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Hello, it's Meren Somerset Web. Here a reminder. I will be at the Fringe Festival in Edinburgh once again this year, hosting four full days of riveting conversations in Adam Smith's Pannier House. I'll be there from August the seventeenth to August the twentieth. Tickets are now on sale. They are going fast. Of course they're going fast. They'll be sold out quickly. Links will be in the show notes, but you can also just head the main Fridge website and
search for Mirren. They'll see the availability and you can buy tickets hurry. Plus more information about this amazing venue and what we will be discussing right onto this week's show. My guest has Lead maida founder and managing partner of Gatemore Capital Management. We talk about why he thinks the cost of capital is the key issue facing UK equities and why he thinks the Great British Buyout is going
to save the equity market. But first, as always, senior border and author of the Money Distilled newsletter, John Steppik is here with me. John.
Hello, Hello man.
Okay, so I'm going to preface this conversation by saying to our listeners, this sounds boring, but there's something John and I are going to talk about and it's not boring. It's incredibly important. Willie Gazad is boring and important, boring but important. But I think it's not boring and also very important John, It's important, right.
Yeah, and it's actually pretty interesting once you get the guts of it. Yeah, because it's all about pensions.
Okay, now then now everyone's turned off, everyone's moved on to another podcast. Pensions are not boring. Pensions are very interesting. And this is a key issue that has been affecting the pensions market, being affecting the balance sheets of big UK companies and being affecting the UK equity market for decades now, right, and it's coming to an end. John tell us about it.
Well, this is the new is that define benefit pension schemes. So the ones private sector ones, one's run by companies, ones that you can't be a member of anymore, unless I think you want for CRODA, which is one foot Sea two five, the company which still has a defined benefit pension scheme, could be wrong with that. I'll double check, but have your kids apply there exactly.
See if they've got an apprenticeship schame or an intern's game or a graduate schame, do anything for deba.
I've already checked. No, So these funds right up. People kept talking about how there's a pensions black ho massively in deficit for years and years and years. Now the interest rates have gone up, thanks obviously to Litz Trust, they're now in surplus because.
You have to stop doing that.
No, sorry, I can't help myself, not Lizzy's fault. So interest rates went up and that means that basically the future liabilities, so the money that they owe the pensils in the future. That number is big when interest rates at zero percent, and as interest rates go up, that number gets smaller. So it means you need less money in the pot today to pay off your pensioners tomorrow. It's probably the easiest way to think about it, and that's why those schemes are now in subtless.
Okay, let's just go back to why. When they were in deficit, everyone's going, oh my god, all these these British companies, they've got these huge deficits. Poor old pensioners. Everyone has to put more money in so constant pressureund the company is to take big junks of what would be profits and slew them off into their pension funds to pay for pensions far into the future. It's a big drag on profitability.
Money, real money because the future liabilities. I think that probably, I guess this is important to understand as well. Was obviously a number in the future is uncertain, so it's based on the theoretical value. But the theoretical value translates into something you need to take actual practical action on today. So you need you felt that deficit, and it has to come from real cash that's coming into the company
at that point. So yeah, absolutely, as you're saying, it's been a massive drag going money that could have been invested elsewhere are or paid out to no employees and wages, et cetera, et cetera.
I remember writing a colum a little while ago. Okay, it damn like distraction alert showing that wages at companies with big pension deficits rose at a slower rate than companies without them, So at a genuine real world effects not on profitability but on the earnings of people working for these companies. So big deal across the board.
Yeah, absolutely huge. And what is interesting because the first time I wrote about this because this is they're now recorded the record suplus in May. But obviously that the supplus came about earlier in the year and it was one fifty company. I noticed that it was Coats that had actually been able to basically stop topping up is to find benefit pension scheme and it's sheer place went up on that news. So this is something that's a
real world right now. Absolutely you know that this is really important and it has an effect.
We did write, didn't we Quite a long time ago. We wrote a couple of columns saying when interest rates go up by companies that have theoretical pension deficits, because their share press will go up. And look, we were right.
