Welcome back to the Rate of Change with York Wealth Management.
As advisors to some of the wealthiest families in the country, the Rate of Change is a podcast
designed to help you in the pursuit of building long-term wealth through the insights of some
of the brightest minds in asset management.
I'm your host Murdoch Gatty and in today's broadcast we're speaking with Luke Cummings,
the co-founder, CIO and managing director of Harvest Lane Asset Management.
If you enjoy reading about the latest mergers and acquisitions and takeovers in the AFR
and always wondered what is the best way to make money out of these stories, then I think
you're really going to enjoy this conversation with Luke.
The first time is Harvest Lane is an absolute return fund with a mergers and acquisitions
arbitrage trading strategy.
The fund seeks to profit from M&A activity due to pricing inefficiencies whilst in the
process of these takeovers and mergers.
Luke discusses current activity, what a good opportunity for them looks like, how they
manage risk if a play goes against them and we explore some recent activity in the market
such as Origin Energy, Liontown and we dig into some sectors including the tech space.
Harvest Lane's approach has returned 10.61% for the past 12 months with an 8.45% annualized
return since inception.
For me, I really enjoyed hearing Luke unpack the nuances of this strategy and there are
so many similarities to playing poker.
In particular, hearing the play by play for the rise and fall for the Liontown deal.
This deal had many major players in the game such as Gene Reinhart, Chris Ellison from
Miner Resources and Viom for the company.
So join us as we hear how Luke and his team managed to navigate this circus to a profit
whilst many others failed.
Before we get into this podcast, I'd also like to encourage you to listen to the disclaimer
at the end of this broadcast and to keep your feedback coming.
You can reach me at mgatty at ywm.com.au.
So with that being said, I hope you enjoyed this conversation as much as I did.
So sit back, relax and enjoy it.
Luke Cummings, welcome to the Rate of Change with York Wealth Management.
Thanks, Madhav.
Good to be here.
Good to have you here, Luke.
Why don't we start things off and can you give everyone a bit of an insight into your
formative years and how you managed up in the beautiful world of financial markets?
Yeah, sure.
Probably not the world trodden path for most.
I grew up in a smallish country town in New South Wales.
I don't think anyone in my family had ever owned a share as far as I'm aware.
I didn't know anyone in the stock market, didn't know anything about the stock market.
So it certainly wasn't something that was on my radar.
I was fairly low socioeconomic to mid socioeconomic background, I guess.
And just before I was meant to start university literally the day before as a journalism undergrad,
I had a very last minute change of heart.
Ended up working in the first instance of art and asset management.
It's probably a firm that's fairly well known to your listeners when they were quite small
themselves.
I think maybe I was employee number 13 or 14.
And I just thought it was the most brilliant thing I'd ever seen, this sort of concept
that I guess if you don't know better, you assume that the way you make money is you
work for it and you get an hourly rate and you rely on a boss who's going to give you
a pay rise and that's how life goes.
And I think to have your eyes open to the fact that there's this cool thing called the
stock market and through your own endeavors, I guess you can use other people's endeavors
to make frankly amounts of money that I would never have imagined or envisaged when I was
growing up.
So that was sort of ended up in markets, I guess.
I suppose we'll get into how Barbers Lane came to be, but that was my background.
I don't think I'd even heard of the internet until I was probably 17 years of age, as in
I don't think we had, maybe we had a computer at home.
It certainly didn't have internet access.
I played lots of sports when I was a kid and just had a, I guess, a kind of 1980s, 1990s
Australian childhood.
Yeah.
Wow.
Could you imagine all the kids listening to this now are just going, sorry, what?
You didn't have internet until you were 17?
I'm not sure I had a mobile phone until I was 20.
Such a foreign concept in this modern world.
Absolutely.
So journalism, the reason I find that so interesting is being on trading floors and some of the
best managers I know of, Marnie, have the most interesting pathways into management.
What made you look at journalism?
Yeah.
Look, I think, as I said, I played a lot of sports as a kid and I think, absent being
an athlete, I thought that being a sports journalist would actually be a pretty cool
way to stay involved in that world.
And zero concept of the fact, of course, that everyone wants to be a sports journalist,
right?
Not many people want to be a political journalist or a financial journalist.
They want to be a sports journalist.
So I guess I had reasonably good marks in English at school.
My teacher told me I was a good writer and that seemed like a logical thing at the time
to do.
And I guess it's, it spins me out a little bit to think that my life may have been completely
different.
I've gone ahead and done that.
I think with the benefit of hindsight, it probably would have been better off focusing
on a law degree, would have been more useful for what I'm doing now than a journalism degree.
But it's funny how life works out, I guess.
Well, journalism would teach you how to research, essentially, which is predominantly 90% of
what you do, right?
Yeah, for sure.
I mean, the love of, I guess, reading, we'll talk about it a bit more.
But you know, there's a lot of reading, there's a lot of researching, there's a lot of digging
for things and I guess nuggets that other people have overlooked.
So if you don't enjoy reading, you're going to find this difficult, this job pretty difficult,
I guess.
Very true.
So Harvest Lane, Harvest Lane is your baby.
How did that come to be?
What's happening now?
What's the philosophy?
Yeah, so looking again, for someone who's quite the planner and likes to be organized,
I sort of fell into being a fund manager too, I suppose.
So I worked at Platinum Master Management, great experience, a bunch of really smart
guys there who I had good exposure to in the early days, I guess, because the team was
so small.
I took a detour and worked for a subsidiary of ANZ for a period of time, was basically
became a stockbroker, working for someone else, was involved in as a partner in my own
firm with a couple of other co-founders, we sold that business.
That would have been circa 2009, 2010, so markets were still really bouncing around,
I guess, a lot at that time.
So the idea that you sort of had this pool of capital from the sale of our business,
a non-compete cause, so couldn't necessarily go straight back into product if that's what
I wanted to do.
And it probably had always had an aversion, I guess, to kind of beta risk in markets,
right?
But this idea that most people make money when stock markets go up and most people lose
money when stock markets go down, it sort of feels to me like it's not quite enough
control, right?
Even the best constructed portfolio of predominantly long-only positions, at least in the traditional
sense, you wake up tomorrow and US market's down 15% or 20% for some reason, that portfolio
is likely down by a similar number.
I think if you're 25 or 30 years of age and you have a job and your income's not dependent
on the stock market and you're not retiring until you're 65 years old or thereabouts,
you don't kind of have that exposure to the sequencing risk, I guess, right?
But when you have a pool of capital but you don't have a job but don't have income, which
was sort of the position that I was in post the sale of that business, the idea that a
whole lot of work to construct a long-only portfolio but yet still at the mercy of the
US market, I guess, out of the back end of the GSC wasn't particularly appealing, at
least from my perspective.
So I think we sort of started to think about, and I say we, I had a couple of co-founders
initially, we sort of started to think about, okay, well, how do we sort of protect and
ideally grow this pool of money in a reasonably safe way?
