early on that the more towers American Tower had, the larger their network density and the more carriers had to go through them, and the switching costs were really high. Once a carrier had their equipment on a tower, it was

A, logistically difficult to move it, but also expensive to move to a competitor. Not to mention these are like long-term leases usually, so you're pretty much locked in. You usually have inflation-protected escalators, which is nice. You kind of have that permanent inflation protection, I think, in the contract unless you probably get a period like 2022 or 2023 where prices kind of go crazy. So at its core, American Tower was sort of a real estate business. They owned the land, the property, and they leased it to tenants. In fact, American Tower saw themselves so much as a real estate company that in 2012, they converted to a real estate investment trust, which allowed them to avoid corporate income taxes and instead reinvest more of their cash into an international build out, which amplified their returns. So looking at Acre's investment, by June of 2002, this was – remember, he bought during the IPO and then was kind of buying on the way down throughout the dot-com crash.

He had accumulated a block of around 500,000 shares at an average cost of around $5 per share. Today, I believe shares traded around $200 and the total return is much higher. We're at $190. $190 as of this recording. So $20 bagger on the price roughly plus all the dividends or cash distributions that is collected along the way. I pulled up the total return chart basically over the last 20, 25 years. American Tower has generated around a 19% compound annual growth rate. one of his better investments. And of course, this is a perfect example of reinvestment runway because the whole country needed cell phone towers and there was plenty of room to deploy.

And in fact, outside of the country, the international expansion was plenty of room there as well. Yeah. But here's the curious part is that they've gotten out of the American tower pretty much completely. And I think that might make sense because maybe they're seeing, And I think a lot of people see the huge explosion in satellite internet that seems to be adding just a massive amount of disruption here. And then there's also, well, I guess that's more for the home internet players. But for the wireless, for the mobile carriers, there could be giant disruption from Starlink, AST Space Mobile, players like that. Maybe they're seeing that as a risk. Again, I would be curious to ask them what was the reason for selling off American Tower.

It could also be opportunity cost, but it clearly was a great investment. It's been even in a 37% drawdown. I was looking at our friends at Fiscal AI as we talked here. Current dividend yield is 3.6%. PE says 31. Different metrics might be used here. Price to, and this is a REIT metric. I think it's funds.

Oh, it's FFO. What is that term? it's something about operations funds from operations that's kind of like an operating cash flow ish thing that's 19.6 and their 10-year dividend per share growth has been 13.7 been a fantastic dividend grower but three-year dividend per share growth of only 4.6 still okay but major slowdown as they've matured um hey look if you think the satellite internet disruptors aren't going to kill the existing infrastructure for internet connectivity in the United States. Maybe now it's time to buy the dip, but I'm not sure. Either way,

Acro Capital Management did well with this one. Yeah. And it seems to be one of his more, I guess, iconic investments. It's one a lot of people talk about. I think part of the reasoning there is that he bought so heavily after the dot com crash. But let's move to our second case study. What investments are you looking at? I'm looking at the private equity stocks specifically for them. They've invested in KKR and Brookfield. I think this is one of the main investment things of the last decade. Wasn't something as old as American Tower, which is a 25 year play. But they've invested in private equity fund managers. Specifically, they first purchased KKR in Q3 2018 and Brookfield Asset

management in Q3 2019. Now, it is impossible to know the full returns of these investments for them because we're not apprised of the exact trades made. However, we can kind of look up total returns from the initial investment, maybe use the help from our AI overlords to estimate bearing IRR ranges. It also helps to use the AI tools when trying to look at the spinoffs where Brokefield split into two different companies. KKR, their annual return, and I just put it as the middle of Q3 2019, total return from the middle of Q3 2018 to today, 19.7%. And Brookfield, which is BN as the ticker, their annual return from the middle of Q3 2019 is 16.2%. If we include the spinoff of BAM, which is Brookfield Asset Management, we might get up to 18%. However,