Basically right, we were We told you so, we told you anyway, So okay, So matters for individual companies, but there's also a bigger effect. So one of the reasons that UK capital markets or UK equity markets specifically have had this kind of drag on them for so long isn't just all of the you know, stuff that's happened kind of like recent years. It's also because the rules
around pensions got tightened up so much. Well, it basically meant was that define benefit pension schemes run by companies shifted all of their money out of equities into bonds, and they also shifted their equity allocation out of UK equities. At one point it was something, I mean, they're probably too much in UK equities at one point like something
like seventy percent. Now is down to three percent. So the amount of UK equities held by find benefit pension funds has collapsed and that has been a constant drag of outflows for years and years and years. Now. The point being about the fact they've got a subplus now is that A, you know this this is now fixed so they don't have to change the portfolio allocation anymore. And B when it's already down at three percent, there is no you know, there's no further drag. Yeah, it's
kind of exhausted. So that big sort of selling structural set, that structural selling force is now gone. And even that just vanishing doesn't need to be replaced.
Well, the removal of a negative is effectively a positively.
But then on top of that, you've got a positive coming in for hey, because you're obviously wondering now, But what happened when all these define benefit pension schemes closed, and of course they get replaced with define contribution schemes. We define contribution schemes are the ones would you save the money? And the plot is what you get at the end, and what's in it is your problem basically, And if.
You are in an order enrollment schame, which if you're in work in the UK, you almost suddenly oh that's what you have, yes.
So you've got an auto enrollment pension. So what was happening now is companies aren't putting money and they they'd find benefits schames anymore or not as much, and they are putting increasing numbers amounts of money into the auto enrollment schemes. And the other interesting thing is that in the year to me, the amount of money going into the auto enrollment schemes overtook the amount of money going into dB schemes. And actually I was quite surprised. This
is the first time that's happened. So again that sort of shows you just what a drag the dB schemes have been, because it's mostly because companies like the amount of money going into the auto enrollment schemes went up at roughly the same rate it has been going up for years. The dB money collapsed because they don't need
to put it in anymore. And the fact that you've got this turn around now, so basically you don't have to mess around your dB scheme anymore, and ever increasing amounts of money are going into the auto enrollment and that means that some of that money will be an inflow for UK markets if you like. So, yeah, you've get one structural headwind has been removed and a structural tail wind is coming up to you child gidding.
Here he go. It's all about the floors. Okay, So this is all very positive for the UK market.
Yeah it should be.
Yeah, and vere with a dB pension which looks like it is going to keep being paid out, John, thank you, And I think amazingly that was not boring at all. It was absolutely fascinating and by the way, everyone, it is very important. Pensions are important and interesting. Welcome to Maren Talks Money, the podcast in which people who know the markets explain the markets. I'm Maren zumzat web. Here's my conversation with lead maida founder and managing partner of
Gatemore Capital Management lead. Thank you so much for joining us today. I really appreciate it.
Thank you for having me.
Now, listen, you and I are on the same page with a couple of things here, right. We both family believe that the UK market is grotesquely undervalued and has been for some time. But I think your thoughts around why that is and why it might change are slightly different to some other people in the market. So talk me through that.
Sure. Well, Well, I think a lot of the commentary and and you know, regulators and people in the city are looking for answers in the wrong places and in many ways, you know, they're looking for new regulation in ways of in a sense, manipulating the market to try to get whether it's retail investors and institutional investors to buy more UK equities. I mean, I fundamentally believe that UK equities need to stand on their own right and
compete on their own right globally for capital. And I think the answers to that really lie in deregulation in many ways, not adding new layers of regulation. I think the extent that people have been exploring opportunities to deregulate, it's around listing requirements and things that are really incremental around the edges. Good ideas, many of them, but I just don't think are going to really solve the fundamental problem.
Okay, So what is the fundamental problem? What is the problem here?
You know, we've got great fundamental the fundamental.
Economy, isn't that all? Well, nothing is that bad here. I may have a little of political instability, but goodness me, look over to France, right, I mean, you know it's not not so bad, right, companies are good. Economy looks Okay, what is the problem.