Something we'd also, I guess, done as part of our stock-broking life was just look for,
I guess, I'm going to call it a loophole, but really inefficiencies, right?
Things that other people are overlooking that sort of sitting in plain sight but for various
different reasons, people just don't pay attention to.
So I think in particular, if I sort of go way, way back, with small amounts of money,
buying a diversified portfolio of stocks when you're 23 or 24 years of age and really hoping
to become wealthy as a result of that just takes time, right?
It's very hard to buy BHP and Westpac and Woolworths and whatever else people buy and
expect to really grow your wealth at an outsized rate.
But what sort of struck me or struck us was there were all these cool things of which
merger arbitrage was one of them where the market would just misprice them for various
different reasons.
So we just got to the point where we're just looking for market mispricings and we're trying
to identify things where future share price performance would be dictated by events,
specific to that company and not the market more broadly.
And I guess we'll get into a lot of the merger arbitrage type stuff that we do really fits
that bill because all of a sudden you have these stocks where their performance is specific
to whatever transaction or event they're subject to.
They should have very little correlation with other stocks in the portfolio and they should
have very little correlation, chosen well with the market more broadly.
A little bit of a tangent, this story is floating around on the internet in various places,
but I guess my other aversion to losing money and to having I guess market linked performance
as opposed to stock specific performance.
One of the loopholes is maybe a story for another day that we thought we'd found in
the market or an interesting niche.
We became pretty confident early on, I'm talking when I'm maybe 22, 23 here, that we'd figure
out a way to pretty consistently make money without losing it.
Nobody would not recommend this to anyone, but got to the point where we started borrowing
money on credit cards like with cash advances in our early 20s to fund this trading strategy,
which sounds absolutely crazy with the benefit of hindsight.
I completely understand.
But the thing was, it was a very short kind of hold period, I guess.
You had kind of an inbuilt safety buffer of sorts in the strategy and the key was just
not to lose money.
If you're borrowing money from anyone, whether it's a credit card, a margin loan or anything
else out of your mortgage, disaster happens when you're leveraging either positions that
you lose money on.
I think that really, I guess, focused my mind on making sure that we protected capital and
protected downside because I think a lot of people go wrong, not by failing to make money
in good times, but by losing too much or suffering drawdowns that are too large when markets
are not performing well.
So, yeah, it's a bit of a backstory that, as I said, I absolutely emphasize that no
one in their right mind should ever consider doing.
I want to know what that strategy was.
Wait, look, I mean, the really short version was, which we still do a little bit today,
but far, much less than we sort of did once upon a time because we're sort of bigger now
and it's harder to exploit.
But this concept of kind of these deeply discounted cap raisings, right?
Whether that be a share purchase plan or a rights issue or whatever the case may be,
keep in mind I'm talking about 20 odd years ago here now.
So like most inefficiencies in markets, they tend to get traded away over time.
But I think if you kind of go back to Finance 101 or 201 or whatever we all studied at university,
the idea was that markets are supposed to be pretty efficient, right?
And we all know about kind of theoretical X rights price.
If there's a rights issue that a company is conducting.
And I'd say a lot of the time now when a company goes X rights, very frequently it will fail
to hold its theoretical X rights price.
So the idea that you would own the stock beforehand can take up your rights and make money.
It doesn't actually usually work, right?
If anything, the opposite.
Once upon a time, though, that certainly wasn't the case.
And I'd say something like a share purchase plan as an example, which is not typically
pro rata.
It probably looks more pro rata these days because companies tend to conduct share purchase
plans more like their rights issues.
But once upon a time, irrespective of holding size, you could buy, I guess, initially $5,000
worth of stock and it became $10,000 and it became $30,000 worth of stock.
Because you don't have institutions actively participating in share purchase plans because
it's too small for them, that part of the market was just far too inefficient.
So instead of trading back to the share purchase plan price or the theoretical adjusted price
post the share purchase plan, quite often these things wouldn't move at all.
So if you had the ability to buy discounted stock through a share purchase plan, through
selective rights issues, you're basically making free money is what it came down to.
So a little bit of market risk between when you pay your application money and consult
the stock.
Typically, that was a period of less than a week, which is obviously a fairly stressful
week.
But you had a nice in-built buffer discount on the downside.
So you were probably 10% or 20% ahead of the curve before you even got started.
So in a nutshell, that's the very short version of what we're exploiting, which went on for
a long time actually, which was really cool.
Unfortunately, it doesn't work anymore, which is a shame.
But it was a pretty fun time.
And look, I think when you talk about how did you end up at Harvest Lane and the strategy
that we're trading, I think to be an active fund manager, you can't believe markets are
efficient.
But I think for me, that was a real eye opener around the fact that, okay, well, you think
that something really cool like that would be exploited or would be traded away and it
wasn't, which I think probably just made us start looking for other things that we felt
were like that, I suppose.
We'll get onto some good stories about that in a moment, I guess.
So moral of the story is you're always looking for sticking money in, not losing it, finding
essentially miscalculation or a discount where essentially there is a profit margin in which
you could calculate, decrease the risk and then have a short-term exit, which I suppose
is the cornerstone of what arbitrage is.
Yeah.
For sure, like in that instance, absolutely.
That's exactly what we're doing.
And I think about what we're doing now as a variation of that.
If you buy situations that are mispriced frequently enough, then whether 20 years ago it was a
discounted share purchase plan or whether today it's a takeover or merger or whatever
it is, if you're buying stuff that's mispriced, the market usually at some point figures out
how to price it correctly and then it's just bankroll management.
So if you've got an edge, if you can keep exploiting the edge over and over again, the
profits tend to take care of themselves and you just need to make sure that you're adequately
position sized in each instance so that when things do go wrong, which they inevitably
do, it's kind of a paper cut rather than something more fatal.
So for everyone out there that's not familiar with merger and acquisition arbitrage.
Do you want to give a bit of an overview of what that exactly means and a couple of examples?
Yeah, for sure.
So I guess one that's catching the public's imagination at the moment as we record this,
I should say we don't have a position in it, but Origin Energy, so Origin Energy would
be a name I guess familiar to most, one of Australia's biggest electricity retailers,
is currently the subject of a bid between where Brookfield and EIG are jointly bidding
by a scheme of arrangement for Origin.
I would say merger kind of flies under the radar most of the time.
Most people probably don't know about it.
No one thinks about it.
It doesn't get much newspaper coverage and this one's really captured people's attention.
I think Australian super, obviously a very big custodian of the wealth, superannuation
wealth of a lot of Australian mums and dads has been pretty outspoken about the price
being too low in this instance and have been putting their money where their mouth is acquiring
shares.
The vote's later this week.
It's going to be really close.
I'll stick my neck out and say I think it's going to get voted down in its current form.
Let's see what happens.
But it's probably a good segue.
So keep the math simple, I guess.
