2024 was a busy year for the fund. We sold several investments and saw three of our portfolio companies successfully acquired, with one more acquisition still in progress. Despite these exits, the fund has increased its invested capital to approximately 90% as we enter 2025—a record high in our 13-year history—thanks to our active reinvestment throughout the year.

Typically, strong equity markets lead to increased sales within the fund as more companies approach our calculation of intrinsic value. Finding new opportunities in these conditions can be harder, often leaving us with more cash on hand. Yet, despite these conditions, we’ve found several new investments this year that met our criteria.

We believe a significant part of the explanation is the uneven allocation of capital across global equity markets. Consider the S&P 500’s return in 2024 of 24.5%, compared to 8.8% for the EURO STOXX 600 or 5.7% for the MSCI Europe Small Cap. The diverging performance of these indices demonstrates that certain markets and segments are attracting substantial inflows while others are being overlooked. Warren Buffett has long cautioned against investing in what is popular, as widespread enthusiasm often inflates prices but also reduces the potential for future returns. GVF always had a contrarian approach. Currently, the fund’s largest exposure is to the UK, where equities are trading at their steepest valuation discount to global peers in over three decades.

While our strategy in 2024 has resulted in a return lower than the most popular indices, there is a silver lining: we see our current portfolio as one of the most attractive in the fund’s history. This confidence is based on the high percentage of capital we’ve invested, the quality of our holdings, and the significant discounts to their intrinsic values. GVF has a long-term focus, a nimble capital base and a contrarian, value-driven approach. All this makes the fund uniquely positioned to capitalise on this market environment, whereby large segments of the global equity markets remain out of favour. In H2 we added four new positions to the portfolio:

• Rentokil Initial plc (7.75%)
• Vicat SA (6.22%)
• Optima Health PLC (4.96%)
• Azelis Group NV (2.18%)

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We discuss the three largest additions below to provide more detail on the compelling opportunities that drive our enthusiasm and conviction.

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Rentokil Initial plc

Rentokil is the global leader in commercial pest control, operating in a market growing at 4-6% annually. This growth is driven by structural trends such as urbanisation, climate change, regulatory requirements, and rising demand from a growing middle class. Pest control is a non-discretionary service; when faced with infestations of rodents, insects or birds, most individuals and organisations seek professional help regardless of economic conditions.

While anyone can start a pest control company, growing the business is difficult without brand recognition. In this industry, scale and route density are critical factors. Companies with higher local market share can operate more efficiently because their technicians spend less time travelling between customers and more time delivering services. This operational efficiency ultimately drives higher productivity and profitability, giving larger players a distinct competitive advantage.

Rentokil capitalises on these economies of scale, using its brand recognition and operational advantages to capture market share from smaller competitors. Additionally, current management has a proven track record of acquiring and integrating smaller businesses and improving their profitability post-acquisition. Rentokil’s sustainable competitive advantage, low capital intensity, and strong operational efficiency have enabled it to generate high returns on capital over time.

These characteristics make Rentokil a business that is typically highly valued by the market. However, it recently came onto our radar after its share price dropped 30% following challenges with its transformational acquisition of Terminix, the second-largest pest control company in North America. The acquisition of Terminix transformed Rentokil into the market leader with an estimated market share of 34% compared to Rollins’ 24%. The U.S. is the world’s largest pest control market and now accounts for two-thirds of Rentokil’s profits.

Terminix had been underperforming for years, lagging behind both Rollins and Rentokil's legacy U.S. business in organic revenue growth. A key issue had been low colleague retention, a critical driver of success in the industry. High retention drives better customer service, which improves customer loyalty and creates opportunities for upselling at favourable pricing. While Rentokil has historically had industry-leading retention rates, improving retention for Terminix's workforce has proven more challenging than expected. Nonetheless, recent results indicate progress is being made.