Well, there are some some long term challenges for the UK economy around productivity, but that is not the core driver of the gap and valuation. The bottom line is that the core issue is, at the end of the day twofold. One is to do with the takeover code and the second is to do with how board members
are incentivized. You know, I think that if you look at the difference the fundamental difference between UK equity markets in the US, those I think are the two that you know that that really have the biggest way in terms of driving the valuation gap. Starting really with with with the second point around director and sative. This is something that we've been very vocal about. In fact, we published a public letter for company recently that really highlighted
this point. You know, in the US, when you join the board of directors, you are expected to go into your pocket and buy somewhere between three to five times your annual fees in the stock. And whether you do that upfront or over the course of your tenure, that's the expectation, and people indeed do that. In the UK
you have nothing like that. The expectation is minimal. You know, you see directors buying very little stock and the in fact, the UK Governance Code discourages companies from incentivizing directors with equity. And so what you have is a situation where there's this concept in the UK of you know, of independence, where the real term for it is disinterested. You know, these are not just independent directors, these are disinterested directors.
And so when it's time to explore situations like uh, you know, acquisitions, selling the business, uh, you know, that's real work for directors. And at the end of that work they lose their roles, they lose their the fees associated with their directorship, and there's very little upside for them. And so really there's a fundamental lack of alignment between directors and shawolders.
Okay, interesting, So you're talking about the general board of directors, but if we look at a CEO pay, now are you including that in this as well? That incentivized in the same way, Because we talk about this a lot, and you say, well, what difference should the pay as a CEO make valuations less?
So I think CEOs more often will have equity incentives. But generally, what I would say is that the UK markets now got a reputation for underpaying CEOs and it makes it harder to attract the top talents. So I think as a result of that, you actually have a situation where we have, you know, a less talented pool of CEOs running UK listened companies. And yeah, that that drive some of the valuation gap itself as well.
Interesting. So one of the fixes for the UK, which is not a quick fix obviously, but you think could be a longer term fixes to align not just executive management, but all directors executive and non executive, with shareholder and trust by effectively forcing them into some kind of equity holding or awarding.
Yes, I think I think non executive directors should be owning a lot more stock in the UK than they do, and I think if you look at the numbers, you know, US directors tend to own many multiples of stock in the company compared to UK directors, And there is a fundamentally different notion of governance of what is good governance between the two markets. In the US, having that alignment
is deemed good governance appropriate governance. In the UK, there's kind of this idea that like serving on a corporate board is like some kind of noble pursuit, like working for a nonprofit or something like that, and it's the farthest thing from the truth. I mean, you know, you are you know, shareholder primacy still exists. It needs to
exist for an equity market to function well. And you know, the directors are there to make sure that they can maximize shareholder value, and I think that they need to be aligned with shareholders. I mean, I can't tell you how many situations we've seen where shareholders are extraordinarily frustrated at directors and it just seems like the board is ignoring the demands. And you know, when you think about the setup, it's very clear why. You know, because at
the end of the day. The sale of the business or selling a division or moving a listing from the UK to the US means they're losing their roles and they're not interested in that, and.
It's an awful lot of work as well. It's interesting. I mean, I do quite a lot of the investment trust industry, and this is one area where there's often a conversation about the extent to which directors should or shouldn't hold stakes in the investment trust and in the main directors, it's expected when you go on board that you buy some equity, and there's a report that comes out every year Skin in the Game, which lists the directors of every investment trust and lists how much they own.
But more recently there's been a conversation about the extent that you can expect new directors to buy significant equity stakes if you're also looking for a diverse board of directors, if you're looking for younger people or people who haven't necessarily had many board roles before who aren't in a position to buy. So that's one of the conflicts around expecting directors to make a financial contribution on being employed.
That's understood, it needs to be taken into consideration. But you know, it's not to say that only affluent people should be serving on boards, but there's a very easy accommodation which includes allowing them to buy the stock over time, over the course of their tenure. So it's really it's
effectively rolling your fees into the stock. And if you are a part of the team and you're one of the key decision makers from a governance perspective, you should be very aligned with the shareholders and you should have skin in the game.