Stock trading at 60 cents, let's say for argument's sake, receives a takeover bid from one of
their competitors at a dollar a share, let's say.
The way the bid would be announced would look something like company XYZ is buying company
ABC for a dollar a share.
That's a 60% premium to its recent trading price.
We expect the transaction to complete in three months' time.
It's subject to receiving 50.1% shareholder acceptances, what they would call no materialized
dose changes, which is usually an unusual challenge in the level of earnings or net
technical assets.
So with three months to go, I'd expect when that stock resumes trading, it probably trades
at 96, 97 cents, let's say.
So from our perspective, there's really sort of three things that happen there.
We buy the stock at 96 hoping and expecting to get a dollar, and that's fine.
That doesn't sound very interesting.
But if you do that often enough, paying 96 and receiving a dollar in a pretty low risk
scenario works just fine.
Ideally, what sometimes happens is that one dollar bid gets improved to $1.10 or $1.20
or $1.50.
I think I was telling you when we were speaking recently that the craziest one I've seen was
a bid that started at a dollar and finished at $8.50.
And people just say, how the hell is that even possible?
It's like an auction for a house, right?
You turn up on the day, you don't know who's going to come.
And first bid very rarely is the last or only bid.
And it's just a matter of, well, who else wants to own it?
And how much can they afford?
And how keen are they?
And that's really in the situation what that is.
So that's obviously really good for the strategy.
And what we're trying to avoid is buying something at 96 cents or 97 cents, expecting
to get a dollar and then something goes wrong and the stock trades back to 60 cents where
it was before or 50 cents or whatever the case may be.
So the key obviously there is you want to keep paying 96 and 97 cents and getting a
dollar.
Occasionally, you want to get $1.10 and $1.20.
And as infrequently as possible, you want to avoid having to sell because the transaction
breaks and you're getting 50 or 60 cents.
So as you'd imagine, a lot of our process is designed around identifying what we think
the risk is of the transaction not completing in the first instance and getting comfortable
around that.
Assuming that's the case, it'll go into the portfolio in some way, shape or form.
Trying to then, I guess, secondly, identify who else might be interested if not just the
current bidder and also at least a rough idea of what we think valuation might be that's
reasonable in the circumstances.
And I guess the third facet of that more recently as we get a bit bigger is sometimes injecting
ourselves into the process in a more active way.
So you can run this strategy somewhat passively as in you still have to be active in terms
of doing the work to decide what goes in your portfolio.
You have to be really organized around monitoring key dates and vote levels and when conditions,
if they are satisfied or not satisfied.
And I think the more active component of that is we've probably participated in 60 deals
a year for the last 10 years or so, maybe more than that.
So you get a pretty good idea of what works, what doesn't work, when buyers can be pushed
a little bit harder, maybe when a target company wants to engage but hasn't quite figured out
how to do that.
We find occasionally that inserting ourselves into that process behind the scenes can be
useful.
So in a nutshell, what we're doing, I think where's the edge there?
The 96 or 97 cents that you're paying, part of that's just a time value of money component,
so interest rates and the discounted future cash flow back to today's dollars is part
of that.
Part of that is the risk that the transaction doesn't complete.
So buyers and sellers have to, I guess, make a judgment on what the likelihood is of that
happening or not happening.
But there's some other sort of, I guess, natural reasons for people to sell.
So other small and mid-cap, long-only fund managers, I mentioned that beta, the market
correlation comes out a lot of these transactions once they're announced because the future
return path is dictated by the transaction itself and not the market more broadly.
So market goes up 10%, probably doesn't affect it very much.
Market goes down 10%, shouldn't affect it very much and certainly doesn't impact upon
the likelihood of the transaction closing, assuming we've done our homework.
That's good for us because that's what we're managing to.
But for a manager who needs a certain amount of beta in their portfolio and is sort of
tracking a benchmark, having the beta fall out of that stock is actually a negative from
their perspective because it increases their tracking error.
So that's a factor.
And I think the other factor is lots of these names, especially when they're sort of small
and mid-cap.
Lots of retail shareholders who when a stock's up 60% or 70% a day because they've got a
takeover beta are really happy to sell it.
I think in other deeper markets like in the US and Europe and other parts of Asia, your
event funds, M&A funds, whatever you want to call our stall of strategies is quite common.
But in Australia, to the best of my knowledge, we're the only one who are doing it in a systematic
fashion where that's our sole focus.
So I'm sure there are other kind of multi-strat funds and maybe long-only funds that do bits
and pieces of it maybe because they're familiar with the stocks that are subject to the bid
or because they have more cash at any particular point in time than they would have otherwise.
But yeah, when you start looking around for people doing it actively in Australia, we're
it.
So we usually have pretty good choice of stock being offered to us when these deals are announced.
It's quite interesting.
You talk about risk mitigation for we just seen a Lions Town play out.
The spectacle that was a Lions Town.
Do you want to use that as an example to walk through the good, the bad, the ugly and you
know how I'm not too sure if you were in that and then how you deal with something of that
magnitude or the events that unfold?
Yeah, I mean, that's a probably unusually complex situation as well in some ways.
I think a lot of this stuff is really vanilla and boring, I would say.
Not boring to us.
I love it.
And I think the whole thing is just like sport in some ways.
But a lot of it is a transaction gets announced.
You have to do a lot of research to make sure that you kind of have a handle on whatever
risks or conditions are inherent in the deal.
And honestly, not much happens.
You buy something at a discount and more often than not, they complete in their current form
and that's it.
It gets exciting if there's a counterbid or multiple counterbids and it's obviously not
very exciting if the transaction falls over.
But the Lions Town was really interesting because it had traded at a discount to the
bid at the time, at least in the first instance.
So and we did have a little bit of it at that point.
Not a lot.
It wasn't a big position size for us at that time.
There were still a few risks in the deal that we weren't particularly comfortable with or
yet comfortable with, which sometimes happens, right?
Sometimes you just need time to get your head around the variables to work out what your
ultimate position size should be.
But we did have some and then when it traded to the bid price at $3, in the first instance,
we weren't a seller.
But I think as it became clear, it became pretty clear it was Gina who was buying that
stock at least initially.
And I guess this is where experience is helpful.
And I must say that you don't know this in advance.
So it's not like we knew for sure that that was going to be the case.
But we've seen other situations where Gina and also Chris Ellison from Mineral Resources,
when they buy stock, they're not buying stock to bid themselves.
They're buying stock to block potentially.
And it's not unusual for them both to turn up in the same situation.
So I think the thing with Lions Town was we couldn't see the path through for the bid
succeeding in its current form, certainly.
I mean, effectively that buying had paid to that.
And then the question was, well, are they going to bid themselves or not?
And look, I played a lot of poker when I was younger.
I haven't played a lot recently.
But the thing that's fascinating to me about poker is there's the cards.
So it's pretty easy to get a handle on pre-flop, what your odds are based on the hand that
you have, what your odds are at any point in time based on the hand that you have.