The departure of key Terminix personnel following the acquisition further disrupted operations. As these challenges persisted, Rentokil reported earnings below expectations, while Rollins continued to perform strongly. This led to investor frustration, eroding confidence in Rentokil's management and triggering a significant sell-off in the stock.

While Rentokil’s management remains optimistic about achieving organic revenue growth of 6-9% and improving operating margins from below 17% to 19% through synergies and operating leverage, our investment thesis does not depend on these targets being met. Even in a conservative scenario where Terminix’s performance does not improve, Rentokil’s strong market position in a growing market, non-discretionary service offering, and ongoing M&A opportunities, provide a pathway to double-digit returns at the current share price. We believe the market overly penalises the near-term challenges, creating a favourable risk-reward profile for long-term investors.

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Vicat SA

Vicat is a mid-sized global player in cement, aggregates, and ready-mix concrete. It is active in 12 countries. France accounts for 31% of its revenue, while the U.S. contributes 19%. About 60% comes from developed markets, with emerging markets representing 40%.

Although cement is a capital-intensive and cyclical industry, it can become a high-performing business under certain conditions, particularly when a company has local monopoly-like characteristics. Cement and aggregates are primarily local markets due to high transport costs relative to the product’s value. Local monopolies can emerge when regulatory constraints limit additional capacity, while geographical and logistical factors make imports prohibitively expensive.

Assessing the quality of Vicat’s business requires evaluating two key factors: the demand outlook in its markets and the competitive landscape.

Let’s first examine the market demand for Vicat’s products. In developed markets, the demand for cement should be supported by a normalisation of residential construction activity. The rise in interest rates, high construction costs driven by inflation, and regulatory pressures have negatively impacted both affordability and construction activity in most of Vicat’s markets. In France, residential construction is at its lowest in 30 years. Long-term projections indicate a need for 500,000 new dwellings annually, while current levels are below 300,000—an unsustainable situation over the long term. The U.S. has been structurally underbuilt since the global financial crisis, with an estimated housing shortage ranging from two to six million homes. Near-shoring, on-shoring and significant government-supported infrastructure investment initiatives are fuelling a construction boom in the U.S. that is expected to drive growth for the next five to ten years. In emerging markets, demand for cement is supported by growth in population and GDP per capita. Altogether, these factors suggest a solid long-term demand outlook for Vicat’s products, driven by structural deficits in housing and infrastructure in developed markets and sustained growth in emerging economies.

Regarding the competitive landscape, the cement industry faced significant challenges between 2008 and 2018, marked by excess capacity and weak pricing discipline in the aftermath of the global financial crisis. However, since 2019, global pricing power has improved, supporting a recovery in earnings. In France and Switzerland, two important markets for Vicat, the cement markets are consolidated. While competition exists in certain areas, these markets have been stable for a long time, and the pressure from CO2 regulations encourages rational behaviour across the industry. In the U.S., no new cement plants have been built in the past 15 years, and regulatory hurdles for greenfield projects remain high. Vicat has also shifted its focus to investing in consolidated markets, learning from negative experiences in markets like India, where the lack of pricing discipline due to slower-than-expected consolidation has hurt profitability.

Historically, management was regarded as strong operators and decent capital allocators, with a return on capital employed (ROCE) of 10%. However, the low ROCE achieved post-2008, the continued investments in EM despite weak returns, and a perception that Vicat lacks ambition in its CO2 reduction strategy have contributed to the view that the company, controlled by the Vicat family, tolerates subpar management and is satisfied with a ROCE below its cost of capital.

We believe the current market perception undervalues the strategic adjustments Vicat has implemented in recent years. The company has shifted its focus away from highly competitive markets, greenfield projects, and low-return investments. This disciplined approach is yielding results, as evidenced by their Ragland plant in the U.S., which has surpassed its initial ROCE target with an impressive 18% return. Similarly, the Brazil acquisition is exceeding expectations, delivering returns above its target range of 10-15%.