Okay, interesting, So the fact that people don't have skin a game is one of the things that might put a spanner of the works of your idea that the Great British buyout is the answer to the valuation problem in the UK. So, as I understand it, your thought is that the M and A in the UK is not a bad thing. We shouldn't be saying, oh my god, well is me we're losing all our companies that disappearing.
We should be saying this is absolutely brilliant. Other people want our companies and this is going to force that valuations, bring you listings into the equation and everything will be absolutely fine, thank you very much to the market.
Absolutely. I mean it's a question of why are companies looking to move their listening to the US wire companies not looking to Why is London not a competitive venue for new listings. It's very simply because of the cost of capital, because you know, issuers are saying, look, it's too expensive for me to issue equity in London. I have very little liquidity. Why do I want to be there. The way that gets fixed is by putting the UK markets back on a virtuous path, and that virtuous path
involves today kind of a shock therapy of sorts. And the shock therapy can't come in the form of new regulation to force, you know, retail investors and to really kind of try to manipulate institutional and retail investors to bi equities. That shock is allowing private equity capital into the markets, and effectively, when you're looking at deals that are getting done, they're being done today at thirty forty fifty percent premiums. And the path that we're on right
now is a slow bleedout. Over the last two years, the biggest buyer on margin of UK equities were corporates ie share buybacks. We are effectively liquidating the UK market slowly over a long period of time. Our view is very simple, which is that what you do want to welcome them is kind of a shock to the system, which is a large, in a aggressive wave of take privates that you know will all be done inevitably at significant premiums. And what that's going to do is severalfold.
One is it's going to retrain, It's going to bring back kind of the animal spirits in the market. So if you even look at domestic investors that have kind of lost faith and the ability to unlock value in the market, for them to see these waves of takeouts, all of a sudden, they start to think, okay, well, you know, if I buy a stock, somebody might take it out, the value might correct, and so it becomes
an interesting game again. Two is you have foreign buyers doing something similar, saying, you know, UK's look very cheap, here's finally a mechanism to unlock the value. And so you have foreign buyers come into the game. And then finally, you know, and importantly is you very quickly realign the supply demand and balance. If you have sixteen seventeen hundred companies today in the UK and one hundred go away very quickly, you know, you still have a large number
of companies on the market. But importantly, what you've done is you've shocked the system and you are realigning the supply and demand. And all the institutional investors, particularly the long only funds that we're sitting on these positions, they all of a sudden get a significant return of capital, and what do they do with that capital? They go
back and buy other shares in that same market. The UK domestic investors are going to recycle the capital that they get from the sale into new names and what that you know, what that's going to do is all of a sudden put us on that virtues path where
there is a rerating across the board. And with that rerating, it's going to come the demand for new listings, and it's going to also slow down the number of companies moving from the UK to the US, and it's going to slow down the number of private equity takeouts because private equity wants to buy cheap, and so we don't you know, ultimately, as public equity investors, we don't want the UK market to be cheap, and so we believe that that needs to be welcomed rather than viewed as a real negative.
I suppose that the worry here is not to be negative about this, because I love the story. I want to go with the story. But our pension funds are big public investors of that type who have gradually shifted all their or very large part of their aum out of the UK. And remember well that long ago that most of the UK's big pension funds had forty percent plus in UK equities. Now they're down to three, four, five percent. The wealth managers have been moving out and
still are. I've still with wealth managers who are in the process of cutting that down from forty percent thirty percent to five six percent. And you keep hearing about this flow of money that is still going. And every time we look at the flows and you think, surely it's got to be positive by now, it never is. That money is still leaving. That is a juggernaut to
turn around. The idea that the big pension funds, I mean you use the words suddenly, quickly, sharp, et cetera, to turn that juggernaut of flows around would seem to be to be more ten fifteen percent.
