GVF’s objective is to construct a diversified portfolio consisting of safe companies purchased at an attractive valuation. The investment strategy, risk profile and target returns have remained unchanged since the inception of the fund in 2011. However, our experience in analysing businesses has led to an evolution but also a better understanding of the type of companies we want to own.

During the early years of the fund, we focused primarily on investing in companies that were undervalued in terms of their historical earnings or net asset value. While the overall returns met our targets, we later observed that our best-performing investments were in companies capable of efficiently increasing their intrinsic value over time. As a result, our investment approach gradually evolved towards identifying those companies that can consistently reinvest their profits at an attractive return. When looking at our portfolio today, this translates into companies trading at higher multiples of current earnings compared to what we owned a decade ago, but the growth potential and capital allocation of our portfolio companies have significantly improved compared to those early investments.

Throughout this journey, we have also come to recognise the value of acquisitions. Many of the companies in our portfolio have successfully created shareholder value through mergers and acquisitions (M&A). In-depth discussions with management and careful analysis of acquisition strategies have convinced us that companies on a consistent and strategic path of moderate-sized M&A opportunities can generate substantial returns for their shareholders. While M&A transactions are not without risks, the potential rewards can be compelling, particularly when buying smaller target companies that can be acquired at much lower multiples than their larger peers. In addition to buying earnings ‘on the cheap’, the acquirer can have a meaningful impact on sales, cost structure, and financing of these smaller target companies. Our fund’s stable capital base and its modest size allow us the flexibility to make significant investments in companies that have the potential to generate substantial shareholder value through the acquisitions of smaller companies.

During the first half of the year, we reduced our holdings in Fairfax Financial Holdings due to a significant rise in the share price as our investment strategy played out much faster than we anticipated at the onset. We would be happy to own it again in larger size at the right price. We also reduced our holdings in Compugroup Medical, as the risk-reward became less attractive due to an increase of the share price. While we still like the defensive, recurring nature of selling software to doctors and hospitals, the absence of meaningful growth opportunities and a lack of visibility on the cost and timeline of consolidating Compugroup’s large product portfolio onto one software platform made us decide a full position was no longer warranted. A rapid succession of senior executives also didn’t boost our confidence. We decided to reduce our position at just over €50 for a 21% return in less than a year.

During the first half, we also gained more confidence in the investment theses of Marlowe and Eurofins Scientific, leading us to increase our participation in both companies.

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Marlowe PLC

Marlowe PLC had captured our attention as a competitor of PTSG, one of our fund’s former holdings [2]. Marlowe is a UK-based company, providing business-critical services and software solutions to offer customers peace of mind by helping to mitigate risk and ensure regulatory compliance. MRL operates through two divisions: Governance, Risk & Compliance (GRC) and Testing, Inspection & Certification (TIC). Their compliance services cater to a vast client base of over 50,000, primarily in the UK.

The TIC division focuses on ensuring compliance with fire safety and water & air hygiene regulations. This segment generates £293m in revenue and £42m in EBITDA. Similar to PTSG, the larger players in a fragmented market enjoy significantly higher profitability due to scale advantages and efficiency gains derived from optimised route density and investments in the IT platform. Maximising revenue generation per day from each engineer while minimising travel distance is pivotal to driving profitability higher in this line of work.

Marlowe’s GRC division primarily revolves around clients’ employees, with advice and support on Employment Law/HR, Occupational Health and Health & Safety. This division also encompasses the rapidly growing compliance software business. GRC generates £200m in revenue and £52m in EBITDA. This business is about optimising the efficiency of delivering advice. By enabling advisors to efficiently handle 15~20 clients (and potentially increasing that number to 30), margins can be significantly enhanced. Additionally, the integration of HR software into consulting services proves instrumental as it often answers clients' queries without utilising valuable consultant time. Consequently, the strategic use of software becomes crucial in maximising profitability. Leveraging scale allows for the efficient allocation of workflow across various channels, including software, junior advisors, and senior consultants.