The actual returns for them was probably closer to the 12% to 15% range, according to, again, this is what Gemini Pro estimated for me, because they average up over the years. uh akri again this is from again the ai akri aggressively accumulated both stocks between 2020 and 2023 they deployed hundreds of millions of dollars into kkr when it was trading between 45 and 70 and into brookfield when it was trading in the high 20s and 30s because of a massive portion of their capital was deployed at these higher prices their average cost basis is much higher than their initial 2018 2019 entry points furthermore their heavy trimming in q1 2026 locked in gains on these specific tax laws, blah, blah, blah. That's more of a tax thing. I think I wanted to look at this case study from the three-legged stool framework. First,

they're talking about business quality. That's the first thing they look at. For private equity companies, I think this may be the most controversial topic of the three-legged stool, but in general, if combined with, you know, you have an ethical, rational, intelligent management team, the industry can be quite good. You have a fixed layer of overhead in the form of the investment team, admin costs, compute costs, compliant costs, and your software services like Bloomberg and many other software and services that these companies are using. After this, as long as you're earning acceptable returns for clients and you bring in that annual management fee, you can scale up revenue faster than cost and with good consistent cash flow. You have long-term

contracts for these private equity funds. You might even have perpetual capital in some cases, so you can earn that steady stream of the management fee, whatever it is, 0.8%, 1% every year. Second is management. I think for them, they probably looked at the specific private equity managers that they thought were the best, and KKR and Brookfield were number one. With KKR, they've been delivering value to clients for 50 years. They're one of the most trusted brands in the industry. And I think the way to look at it, this is obviously extreme. This is totally made up. But if you were looking to pour $10 billion of your sovereign wealth fund into private equity, would you choose KKR or the Chit Chat Stocks buyout fund that we just started last week?

I think KKR may be more credible. Exactly. So that's part of why that maybe they trust that management team. Now, third is reinvestment runway. With KKR, you have a long tailwind of market share gains for investable assets transitioning from public markets, bonds, real estate, to alternative assets managed by these PE firms. Again, they are controversial, I guess, in the investing world, especially today, but you could have a differing opinion on that. But at least 10 years ago, I mean, they were completely right that more and more assets were going to shift to private equity. And I think I have a chart here from our friends at Fiscal AI.

I have it small on my screen here, but it looks like total AUM has grown at an 18.1% CAGR since 2012, up to $800-ish billion probably over the last 12 months, $760 billion. I mean, that is just a fantastic reinvestment runway with attractive returns on invested capital. And again, I'll mention right now, since we're at the middle of the episode, use our link, fiscal.ai slash chitchat. You can get these KPIs and segments and all the other good stuff with them. Use our link and get a 15% discount in the show notes. Let's see, where are we at? reinvestment runway. Yeah, AUM has compounded 18% a year. I believe ACRI probably thinks there's durability and durable growth for AUM over the decades, which is why it can make it a never

sell position. They have also pushed into insurance for more permanent capital, and they have a strategic holdings segment, which kind of is funding investments from their own balance sheet, from the corporate balance sheet. Brookfield, again, is a slightly different beast, but I'd say they probably have the same ilk as KKR, and that's why they've both been good investments. Here is what they had to say. Now, this is ACRI, on the recent private credit scare and these two holdings. I believe this was either in early February this year or May of this year. Either way, it was in 2026. Quote, in assessing the risk context and nuance here are critical. Again, the entirety of the direct lending market is less than 4% of the

$45 trillion global credit market. For KKR, total private credit represents 18% of total AUM. And if we look at Brookfield, it has even less exposure to direct lending than KKR, likely in the 3% range of fee-paying AUM. In terms of software exposure firm-wide, KKR recently disclosed that its exposure was just 7% of total AUM, while Brookfield recently disclosed that they are less than 1%. This is probably why Brookfield, as a side note, has been doing better than a lot of other private equity players of late. Does this mean that problems will not arise in the broader private credit market or for certain software businesses? No. But the above context gives us comfort in owning KKR and Brookfield. If 10% of KKR's total

private credit investments defaulted, it would amount to 1.8% of AUM. 20% of the direct lending loans defaulted, it would amount to 1.4%. For historical context, consider that during the 2008 to 2009 financial crisis. Losses for sponsor-backed direct loans peaked at 7%. So what they're saying is these are high-quality businesses within private equity, which are already high-quality businesses themselves. There's other companies that may have struggles, like Blue Owls, Men of the News. I don't know if they actually have exact struggles, but they may be more exposed to the struggles in software. Now, my discussion question here, and maybe this is a whole other episode we can look at, KKR, it's in a 40% drawdown,