Yeah, first of all, I don't think the UK pension funds are really in the game anymore. I think they've they've reduced their equity holdings across the board, They've a lot of them have significantly derisked. I would not rely on that pocket of capital really for the future of UK equity markets. But let's just take a step back
for a second. Fifteen twenty years ago, if you look at a UK institutional portfolio of pension portfolio or an insurance portfolio, you'd find or nonprofit or whatever it is, you would find a vast overwaiting till UK equities, what we call a home bias. Why you know, at the time, the UK had about five percent of the global market cap, and yet you would find portfolios of forty fifty sixty percent UK equities. Why the UK needs to compete globally. We cannot look inside and just say, okay, what new
pockets of assets internally can we source? The UK should be a global financial center that really is attractive for global investors and needs to look and compete globally, not just not just for you know, UK share of the UK waalert.
Okay, I feel like you're not that keen on the British iSER.
No, I listen. I don't think that's a bad idea. I just think it's incremental. I think that could work, I just don't know if it's going to work in time. It doesn't make the UK more competitive globally. I think that the way you make the UK more competitive globally is you fix the alignment first of all between directors and shareholders. And the second point, which I was I was starting to make earlier, is around the UK government, Sorry, the UK Takeover Code, which I think is no longer
fit for purpose. You know, the UK Takeover Code is like SACRICYNCT in the city and people like don't want to even debate it, but it's no longer fit for purpose. There are there are things that make that effectively create barriers for takeovers in the UK that are undress necessary and unhelpful and effectively take agency away from from shareholders and that's not positive.
Will you give make a couple of examples of the kind of thing that in the code that, yeah, I mean a.
Lot of things. You know, sure, the put up or shut up rule, I know that's something that's very unique to the UK. So when a buyer comes in, you know, you think about a foreign buyer comes and says, hey, there's a company in the UK that that we're interested in, we want to approach them. They sit with their lawyers and the first thing they do is they get a rundown of okay, well, do you have to be aware of a few things. One is, if you're even your
conversation leaks, forget a bid. If your conversation leaks, then you have twenty eight days to put up a fully funded bid, or you have to so called shut up, You have to stay away for six months, and you have to deal with the public repercussions of the fact that everybody knows about this, et cetera. You know, and you and so that is the kind of thing that's just not particularly helpful in attracting foreign capital. Another example is you need to have a fully funded deal. You know,
when you're making an offer. That is a very difficult position to put a buyer into. Now, some buyers can do that if they're making a reasonably small acquisition relative to their size. But you're asking other buyers to not just show the equity capital, but have it fully financed. In other words, get the debt providers on board, do all the work in advance, not knowing that you're actually going to get a transaction consummated. That's a big ask. Whereas you know in the US there's a little bit
more of a fluid process. It's not as rigid. You can come to agreement. The board can take a view that you know, this company should be able to get its debt financing. We kind of believe in that, and and we're willing to, you know, to get a higher price. We're willing to take a little bit of that of that risk. In the UK, it's just not even possible. The board can can't kind of make that decision. And so the takeover codes really you know, run its course,
but it needs to be revisited. And I think barriers need to come down, and they need to come down, not just you know, in order to make it easier to transact, but also to signal to foreign buyers that the UK is open for business. Hey, come look over here. We are we are heading the right direction here with regulation, and I just think that needs to happen.
Anesting, I mean, a lot of people would say, and a big part of the commentariat in the UK would say that it's too easy to take over a UK company. It's too easy to come and snap up a UK company. And effectively take it abroad.
Yeah, those aren't people who have bought companies in the UK. Okay, fair enough.
I mean it is interesting. I mean books written about how easy it is to buy companies in the UK and how we effectively give away our companies.
You know, there is a real issue with a lot of pundits that speak without knowledge or experience, you know, and in fact a lot of our regulators, a lot of people who are involved in regulation. It's just shocking kind of the concepts that they come up with and you know, and what they think is the right solution. And so you see it time and again. People have views, but you have to really understand what's the driver of those us Do.
You say that a change in the takeover code would be a really great signal the world that we are open for business. And one thing that we've talked about a lot on this podcast is that another great signal would be to not have one of the highest stand duties in the world, and the cutting stand duty at least down to somewhere roughly in the region of where other countries have it if they have it at all, or abolishing it would be a great way to signal to the world that we are open for business.