And the cards you see in the middle.
But of course, the game gets interesting when there's more cards in the middle.
And now all of a sudden, there's a bunch of unknowns.
And you have to try and work out what your actual odds are based on what your cards are.
But also what others may have and what others may represent that they have.
And a lot of the dark arts of murder are, I guess, is people tell you what they want
you to hear or they tell you nothing at all.
And it's trying to work out in that situation, at least.
And it's not normal to have to go to this extent of doing analysis on people as opposed
to the transaction itself.
But I think some other transactions we've been in previously told us that Gina probably
wasn't going to bid at least straight away.
And look, as it turned out, obviously, for anyone that was in that trade, they did a
pretty hefty cap raising at a pretty big discount not too soon thereafter, which meant that
any ARB funds that were in that trade, expecting that there was going to be a counterbid.
You know, from Gina or anyone else, obviously lost a lot of money through that process.
So what sort of happened there was, I mean, the downside in that transaction is what we're
trying to avoid.
Absolutely, the difficulty in Linetown, I think, even for us, was part of the attraction
of these strategies, the counterbid, right?
So when there's a bid at $3 and you see someone buying a lot of the stock, once upon a time,
my first reaction would have been, oh, this is great, there's another bid coming, right?
And if you think about those transactions I mentioned where the first bid's at $1 and
it ends north of $8 or the first bid's at $3.75 and it ends at $11, at some point, someone's
had to aggressively get involved and buy stock and come over the top from a bid perspective.
So I think the confusion, with less experience in Linetown, I could easily have thought that
all of that buying was going to lead to a counterbid when in fact, not only did it not
produce, not lead to a counterbid, but it actually led to the deal breaking and a pretty
big cap raising at a discount.
So yeah, it was a bit of a curly one to throw at me, to be honest.
Not common, I would say.
But yeah, that's the benefit of experience, right?
Sometimes I talk to financial advisors and research firms and they're like, oh, there
are vehicles offshore where this is sort of passive and it's done via an ETF.
And my first question is, oh, how's that ETF going?
And they're like, terrible.
It makes sense, right?
If you just bought all of these deals when they're announced, then just don't actively
manage them.
Don't adjust your position sizing.
Don't make phone calls to check assumptions and kind of do the industry background and
just let things run their course.
I absolutely guarantee you lose money in this strategy because the key is to avoid the losses
and the blowups.
And it's just bankroll management, right?
It's the same as poker, I guess, right?
There are some hands you'll never play because the cards are rubbish.
There are some hands that for the right value, you'll play.
It doesn't guarantee that you'll win.
But if you position size in terms of what you have in the pot at that point in time,
then it's fine.
And there are other things where the odds are massively in your favor and that's when
you want to have a lot of money in the pot, albeit like poker in markets, weird things
happen and sometimes you can think you're on a sure thing and you're not.
So we're just ultra focused on just making sure that everything is position sized accordingly.
No matter how confident we are so that if something unexpected does happen, yeah, it
hurts a little bit and lose a couple of percent of the portfolio in a deal potentially, but
it's fine.
That happens a couple of times a year.
It has done every year for 10 years and you live to fight another day.
What you don't want to do is be so invested in something that goes wrong that it wipes
out your capital and then you've got nowhere to go from there.
So someone called me a bush lawyer the other day, I think to your point about being a journalist,
I think you really need to understand the laws that govern these takeovers and schemes
in Australia, what the rights of bidders and targets are, what the rights of shareholders
are.
And I think a lot of it is just experience.
There's a lot of commonality between all of these transactions and we don't at the moment
at least have an awful lot of competition in a lot of these deals and the smaller and
mid cap deals, the big offshore funds are too big to play in that space.
There's no one really exploiting in Australia.
Probably lots of private investors actually who used to work as fund managers or prop traders
and investment banks.
I know a few who work from home and sort of trade this with their own private capital,
but it's an interesting space.
It's a very, very interesting space.
For people that don't have a chart in front of them, what were the actual prices that
you were flying to, like where do you start, you said $3, where do they end up and where
do they finish?
Yeah, so I mean the interesting thing about Liontown in particular was that there was
a lot of talk about this bid before it actually became a bid.
And in fact, Liontown had sort of disclosed over that journey that they'd had a couple
of approaches over time.
And I guess it just kind of eventually got to the point where the approach was sort of
so good that they were happy to try and firm something up with the bidder.
But I mean the stock, I mean lithium's obviously been pretty volatile.
Well, I was going to say for the better part of the last year, but really for the better
part of the last few years.
But Liontown was trading, let's say between like a dollar and sort of a dollar and two
in the lead up to the bid, I guess.
I think a lot of that sort of trading above $1.60 through to $2 was on that bid speculation.
But immediately before they announced that bid, the stock was trading at about $1.50
and the bid was pitched at $3.
So after it was announced, the stock sort of traded between $2.60 and $2.80 for a period
of time.
And that's sort of when we had started building our position and then traded almost straight
to three, which was around the time that we were a seller.
We traded through three, I think it got to like three or four, three or five, maybe a
bit higher.
And then sort of bounced around between $2.80 and $3 for a couple of weeks whilst people
weren't really sure what Gina's intentions were and whether that was going to lead to
another bid or not.
Stock's back to $1.50 now, $1.47 as we speak.
So having not succeeded with the $3 bid, the company raised a bunch of money at $1.80 soon
after it became clear that the bid wasn't going ahead.
And even anyone who bought stock in that placement at $1.80, we're talking before about rights
issues and placements and theoretical X rights prices.
I mean, the stocks, if you paid $1.80, you're down 20% on your money from that placement
of just a few weeks ago.
So if you look at that chart, you sort of traded that the whole way through, you've
probably bought stock at between $2.60 and $2.80 expecting to get $3 and if you've held
it the whole way through, well, now you're back to $1.50.
You don't need a calculator to work out that that's not ideal.
So in many ways...
How much money is in the strategy?
You say position sizing.
So what's your minimum start with?
What's the maximum you've gone at a particular place?
For sure.
I think Linetown is a great example of what we're trying to avoid.
And I think seeing that and living that is what scares people about merger art.
It's like, okay, well, you can do lots and lots of good work and then you get one of
those and the perception is it wipes out all your gains.
I think if origin fails, like we're discussing before in the next couple of days, that's
also probably a negative.
But yeah, look, so we run currently $150-ish million in the strategy.
So I'd say that's quite small by most fund manager standards for sure.
But it gives you the ability to, I guess, look in places that others wouldn't necessarily
look.
So we think about everything in terms of max loss.
So we have a really comprehensive checklist of items that we go through to determine how
risky or safely perceived an announced deal to be.
Just to give you a flavor of those types of things, conditionality.
So the more conditions there are, or the more outs that a bidder has, the more likely they
are to walk away if and when times get tough.