Market cap of $84 billion, and it's about 14 times kind of their asset management and insurance EBIT. What do you think? I find it interesting. Yeah. The weird part here is that Acre is – it's one of the positions they've trimmed. Still a large holding, right? Correct, I believe. Let me pull it up real quick.

It is there. We have it at the end of here, right? Sixth largest position. It accounts for 7.5% of the portfolio of the ETF. But, yeah, I mean, they did trim it. I guess they transitioned to SaaS, right? We're going to talk about that. I mean, they trimmed everything.

For the most part, they trimmed most of their large holdings that weren't SaaS. So maybe it is all just an opportunity cost thing. Like, yeah, these businesses just have an incredible ability to gobble up assets, to attract investors. It really is – I don't know what they're doing. I don't know if they're throwing great parties or something to invite all the investors that – what draws them to it. Maybe it's the returns that they've been able to generate. But yeah, my only hesitation would be that I see this and I think, okay, you're almost at a trillion dollars in assets and Brookfield's fine for a lot of the same dollars. So are a lot of these asset managers.

Like how much bigger can this get? Pretty big, Ryan. There's like $100 trillion in investable assets worldwide. Yeah, I guess that's fair. Yeah, I am interested in obviously pretty capital-light nature given that they are earning management fees basically, and that's their distributable earnings. So yeah, I think I'm interested. What about you? I think I'm interested, but for some reason I don't love these businesses because like with banks, I maybe put a higher hurdle rate because there's always the potential for cockroaches.

I don't know if we have the same sort of analytical capabilities of the acrocapital managements of the world where they can kind of get in there and see exactly what these loan book look like, loan books look like, excuse me. But if the future looks like the past and they keep growing that assets under management, along with the insurance and the new strategic holdings initiatives, like a 14 times earnings, I mean, like, yeah, it's going to do well. Yeah, I do agree. I mean, you don't really know everything they own or everything they've lent on. So it's a little hard to judge. Let's move to my second case study. This, in my opinion, is the clearest example, maybe not the best example, but the clearest example of what a great reinvestment moat looks like. So this is O'Reilly Automotive. Acre started buying O'Reilly in 2005 when it was a much smaller business. It was primarily focused only in the Midwest at that time. And it has been a core holding pretty much ever since. They've actually doubled down or bought during a couple of dips, I believe, in 2012 and 2017. For those that don't know, O'Reilly is an auto parts retailer and distributor for both DIY customers as well as mechanic shops, so auto repair shops.

Early on, Acre recognized that this business model was not only durable, but – and I think this was the part that really stood out. A, there was a big runway to reinvest. Like they could go out and add these auto parts stores throughout the country. But the returns on invested capital would actually get better as they grew their footprint. So they would have a big distribution advantage and then they could increase ROIC, which is what happened. Return on invested capital from 2005 to 2012 was between 12% and 17%. For the last decade, it's been 25% because they have such a massive footprint. I'll talk about why that is in a second. But if we look at the business model on the quality side, sort of that first leg of the three-legged stool framework, it's very durable.

The end customer base is consistently growing. Now, maybe there's potential disruption in this from EVs over time, but the number of cars on the road continues to grow every year. The average age of cars on the road increases as well, and it's very recession-proof. So if the country falls on hard times, you don't buy – less people buy new cars, and all of a sudden, you're having to get your existing cars serviced more because it's getting older and you're not swapping it out for a new one. so it's it's very resilient the other part is customers are typically in need of a part right away so they can't necessarily wait for e-commerce i can't remember the exact percentage but they mentioned that a lot of these are urgent buys it's not like waiting by it's they're going to o'reilly because you know they need whatever that screw the oil the whatever it is coolant