Absolutely. I mean, I think that's one hundred percent of step that should be taken. I think liquidity in the market is very poor, and I think that that is for sure both a substantive and important signal change.
Okay, so we've got a dump stand duty, we've got to fix the takeover code, and we've got to change the obligations on directors anything else.
Those are the core points and I think that generally, you know, I think the attitude towards private capital, you know, should change. You know, these are not national treasures that are being taken private. These companies that are being taken private often remain in the UK, very often are very well run. And I think at the end of the day, the sooner we let it in, the sooner we kind of deregulate and welcome transactions and create better alignment with directors.
The sooner we do that, the sooner that valuation gap closes, and the sooner you have a slowdown of a way of buyouts. And then the sooner you have companies really vying to list in the UK again, and that would be a good place to be.
Yeah. Is there a case also for changing some of the regulations around listing. I mean, it's very onerous to be a listed company in the UK relative to being a private company, and you hear a lot of complaints from listed companies, particularly smaller list of companies who don't have the resources these compliance and departments that in fact
that the burden of this is huge. I mean I spoke to a recently retired CEO of a company the other day who'd been a CEO of a UK to sid company for a long time, and he said, in the early parts of his career as the CEO, he was spending maybe one or two days a year dealing with regulatory issues, discussing things with government, dealing you know, lobbying, etc. Towards the end of his career he could say that was maybe one or two days of a week.
I think deregulating across the board is helpful. I think that signaling, you know, sentiment matters. And I think that when you inject, you know, when you provide the signal that the UK's is open for business, that the UK is is deregulating, then I think the sentiment that can really drive a shift in sentiment, and sentiment matters.
I want to talk about how you invest, you know, the kind of companies you look for, and the way you are a very activate and impactful investor. Before we get to this, I want to pick up on something that you said the very beginning, when you said the UK does have a worse productivity problem than other countries. Do you have a sense of why that is or feeling about what it is and what might change it? Well, you can be rude, I'm fine, no, no, no, no, no.
I mean, look, I think that's not really not being rude, but I just knowing what I know and knowing what I don't know, it is a bit perplexing on some levels. But I do think that the problem has been around for a long time, and I think it's been masked by having an economy that was so heavily reliant on financial services, where productivity became extraordinarily high, and it kind of masks the poor productivity in other segments of the market.
And so as the economies become less reliant on financial services, I think that that reveals a fundamentally low productivity market. You know. I think the issues when it comes to productivity, I think there's many things at play, and I think that the vast swing in immigration in the UK both and you know, the kind of exodus from Brexit and then you know new forms of immigration makes the data, you know, just a lot harder to interpret.
So let's go on to how you invest some of you if there's a special opportunities fund and the idea there is to some summarizing very quickly find value traps and stop them being value traps.
Yeah, that's fair. I mean I wouldn't say find value traps as much as we're activist investors, meaning we engage with management, board shareholders to unlock value. The companies are starting point, are really companies that have lost a significant amount of their peak market. Sure, that could involve you know, companies on the verger distressed like which involve significant turnarounds, or companies that really just have lot sty're footing a bit and need the shareholders to push the board to
take certain action. And so we find our role to be really identifying those opportunities, aligning, getting kind of some kind of unity amongst the shareholders around these issues, and just really holding the board to account. And that's what we do.
What's the biggest mistake do you think that company management make in the UK and smaller companies what do they do that causes them to get themselves enter these problems?
But that's a whole other podcast. But where do we start? You know, because of the nature of the kinds of companies that we look at, the sets of mistakes are, you know, a little bit different from I would say, you know, the broader market. Being a public company CEO, or any CEO for that matter, any leader. In a sense, the key attribute of a successful leader is being transparent
about the challenges and the issues. And I think that once you are transparent and open about where the challenges are, where the mistakes have and you own those, you build trust amongst your management team, amongst your board, amongst your shareholders, and you know, there are very few problems that can't
be solved over some reasonable period of time. But when you don't own those, when you aren't, when you try to kind of hide the mistakes, when you try to brush over them, that's when the bigger problems come up. Too many CEOs are too quick to try to kind of hide the mistakes and or you know, or try to deny that a mistake has been made or that there's a you know, meaningful challenge. They think they need to create a certain appearance at all times, and that's
where trust breaks down. And you sometimes see these companies with stock prices that make no sense, and when you really spend more time on it, you just realize the shareholders just don't trust management anymore. I know that's a problem that's hard to solve, and in fact, most often there's only one solution for that, which is for the CEO to go absolutely.