So in normal kind of markets and rising markets, M&A deals that are announced tend to complete.
When deals tend to break more often than not, sorry, not more often than not, but more so
than in normal times is in times of market stress.
So GFC, COVID, all those types of things, that's when buyers want to get out of deals
because they've probably got other parts of their portfolio where they're running around
with their hair on fire.
They don't need to add more problems.
So our whole process is aimed at making sure that irrespective of kind of market conditions,
we want to know that the deal is binding and enforceable.
So something that's really easy for a buyer to use to get out of a deal is if a deal is
subject to due diligence, that's really in the buyer's control, not in the target's control.
If it's subject to the buyer's investment committee approval or subject to financing,
they're all things that the target and the target company shareholders have no control
and very little visibility over.
And it's super easy.
If I decide I want to get out of a deal because market conditions have changed or whatever,
I just say, well, look, guys, I wanted to do the deal, but we couldn't get financing approval
or we couldn't get investment committee approval or we found something due diligence we didn't
like.
Right now, there was a bit of an Elon Musk Twitter circus a couple of years ago where
he'd bid for Twitter and then was kind of doing everything he could to get out of it.
The difficulty for him was in the US, when you launch a transaction, a bid, you need
to lodge a whole bunch of docs with the SEC around your approvals.
So it was already very clear that he had financing approval on an unconditional basis.
So when he was trying to tell people, hey, I can't afford to do this anymore, my funders
won't fund it, they're like, well, we've actually seen the documents that say that
you can.
So we might come back to that later.
So things inside the bidder's control, we don't want ideally.
What we also don't really want for the most part is ACCC approval or foreign investment
review board approval to politically influenced bodies, whether they say they are or not.
The way that they think about approving transactions are not sort of ebbs and flows with both the
political party of the day, but also, I guess, public sentiment, who the public at various
times care more about foreign buyers buying some of our assets than they do at others.
I think the new head of the ACCC seems more intent on, I guess, having more stick than
carrot, I suppose you would say, when it comes to some of these deals.
So they're not deal breakers for us, but it's certainly something you need to consider.
In a small 50 or 100 or 300 mil market cap company, ACCC or Ferber are unlikely to be
issues for the most part.
But something big like Origin or ANZ and Suncorp have a deal at the moment that comes out
currently doesn't have ACCC approval.
They're the things that are at risk.
So material adverse change causes.
So a bidder will say, okay, we're going to go ahead, but if your earnings fall by 10%
between now and the end of the bid period or your net tangible assets decrease by 5%
or X and Y and Z, we have the ability to walk from the deal.
So we need to get really comfortable around the company's numbers, level of earnings,
PTA, whatever those other conditions may be, and just, I guess, take a view on how likely
we think it is that something will trigger there that allows the bidder to walk.
And then other things like, okay, who are the major shareholders?
What percentages they own?
What's their average price?
If we can work that out, are they likely to be in favor of this bid?
Are they likely to be against it?
Who else is on the register that might bid?
What other transactions have happened in the sector, either in Australia or elsewhere?
What's the earnings multiple?
What does the business look like in a comparative sense?
Does the company have any excess franking credits on its balance sheet that maybe should
be getting tipped out as part of this process?
So that's sort of a flavor of what we're looking for.
Shareholder composition is interesting.
As I said, I was a super big shareholder in Origin at the moment.
I've been buying more with the intent to block this deal.
Sometimes having a blocking type shareholder on the register can be really helpful because
it may lead to a higher bid or improved bid terms to get that shareholder over the line.
But of course, some shareholders maybe won't sell at any price.
And that's kind of what we're trying to avoid because we don't want someone who's going
to interrupt the current transaction and stop it from completing.
So that's sort of a flavor of what we're looking for.
And then it just becomes position sizing.
So something we're super confident in is what we would consider to be a full position size.
We've run a few different mandates, but in our public fund, we're kind of risking 2.75%
of NTA max on a deal we really, really like.
So if that transaction breaks for some reason, even though we're really confident that it
was going to go ahead, it should cost us 2.75% of NTA give or take.
As I said, we sort of had a couple of those a year.
In the earlier years, we probably were more likely to lose kind of circa 2% or more if
something like that went wrong.
I think we're better now at working out which transactions are likely to fail and either
avoiding them altogether or having much smaller size.
And then position sizing just becomes, that's a full risk position.
So something where it ticks a lot of our boxes, but maybe not all of them.
Maybe we need more information or maybe we're waiting to see how something plays out.
It'd be a three quarter risk unit, half risk unit, and usually a quarter risk unit.
And a quarter risk unit is something that's a bit more speculative, but where we think
the upside justifies having a position.
And if you lose a little bit of money on that basis, so be it, because the risk reward stacks
up.
And all of those numbers sort of change.
So we'll take an initial view on what something looks like at the start.
It might be a 50% risk unit, half a risk unit at the start, and it becomes a full risk unit
over time.
Or it might be a full risk unit on day one, and then something happens as the transaction
proceeds that changes our view on that.
And maybe it goes back to being half risk position or no position at all.
So Linetown, going back to that, was probably a quarter risk position for us.
At the outset, it traded to the bid price and we exited in its entirety.
So most transactions were holding through to completion, I would say, generally.
But it's a really dynamic process where you just have to be monitoring for price movements
and new news and developments every single day.
So how does that translate into the performance?
So what's the performance been on the fund historically?
What's the beta past 12 months?
Yeah, so look, historically, so we've been going for a little bit over 10 years.
We've done about 8.5% net of all fees over that period of time, which is sort of right
in the sweet spot of where we'd like to be.
So reasonably pleased with that as a number.
In particular, because we've done that with kind of single digit volatility.
So over that period of time, we're not trying to keep up with the market per se.
We're an absolute return fund.
So that sort of 8% to 10% per annum number is sort of in the sweet spot of where we want
to be net of fees.
But the ASX has done roughly that number over that same period of time.
But with vol of, I'm going to say like 12 and a half or 13 versus for us, sort of vol
of nine-ish over that period of time.
Last three years, we'd be about 16% net of fees for three years with much, much lower
vol, sort of vol of more like 6% over that period of time.
So we're up, I think, 11 and a bit net of fees as of end of October.
So I guess we're having an average year of sorts in terms of slightly above average in
terms of where we'd like to see returns.
I think our 16% per annum stacks up pretty well over the last three years against the
market and a lot of other strategies.
So I think there's sort of this perception that when interest rates go up, that M&A kind
of dies and is sort of severely diminished.
I think that's absolutely fair in bigger transactions and anything that's kind of PE sponsored where
funding, external debt funding is a big portion of kind of the acquisition proceeds.
But the smaller mid-cap section of the market, you tend to have buyers paying for things
in cash or from existing kind of debt facilities or lines of credit that they have, script
bids, one company buying another for script.
So we've been pretty pleasantly surprised in the past few years about the opportunity
set.
And look, we're not solely merger-arb either, right?
