Griffin Value Fund celebrated its 10th anniversary in November 2021. Ten years is a representative timeframe to evaluate our performance. The fund’s equity investments generated a gross annual return of 20.57%. This compares favourably to the target return of 15% we had set out in 2011. It also comfortably beats the 12.30% annual return for global equities (MSCI ACWI Euro). We use gross returns as the fund was run with partner’s capital for the first five years, until we welcomed our first external investors in December 2015. Risk management is our number one priority and we focus on limiting both the probability and the impact of losses. We achieve this through a diversified portfolio of safe companies, acquired at a discount to our assessment of fair value. Looking back over the first ten years, approx. 80% of all investments generated a positive return for the fund (taking into account both the realised and mark-to-market losses). Although we’re pleased with the performance of our equity investments, overall returns were diluted by high cash levels, especially in the early years of the fund. We’re very focused on increasing the fund’s equity exposure. Over the last three years, we succeeded in gradually increasing the equity exposure to 71% without compromising on our investment criteria. We are confident our improved sourcing ability will allow us to increase this further.

Ten years ago, we were looking for the best way to compound our personal capital in a strategy we believed in and could continue to apply for decades to come. We are very passionate about investing and we go to work every day with the aim of becoming a bit better at investing than we were the day before. We’re also not the same investors we were ten years ago. We have evolved in how we source ideas, how we approach our due diligence and also in the type of companies we invest in. Our watchlist of companies that we would like to own but where the valuation is currently out of our reach, has grown into the hundreds and our network of like-minded investors has continued to expand. Conversations with senior management have become a standard part of our due diligence process. We have improved our ability to identify key issues and are better at getting answers to our questions. Every company we analysed expanded our circle of competence and improved our understanding of what drives the value of a business. For instance, today we assign more value to a company for its ability to grow at high returns on capital. This means that some of the fund’s current holdings trade at higher multiples of historical earnings than the typical investments we made 10 years ago. A good example is our recent investment in Epsilon Net, which we describe below. But, regardless of how we evolved as investors, we’re still looking to buy safe companies at a discount to our best estimate of fair value. We still don’t have the ability to predict geo-political and macro-economic events and we do not have an opinion on every company. In that sense our approach has not and will not change.

Our strategy is to build a resilient investment portfolio based on diversification, the characteristics of the companies we own and the price we pay for them. Intel CEO Andy Grove once said: “Bad companies are destroyed by crises…great companies are improved by them”[2]. If we’re right about what we own, we should do well over the long term.

During the second half of 2021 we sold our investment in Taiwan Sakura and reduced our stake in Golden Friends Corp. as the share prices approached our estimate of fair value. We’ve had considerable success with our investments in Taiwan and by selling these stakes, we have also reduced our exposure to the country to less than 10%. During the period of review, the fund made one new investment in a Greek software company called Epsilon Net SA.

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Epsilon Net SA

Epsilon Net is a Greek software company, dominant in the local market for HR/payroll and accounting software. It also has a fast-growing enterprise resource planning (ERP) business. The company was founded in 1999 by current CEO Ioannis Michos who still owns more than 60% of the company. Over the last two decades, through a combination of organic growth and opportunistic acquisitions, he built Epsilon Net into one of the dominant providers of enterprise software in Greece. Switching from ERP software providers is a costly and painful exercise for customers. This explains the low churn rates, the resilient recurring revenue streams and the high profit margins at scale. It is very unusual to find these high-quality businesses at prices we’re willing to pay.

In the case of Epsilon Net, several developments contributed to what we believe to be an investment opportunity. Firstly, Epsilon Net acquired SingularLogic SA, the number two player with a 20% market share in the Greek ERP market. The combined entity became the dominant provider of ERP solutions to SME’s. Epsilon Net competes with large ERP software vendors such as SAP and Microsoft, which are preferred by multinational companies in Greece and local competitors such as Entersoft SA, which is focussed on the higher end of medium sized companies. Epsilon Net's main advantages over the larger foreign competitors are its lower cost base and it being a local company focussed on local business practices. Secondly, Epsilon Net will benefit more from the digitalisation of the Greek economy than the above-mentioned competitors. The very difficult economic conditions of the last decade caused a massive under-investment in Greek IT systems. Significant financial resources are now being made available by both the EU and the Greek government to facilitate a digital transition. This will provide a multi-year tailwind for Epsilon Net.

