We are excited to have been asked to present at the upcoming (and sold out) SOHN Hearts and Minds Investment Leaders Conference next month. Hamish is busily preparing his pitch, but in the meantime the AFR ran the below article as pre-SOHN teaser.
Robert Guy Senior Writer
Oct 21, 2019
TDM Growth Partners’ Hamish Corlett reckons the reversal of fortunes for the once high-flying WeWork may be a reality check for fast-growing private companies with complex ownership structures, and the torrent of money that has propelled valuations ever higher.
As one of the partners – along with Tom Cowan and Ben Gisz – of an $800 million fund that has delivered 20 per cent compound returns over the past 14 years by investing in high-growth private and publicly listed companies, he argues simplicity and equality of ownership are vital in maximising value from private companies.
“I really believe it is an inflection point. But these things can remain irrational longer than I anticipate,” he says, when asked whether WeWork may be a turning point in what had been a red-hot market for venture capital-backed US companies.
TDM Growth Partners’ Hamish Corlett says the fund is looking for quality companies that can become category leaders.
“What we’ve seen certainly in the US private market is the over structuring of private market securities and preference shares, all the false valuations that are built on top of that house of cards.
“There isn’t the same transparency and accountability that there is in the public markets and so what you’re seeing in private markets is because of all this structuring, and there’s obviously the immense amount of capital that has been in the growth space and private markets.
“The combination of those two things means risk aversion has gone way down and it creates the inevitable situation of bubble type features.”
With stakes in Tyro Payments (which has telegraphed a potential IPO and includes Rich Lister Mike Cannon-Brookes as a shareholder), Mexican quick-service food retailer Guzman y Gomez, and workplace engagement startup Culture Amp in their portfolio, Corlett and his team like to keep it simple when investing in private businesses.
Simple ownership structures, combined with board seats and a preparedness to “really roll the sleeves up” in helping management and boards drive growth, are key elements of TDM Growth Partners’ investment approach.
“When we do private deals, our preference is to do common equity private deals. We own the same equity as management and the other board members own,” says Corlett.
“Everyone is in the same boat. When you’re in the trenches, which inevitably happens because businesses go up and down, it’s not always smooth sailing and we like everyone having the same security.
“There are no misaligned incentives, and we believe that not only do we thrive in those tough times, we believe that gets the best outcome for all shareholders.”
From reading Peter Lynch’s classic One Up on Wall Street to everything Warren Buffett, the exposure to the thinking of investment legends provided early inspiration for Corlett and friends Cowan and Gisz to create a fund that would allow them to deploy long-term capital in companies offering strong growth, potential leadership in a category, excellent management, and supportive corporate culture.
Started with less than $1 million, the fund now targets investments in eight to 15 companies, especially those that can become a leader in their category. The fund can invest up to $125 million in any given investment, but the “sweet spot” is between $50 million and $70 million.
“In terms of first principles, whether we’re investing in a multibillion-dollar Nasdaq-listed tech company or we’re investing in a private Australian business where we’ve got two board seats, we think of ourselves as long-term business owners,” Corlett says.
Prospective investments in early stage companies start with a bottom-up assessment of the total addressable market.
TDM Growth Partners, which will present at this year’s Sohn Hearts and Minds investment conference, uses a range of scenarios based on the quality of execution over a five to seven-year period to derive a range of revenue and underlying earnings outcomes.
“If we have the starting point and the end point then we can assess an appropriate value of that business today based on the probability weighted outcomes in five to seven years’ time. We’re very disciplined around what that number is,” Corlett says.
“That’s the approach we use across any business we invest in no matter what the growth profile or the level of maturity is. It’s just harder and the belief in the vision and the founding team is more important in the early stage than it is at a later stage.”
TDM was an investor in the latest funding round for Culture Amp, with the $US82 million raising – headlined by Sequoia Capital China – valuing the company at $US700 million ($1.04 billion), or a “unicorn” in Australian dollar terms.
Corlett says the business is growing very fast but it is still relatively small. It’s got more than 2300 customers globally, but they’re all customers who tend to care about culture, with leaders who understand that culture is important to the success of organisations.
“The way we think about value there is what does this business look like in five to seven years’ time. Do we believe in the vision and strategy?
“We absolutely believe in the vision. There are very few other companies that we have ever invested in that we believe so strongly in about the vision of this business and it is creating a category.”
Payments system provider Tyro Payments is another key investment, with TDM Growth Partners having held a 15 per cent stake since late 2015. But it was one that almost got away.
It was only through chance and a personal relationship with company chairman Kerry Roxburgh that TDM was able to invest in the provider of payments and financing for small businesses that has said it is considering an initial public offering.
“It was purely coincidence at the time, but they were going through a $100 million capital raising. Again one of the frustrations for us was this perception that investors like TDM don’t exist in Australia.
“They didn’t think anyone in Australia would be able to write a common equity $100 million cheque for a private growth business. So they went straight to the US.”
He said they were eventually able to pitch to the board and make an investment.
Corlett says Tyro delivered innovation in a sleepy industry, adding that “banks were asleep at the wheel” and “they’ve never invested in their infrastructure”.
He says there is no more critical infrastructure for small businesses than its payment systems and it’s only getting harder because of the multitude of offerings such as Apple Pay, Alipay, and crypto currencies. Having a software-led payments system ensures businesses can keep up with change.
Despite the possibility of an IPO, Corlett says TDM remains a long-term holder.
“We are not looking at that IPO as an exit for us. I’m still on the board, we see this as a business that we want to own for the next 10 years.
“We’ll see what happens over the next 10 years but this is one of the few businesses in Australia that can organically grow from $190 million of revenue [in 2018] to $1 billion-plus over the long term.”
Corlett admits the team frequently tests the products of one of their more tasty investments – Guzman y Gomez (GYG). “We’re all GYG customers here. We love the food, we eat it all the time.”
TDM invested a bit over a year ago, but Corlett admits that when the opportunity first came across the desks of TDM his initial impression was “food retail is bloody hard”.
He says the quick service food industry has not had a new category leader for decades, but good food at a reasonable price point that is healthy and that resonates with people in terms of environmental consciousness could see it emerge as a category leader.
“GYG is, I’ve been saying this a little bit lately, but I think it could be the best investment we’ve ever made.
“We think it’s going to be the McDonald’s of the next generation.”
One investment that seems at odds with other portfolio holdings is mining services company Mineral Resources, led by Rich Lister Chris Ellison. TDM bought into the 2006 IPO at 90¢ a share. The stock last traded at $12.70.
“Chris’ story is incredibly inspirational and he is a commercial genius. He is one of the best entrepreneurs we have ever come across.”
It is “one of the most underappreciated, great Australian success stories”.
“The kind of vision that Chris has talked about for quite a long period of time will come together over the next three to four years.”
The Sohn Hearts & Minds investment conference will be held on Friday, November 22.