Yet Another Value Podcast - Dave Waters of Alluvial Capital / OTCAdventures on $PIOE

Episode Date: August 31, 2020

Dave Waters of Alluvial Capital and OTCAdventures.com comes on the pod to talk about how he got started, his adventures in foreign markets, and his current investment into P10 $PIOE.

Hello and welcome to the yet another value podcast. I'm Andrew Walker, your host. And with me today, I'm happy to have the founder of Alluvial Capital and the excellent OTCAdventures.com. Dave Waters. Dave, how's it going? Doing great. How about you? Really happy to be on. No, man. It's great to have you. When I first started this podcast, you were one of the people I was like, I'm going to have them on at some point. So, you know, let me just start. Just keep going with that and start by doing what I do every podcast and start by pitching you. You know, Dave is the founder of Oatsy Adventures, which absolutely belongs on the kind of mountain rushmore of value investment blogs, if you asked me. I mean, you're one of the first and I think the people who started first, most of them have stopped and you've kept going. You've obviously built a really at this point, I'd say, very successful fund with a great track. record and alluvial so you know uh congrats on everything it's great to have you on here and all the success has been deserved so uh with that background and plug you know maybe you can just give us some background on yourself how you started oTC and alluvial and everything yeah totally well thanks to the great intro and i have to say that i mean your blog was one of those early blogs that kind of popped up a decade ago a little bit newer but just great commentary that we people weren't finding anywhere else and so there was a whole lot of us at that point and like you said most of us stopped

found another job and they couldn't write, but I kept going and it's, it's been rewarding. But I think that's how our paths first crossed all those years ago, isn't it? Cool. So, I mean, yeah, I started the OTC Adventures blog in 2012. It must have been. And it basically did it because I was bored at work. I was working for a large trust bank in Pittsburgh. It's not too hard to nail that down if you do a little bit of thinking about that. But it was just boring. I mean, trust banks have a role and they do it well, but they're not places to make money. They're places to keep money.

All that old legacy industrial wealth we have around here is not interested and pursuing anything off the beaten path. And so I was just sick of looking at the same 50 S&P 500 components every day long and helping my PMs pick which ones to make a portfolio out of. During the same time period, I was pursuing my. at Bay Charter. I was doing a lot of reading, a lot of studies, the academic work on, well, how do you make money in the stock market? And what are the ways that you can increase your odds in the longer term? And the consensus at the time, well, maybe it's been challenged a little bit by recent markets, but the consensus, at least at that time, was you have a good chance of realizing stronger long-term returns, if you can accept the risk, but, you know,

tielding a portfolio toward very small stocks, very less liquid stocks with limited trading frequency, as well as the traditional value metrics like price to earnings and price to book and things of that nature. And that suited me very well. I've kind of always been a kind of guy who enjoys a treasure hunt. I spent a lot of time in my 20s at thrift stores digging through baskets of vinyl records or trying to find a cool t-shirt or something like that. I've just, I've just always liked looking for things that no one else knows about and enjoying it when I find something that I think is really cool. So that suited me very well in my investment process. And as I started to make trades for myself and find my own investments, I knew that was the direction I wanted to go as well.

So the timing was somewhat fortuitous. I mean, in 2012, we still weren't that far removed from the wreckage of the financial crisis. and a lot of companies, a lot of, especially smaller companies with, like I said, little trading volume or they were unlisted or even they were non-SCC reporting. Well, they were just trading at such depressed multiples. And they were trading as if they'd never grow again. And but as it turns out, they would and they did. And I was just tripping over good ideas of the time.

And so I thought, well, I want to do this for a career. but how do I do that? Here I am in Pittsburgh, which is a lovely city, but not a financial capital. Not too many hedge funds here, but I knew I wanted to do that. And I didn't really have much of a blue chip resume or anything. I pretty much had just an interest and an ability to find intriguing little ideas. And so I thought, well, if I publish my research somewhere, put it online and it's good and people like it and on average my ideas do well, the opportunities will come. And I was lucky because it was a time in the history of the world where I could do that. If I were 10 years older and trying this in the 90s, it's unlikely I would have ever been

noticed. There just weren't people looking online for investment commentary and ideas the way there was by 2012 and even more so now. Yeah. So I started OTC Adventures and started writing about the most absurd, strange little situations I could find all kinds of stuff, cheap growth plays, liquidations, a little bit of merger arbitrage, asset plays, things like that. And on average, it worked. And I started getting inquiries from people saying, I love what you're doing. You write about things no one else is talking about or I've never seen. And sometimes, hey, you wrote about a stock I own.

I've never seen anyone write about this. How'd you find it? And people would often say, I'm too busy to look after this old IRA I have. And could you manage it? At the time, being a good little CFA charter holder, I had to say, you know, I can't do that. I can never compete against my employer, which is the ethical thing to do. And they'd say, well, if you ever go off on your own, let me know, I have some capital fee to manage. And so with that in mind, I decided to go for it in 2014, just a couple of years later. Now, funny how life changes. At the time, I was just sitting in my cheap little apartment in Pittsburgh, single guy, not a whole lot of responsibilities after work or on the weekends. So I could sit there doing this research. And so I started with a shoestring.