And they need it right away. And then on the flip side, the auto parts or the mechanics, the service centers, they typically want multiple shipments a day for any parts or certain SKUs that they're low on. And because O'Reilly has, I think, almost 7,000 stores throughout the U.S. and a bunch of distribution centers, they're able to get these SKUs in the hands of their customers much faster than an Amazon or even AutoZone. They've really won on the service center side compared to AutoZone. And then advanced auto parts is basically nonexistent in that market. So anyways, durable business. But as that hub and spoke model, where you've got the big distribution centers, you've got the stores, as they continue to build that out, they were able to service customers a lot faster. They were, they had better negotiating leverage with part suppliers. So margins grew. And then they were able to acquire these local auto parts shops, which has been a huge part of their strategy in building out their store footprint is by these local shops, you generate probably twice the gross margin that they do. It's an instant lift to earnings for that location. And it's just been a fantastic formula for returns on invested capital.

I mentioned it at the start of this case study, but 25% basically average ROIC annually since 2011. I mean, that really is strong. Yeah, I guess he bought it in 2005, doubled down in 2012, I believe. There was a temporary slump in comp store sales. And in 2017, I don't know if you remember this, Brett. This is kind of right when we started investing. But the thought was Amazon was going to destroy everything in retail. Right.

Yeah. O'Reilly sold off hard on that. So don't know his exact returns because I don't know how much he bought during those drawdowns. But since 2005, shares have generated a 21% compound annual growth rate. I really like this business. You're a shareholder, right? Or are you out now? I think I ended up selling just purely for opportunity cost, but it's like one of those classic economies of scale stories where it's like the bigger they get, better negotiating leverage, better service they can provide to customers, all that good stuff.

And I think the important part here is it was not clear that this was a phenomenal business when Acre first bought its position. People weren't talking about it as a case study for a great investment in 2005 like they are today. That's true. And do you know the jingle in your head when you say it? Yes. Yeah. So there we go. O'Reilly. They got that brand notoriety.

I'm pulling up the ROIC chart on Fiscal AI. Again, use our link. Get that discount. It's in the show notes. They did have steadily improving ROIC coming out of the great financial crisis of 2009. And it's still at 25% today. But from 2018 to today, it's actually been slowly decreasing while the current P.E. is at 30. So maybe that's a slight cause for concern.

I mean, you know, ROIC of 25 percent is still impressive. But I'm curious why that's happening, whether and what management has to say about that. Maybe it's an inflation thing. We'll see. But there's more cars aging on the road. The EV risk is potentially there long term, but it's probably not the end of the world. people still need repairs and things like that for for electric vehicles as well and i think the international market is promising we've seen a huge build out from auto zone in mexico and brazil

and brazil yeah they're going after both now yeah i do i do see the ev risk as sort of a headwind maybe to comp sales but the the math still works to generate good returns uh or generate good roic even if comp sales grow slightly slower over the next decade. Yeah, the only issue is starting valuation, which I believe we're in the high 20s today, so. Okay, when I sell my business, I want the best tax and investment advice.

I want to help my kids and I want to give back to the community. Ooh, then it's the vacation of a lifetime. I wonder if my head of office has a forever setting. An IG private wealth advisor creates the clarity you need with plans that harmonize your business your family and your dreams get financial advice that puts you at the center find your advisor at igprivatewealth.com that kind of tosses a wrench in the mix no pun intended let's go to the last case study here

it's what we've talked about a lot i'll probably keep it brief because many people know about this company but we can kind of lead into the final talk on sas because this one sort of relates to that, although it's been a long-term holding. It's Constellation Software. Again, I would classify this as different than the pure SaaS investments that they have been recently making. Let's see. Well, their initial investment in CSU was made in 2014. If you include special dividends and the topic is spinoff, which I did not do this math myself, it's perfect for the AI tools use. I'm not going to spend 15 minutes doing it myself. The initial CSU investment has probably generated an IRR of 25%, which is fantastic. That's really, really good. The actual money-weighted returns for