All right. So it's the core problem with a smaller company in trouble is that trust is broken down. How does an active investor let you coming in buying a mistake? How do you then build trust with a management team who are already not trusted by their other showholders?
How do we build trust? Well, we have a saying internally, which is we seek to understand before we seek to be understood. And so, you know, I do think that we when we enter a position, we have a thesis. We have a view on what's potentially going wrong, and usually that view is more often than not right. You know, we we do it enough homework that we really get a pretty good we build a pretty good mosaic. Having said that, as you get to know the management team
as you spend more time with them. You know, you need to be open minded that we don't know it all and there could be factors there that we're unaware of. And so I think that not being open mind, but showing, you know, management teams our ability to be open minded, our ability to change our view. I think it's important. And from a trust respect, we're not out to get them, you know, And in fact, I would say more often than not we play a very supportive role with existing
management teams. But the ones where we don't are the ones which make more of the headlines. And so you know, that's that's the nature of the beast.
You're in a public letter recently about Elementis, So that's something that that you hold in the front to tell me a little bit about that.
Elementis is a company that has underperformed over a long period of time and has significant underperformed during the tenure of the current management team. They made an acquisition which has not panned out as planned. In fact, I'd say it was a very poor result. And you know, and and the management has not met its targets, but in
fact has fallen far short of its targets. And so you know, I would actually say that's an example of a company where shareholders have lost trust with management team and we're expecting the board to make the appropriate changes.
And what are those appropriate changes.
Well, we've highlighted in the letter one of the points we made, which is a topic we just spoke about. This is the lack of alignment between the non executive directors and the shareholders. You know, non execut directors own
less than one year of their fees in stock. And so yeah, the changes is that the company is undergoing a significant cost savings program right now and implementing a significant cost savings program, and in the midst of that, we just think that it's not great for company morale to be implementing cost savings while you have a management team that has consistently underperformed keeping their jobs.
Yeah, well, maybe they're listening. Listeners. Will put a link to that letter in the show notes so you can go and have a look at it. Learn more about this in general. Right, few of things. You are very very active. Are you concerned that the rise of passive across the world when it comes to investing is a problem for market or is it just a huge opportunity for you.
There's two things that have really changed the fundamentals of markets. One is the rise of passive the other is the rise of quantitative trading. You know. In both of those cases, you know, the investors aren't looking at the fundamentals, you know, and and so that leaves a more limited universe of investors who are still looking at the fundamentals. Now, one would argue that there are enough active investors out there to set you know, the prices appropriately for someone like us.
That creates opportunity. I mean, for our biggest concern is buying the right way, because we we fundally view if we buy right and we can get what we want to get done, you know, the valuation will will play out, you know. And so there's an important role for passive investing in the investment universe. But I think people need to be reminded that passive only works because there are active investors out there.
Yeah yeah, and so then may well become a tipping point when there is too much passive.
What's going to happen is just active investors, you know, by definition, should over time be able to capitalize on that. It's just real to require a different kind of capital base where investors maybe aren't providing you know, funds aren't providing daily liquidity, but maybe have a longer term view on their capital and can hold positions and really significantly
outperform markets as a result of that. Now, having said all that, I mean, part of the story here is that the vast majority of wealth creation in the markets has been some of the bigger tech names out there, and that's been in recent years. That's a part of the equation that that kind of needs to be taken into account as well.