I had about between two and three million under management at the beginning of that year, which was enough for me at the time. Fortunately, Alluvial has grown and things have changed for me. Now I got a couple kids in a house and all that. And so it's funny how life changes so quickly at that age. But we still do the very same stuff. I still focus on these little-known, under-researched, under-appreciated companies. and that's what I buy for clients,

and that's what I still write about from time to time on OTC Adventures. Yeah, my only complaint would be that you don't write about enough because every time a post comes from you, I know it's going to be an interesting situation, something I've never heard of, so I love it. And I've got to say, like, every time somebody comes to me and says,

hey, I want to break into the industry, how do I do it? Like, you're one of the people I point to. I say, look, just go out and start writing online. Like, if you have no track record, you'll get better over time. And once you get good enough, you know, hopefully like you start publishing out there, people are going to start following you and maybe people aren't going to say here's a check

for 500 million dollars they won but you're probably going to build a reputation you're probably going to get job offer so you're you're like example one of what I point to what about that's exactly true yeah exactly true and people come in to say the same thing and people say I'm not sure am I good enough to have a blog it's like have you read some blogs there's no such thing it's good enough to have a blog anyone can and I look back at some of the very early stuff I wrote like, I really miss something major or that doesn't really hold up over time, but it's about learning. It's about improving. And if you're diligent at it, you will. And that's what investors want to see. It really is. And you know, you and I were both still pretty young for investors. And like,

I go back and I think of stuff I wrote 10 years ago or even four or five years ago when, you know, I was a professional investor. And sometimes I look back and I'm like, wow, like I couldn't have been more wrong. You know, when I was right out of college, one of the first stocks I wrote up was Radio Shack. And, you know, looking back at that, it's like, how stupid were you, Andrew? But you're exactly right. Like, you know, the most important thing, getting out there and I think writing is the thing that has, I don't know how you feel. It's the thing that's helped me learn the most and evolve the most as an investor. Absolutely. There's been times when I've started writing an article about a company. And by the time I'm nearly finished, I've talked

myself out of whatever opinion I held near the beginning. Just forcing yourself to organize your thoughts like that in a concise manner and really come up with a thesis is crystallizing for me at least and i don't know about you and i don't want to make this all about writing but a lot of times like in my head i'll think i'll have something but you start writing it and there'll be a lingering question and when i start writing i'm like it like forced me to break through the lazies to say no i got to go find that answer because a listener's going to a reader's going to ask about that and i have to have the answer to this and it really helps you dive deeper into investment thesis i'd say. It's so true. And the feedback you'll get as invaluable. Yep, yep. Cool. So hopefully,

who knows, maybe five years for now, somebody will send us an email and be like, hey, started my blog because of this conversation. And now I'm managing $15 billion. So thank you guys. That would be incredible. And can I get an allocation? Let's turn over to Alluvial. So, you know, you started writing a OTC. I think Aluvial, you started it in 2016. Am I remembering that currently? 2014, if you can believe it. Yeah. 2014. Okay. So you switch over to alluvial and what's the what is alluvial focus on what type of investing style do you run there? Yeah, sure. Really, there's not much of a change from the stuff on

OTC Adventures. We very much focus on small caps, microcaps, not exclusively. I mean, now and then we'll buy something larger if it's a it's a unique situation, maybe like a low float or something. That's very common in Europe actually. Yeah. larger companies, but maybe only 5% or 10% of the shares are floating. But we look at that, basically anything where we think there's barriers to entry for larger funds, whether there's not enough liquidity or the company's just too small or it's a controlled company and there are certain investors who won't get involved there. Or it's in a very unpopular trading exchange or domicile that is tough to get into or stigmatized

for some reason, but essentially, well, Alluvial is a small fund. On the whole, we have about 40 million under management. And I think my time is best spent looking at things where I don't have a whole lot of competition, whether the holder base is largely retail or it's largely insiders. And it's just not worthwhile for larger funds or really anyone to spend their time there. And that's worked out well for us, whether they're, and there's not always on list. Sometimes it's just, geez, I tell you, European small caps get no attention whatsoever. And so sometimes that you can catch an inflection point there well before the market does.

But yeah, we keep on doing that. And yeah, we have more AOM than we did years ago. But I think there's plenty more. It's going to be a long time before I run out of places to put money. There's just, there's a big world out there. I mean, what does the world have? Over 60,000 tradable securities or something. And only a few thousand of those are large caps.

or even midcaps. And so there's thousands upon thousands of securities. And I just spend all day looking at them, trying to, much like you do, trying to find something new to learn all the time. So that was great. So the most popular questions I got were on Aluvial and looking through foreign stocks and stuff.

And it's actually good. You said there's lots of securities because one of the most popular was what happens when he gets too big and runs out of securities. But it sounds like that's right there. Let's just, you know, one of the great things about OCC Adventures, Alluvial and everything is, you do focus on a lot of foreign securities versus domestic securities.

Like, it's a combination of both. So what percent of time would you say you spend researching foreign versus domestic? Yeah, you know, it depends a little bit on the state of the market and what I think are sort of relative valuations. And I'm not really macro guy. I'm not going to sit here and make a call and say that U.S. stocks are cheap or expensive or whatever. But I do think you can look at recent performance trends and get an idea of where you're more likely to find better value. I mean, if you take a look at the relative performance of U.S. stocks as a whole versus Western European stocks or Australian stocks or what have you, I think I'm more likely to find better value right now in stock markets that have lagged for the last several years. And so, typically, I'm about one-third international and two-thirds domestic by allocation.

But right now, I'm splitting my time almost evenly. And I'm actually having a bit more luck finding interesting and attractive scenarios overseas. And that could change in any time. I mean, probably back in March, I can and did find good ideas in the U.S., but we rebounded so quickly that it was difficult to find a lot before the market took care of that problem. But if you look at certain European markets or even the Canadian market, the rally, the recovery there has not been nearly as strong. And you still can find some, some companies of business models that have probably rebounded as quickly as their American counterparts,

but with stock prices that have not. So yeah, these days, it's probably about even. One of the things I think is most unique about you for someone who smoke is on smaller type companies is, you know, me included, when people who focus on smaller companies tend to focus more on asset-based valuations, I'd say, you know, they're looking for the traditional Ben Graham net net style company, or they're looking for something trading extraordinarily cheaply. I'd say you focus a little bit more on, a lot of these are very cheap, do not get me wrong, but better business models or more stable business models? Do you think I'm characterizing that correct? And what detracts you to that in particular? You are, and I will say that's been a slight evolution for

me. I mean, several years ago, and definitely when I started OTC Adventures, I definitely had a strong preference for the, oh, you know, big discount, the tangible book value, or maybe it's even a net current asset sort of play or something like that. But what I found, and it's a little bit cyclical as well, at a market low, you can do very, very well identifying securities like that and buying them. But several years into a bull market, the majority of the companies that are still trading at a large discount to asset value or what have you, trade that way for a very good reason. It's usually management. And oftentimes, as a small investor, there's very little you can do about that unless you're an activist by trade. But yeah, you know, it's interesting.