clients are probably slightly lower, but that's part of doing business. When you have solid returns, you get more people to invest and you have to invest at a higher price. Now, their position sizing started small, but then it grew faster than the overall portfolio. And it is now a high conviction bet for Acre Capital Management, which they've kind of pounded the table on over in the stock's latest drawdown. We can talk about more of that in the last section, but what could have led to the initial position is what I want to talk about in this case study. First, business quality. Constellation portfolio of software assets, and again, I'm talking about 2014 here, generates consistent cash flow, has low churn, and earns great returns on capital because of

the asset-like nature of software. Unlike the, quote, hot areas of software, these niches are not attracted by competition, which is an underrated advantage. Second, we have the management team. Mark Leonard is considered Buffett-like, and in some aspects is probably much better as the business hasn't skipped a beat while he unfortunately had to step away for major health reasons. Leonard should be considered, I guess, one of the few, quote, stewards of capital, where you can be honest about that. He's a true steward of investors' capital, and he has built a culture that was easily able to, I think, adapt to him leaving even at tumultuous times like the AI revolution. Third, you have reinvestment runway. You can see this

from this chart from Fiscal AI, which is Constellation Software capital spent on business acquisitions. It's been not directly growing, but generally over time, they've been able to spend more each year of their free cash flow on new business acquisitions, which grows their free cash flow per share. They are able to identify this long reinvestment runway with minimal competition in niche vertical software back in 2014. And the game may have changed a little bit today. I mean, they're at a much larger size. They've had to adapt, go into different markets, make larger investments. But back then, in 2014, this was as rock solid as the three-legged stool could get. Anything to add there, Ryan? No, I think this is a perfect example.

And it's one where, again, I think the reinvestment runway is quite large. They're showcasing that right now. They've deployed more capital over the last 12 months than any period in their history they've acquired i think the number is 1300 uh total software companies to date uh like cumulative acquisitions over their whole lifespan i believe they've ballparked their like possible acquisition targets at around 120 000 i believe is the number from an analyst report. So the addressable market is quite large and it's growing. More and more software companies start every day. And this kind of leads into our next discussion because the stock's been crushed on some of these AI concerns. I recently went to the Constellation

And they mentioned that the – someone asked like with the SaaS apocalypse, with the SaaS sell-off, are you getting businesses at cheaper discounts in the private markets? And they said, no. Prices haven't changed. That's a public investor thing. Like these owners aren't selling their businesses for cheaper because people are worried about AI in the public markets. It's just not – it's not a thing I guess in the private market. So I think it maybe goes to show what part of it is they're paying cheaper prices anyways to begin with, but maybe like what people believe versus reality here seems to be distorted in the AI versus SaaS debate. Just wait, Ryan.

Next quarter, the shoe is going to drop. Yeah, it's tough because the narrative is just AI is getting more powerful every quarter, but yet their numbers look all right. It will be interesting to see if, and I can't remember if they changed their tune on this, whether they have changed and decided to repurchase stock. I'm going to look at the amount of money spent on share repurchases. Are we still at that super flat figure, $41 million? Yeah, they've said we're still seeing better opportunities to go deploy capital elsewhere. Like, if we can buy these software businesses at one, I think it's usually around one times revenue is the average cost. Again, margins probably fluctuate, but one times revenue, that's probably still going to be cheaper than Constellation repurchasing their own shares. and there's been some nervousness around their moves into larger companies i think there's like

an investment in saber which is a total um a lot of people think it's a i'm not trying to swear it's a crap go uh in case there's kids in the car it's a travel technology company that is just doesn't seem to have good financials they have a big investment in this we'll see what happens there i think there's nervousness moving into bigger companies and maybe that's out of their expertise but clearly i mean i didn't even mention the stock has been a big dog for acri it's been it's recovered a little bit but we're still in what like a 50 drawdown now 43 it's been a huge draw drag on their returns and that kind of leads into their current current portfolio here that you made some notes on and i think we can have some off-the-cuff conversation on is the sass pivot