Vicat trades at a historically low valuation, with next year’s EV/EBITDA multiple at 4.4x and a P/E of 6.2x, representing a significant discount to global peers. Given the company’s strong balance sheet, imminent large cashflow generation, recent efforts to improve ROCE, and favourable medium-term earnings outlook, this valuation is compelling.

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Optima Health PLC

Optima Health is the largest provider of occupational health services in the UK, serving over 2,000 clients across both public and private sectors and covering more than 5 million employees. By addressing workplace health proactively, Optima Health helps employers reduce absenteeism, improve retention, and boost overall productivity. Company data shows that Optima’s services generate an impressive return on investment (ROI) of 7–9x, demonstrating the financial impact of healthier employees. This strong value proposition has resulted in high customer loyalty with a 93% retention rate.

The business stands out for its resilience, driven by non-discretionary demand and recurring revenue streams, as well as its growth potential. Rising sickness rates within an aging workforce have led to increased investment in occupational health, with the market projected to grow at an annual rate of 4% in the medium term. Leveraging its superior scale and advanced technology, Optima Health delivers specialist expertise with fast turnaround times and competitive pricing, while maintaining industry leading profit margins. Operating in a fragmented industry, the company is well-positioned to gain market share and to capitalise on consolidation opportunities.

In September 2024, following a strategic review, one of our portfolio companies - Marlowe PLC - spun off Optima Health. Marlowe had acquired the business in 2022 and subsequently spent 18–24 months integrating nine previous acquisitions in Optima Health. This integration period, combined with restructuring costs, the loss of two key contracts, and a temporary suspension of M&A activity, led to slower growth and lower operating margins. Typical spin-off dynamics have likely contributed to the recent decline in the share price, which allowed us to increase our position.

Now that the integration is complete and restructuring expenses are behind us, the focus has shifted to driving organic growth, pursuing tuck-in acquisitions, and improving margins. At 12x our estimate of after-tax earnings for the fiscal year ending March 2026, Optima Health's valuation is highly attractive for a resilient business with robust growth prospects, a strong balance sheet and margin expansion potential.

Lord Ashcroft, the largest shareholder, increased his stake in the company from 17% to 24% following the spin-off. Over the past 12 months, his support for the strategic decisions taken by Marlowe, such as a major divestment, a substantial special dividend, a significant share buyback, and now the spin-off of Optima Health, all demonstrate a commitment to realising a fair valuation for the business.

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Portfolio exits

During the second half of 2024, Hamilton Thorne and Epsilon Net were acquired, while we exited our investment in Omda (ex-CSAM Health). Hamilton Thorne was acquired for C$ 2.25, close to our estimate of fair value. GVF’s investment, initiated in 2018, delivered a strong IRR of 22.9%. In our H1 letter, we expressed hope for a higher offer price for Epsilon Net, but this did not materialise. We sold the shares at the tender offer price of €12, realising an IRR of 62.7%. While we believe the offer price was not particularly generous, Epsilon Net was nonetheless a highly successful investment for the fund.

Conversely, we decided to sell our position in Omda at a 40% loss. At the time of our investment, margins were still depressed due to the acquisition of lower-margin businesses, but management believed a 30% EBITDA margin was achievable post-integration. Our conviction was further bolstered by Omda achieving 29% adjusted EBITDA margins during the Covid period when the company made no acquisitions, and the true earnings power became visible. However, despite significant restructuring efforts, management has struggled to optimise the cost structure, and target margins remained elusive. Reduced confidence in the earnings power, combined with the risk of a more levered balance sheet, made us sell the position.

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Update on the five largest positions of the fund:

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Marlowe PLC (9.74%)

In our H1 letter, we discussed Marlowe’s decision to divest its compliance business following a strategic review and prompted by frustration over the low valuation in public equity markets. During the second half of 2024, the company spun off its occupational health business, Optima Health. This demerger allowed both businesses to focus on strategies tailored to their respective markets, optimising each to generate maximum future value for shareholders.