I definitely focus more these days on I want a low multiple of normalized cash flow with a big degree of ability to reinvest those cash flows and a defensible business model and smart motivated people in charge. And I find a lot of really intriguing situations like that in Europe because, and this is actually something I find a lot of investors are shocked to learn, but it's that Western Europe is actually a tremendous place to go public as a very small company. That's become nearly impossible in the U.S., just with the regulatory burden it's placed on some small companies with the Sarbanes-Oxley. I mean, if you're a small company doing, you know, 10 million in revenue, and even if you have great margins and you make like 3 million in operating income

or something, it's not attractive to go public and then spend a million or more each year in compliance costs and legal costs associated with being public, not to mention exchange fees. But certain countries in Europe, specifically Sweden especially, even Italy, France, and in Poland have made it incredibly economical and attractive for very, very tiny companies to go public and raise equity capital and to do so with only a minimal amount of additional overhead. And so I found a few incredibly attractive and compelling stories over there where a company went public and raised four or five million euro and is still 65% owned by

management or something, but floated some shares. And it'll trade at four or five times cash flows sometimes, even though they're growing at a teens rate or something. So I really, really hope for the future for investors, especially those who focus on smaller companies that the U.S. can get its act together and do something like that to ease the burden on these small companies. But But for now, the action in high quality, high growth, long reinvestment runway companies, Europe is the place to be. Not what you would expect in some cases. Yeah. No, look, I think that was absolutely perfect.

The only thing I would add there is I think to a degree what you said earlier when you said into a bull market, a company that's trading under working capital value, it's because of management. Like I also do think like in the U.S. for a lot of nano caps, it's, hey, if. something's still a nanocap reason. Something's still a nanocap in the U.S. with all these regulatory fees and everything, it's kind of, it's been picked over. There's a reason it's out there and still a nanocap and it's because management just doesn't care for a lot of reasons and they're probably just trying to build their share hurdles, basically. That's kind of how I feel about a lot of the nanocaps in the U.S. So, so common. I found that a really, really important question to ask yourself, if you're considering investing in a tiny U.S. company is why are they public? Because most

of these companies should not be. They're not getting any benefit. They're not lowering their cost of capital. They're not raising equity so they don't need access to the capital markets for equity. They should be public. And if it's not, if they're not, well, it's often a management issue where management, like you said, is finding ways to siphon capital under their own pockets or yeah, it could be any number of reasons, but there's not many good reasons for a company to be a tiny public company in the US and you have to have a good one. They're just paying a million dollars per year to the auditors and lawyers for no reason. You mentioned activism in there real quickly. Has alluvial participated in any nanocap activism or would you guys consider doing so in the

future? We have not to this point. I consider a sort of specialty skill set that you probably don't get really good at until your fourth or fifth campaign at least. And so I will say if If we went that way, if we were to participate in an activist campaign, I doubt at least at first it would be one that we initiated ourselves because frankly, I would not know what to do. And I'm not opposed to joining forces with someone to get realized some sort of catalyst in these companies. But I would be in over my head on my own right now. So it's not a tool in our toolkit for now. We've tried a few, and this is a story for a different time, but you know, the same things with scale apply like it's a million dollars per year to be public to run an activist campaign it's

going to cost a couple hundred thousand dollars whether the target's a hundred million or five hundred million or a billion or two billion and you know five hundred thousand dollars on a 50 million dollar market company like the returns to activism it's just not there just not there's true what's your current favorite your favorite foreign market right now well let's see uh i continue to really really like the alternative investments, the alternative segment of the Borsa Italiana. There are a tremendous variety of industries represented. There's a lot of just old school industrials. There's tech companies, software, tech consort, things like that. There's consumer. Not really a whole lot of the financial or anything like that. But those are in many cases,

the growth industries over there. Now, Italy, like I mentioned before, is one of those economies where it's stereotyped as oh you know there's a high unemployment there's a lot of bureaucracy stuff like that but but they really made a lot of reforms to encourage um entrepreneurial expansion and a lot of these small companies are going public for the first time they get like a 500 000 euro tax credit for doing so so i've done well there it's a fun place to look and then poland is another place that i've found a ton of interesting value lately there's not only the the Warsaw Exchange itself, but they have a segment called the New Connect, which is a lot like the OTC markets in the U.S. The listing standards are a little lower, but honestly, you can find

profitable growing companies there that in U.S. dollar terms have a market cap under $2 million, if you can believe it. I mean, that's just the tiniest of the tiny. I mean, I have clients who have private businesses worth well in excess of that, but these companies are public, and it makes sense for them. Have you tried buying into any of these sub two million dollar market cap Polish companies? Because like Alubo, you said $40 million in management. Like I started doing the math.

I'm like even if he took half of that company, like you tried or is it just not worth of bother? You know, I'm evaluating that right now. I have a couple total positions in a few of these companies. And that's the question I'm asking myself. Is it worthwhile to allocate more capital here? I mean, I sort of think that if I go this true, it's going to be a basket approach. I mean, maybe I take 5% of the portfolio and I identify 10 of these companies and, you know,

each one gets 50 basis points or something. It's probably sort of a set-it-and-for-get-a thing, too. If you figure, if I invest in 10 of these, six of them will do okay, two or three of them will do poorly, two will do well, and one will be an absolute moonshot in all likelihood, and it might go up 10x over the next five years, and that's a good return for my capital. But the language barrier is difficult as well. I mean, translation tools are better than ever, but Polish is difficult. I mean, if you, yeah.