what happened here, Ryan? What have they been buying recently? And maybe go through what their existing portfolio looks like before we kind of wrap up, give our thoughts on their portfolio and our lessons from the episode. Yeah, they actually, they released a letter to investors about everything that's going on lately. So to paint a picture, I mentioned this earlier, but Acre portfolio is down 20% about thereabouts over the last 12 months at a time when the S&P has returned about 30 this is due partly to the software magetta and saspocalypse narrative but also some of their other leading positions that aren't really like traditional sass they're down too so mastercard visa moody's kkr they're all down basically 10 or more over the last year

john andrew and trey who manage the investments now that's the john's the cio and the other two are analysts decided to write a letter about it in february and here's what they said we have spent our time as a research team actively trying to shake our conviction to understand the vulnerabilities to ai that the market is ascribing so far we have failed to do so our frustration is high but dwarfed by our conviction which we continue to test given our conviction we are doing the only thing that makes sense to us in the face of this fear-driven ai stampede over the dominant businesses we own leaning in and buying more of these great businesses They then described four reasons that they don't see the companies they own being hurt by the AI wave. First one is same thing I think everyone's saying. AI is not a wholesale replacement for software. I'm yet to see any evidence of companies replacing truly mission-critical software with homegrown solution. It just doesn't really seem to be happening, but whatever.

second part i think this is maybe something that goes underrated code generation is estimated to be 20 of the work required to create distribute and maintain commercial software yeah writing code does not mean you've built a business it it just doesn't even in a world where distribution is so cheap you just on the internet still you got to go out and sell it and then he says the software companies they own provide mission critical stuff that their customers won't replace and then the last one was proprietary data and benefits of network effects some of these software tools they have a lot of data on there

and they're very integrated with their customers but and that all makes sense and I agree but that's I don't know if that's why MasterCard and Visa and Moody's and KKR are selling

off like oh some of their portfolio yeah Yeah, that's a different beast. Maybe they're trimming these positions. I think you may or maybe you're about to mention this. I might have skipped your notes. They're trimming them as these positions now because they're in the ETF structure. So I don't know all their capitals in the ETF structure, but that might be part of the trims because they had all these unrealized gains. Gives them more flexibility nowadays. yeah yeah it's a good point i mean just if you look at the portfolio like yeah that is probably why roper sold off that's probably why constellation sold off that is the same with um do they have crm i think they own yeah serum's a new position okay but yes um But 50% of their portfolio is in MasterCard, Brookfield, Visa, Moody's, and KKR.

And it's – I think it's more likely that – and we can talk about this. There should have been a fourth leg to the stool. These companies were just simply trading at extreme prices. Yeah, I think that makes sense because when – and I don't know if it was that February letter you're referencing here or the recent one. they mentioned hey our portfolio average earnings or something like that whatever metric they use they might use cash flow or some equivalent it was at 37 times their preferred metric last year or maybe the start of last year now it's down to 19 times and maybe if it was at 20 and it went down to 10 you go wow this is dirt cheap these companies can start pounding the

buyback or you just have attractive roic's at 10 times earnings but yeah i mean look you have higher ROIC and you're buying close to 40 times earnings, don't be disappointed when you have a drawdown like this. I agree. I don't understand why valuation is not a fourth leg of the stool here. And maybe it's because I'm thinking about my own investing philosophy where instead of reinvestment runway, I kind of put reinvestment runway and moat together. I have the third leg as I replaced reinvestment runway with valuation because I think price, management, business, is the key here and maybe they could have closer returns to that 20 25 of some of the other legendary investors if if they focused on valuation like they did yeah i mean i agree

with some of the decisions as they made recently like i think honestly i think sales you know trimming kkr trimming o'reilly at uh higher multiples and and buying salesforce i think that works out i think it makes sense yeah if you're over riley at 29 times earnings i just looked at salesforce uh pe here uh on fiscal ai it's 21 and you kind of go yeah salesforce can probably with more capital efficiency grow slightly faster than o'reilly but you think about that it's like okay say you're i mean salesforce is probably a bad example because it's a new position but constellation software say you're you think wow at the current multiple we can get 15 percent annual returns or 20 percent annual returns well what were you thinking like