Over the past year, Marlowe has undertaken a series of significant corporate actions, including a major divestment, the spin-off of Optima Health, a large special dividend, and a substantial share buyback program. These moves demonstrate a clear commitment by the board and management to unlock value from the companies’ assets. While Marlowe has been the strongest contributor to the fund’s 2024 returns, we still see substantial upside. Over the coming years, we anticipate Marlowe's revenues to grow organically alongside an improvement in profit margins. Additionally, with cash flow from operations and management’s intention to increase net debt to 1.5x EBITDA, the company has ample firepower for accretive acquisitions and share buybacks. Post buybacks, we estimate that the company trades at a rather undemanding 17x current earnings per share.

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Fairfax Financial Holdings Ltd (7.84%)

Fairfax, a global insurance company, was discussed in our 2022 H2 Investor Letter. Before the fund’s investment, the global insurance sector had faced profitability challenges due to significant losses from natural catastrophes and an extended period of low interest rates. These factors weighed on market sentiment, creating an opportunity for the fund to acquire Fairfax shares at a 23% discount to book value. We considered this valuation highly attractive, given the company’s positive earnings outlook and its exceptional track record of growing book value per share at an annualised rate of 18% over 38 years.

Since then, higher underwriting profits and rising interest rates have fuelled strong earnings growth. Additionally, aggressive share buybacks have further enhanced earnings and book value per share. As a result, Fairfax’s share price has risen significantly, making it one of the largest contributors to GVF’s 2024 performance. Despite this strong performance, we still see the current valuation as appealing. The shares trade at 1.2x book value and 10x earnings, and we believe the company has the potential to sustain its 18% annual growth in book value per share.

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Rentokil (7.75%)

See above for our long-form thesis.

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Eurofins Scientific SE (7.52%)

Eurofins is a global leader in food, pharmaceutical, and environmental testing. Over the past 12 years, the company has expanded aggressively, growing from 100 to 1,000 testing laboratories. Significant investments in IT infrastructure and the implementation of a hub-and-spoke model have been key to optimising lab efficiency, albeit at the cost of short-term earnings. Eurofins is now nearing the end of its multi-year investment phase. Taking a long-term perspective, we believe these strategic initiatives will not only enhance the company’s competitive position but also drive meaningful improvements in profit margins.

In 2024, the share price declined by 16%, primarily due to lower-than-expected organic revenue growth. This was driven by soft demand in BioPharma, particularly in early-stage clinical activities, and also in Agrosciences. However, we remain confident that revenue can grow organically at 6.5% annually, with EBITDA margins reaching 24% by 2027. This confidence is underpinned by the continued need for pharmaceutical companies to invest in sustaining robust product pipelines. For 2024, Eurofins is projected to achieve a 22% EBITDA margin. Management has indicated that IT spending will normalise to 3% of revenue, down from 6% today. Efficiency gains from the hub-and-spoke model, along with investments in automation and IT, are expected to further boost margins, making the 24% target increasingly achievable.

Based on the company’s 2027 targets—which we view as realistic—the current share price implies a 12% free cash flow yield. This represents an attractive valuation for a highly resilient business with the capacity to reinvest capital at high returns through organic growth initiatives and acquisitions.

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Volution Group PLC (6.93%)

Volution, a leading supplier of ventilation products, has delivered strong operating performance, driven by increasing awareness of indoor air quality and stricter energy efficiency regulations.These favourable structural trends, combined with the company’s strategic acquisitions, provide confidence in its ability to achieve further growth in 2025. The share price performed well last year, supported by robust operating results and the acquisition of the Fantech Group in Australasia. This acquisition, the largest in the company’s history, was well-received by the market. Despite a strong share price performance, Volution still trades at a reasonable 17x forward earnings.

Our next letter will be out in July 2025. Wishing you all a safe and healthy continuation.