So we do do like a company liquidation, for example.
So we did one recently in Sunland Group.
Sunland for anyone who doesn't know, it was a Gold Coast property developer.
I think that would scare most people off from the outset.
But founding family owned roughly 60% of the shares on issue.
They make an announcement sort of three years ago that they're going to basically start
liquidating the entire portfolio because it had never traded near NTA.
I think the stated NTA at that time was sort of roughly $2.20 and the stock was trading
at maybe $1.40 or $1.50.
So we did a little bit of work and just credit to Ben and my team, who really sort of drove
this one, but had a quick look at the balance sheet, realized that a lot of the inventory
that was being carried was actually being carried at cost, in some instances from years
and years and years ago.
Sure, lots of property companies like to revalue their assets, kind of annually at least, and
will typically increase NTA and sometimes earnings on that basis.
These guys just hadn't done that.
And as we sort of realized that, it was like, OK, well, $2.20 is probably too low in terms
of what the real NTA is.
We can buy this stock at like $1.50.
The founders and a lot of the staff, key staff, have a real vested interest here in getting
an outcome.
And just as they sort of sold off apartments and inventory and whatever, it just turned
into more and more of a cash box and the market just wasn't really reflecting the progress
they were making.
So we got what was probably the last $0.90 capital distribution just a couple of weeks
ago, I think in total, including dividends and franking credits.
We've had about $4.50, I think $4.60 returned to us through that process.
There might be a little bit more juice to squeeze out of it as they wind down the last
of it in an unlisted capacity.
But that was in plain sight for everyone to see the day it was announced, a month after
it was announced, a year after it was announced.
We wrote about it in our newsletters.
It wasn't a secret and yet, as far as I could tell, we were probably the only institutional
professional fund of note that was buying this stock at any stage through that process.
So I mentioned some of the stuff we were doing early days, 20 years ago, those efficiencies
have been removed.
But that was literally just not being scared off by Gold Coast property developer, getting
a handle on the balance sheet and just working out how much capital was to be returned there
over time and full credit to the team at Sunland.
They did an amazing job of that.
We were pretty passive through the process, didn't have a lot of contact with them throughout
that process.
It was pretty easy to work most of it out ourselves.
Sorry, I tell that story because we want an active, buoyant merger, market and takeover
market in Australia.
For sure, benefits our strategy, but in all market cycles, there are different versions
of the same sorts of transactions.
So it might be a merger, but it might be a spin off or it might be a liquidation.
It might be an asset sale with a capital return and then some residual assets left behind.
There's so many permutations of this that tend to get mispriced.
So pretty rich opportunity set for the most part, much more so than I think people would
appreciate.
Yes, quite interesting.
Starting on the mechanics, you mentioned a while ago that the minimum is only two and
a half thousand, which is quite uncommon for a strategy of your ilk.
Is this wholesale only?
Can anyone access the fund and why have you done that that way?
Yeah, rightly or wrongly, I regret this five times a year at least, but it's a retail fund.
I mean, I joke when I say that.
I think I mentioned before, I didn't come from wealth or a family of means.
When we're setting up the fund, the question was asked from our trustee, well, you want
the minimum to be?
I said, well, talk to me about what's the difference?
What is the minimum it can be and does it cost me more or less or cost the fund more
or less if it's 2,000 or 50,000 or whatever?
I said, look, it's $2,000 and it doesn't make any difference.
I said, well, why do some people do 50 or 100 or 250 and it's basically marketing and
ego and something seems more out of reach if it's 50 grand or 250 grand than if it's
two.
So I guess our view is that if someone's got $2,000 and they want to put it into our fund
and they believe in what we're doing, then you're absolutely welcome them doing that.
I mean, clearly, if you have wholesale fund, you need to have a $500,000 minimum or you
need someone to be a sophisticated investor, but that's not the case here.
It is a little bit more expensive and time consuming to run a retail fund, but we felt
pretty strongly about it being accessible to as many people as possible.
It has daily liquidity, so it's available on a number of platforms.
I know financial advisors generally, a lot of them prefer to have daily liquidity and
a lot of the researchers prefer daily liquidity.
So daily price retail fund accessible to everyone is basically the nuts and bolts of it.
Yeah, it's just so interesting, this strategy and you're saying what only player in Australia
currently operating this was this and there's a number offshore.
What's the main reason for that?
Yeah, so I think, look, this type of strategy, probably 20 years ago, guys who were propped
up, propped traders working on the propped desk and investment banks for the guys that
were doing this type of stuff.
So a couple of other managers in Australia that I'm aware of who started out as propped
traders doing that, they don't do a job now, they do something different.
But if you think about being in an investment banking environment like that, your cost of
capital is really low, so you're usually using bank balance sheet to do that and you're just
super plugged into the market.
By virtue of the fact that you have so many different divisions within your bank, investment
banking, trading, usually what we would call wealth advisory now, but in old school terms,
stock brokers and the like, I think you're just really plugged into the market.
You're across transactions and there's just loopholes everywhere to be exploited.
And when you're using bank capital and you're a small team, then you can sort of chase nearly
all opportunities, right?
No matter how small they are, because if you and I working together on a propped desk and
we can find ways to make five grand in 10 minutes and 20 grand in three days and whatever,
we're just racking up as many gains as we can over that period to our ultimate benefit
come bonus time, right?
And I'm not necessarily sure that, I mean, you have to account for your cost of capital,
absolutely.
But I think banks were kind of far less focused on that back then.
Some of the risk ratings they had to give to various different strategies and uses of
capital looked a lot different back then than they do now.
So a lot of those regulatory changes around capital ratios, but also some of those local
legislation that was enacted in the US in the first instance post-JFC just basically
meant that all of these investment banks no longer had propped desks in the sense of what
they once did.
So the choice for those guys is to be one of those private individuals that I mentioned
who I know of who sit at home with their own Bloombergs and whatever else and trade mergers
or Arben events, or you go out and set up a fund.
And I think our ultimate capacity in this strategy in Australia, so focusing on Australia
alone is probably $400 or $500 million would be my guess.
So that's not big in anyone's terms, right?
If I'm a big fund manager, whether it's offshore here, and you look at our returns, you say,
geez, those returns are pretty good and we could raise $400 or $500 million.
Well, we've got a team of five people and I just don't think it passes the hurdle rate
for most bigger firms to set up a team with five people and Bloombergs and Iris and all
the different things we need.
We've got a full-time coder who works in our team to I guess make the process of gathering
information and monitoring both announcements and media and prices and whatnot just more
efficient because you can't buy that off the shelf.
So we do a lot of that ourselves.
That works when I have a lot of my own capital invested, when our team members have a lot
of their own capital invested.
We don't take anything in terms of management fee out of the fund.
We pay external expenses only and they're remunerated in bulk by performance fees.
So we've got really good alignment and the economics work for a small team who are pretty
passionate about finding mispriced opportunities.