Yeah, the other the other big change along with the rise of passive, we've also have the rise of private acquity, which is something that you're quite close to because you're working and there's a private equity style end of the market. And one of the worries with private equity is day that, you know, it's not necessarily particularly good for companies. They get their cost cut too much, they get loaded up with debt, et cetera, and it's not necessarily the best
thing for a company. So if we get to a stage where we see less private equity more IPO, that seems like a good thing. A could shift back of the pendulum.
Do you think if we're seeing less private equity and more IPOs, that's because valuations have corrected. Having said that, I don't think that there's anything apherently wrong with private equity owning businesses. In fact that I think that private equity more often than not runs business as well, and is able to do things and invest in the business in ways that sometimes companies standalone independent public companies can't.
And so I think that there are some advantages to being held as a private company versus public company, and in some cases it can be in fact better.
So the rise of private equity might even be about something other than cheap debt.
Yes, as the cost of debt has risen, I think that's going to separate those private equity firms that are creating real value versus the ones that made their money entirely through financial engineering. But I think there are definitely many private equity firms that are the real deal, and you are good stewards.
Of that capital, competing with you a bit, though.
No, not competing. We welcome private equity into the public markets, and in fact, I think we need to see more of it right now.
In essence, let's end on a positive high note in essence,
you're pretty bullish on the UK. So all the things that people will look at and might say, well, it's perfectly fair for the UK to be cheap because the companies have badly managed, loudly productivity, political risks, shooting themselves in the foot with net zero and overregulation, etc. All those things are not minor but not going to hold us back from possibly seeing a good res So we should all probably run out and buy the thirty two fifty or even smaller.
I don't know if i'd say I'm bullish broadly about UK markets. I think there's a lot of value individual individual names in the UK market, and I think there is a path towards unlocking that value, and I think that boards really need to think very carefully about how to unlock that value.
Excellent activist answer, thank you, what we do, that's what you do. The final question of the one that I have to ask everybody on this podcast, and mostly I know which way people are going to go, but I don't know which way you're going to go on this one. If I gave you the choice over a ten year period of holding one I said and one I said only, and I made you pick between gold and bitcoin. Which would you choose?
Well, it's never bitcoins, so whatever the other often is. And I know that's a predictable answer.
In many No, it wasn't predictable. Most people don't say never bitcoin. So tell me why I never bitcoin? We got it, we get a little our. Well, I don't really know enough about it, but going to ongoing gold bitcoin, you've been very clear, So I'd love to hear a little more about that.
Bitcoin is a speculative asset that you know, has has no basis to trade one way or another. In my mind, it really has no intrinsic value. By the way, gold doesn't eat either, but at least gold has been around for thousands of years, and at one point, you know, was was the underlier of some major global currencies. And so you know, I just think bitcoin. It's really interesting when you hear these evangelists talk about bitcoin and talk about fiat currencies, and you know, you look at the
US dollar. Americans spend five point five trillion dollars a year on US taxes. Until the IRS starts accepting something other than the US dollar as payment. The US dollar isn't gone anywhere. I mean it, it is it is it is the you know, all all this this this idea that that the US dollar has no fundamental value, Well,
it underlies the world's biggest economy. Now, I think from there, you know, you can look at currency by currency and try to think about, you know, what's the fundamental value currencies. But bitcoins certainly just doesn't belong in the conversation. It's not a real asset. It looks like a real asset in some ways, but but it's fundamentally not.
If I were to be incredibly generous, because it's you and this has been a really great conversation and say to you that it didn't have to be bitcoin or gold, you could choose one other asset clus to hold for a decade.
What would that be, Yeah, that'd be That'd be easy.
UKUS Global equity is nice, Vanguard ETF.
I think the easy decision is owning SPI. You know, global equities would be you know, would be a close second.
Thank you so much, Absolutely brilliant, really.
Nice to enjoy the conversation.
Thanks for listening to this week's Marin Talks Money. We will be back next week. In the meantime. If you like our show, rate review and subscribe wherever you listen to podcasts, and keep sending your questions or comments to Marriorn Money at Bloomberg dot net. This episode was hosted by me Maren's amst web. It was produced by Samasadi and Moses and Bazil thanks to lead Maidar