So my wife is Polish, and actually, I've been trying to learn Polish, but I agree with you. It's difficult. I want to ask you about the language barrier in one second, but real quick, have you looked at Domino's Pizza, Poland? Yes, I have. It's really intriguing. Have you, you know, I don't want to get too sidetracked, but I've looked at it a lot. And I kind of stopped that merger, they just announced. Like, I probably think it's a good one, but I just don't know any, and they've published nothing on it.

Have you seen anything on the merger? No, I have not. And that's a thing. If you're going to be willing to invest in some of these markets, you have to figure out if you're going to be okay. We're just a somewhat lower level of disclosure. And in addition to the cultural differences in the language barrier. And that's why demanding a higher perspective return and spreading your money around a little bit can be very high. helpful but yeah that's pretty part for the course for some of these markets they have a company

release a very material news item and follow up with almost new detail and you know i'm sure our listeners were just thrilled for us to dive into a random domino's pizza polish dog exchange company let me let me give you a quick hint about that if you have a situation where you find a foreign company and they release some sort of news or something and you're not quite sure what to make of it one thing I like to do is take a look at any of the analysts that cover them if they do and reach out because more often they're not, they're thrilled that someone cares about the company. Moreover, nevertheless, an American or other large Western nation investor there would care about a little emerging markets or frontier markets company. I've gotten in

long, long conversations with analysts or investors or even reach out to some of the top holders sometimes. You have nothing to lose by doing so. And oftentimes, they're willing to talk about the company as much as you like. Interesting. Interesting. You mentioned translation issues. So, you know, one of the barriers I've had is a lot of times somebody will ping me and say, hey, this company's interesting, especially with the Japanese companies. And I'll look and their financial statements are in Japanese. And I do not speak Japanese or read Japanese. So a lot of times I'm presented with, you know, I can do the math. I can put it in Google Translate and get a rough. translation. I can say, hey, this trades really cheaply, but I can't read anything. I can't get

any disclosure personally. How do you invest in situations like that? Well, I will say that one of the best things for me, having OTC adventures and being fairly active on Twitter, is the network I felt. Oftentimes, if I find a company in France or Italy or maybe Japan or something, where I, yeah, like you, I can look at the numbers. I can probably stumble my way almost entirely through the footnotes, but I feel like I'm just worried maybe I'm missing something. I contact someone I know in that market and I say, I'm interested in this company. Would you take a look at here and make sure that what I'm thinking is what's actually going on here? And I'm, of course, willing to do the very same next time. Maybe come across

an English filing company that they're a little bit curious about. You can't undervalue a network And I do find that investors, particularly investors who are doing something a little bit outside the mainstream, are very, very willing to share their time and expertise just because it can be lonely now and then looking at a couple of these things without a whole lot of discussion around them. So, so yeah, I rely on some local knowledge and local expertise. And honestly, sometimes I end up really liking a company and thinking maybe I shouldn't invest in this. But if I'm just not sure, I'll put it on the back burner for a little bit. that there's no one saying you have to buy in anything today. In all likelihood, the price won't move that much in the next couple months and especially compared to what it might be in a few years. So if you're just not sure, just wait. There's no really no harm in that.

Perfect. Perfect. Let's see. All right. So we've also mentioned you invest in a lot of e-liquid securities and a lot of people had questions on getting positions in and out of e-liquid securities, right? So when you're looking at one of these really small companies, maybe not the $2 million Polish company, but, you know, one of these small or any liquid companies, how do you go about getting into and or getting out of these companies? Like, are you willing to put out a bid, you know, at or above ask for your whole position right then if, you know, the stock's at 10, you think it's worth 50? Will you put out a big bid at 15? Or how do you kind of go about that? Sure. So, I mean, I'm not going to give away all my trading secrets here, but, but I do have

some advice on that. I guess one thing, if you're dealing with a security that just doesn't trade too much. You have to learn to be a little bit less of a stickler on price, especially if it's a situation where, okay, you found a stock, it's eight bucks, you think it's worth 18. Guess what? Your return is not going to be affected terribly if you pay 830 or 840 or 850 or even 9 for the shares. If it's a matter of getting the shares or not, if paying a little bit above ask day after day after day is going to get you the shares versus sitting on the bid and never ever getting any shares and missing that return, I'll gladly pay it a little bit more. It's just just a fact of life.

And the same thing happens if you really, really think you made a mistake or you found something better and you want to sell, guess what? You're probably going to have to be willing to accept the price a little bit below the bid day after day to get out. That's just the price of dealing in illiquid security is just, that's just that's. just the facts. It can be painful sometimes, but that's just the way it is. Now, of course, you can mitigate that by peeing extra, extra sure before you even buy into anything. I mean, sometimes for me, knowing that if I buy 50,000 shares of this security, it might take me six

months to get back out. Well, I really have to sit there and think, do I actually have the confidence in this to sit there for a while, even if it doesn't trade? So that's incredibly important. But But yeah, I wouldn't recommend anyone go in there and just slam the market just by showing their whole hand and saying, oh, the bid's nine. I'll put a bid for 10,000 shares at 925 because guess what? The bid's going to jump to 940 immediately and stay there because you just show that there's a big buyer in the market. And market makers and other participants aren't stupid. They see that. But, yeah, there really is no substitute for the old virtue of patience either.

You just have to be willing to abandon the market. mindset of I click a button and all the shares are in my account in five seconds. That just doesn't work that way in these markets. It's a bit more old school. I mean, yeah, that's how it is. Is your exit for most of these Eliquid securities? Is it some type, you know, obviously you're not investing in a $5 million nanocat expecting a takeout. But do you find your exit is generally some type of corporate event? Or do you find your exit as, hey, you know, it was at two. We paid up a little bit and bought a lot at $2.15. Now it's at $3.50 and we're selling. You know, the best exit for me is when a company that starts out as obscure, ignored, and illiquid succeeds.