what was the math when this was a core holding at twice the earnings multiple like what were you hoping for there yeah i i do i understand like they are buy and hold investors and they've done well with that approach so i guess who am i to knock them but i think the trims should have started a year ago with some of these positions or long or two years ago but this is easy with hindsight it is easy in hindsight it's not like the returns have been bad even with this drawdown and yes the comp from 2009 is tough with the s&p 500 i will wrap it up with a final question on what we think this portfolio does over the next, it's two years, whether we'd bet on it or bet on something else or bet on the market. But I want to mention that something that I think either one

or a couple of fund managers I've heard say before is that you better have opportunities to buy when you're gifted money or not, it's not a gift, but when someone invests in your fund. So with them, maybe the issue is, oh, we're buy and sell. We're never sell. Well, you're going to have attractive looking trailing results when the stuff you never sell is at 40 times earnings and then people are going to give you more money but you need something to do with that besides buying constellation software 40 times earnings or mastercard at 37 times earnings right i think that that's where you can run into trouble when generating the actual true money way to return ir or whatever you want to use for your clients yeah to answer the question you were going to

suppose, how does this fund do from here? Would you do the beat the market over the next five years or lose the market? Not even the current holdings, just the Accra focus ETF. I think it beats the market. And like, okay, if I look at their top 10 holdings, MasterCard, Brookfield, Constellation, Visa, Visa's a little stretched. Moody's has come in a bit. KKR, TopicS, Roper, or o'reilly airbnb i like all those uh and i think they all do well and again i feel like i've been people have been saying big tech is overvalued for 10 years and it hasn't worked out and those have carried the returns of the s&p but it does feel extra stretched right now it feels like we are in a bit of an earnings bubble potentially with uh the the bump in all the chip revenue

Maybe I'm dead wrong there, but they have very little exposure to semiconductors. So it's a very different bet than betting on the S&P here. There's very little overlap. So I think the returns will be different than the S&P. I would bet they end up looking pretty good, but we'll see. All right. I got nothing else. I think there's a lot to learn from them.

I love the reinvestment runway. Okay. Maybe any other lessons for Macri before we close things out? I think it's a good example of when you've owned a business for a while and you are constantly keeping up with it, you tend to know it really well. Like you actually get – you start to feel more and more like an owner so that when something comes along and someone says Amazon is going to disrupt O'Reilly, it becomes easier to make buy decisions on that stuff. Yeah, when you know it's not going to happen with a high conviction. Yeah. So I'd say maybe like the best investments might already be in your portfolio is maybe a takeaway here. Or you might have to wait 10 years, keep it in on the watch list, and then eventually it's the right price.

Yeah, I mean we talked about the reinvestment runway. I come back to the, again, focusing on durably high return on invested capital and a management team that focuses on long-term growth and free cash flow per share. I honestly use this philosophy so much in my personal portfolio. I look at some of my holdings, MercadoLibre, Coupang, Adgen, NewBank, Interactive Brokers. I think this is something I really have tried to learn from them. and it's not going to be something where you're going to chase the market and you're going to try to maybe beat it by a little bit.

There's going to be periods like they've had in 2026 where you have a massive drawdown and you're going to be very uncorrelated when you have concentrated bets and stuff that's not, like you mentioned, they have what, zero semiconductor exposure? But over the long term, if you focus on that reinvestment runway, even if you buy at a slightly less attractive price, if you buy at a slightly higher multiple,

that business will win out because it's where that reinvestment runway comes in at a high ROYC that's going to overtake that valuation. It's kind of a long-winded way of saying the Munker quote about the business quality wins out in the end. But what I think people don't remember is that you need a reinvestment runway because if you're stuck at the same capital base and you have an ROYC of 15, 15%, but you buy it at a PE of 45, but there's no growth, you're going to be stuck there and it's going to be tough last thing I'd say before we sign off is

if you have a business that you find is a real compounding machine and there's a large reinvestment runway and it's distinct not an easy target for competitors don't get in the way of it don't sell

don't that's one where you might just have to ride the valuation highs because I'm sure he could have trimmed O'Reilly at some point. He could have trimmed American Tower at some point and it probably would have hurt him. Yeah, that's a great point. All right, I think that's good to wrap things up.

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