I think the likelihood of someone setting up to do that in a professional sense is quite
unlikely and look, in terms of the big funds offshore, a lot of people don't think much
about this in Australia, but it's very common internationally.
Those guys are just too big.
If you've got a billion dollars or $3 billion or $5 billion, they just can't deploy money
efficiently into a lot of the smaller situations that they were able to benefit from.
So lots of them were trying to do that pre-COVID, I would say.
There were some funds that had raised quite a lot of money who were pretty active down
here.
It's actually a pretty frustrating period for us because they were willing to trade
things on far tighter spreads than we would have been.
So when I said before, we like to, for expecting a dollar in three months, we probably want
to pay 96 or 97 cents for it.
They're happy to pay like 99 cents for it.
So they're making a cent, they're leveraging it three or four times to make the numbers
work.
That's great when everything's working well, but when you have a deal break or you have
lots of volatility like we did during COVID, that doesn't work very well.
So I think that scared a lot of those funds off from doing smaller stuff in Australia.
And look, I've got no doubt they're doing some of it in bits and pieces and they're
very much active, like Origin as an example would have heaps and heaps of offshore merger
up guys playing in the name.
Liontown would have been the same when BHP bought Oz Minerals, that was sort of big enough
to attract that as well.
So those situations are pretty efficient.
The likelihood of counterbids, the really big names and big transactions, it's not
impossible to think of a counterbidder for Origin, but the potential pool of counterbidders
for Origin is far, far smaller than your average 250 mil market cap company that I might have
in the portfolio at the moment.
Not only is it harder to raise the capital or have the financial firepower to buy Origin,
but you've got a whole bunch of regulatory hurdles to clear as part of that process.
So yeah, look, it's sort of a weird situation where we're just kind of big enough that we
can kind of deploy capital in a professional systematic way, but not so big that we're
pricing ourselves out of opportunities that I think others just can't access.
And the other thing is too, it's not at all sexy, right?
Like it's in some ways, as I said, I knew it out on it, but I think for a lot of people,
it's super boring, right?
You have to read, I mean, your average scheme document probably is like 160 pages.
I think we had one for a small mining company the other day, it was like 420 or 480 or something.
And you just can't afford not to read it, right?
Like some of the best things we've ever found have been on like page 234 of like a 400 page
booklet.
And if you get so lazy or so complacent that you start skim reading, that's the type of
thing you could miss.
But I think if I say to most people, look, you can buy this thing for 96 cents, you'll
have to read 480 pages, you'll have to be really organized around all of the dates and
conditions and then you'll get a dollar at the end of it.
Oh, and by the way, if you get it wrong, you might end up only getting 50 cents.
It doesn't really scream compelling investment opportunity, I suppose, is what I would say.
I can understand why you said you wish you studied law.
All the reading you're doing is predominantly what a lot of my friends are doing that are
lawyers.
Yeah, I think there's overlap for sure.
I think it's some part psychologist, part fund manager and part lawyer, I think.
One thing I've always found quite interesting just looking at the cyclical nature of markets,
I've always noticed a trend when you're looking at patterns, especially in cyclical asset
classes where the smart players, you kind of keep abreast as you said, you mentioned
two names, who look at doing these acquisitions, they kind of have the cash balance to essentially
wait until the pressure's on and so commodity price and lithium is 600,000 down to 140,000
maybe consolidating here, but then it just what's the number one business cash flow,
cash is king.
So when people are so rich and cash poor and they can't raise and finding equities difficult,
I've always found it quite an interesting pattern how most acquisitions tend to really
start to ramp up near the bottom of the cycle.
On the negative side, a lot of acquisitions happen at the top of the cycle, which you
kind of want to avoid, but I've always seen it as a leading indicator.
Like as an example in the lithium space right now, some acquisitions are starting to come
through at these lower levels and then there's like almost like consolidation play.
I think we've also seen the same thing in the online gambling space right now.
Exactly the same thing is happening.
There's a gigantic consolidation play from the big cash type players looking at consolidating
32 small companies into about eight.
I know the pattern exists, but would you say that's a very good leading indicator on changing
tide from like a MACD to a very big perspective on the cycle or it's just pace by pace?
I think that's a factor for sure.
Lithium is interesting because I think what you're seeing in lithium at the moment is
there's sort of two factors at play, right?
Yes, the lithium price is off a little bit and in some ways it's kind of counterintuitive
that there's so much interest in lithium right now and lithium M&A and the kind of land grab
that's happening in the face of falling prices, right?
Even SQM with his bid for AZS at the moment and obviously Gina and Chris Ellison have
been in there as well and Gina and Chris are buying up everything everywhere, right?
Like 20% in WCA Wildcat I think it's called and Delta Lithium and whatever, right?
So they're everywhere at the moment and it's almost like intuitively you go, okay, well
when lithium prices are sort of in freefall, usually you don't expect to see the M&A aspect
until there's sort of a stabilization, right?
So if we ignore lithium for a second, let's talk about sort of tech, right?
So tech flying high kind of into the backend of 2021, I guess, and then sort of early 2022,
we kind of have this reckoning in tech, at least for a lot of the more speculative stuff,
right?
So businesses that kind of had good ARR numbers in terms of growth and had had investors throwing
heaps of money at them to, it's fine, just keep losing money, keep losing money.
It's all about growth.
It's all about getting as big as you can get as quickly as you can that the profits will
come to, well, okay, money's not free anymore and you guys are burning heaps of cash and
we can't keep funding this on its current trajectory.
What we sort of saw late last year is not a lot of tech M&A in the first half of the
year, but in the second half of the year as tech had kind of stabilized and bottomed,
well all of a sudden it's like, okay, we can actually figure out here now which businesses
are viable and have good long-term trajectory and it just, to your point before and a bit
of a hold because they've run out of cash.
So the asset is good, the business is good, but they just completely mismatch revenues
with expenses.
So you saw some bids last year where that was the case, right?
So Nitro was one of those which Potenture ended up buying, it sort of developed into
a bit of a bidding war.
And that was sort of interesting because those guys waited to bid until the market had stabilized
somewhat, but as the bid was on foot, the market started to recover.
And what was sort of happening was they were just kind of one step behind the whole way
because people started going, well, hang on, if you guys weren't bidding for this, this
thing would be probably up more than it is because of your bid, right?
So I said before, a falling market shouldn't really impact on our strategy too much if
we construct the portfolio.
Well, a rising market can help it in some instances, right?
Because if the backdrop is that the prices fundamentally of whatever these companies
are would be increasing otherwise, it puts a bit of pressure on bidders to kind of have
to up the ante.
I mean, that's what's happened to these guys in Origin, right?
They started working on this deal like a year and a half ago when most people in the Australian
market hated Origin.
The earnings outlook for the company wasn't as good as it is now, but they've since had
I think two results, certainly one more recently that kind of woke everyone up to what the
value was.