And all of a sudden is no longer a microcap, no longer incredibly illiquid, and suddenly people know about it. You'll find that companies create their own liquidity if they just operate well and do smart things. And the market gets there eventually. It can take a long time, but I'm willing to be patient, as long as the company and the management are doing smart things and trying their best to increase the value of the company. Yeah, I mean, takeouts do happen. So sometimes you just wake up one morning and see, you know, XYZ partners is taking whatever company private at a 50% premium.

That's wonderful. That happens, but you can't bank on that for most of these. So, yeah, I mean, with limited exceptions, I'm buying these companies with the expectation that whenever it comes time for me to sell, I won't be selling into the same market that I had to buy into. It's kind of the reverse of, you know, you're looking at a nano cap because it used to be a mega cap and now it's down 90%. You're hoping to kind of look at the nano cap and maybe it's not a mega, it would be great if it was a mega cap when you sell, but you're selling it as a smaller midcap because, you know, it's gone up a lot and that type of stuff. Exactly. Maybe it maybe an

uplist, maybe something like that. But yeah, the Fallen Angel approach has never worked too well for me. I I tend to invest in companies that have never been substantially larger than they are now, but hopefully we'll be within a couple of years. What's the quirky security alluvials kind of ever invested in off the top of your head? Oh, man, we own some CVRs, I mean, some contingent value rights. Sometimes you get some really, really weird securities that trade over the counter as a result of a merger or post-bankruptcy. One thing I do every day is check FINRA's daily list.

They publish a list online of every corporate action that affects over-the-counter securities. And sometimes you'll see a rights issue popping up or a new CVR has been listed or could be any sort of thing. And sometimes those are really compelling. A lot of times that much like the old Greenblatt spin-off strategy, these things show up in people's accounts. I think, what's this? Well, if I can sell it, I will. And it's gone. So yeah, we've owned a couple of CVRs over the years and, yeah, some probably the most successful, strange weird security we held was, over the past couple years, was a distressed convertible preferred issued by a Swedish issuer called Farron Nordic that had a business in Russia that was struggling right then, but turning around quickly and we were able to buy it.

It was pretty cool. It had like a conversion feature that stepped up every year and yeah, I won't get into the details, but it was, it worked. out well, but we were 75% or more of the volume over about three months to build that position and it paid off at par within a year. That's incredible. That's a great story. That's incredible. Last one, and then I'll turn away from foreign holding yourself. One of the things I've had an issue with a lot, and you mentioned Italy, like Italy in particular has been one, is you look at a security in Italy or a foreign market and the taxes for a U.S. investor can be so crazy and so harmful. Do you do anything to structure around taxes or are there any like kind of foreign environments you prefer because of taxes for one reason or another? Honestly, all I really do is

try really hard to avoid high dividend yield paying foreign companies. It's the dividend. I mean, there's really no way. Well, I mean, yeah, there's there's tax treaties and you can submit the paperwork and alleviate the burden a little bit. But honestly, well, also if a company's paying a high dividend, it's probably not, what's not reinvesting as much as it could be, and it's probably not the company for me. Yeah, it really stings. I mean, some companies, countries, you're paying 35% of more of your dividend to the tax authorities, and that's just a pure drag in your returns. And so, yeah, I definitely avoid high yielding foreign securities. And there's, there can also be weird tax things around buyouts and merger arms. So I don't really do a lot of special

situations overseas as well. I'm really trying to invest in the classic like undervalued a company that will grow and that's my return. Yeah. No, 100% agree. It's just one of the more frustrating things about foreign stocks. Let's turn over to, you know, we started planning this, your largest holding. We started playing this last week right when you put a post on them. And that night they came out with a killer announcement that sent the stock up 50%. So, you know, congratulations. It kind of ruined a little bit of our plan. But why don't we dive into P-10 holdings? The ticker is P-I-O-E. Anyone who's followed your blog has heard of it, but probably anyone who does not, has not. So why don't you give us some background on P-O-E? We'll just

call on P-10. Give us some background on P-10, how you found it, kind of your investment thesis and everything there. Yeah, happy to. First, it should be obvious. I own a lot of it. So I'm absolutely talking about my book here, not our recommendation. Yeah. So P10 has sort of an interesting story. It was a company that went bankrupt. They were called Active Power Holdings. And they were, well, terrible for a long time. So they lost a lot of money and ended up in bankruptcy court. And they were recapitalized by a couple guys, Robert Albert and Clark Webb, who run an investment firm in Texas. And they've sort of made a little cottage industry of identifying banks. bankrupt companies that are now in bankruptcy courts and taking them over, essentially, recapitalizing them by buying 49% of their shares, newly issued, injecting cash into the company, and importantly, stopping at 49% so there's no ownership change in the net operating losses are preserved. So I saw them do this a few times with a lot of success, and I thought,

these are a couple guys I need to watch. And you see this now and that. I mean, there are probably half dozen investors who just sort of have the golden touch in microcaps and small companies. And if you see them doing something, it's worth looking closer because there's nearly always something impressive and you might want to get on board. So I saw these guys take over active power. And so at this point, active power was just a shell. All they had was some cash, some net operating losses. And they were out there looking for an acquisition like a lot of shell companies are, different speeds.

I knew these guys could actually do it. There's a ton of NOL shells out there that say they're looking for an acquisition and you know it'll never happen or it'll be something super cruddy when they do buy it and they'll probably just end up bankrupt again. But I knew they could do it. And so it took a couple quarters and they were trying to sell off some intellectual properties and patents that Act of Power still had, not a lot of success. But one day I saw that they had decided to purchase certain assets of a private,

an equity manager called RCP Advisors. And they structured it really interestingly. They weren't buying the entire firm. They were just buying the management fees of the funds that RCP ran, both the existing funds as well as all future funds. And they were funding the deal by issuing another, a new 49% of shares in P10 to the selling principles of RCP, as well as some seller nodes and some cash. So essentially, they'd done the whole 49% trick twice now.