We are optimistic about the quality of Marlowe’s businesses for several compelling factors. Firstly, their revenue streams are characterised as being non-discretionary and recurring in nature, providing stability and predictability. Moreover, they are capital-light, minimising the need for heavy investments in physical assets. This, coupled with their durable competitive advantage gives them an enviable position in the market. Additionally, the company benefits from a long runway for growth, driven by structural trends in the industry. One significant driver of Marlowe’s growth is the increasing regulatory requirements and the growing emphasis on environmental, social, and governance (ESG) considerations, as well as employee health and well-being. These factors create a conducive environment for Marlowe’s services, enabling them to tap into high single-digit organic revenue growth. By offering a combination of software and services, Marlowe achieves higher compliance standards and opens up new avenues for growth. The company estimates they hold a 5% market share, which leaves substantial room for expansion in a fragmented market. This presents a major opportunity for mergers and acquisitions (M&A). Since establishing Marlowe in 2015, CEO Alex Dacre has successfully overseen 80 acquisitions, demonstrating a strong track record of integrating and enhancing the acquired businesses. The company's decentralised structure ensures efficient integration of bolt-on acquisitions, further strengthening its position to capitalise on the robust M&A pipeline. Achieving successful integration and growth of acquired companies is pivotal to Marlowe's financial returns. The company aims to achieve mid-to-high teens return on equity (ROE) after realising synergies in labour, property, procurement, and back-office functions, with additional upside potential stemming from route density improvements and cross-selling opportunities.

Marlowe’s share price peaked at around £10 in January 2022, followed by a 60% decline by the end of last year. This decline can be attributed to the significant increase in interest rates during that period, which made investors apprehensive about companies relying on debt to fuel their rapid growth, particularly smaller firms. While Marlowe’s leverage was acceptable around 2.5x Net Debt / EBITDA, the debt profile on the other hand was more aggressively managed with floating rate notes that left the company more exposed to the rapid increases in interest rates. The company quickly responded by lowering its leverage target to below 2x, from the previous 1.5x to 2.5x range. This move aimed to address investor concerns and strengthen the company's financial position. Market sentiment was further impacted when one-off transaction and restructuring expenses associated with higher acquisition activity, resulted in reduced earnings and free cash flow. The fund made an investment at 11x our estimate of normalised free cash flow, recognising the attractive risk-return profile of Marlowe. We view the company as resilient and dynamic, with projected organic growth in the midto-high single digits, coupled with significant opportunities for value accretive acquisitions.

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Our next letter will be out in the first weeks of January 2024. Wishing you all a safe and healthy continuation.

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Update on the five largest positions of the fund [3]

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Epsilon Net SA (9.02%)

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 is actively benefiting from the digital transformation of the Greek economy and a positive political environment. The share price increased 25% during H1 2023, on the back of strong operating results. Management’s medium-term plan is to double sales by 2025 (vs 2022) to €150m at +30% EBITDA margins. Based on current business dynamics, we believe this target is achievable. Epsilon trades at 21x our estimate of 2023 earnings.

Delfi Ltd (7.77%)

Delfi is the market leader in Indonesia’s chocolate industry with a strong ‘own brands’ portfolio and a vast distribution network. For 2022, the company reported 19% revenue growth and a 69% increase in after-tax profit (excluding one-off gains in 2021). The business is driven by sales growth of premium products and disciplined cost control. The strong performance has continued this year. The share price increased by 66% during H1, but at 13.5x last year’s net income we believe the valuation remains compelling.

Marlowe PLC (7.56%)

See long-form write-up above.

Volution Group PLC (6.94%)

Volution, a leading supplier of ventilation products, continued to show strong operating performance as a result of the increasing awareness of indoor air quality, coupled with ever-tightening regulations on energy efficiency. Interim results for the period up to the end of January 2023 showed revenue growth in excess of 8% at stable profit margins of 21%. The share price of Volution has not yet recovered from last year’s decline, as investors anticipate lower building activity during a recession. The company just issued a trading update expecting EPS ahead of market expectations. A softening European market offset a strong performance in the UK, to deliver good overall organic growth. With leverage below 1x, the company has plenty of headroom to continue its acquisition strategy on strong footing. The stock market is currently valuing Volution at 15x current year estimated after-tax earnings (taking into account recent acquisitions).

Kaspi.kz AO (4.99%)

Kaspi is Kazakhstan’s largest payment provider, the largest e-commerce business, and a profitable financial services provider. Each of Kaspi’s activities are high-quality businesses that dominate their market and benefit from competitive advantages and significant growth potential. The share price increased 11% during the first half of the year and taking into account dividends received, has now generated a positive return for the fund. This is rather surprising considering the geopolitical tensions in the regions bordering Russia. On an operational level, the company grew earnings by 36% in 2022 and continued its strong performance with a 50% increase in the first half of this year. Based on the company’s guidance for 2023, the shares now trade below 9x this year’s after-tax adjusted earnings.

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