Plus they've got this kind of octopus investment in the UK, which I think no one thought about
before and now it's kind of sky's the limit in terms of what the valuation is.
But it's sort of funny how markets work, right?
So I guess my point is in tech there, people are waiting.
They're not trying to catch the falling knife.
They're waiting for the knife to stick in the ground and then you make your bid.
That's not happening in lithium.
And I think the reason for that is it's also a land grab, right?
I think all these guys have realized there's only so much land to go around and sometimes
you just pay what you have to irrespective of market backdrop because you feel like if
you don't move now, you'll miss out.
And that bid that I mentioned before where it started at a dollar and finished north
of eight, it's in a company called Pure Energy.
PES I think was the code and it was when the coal seam gas boom was happening in Australia,
which I think was sort of circa 2009, I want to say.
You had Queensland Gas, you had Pure Energy, you had Arrow Energy, like all these companies
and same thing, it just became a land grab and consolidation.
It's what you're seeing in lithium now for sure.
So yeah, sorry, it was a long way of answering the question, but it's a factor, absolutely.
And I think there's lots of reasons that M&A happens and that's why I'm not super concerned
about market cycle, far less now than I was 10 or five years ago because sometimes M&A
happens in sectors that have been bombed out and are stabilizing.
Sometimes it happens at the top of the market for strategic reasons, like in a land grab
type situation.
Sometimes it happens because people just go one step too far and get too caught up in
the mania of booming markets and decide to do ridiculous mergers at the absolute top
of the market.
I mean, Elon kind of bought Twitter at the top of the market, right?
If he'd waited four more weeks, not only would he probably not have bought it, but if he'd
wanted to, he would have paid half the price that he had to pay.
So the interesting thing, there's people behind all of these transactions, right?
So none of it happens in a vacuum.
And I think it comes down to some boards won't do a deal and I watch all their competitors
do a deal and then I'll watch the competitors do another deal.
And then eventually, that's the end, right?
I mean, I've got a group of mates who probably do too.
We all joke about like Sydney residential property, right?
I've got mates who have refused to buy a house for the last 15 years because the market's
going to crash, right?
Now market hasn't really crashed.
It's had a couple of corrections arguably along the way, but the joke is now that Sydney
property could correct by 50% and there's still no better off than if they just bought
a house 10 years ago, right?
So people do things for weird reasons, but their big fear is, which I completely understand,
is having not bought a house for 10 years.
You can't then jump in and buy a house at a moment's notice because you feel like you're
buying the top of the market just before a correction comes, right?
So the more something like-
What was it, probably what, 2% and now people are paying 6s and 7s.
This poor people, their bills have gone up 200 odd percent.
And the amount of money which they're borrowing is, I live in Lake Cove, the average price
was what, a million bucks before COVID, now it's like three.
Yeah, right.
But I think my point sort of is there, right?
There are a whole bunch of people who bought during COVID, went interest rates at 2% because
of the fear of missing out, right?
Boards do that as well, right?
You can sit there and go, well, companies make better decisions and they've got governance
and whatever, not necessarily, right?
Some acquisitions are really smart, some acquisitions are really dumb.
We don't really mind whether they're smart or dumb.
We just want to margin and ideally a competitive bidding process.
The one that always I think about doing the deal at the wrong time and then the consequences
of it was QBA, like a decade ago.
And they were paying for that for years.
So that's why I always say that as a pattern, people doing deals at the wrong time and then
they have to hold it.
I mean, they get talked into it.
I mean, we're a bit off topic, but they get talked into it by investment bankers and brokers
sometimes too, right?
And sometimes shareholders.
I mean, I won't name the company, but we're involved in something at the moment where
the CEO and founder got kicked out not that long ago by a bunch of shareholders who wanted
it gone.
And then there was a raid on the register like a week and a half later.
And all these shareholders that led to the founder getting kicked out sold all of their
stock.
And now the company's in no man's land.
It's subject to a bid.
The founder's no longer the CEO and the shareholders who wanted the CEO kicked out are now gone.
Now I'm not passing judgment one way or the other on whether that was a good decision
or not, but it's an unusual situation where someone's being kicked out by some shareholders
that are no longer there.
And the founder's still there.
He's still a shareholder and now they're defending this bid.
I think that happens all the time in companies that do capital raisings, get talked into
it by investment bankers or they get talked into it by brokers or shareholders.
It's a factor for sure.
People just sometimes think the champagne's never going to stop flowing.
Yeah.
Or you use fear to tell them, hey, it has stopped flowing.
It's never going to flow again.
So you better take action and raise a bunch of money and pay us a bunch of fees on the
way through.
Everyone I guess in all facets of life, the markets, they need to play a fear and greed.
You just got to figure out which side of that you're currently on and try and get back a
bit more towards the center.
Well your investing universe is pretty interesting.
So my favorite question to finish on is what keeps you up at night and what gets you out
of bed in the morning?
Yeah.
The answer to that question is probably the same thing.
I hope it comes across when we're talking about this.
I'm just absolutely fascinated by this strategy and the opportunities that exist.
I think this concept that if you just dig a little and you read and you push and whatever,
that I sometimes talk about, it's just like a big pile of money sitting over the corner
in the corner covered up by a blanket.
You just have to be curious enough to go over and lift up the blanket and see what's underneath
it.
So that's what gets me up.
I'm really passionate about what we're doing.
It's probably also what keeps you awake at night a little bit.
You can't ever be too complacent in this role.
So you've got to make sure that you're really crossing the T's, dotting the I's and that
your research is thorough.
You've got to have this kind of sense of skepticism.
You have enough confidence to believe you've got an edge and you know what you're doing,
but also I think be humble enough to realize that you might be missing something and maybe
someone knows something that you don't.
I would say I sleep pretty well most of the time, but I definitely have been known to
be making notes in my iPhone five minutes before going to sleep to remind myself to
do something the next morning.
So yeah, look, I feel very privileged that I get to do this for a job.
I think it definitely has its moments and bad, but on balance, I think it's a pretty
fun thing to wake up and do every day.
If anyone listening wants to learn more about the strategy and yourself, how can they find
you?
Yeah, look, I mean, you know, our website, obviously, so www.harvestlaneam.com.au.
I'm not super active on Twitter.
I have a reasonable number of Twitter followers for someone who doesn't tend to tweet much,
but you know, there's bits and pieces like white papers and interviews and things that
I've done or contributed to floating around on the net.
But look, I think if anyone feels strongly enough about it, we've put together a pretty
solid recommended reading list over the years for anyone who's sufficiently interested in
what we're doing.
So someone reaches out to me via email, through the website, I'd be more than happy or through
Twitter for that matter to share that.
So I joke it'll either lead to a career in merger up or I help people sleep at night.
So either way.
Really, really good having you on.
I really appreciate it.
Thanks very much.
I appreciate the opportunity.
It's good to chat to you.
All right.
Have a good one.
Thanks.
You too.
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