So they were down to 24% ownership, but they now had some new strongly aligned investors who owned half the company and were still working for RCP. And I thought, okay, things just got really, really interesting. If I look at the prospective free cash flow here, there's going to be a lot. Private equity management fees are incredibly steady. high margin. There's zero capax needed. And so I thought, okay, basically all the fees they gather in after overhead costs dropped to the bottom line. And at the time, they were trading at five or six times free cash flow. And I started buying shares. And pretty soon I could tell

the strategy was, well, they're not going to just do this and be one and done. They're going to keep on doing this. And just the economics are so compelling. I mean, if you can go out there and buy a fee stream, and it's not just a wasting fee stream. It includes the future funds. And you can do it at five, six, seven times cash flow. That's incredibly accretive. And so they just kept on doing that since then. They bought another private equity manager in April called five points. And then, yeah, as you said, just the other day, they announced another one their largest yet. So yeah, pretty early on, I bought nearly 2% of the company between the fund and the separate accounts I run and it's been a really, really fun ride. But yeah, it's a complicated situation and

it's definitely off the radar. Yeah, no, that's great. And you know, I've spent a lot of time in the industry and everything you said, like the fee stream, it's sucked, it drops straight through to the bottom line. These assets tend to be extremely sticky. I know, I know P10 said I think they've got like 10 years life on a lot of their, on most of their contract. So I mean, 10 years, that's so long. And it's just such a great thing. I guess the one, you know, I think it's killer investment thesis. The one thing that I would push back on when I read it is I think RCP is mainly fund of funds. And I think fund of funds get a bad rep, probably deservedly so.

And I think fund of funds are kind of like legacy dinosaur. So how did you get comfortable with RCP in that fund to fund exposure? Yeah, sure. I mean, on the whole, I do agree with you. Fund to funds have a mediocre, if that, reputation for good reason. historically they've delivered unimpressive returns and well at a high fees because you're paying two layers of fees at the same time i think what rCP does can make a lot of sense for a certain type of LP uh yeah i mean if you were running a major university endowment or a state pension

system or insurer they don't offer a lot of value for you because you have a full investment team and and you have the ability to go out there and pick managers yourself but i think rCP and fund-to-fund managers do have a role to play for the smaller LP, the family office that has $5 million to invest in private equity or the smaller or the smaller endowment of the university is something that has $10 to $15 million and doesn't have the staff. If you only have $5 to $15 million to invest in private equity, well, you don't want to put it in one or two funds

because the chances are high that you're not going to pick well. I mean, there are thousands of managers out there, and you don't have the expertise or the time or the bandwidth to interview them all. And the best ones don't even want a check as small as yours. So what RCP can do is aggregate 100 or more of those small checks from smaller institutions and family offices and have a pool of 400 million in capital. And then they can go out and do what they do best and identify the best managers and write at $20 million. check if it makes sense and get you into a manager that you could never access by yourself. So I do think they occupy a niche that makes sense, but I totally agree that the fund to funds model does not make sense for every investor.

And if you have the ability, you're better off picking managers yourself, but there's also career risk for a lot of these smaller managers. I mean, if you pick the wrong fund and you have to report that to the board, well, you might lose your job or you might at least lose your responsibility over that. future. And so it's really about risk mitigation more than it is about maximizing returns for a lot of the LPs that go to RCP. No, I 100% agree. You know, one of the great, one of the great things about the big private equity firms I always said is, look, if you are a pension manager and you write a $10 billion check to KKR or Blackstone or one of these guys and the fund doesn't do well, well, you're going to

go to the board and you say, guess what, everyone else was invested in it? Like we basically match the indices, right? If you do that for some unknown person and the returns are awful, you're going to get fired. If the returns are great, you're going to get a pat on the back. So, like, it's the old nobody ever got fired for investing in IBM. If you're a techist, nobody ever got fired for going kind of with the brand name. And RCP, I'm sure, benefits from that a little bit. Let me tell you, I have seen the returns on the funds, and they are competitive. Yeah. So, yeah, they're doing fine. What about, so P10's done a lot of acquisitions. You know, first RCP, then five points, and then the one last week. The one last week got them into, I believe it was a venture

capital fee stream. I think the track record of M&A and the investment manager business is probably mixed at best, I'd say. How have you gotten comfy with a acquisition roll-up strategy at P10? Sure. I mean, the biggest risk, well, a couple of them. The biggest risk in any M&A strategy is you overpay. So number one, you have to worry about that. But especially in M&A with asset managers, the biggest risk is that the talent logs out. the door. Because they're no longer incentivized. And if you don't have the talent, well, you don't have a company anymore because you have practically nothing in the way of tangible assets. And so I like how P10 has structured the deals. They always make sure to, well, deal the sellers in.

In every transaction that they've done so far, the selling managers of the firm have taken stock and a lot of stock. And it's not easily sellable stock. It's not easily sellable stock. It's not stock they can get rid of tomorrow. In the most recent two transactions, these managers took convertible preferred stock in a subsidiary of P-10. There's no trading market for that, so they're sticking around. Yeah. So incentives are, and this is not a new insight, but incentives are perhaps the most important aspect of manager compensation and manager alignment. And they're making sure that these selling, the people who are they're buying from are going to stick around and continue to be incentivized

to generate good return and grow the value of the franchise. And yeah, not only because they own stock, but because they also own the incentive fees and the carry that these funds can generate. P-Ton only owns the just the management fee, which is kind of set in stone. But there's still upside for the selling partners if they earn performance incentive fees.