Notwithstanding their accounting software being a mature product with mid-single-digit growth, there is significant growth potential in all their other business segments. In HR/Payroll software, they are ideally positioned to sell an additional module to comply with Greece’s new legislation on monitoring remote working hours. In the ERP segment, multiple growth avenues exist after the transformative acquisition of SingularLogic. SingularLogic was overleveraged and underinvested in software development, with 50% of its clients on outdated software. Epsilon Net is making good progress upgrading these customers. In addition, the EU and Greek digital transformation incentives will significantly boost spending on enterprise software. We believe Epsilon Net is best positioned to capture business from both legacy ERP software users who consider switching vendors, as well as from first-time ERP software buyers. Unlike their main competitors, Epsilon Net’s business model is built around servicing many small customers. For example, they have a call centre with over a thousand employees supporting clients all over Greece. Another crucial element is the link Epsilon Net can provide with the tax authorities and accountants, as most tax advisors and accountants already  use their software. Users of competing software still have to rely on sending documents manually to their accountants. Epsilon Smart is their e-invoicing solution and was launched at the end of 2020. Its success demonstrates that Epsilon Net is very well positioned to take advantage of the growth opportunities in business software. After little more than a year, it already reached more than 68,000 customers. This product alone will generate over €8m in high margin recurring revenue in 2022, for a company that is estimated to have generated overall revenue of €50m in 2021. Going forward, the company should be able to grow the number of customers in its various business lines and increase the revenue it generates per customer.

Mr. Michos sees the current situation as a turning point for Epsilon Net, taking advantage of the opportunities presented by the digital transformation of the Greek economy. Years ago – during difficult times for business software - the company started to invest in new products and a scalable and up-to-date IT-infrastructure. Today, based on the success of their e-invoicing solution, it is beginning to look like Mr. Michos’s insights were spot on.

Finally, Epsilon Net is a small company with a limited free float and a market capitalisation of approx. €246m. It was just over a €100m when we started building our position. The poor liquidity has been both a blessing and a curse. A blessing, because a larger company of similar quality would never have been available at the price we paid. A curse, because we were unable to buy a full position at the price of our first purchase. Our average cost is just over 10x our estimate of 2022 after-tax earnings.

Our next letter will be out in the first weeks of July 2022. Wishing you all a safe and healthy continuation.

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Update on the five largest positions of the fund:

Volution Group Plc (9.3%)

Volution, a leading supplier of ventilation products, continued to show strong operating performance as a result of the increasing awareness of the importance of indoor air quality, coupled with ever-tightening regulations on energy efficiency. A trading update for the four months to 30th November 2021 shows continued strong operating performance despite supply chain disruption and significant cost inflation.

Kaspi.kz AO (7.3%)

Social unrest in Kazakhstan took the equity market, including ourselves, by surprise and the share price fell 40% only to recover quickly to 17% below where it traded at the end of last year. The probability of such events occurring is the reason we limit exposure to countries like Kazakhstan to 5% at cost. However, on an operational level the company outperformed on every conceivable metric.
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Tyman plc (5.2%)

Tyman is a leading international supplier of engineered components for the door & window industry. Underlying demand has remained firm, but supply chain constraints have affected industry top-line growth.
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Epsilon Net SA (5.0%)

See long-form write-up above.
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Delfi Ltd (4.7%)

Delfi is the market leader in Indonesia’s chocolate industry with a strong ‘own brands’ portfolio and a vast distribution network. After a slump in sales and profitability due to changes in customer buying behaviour and international competition, the company was well on its way to restore both until COVID-19 hit. For 9M 2021, revenue and EBITDA increased by 6% and 6,6% respectively.