So those are the big ones. But yeah, you do, that is a major concern and a major historical pitfall of M&A in the asset manager space. No, one of the things I love about your, I think it was your first write-up was you wrote up P-10 and the stock, I think, set $2.50 or something. And the five-point deal had just happened. And they struck a convertible preferred that converted at $3 per share, right? And the stock was at $2.50. And you just kind of look at that and you say, hey, like, I am sure the P-10 guys had to go. and like they're not setting this can the conversion price like willy nilly there was obviously a

negotiation and they pointed to it and like the buy at kind of a 20 percentish discount to that conversion price i just thought that was so interesting and such a great piece of the investment thesis uh yeah the the newest rounder preferred to stock at 3 30 yep for the majority of them and and you figure that's that's leaving something on the table for the selling partners that's leaving something that's there's something on the table for p10 as well so yeah i like that uh I want to ask you a little bit about RLECs, but anything, any last thought it's on P-10 or anything we didn't hit that you kind of wanted to get out there? Just that I think it's very, very likely that they'll uplist and perhaps even do sort of an IPO in the next year. They have to wait until the three-year clock reset for ownership change rolls around again, which will happen pretty early in the year in 2021.

But it's another case of a stock that I bought. first I bought it when it was very, very, very liquid and very, very little known, not even fully SAC reporting. But I think, and I hope it's a long, long time before I end up selling. But when I do, I'm fairly sure I'll be selling a listed security with a lot of liquided. And I would just personally say, like, one of the things I've underestimated, maybe it's just the markets or maybe it's a lesson I haven't learned is when something Uplist or something, I always said, oh, it's like the same value, but it can serve as such a catalyst. It can really, maybe it's the markets, but I agree if, you know, I think it's going to be one of those, you invested nanocap and e-liquid

and you're selling kind of mid-cap and lots of liquidities. That's the goal. It doesn't always happen, but it's the goal. Let's talk RLEC. So an RLEC is a rural, local exchange carrier. I know you've had a big position in a couple different ones over the past couple years. There's been a lot of biode activity in the space recently, actually. And I think you're still in LICT.

I think that's one of your largest, if I remember. Right. I also own Nubera Communications. and those are my basically the two. So, you know, just real quickly, you know, RLECs, these are the guys who provide, you know, legacy. They provide your local telephone in kind of rural communities. What attracted you to the RLECs, kind of how did you get turned on to them and what did you see in them? Sure.

This is really a case of, well, where my expectations to these companies are sort of radically different than what the market sees. The market, for good reason, for a lot of cases, just views these companies as melting ice cubes. And I mean, who wouldn't? Who has a landline anymore? I mean, people do, but fewer and fewer each year. And I mean, the landline is, it's a dinosaur technology. It's probably won't exist in 10 years. And so why would you ever want to own a company that is selling a product that likely won't exist in 10 years?

Well, the one exception might be is, if they're harvesting the cash flows that that business still provides and investing in something attractive that will exist, not only 10 years from now, but 20 years, 50 years, it's a product that people need more of all the time. And that, of course, is internet connectivity. So, and this is a story of not just the market incentives, but what's going on with the government. So historically, for a long, long time, the federal government, as well as state governments, have subsidized, rural, well, nearly all phone companies, but especially rural phone companies because they wouldn't exist without subsidy. It is not profitable under any circumstances, under any reasonable rates

to provide phone service to sparsely populated rural areas. I know that well. I grew up in an incredibly rural area. And yeah, good luck making money running a cable, you know, a mile up a mountain to two households up there. You'll never get that investment back. And so for the simple reason that rural people still need to participate in the economy and communicate, the federal government has always subsidized that. Well, the federal government got wise a couple years ago and said, why should we keep on subsidizing phone connections and long distance and things of that nature? What we should subsidize is broadband. We should offer very generous subsidies to these rural telecoms and essentially paid them to put fiber in the ground. And so that's what they did.

Starting with the Connect America Fund and now Connect America Fund, too, the federal government went to all, the FCC went to all these companies and said, look, you can stay on your current subsidy schedule, but we'll make it really, really attractive for you to take all this generous annual subsidy money. If you promise that 10 years from now, all of your clients in your service area will have at least the bare minimum of broadband. internet. And they all said yes. I mean, these subsidies were incredible. In some cases, it increased these companies' revenues by 30, 40, 50 percent. And they all saw the writing on the wall, too. They knew their traditional business was dying. And so they all left at this

opportunity. And so companies like LICT, companies like Nuveira, they're rapidly transitioning from being a traditional landline heavy telecom operator to being a fiber network office. operator, a fiber operating network owner and installer. And if you take a look at the value of fiber operating networks recently, I know you have, I read your read up right up on Zayo and everything like that. The value is large. And in some areas, it's getting larger. No, of course, it all depends on where the fiber is and how many crossings and interconnects

it has and what kind of traffic it can generate. But fiber is valuable. And so companies like LICT and NUVERA are putting fiber in the ground as quickly as they can. They're increasing their network by hundreds of miles a year. And they're basically future-proofing their business models. Every quarter as it goes by, they have more and more broadband revenue and less and less landline revenue. And that's as it should be. At this point, LICT is, I believe, over 60% broadband and subsidy revenue.

And that's in 40% landline. In five or 10 years ago, it was the opposite. And so if the market is still valuing a lot of these companies, as if they're these melting ice cubes, the market is caught up to LICT a little bit because the company has known debt. Mario Gelli is the largest shareholder and they buy back shares like crazy. Nouvera has been a bit more frustrating. It just kind of sits there, but all the same.

They're paying down debt. They're putting in fiber and trading it around seven times cash earnings. And so, yeah, it's just me sitting here waiting for the market to realize that the currency of the future is broadband. And broadband providers are going to be incredibly useful incumbents. And they're not facing another thing. Another question I get is, okay, you know, Arlax, look at Frontier, look at Windstream, look at, you know, all the other ones out there. Yeah. They all went bankrupt.

Why is this any different? And I said, well, they're very different companies. I mean, Frontier had to compete in various markets with companies like Charter and Comcast and all these other well-funded, extremely aggressive providers of their networks were terrible. Frontier's network was awful. It was large in copper. And they had massive, massive debt loads and large legacy dividend obligations. Well, that's not the case for a lot of these tiny rural telecoms. They're literally operating in places that it is not at all profitable to be an overbuilder. They're going to go to a fiber optic network and then it'll be the only fiber optic network likely for decades if not forever and so they'll be the sole beneficiary of that i mean in more densely populated in affluent suburbs you can go to fiber optic network and then the cable company can lay their cable down right beside you and then you have to share the economics and it's terrible doesn't happen in these rural telecons because they're the only game in town so that's the big difference there yeah yeah no look

i completely agree with you i've done a lot of work in the space and You know, the biggest barrier is having something that it's already laid down in the ground. You're the only person and nobody can economically kind of economically overbuilded you. You know, I'd say there's been two big buyouts in the space recently. CBB is kind of a loose Cincinnati Bell kind of a looser comp. But O'Tell, obviously, I know you've talked about it a lot. That's a perfect comp for these guys. How are you looking at these, you know, what's driving this merger and acquisition interests here?

And how do you kind of look at that for the rest of your RLDC? yeah sure there's well a lot of it is scarcity value i mean there are only so many fiber up big networks there's only so much territory out there and so and a lot of these produce incredibly stable cash flows the prime asset for infrastructure operators and uh anyone else who wants to leverage a very stable cash flowing asset there's there's actually been a few smaller bites as well in north state telecom and north carolina was taken over last year and year before, a couple years before that horizon in southeast Ohio was taking over two. So, yeah, I think the hotel acquisition was a little different. They were struggling.

They did face pretty heavy competition in some of their service territory. And frankly, the board was kind of weak and didn't really run much of the process. And they were very wireline and copper heavy as well. They didn't get a great deal for them. But I do think the the telcos that have successfully transitioned their networks to majority fiber and are far along in that process, they're going to continue to get interest from private equity, from infrastructure funds. And you might have cases where they do a sale and leaseback of their assets and generate a ton of capital. But yeah, it's a good asset. There's only so much to go around. And with interest rates as low as they are, there's a lot of attention being paid to these.

yeah no i 100% agree you know i i'm sure you read the hotel uh the merger background in the proxy but it was basically the board was like i don't know what to do like please they got a buy out and i think they were they were very happy with the price and buy out they got because they felt like yeah yeah they were the the smallest weakest herd member they got picked off but oh wow it sounds like right now uh new vera is your favorite in the rlec space Well, it sort of depends on what you want. I mean, LCT trades it around five and a half to six times EBITDA, but they have substantial net cash, some non-core assets they're selling, and they're just voracious repurchasers. They'll probably buy back a thousand shares this year of the 18,000 that are out

there. And only about half of those are in the free float. That trains for like, what is it, like $20,000 per share or something, right? It was. It's around 18 right now. You know, I'd say the one nice thing with LICT is you mentioned, it's run by Mario Gabelli, who is a very famous value investor. And, you know, at least there, you know, like, when it's controlled by somebody like that, you know that there's not going to be any stupid decisions, right? Like CBB, where Mario Gabelli was actually an activist in it, they way overpaid for some Hawaiian acquisition. And like, the capital allocation had been absolutely awful. And like, with Lick, like, maybe he's going to make bad decisions, maybe you won't. But you know, it's just not going to be like a stupid.

decision that the moment it gets announced, shareholders are going to be revolting up in arms. And over time, that's come to mean so much to me. I totally agree with you. I mean, Nouvera, on the other hand, is very, very cheap on the numbers that has a double-digit, normalize the pre-cashbow yield. It's got about two turns of debt on its EBITDA. The debt's very, very cheap. It's from co-bank, which is a whole other podcast you can do on how awesome they are. But they're run by people who I think are really nice and they're competent, but they're a bunch of very nice, don't rock the boat kind of people. And they may not do the absolute optimal thing as far as capital allocation goes, but they're doing something good.

The acquisition that did a couple of years ago of Scott Wright's Health Fund has been very successful. When I talked to the CEO, he never stops talking about additional acquisitions they'd like to do. And so I think they will at some point. But they're not going to be as aggressive as LICT. But again, what comes down to what do you want? Do you want to pay up a little bit more for the guarantee of great allocation, more and more, that's been a better decision, at least my own investment making. But then again, at the end of the day, sometimes those numbers just get in your face and, wow, I got to go there. So I own both. I hear you. I hear it. Last thing, last question I ask every guest, you know, any other podcast guests you'd be interested or you

think would make for a good guest? Yeah. I mean, I talked to a lot of managers. And I was fine that The most interesting conversations is when I see someone and I think, what you're doing is cool. I'm not sure I totally understand it. And I like to know more. So I think the guy's at Vanshap, Capitol, are very interesting. That's Evan Vanderbier and David Shapiro. I talk to them. They do a lot of investing and really out of the way places.

They have a hoardings in the nation of Georgia of all places. So, yeah, they can be fun to talk too. And I don't think this guy, well, he wants his own capital, but Wexble. value on Twitter is also incredibly interesting. We've met up a couple times. He always has a lot to say. I always come away learning something I never knew before with a different perspective on something I thought I knew. He's in London, isn't he? Yeah, he bounces, New York, London, Dublin, he gets around. Hey, Dave, this has been a great podcast. It's great to have you on. All the success is deserved. I love the blog. I'm really happy for you and Olivia. It's been awesome.

Thank you so much for coming on, and we'll have to have you on again at some point. I love it. Thanks so much. It's been great.