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Peter Higgins 00:17
Hello, and welcome to this Investing Matters Podcast. My name is Peter Higgins, you can find me at Conkers3 on Twitter.
And today I have the huge privilege of speaking with Alex DeGroote, highly sought after former sell side TMT Analyst has worked with numerous investment banks and brokerage firms and equity firms.
And I'm thrilled to have him on here because he's got such a wide breadth of knowledge going back from joining the City in 1996.
So 27 years or so, expertise and I discovered, I say discovery because it's not an island. But I discovered Alex, via a good friend of mine, by the name of Phil Oakley was talking about getting some guests on to the Investing Matters show and live panel sessions that I had. And we've talked about this chap called Alex DeGroote and absolute specialist in the tech sector, and sell side. So here we are. Welcome, Alex.
Alex DeGroote 01:19
Thank you, Peter. It's an absolute pleasure to be with you. Thank you.
Peter Higgins 01:24
Right Alex, we're going to start our conversation, if I may, with you, sharing with us all the way back at university, what did you study? And what did you do? What did you obtain from your degree? I want to go all the way back there. Where did you study? What did you attain?
Alex DeGroote 01:44
Sure. So way back in the distance of time, in the sort of early to mid-90s.
I did an undergraduate degree in History at Durham.
And then I did a Master's in I mean, I think it was called European Management Studies at the London School of Economics, and graduated in 96. And got my first job in the City or in investing shortly thereafter with a small firm called Albert E Sharp, which was a Midlands based securities firm and asset manager.
And I got the job really through a friend of a friend. And it was a pretty small firm. I mean, this is the very early days of the internet. So you know, the way you got jobs back then was very different. I didn't really know anything about stocks and shares or investing or finance, I'd done a sort of social sciences type education.
You know, I wasn't hard maths guy, wasn't really a, you know, an accounting guy.
But this investing lark sounded quite interesting.
And so I joined this little firm, really, as a grad, to be honest, helping out on high net worth portfolios, a little bit of institutional equity analysis, a little bit of going to site visits when the fund managers couldn't go, a little bit of taking notes, a little bit of settlements.
So it wasn't a glamorous start. But it was a really good start in terms of breadth of opportunity and for those that don't know, the firm this Albert E Sharp had a really good presence in the Midlands, in particular, with engineering companies, metal bashers, and it had helped a lot of these companies raise capital over like 50-60 years very prominent firm, but in a built up and asset management business alongside so it's a hybrid firm.
And that gave me a good hybrid exposure into investing, and also the sort of more institutional side of corporate finance and equities.
So you never really realized these things. When you're quite young, I was probably only 23-24.
But it was a good starting point. And they put me through my exams.
So back in the day, we used to do exams through an organization called the Securities Institute, since been superseded by the CFA, but back then it was called the IIMR.
And so again, this firm sort of put me through that.
And really over a very brief period 12 to 18 month period, I learned a lot. And I learned from some very experienced guys, stockbrokers, analysts, sales guys, dealers, and it was a good starting point, if I'd gone to do like a normal graduate recruitment thing at somewhere like KPMG, or Ernst and Young, it would have been a lot more structured, it would have been a lot longer, and it would have had a lot less responsibility.
But in a way, I was just sort of thrown in at the deep end. And at the time, it was a bit daunting, but I think looking back on it was a good thing.
So I guess my message to grads or people who've recently left uni looking to get a job in investing, don't ignore the little guys don't ignore the small firms, because sometimes they give you a leg up a lot quicker than in the more structured environment.
And I think the other thing about my story that I should sort of get out there early doors, is that, you know, I've built most of my career living in the north of England, and historically, most of the opportunities in investing in finance have been in the City, the City of London, I have worked in the City of London, but you know, 25-26 years, well over half of that two thirds has been working in Liverpool, Manchester, you know, working remotely, so you can do it.
You don't have to be in London. And these days, we're working from home and systems, better cloud based systems, there's more opportunity to learn and develop you can do CFA remotely or online.
So in in a way the world is easier now to sort of carve out a career away from London if that's what you want. And in a way my sort of career has evolved in that way.
Albeit, this is like 20 odd years ago, nobody really knew what working from home was 20 years ago, the cloud was not a thing.
And one of my first jobs, this little firm Albert E Sharp, in fact, this will make people laugh was to do what were called McCarthy cards. And so in the library, believe it or not, this company had a library in the library of Albert E Sharp, they would have row upon row upon row of McCarthy cards.
And McCarthy cards were called, card based bits of news cuttings, on companies, and economic events. And I would be sent to get the relevant McCarthy card on GKN or Unilever or what was then called Racal, which was the early Vodafone.
So I would trundle along to the library, I would open up the rack of cards V for Vodafone, G for GKN, so on and so forth. And then you would bring them back, and then the people would get their magnifying glasses, and they would look at every story. It's old school, isn't it now?
I mean, it makes us laugh thinking about it. It's not that long ago. But this is before Google Search. This is before things were really filed online. But in a way to get in another way Peter it was a good way again, to learn things and to learn the processes.
And you know, I was a guy in my 20s, then early 20s, but I was working with some brokers and some guys who are in the 60s. So these guys were born in like 1930, so that they didn't really get tech at all, they could just about use a computer. But most things were done manually. Dealing was still done on the phone, voice broking.
And just one final anecdote. One of the analysts I sort of looked up to a lot was a guy called Colin, who was an engineering analyst who is then in his late 50s.
And he sat bolt up right in front of you know, like, a preacher would stand in front of the lectern.
And on the lectern was his squared maths paper, where he would do his calculations with his pencil and his rubber operating margin, you know, return on assets, blah, blah, blah, all done on paper with pencil. I mean, that was too old school for me.
But it was interesting to see that there were still guys in the City that did it that way. But things were about to change rapidly. Anyway, that's a long, very long winded way of explaining how I started in the mid to late 90s. And the environment I started in.
Peter Higgins 07:04
That's brilliant. I think that's a brilliant, brilliant consensus that you've given there regarding the journey and the beauty of doing things almost in a way that enables you to get a greater learning and understanding you say that you were thrown into the deep end.
But I think the beauty of sometimes as you said, being in a smaller firm, is that enables you to do that, that you know, they thrust into the forefront of it all their opportunity when somebody doesn't turn up or somebody's having a day off and go you know what, who's the guy that oh, Alex can go and you're going what me I don't know what I'm doing.
But you go there, and you have to learn on your feet sort of thing. And that's almost how it was done in in the up north and in the Midlands, you know, you had to learn on your feet you had to hit the ground running so yeah, thank you for sharing that's absolutely brilliant.
Now, Alex, you've then went on to work at Charterhouse Bank, ING, Credit Agricole, Panmure Gordon and Peel Hunt, Cenkos Securities and latterly, until February 2023, Arden Partners during your career is encompassed equities, fund management and corporate broking finances, please share with our investors and listeners, your greatest lessons and learnings from your career in relations to firstly, equities please so that you know we've got a lot of investors that listen to this professional as well.
What's been your greatest lessons, please, Alex, on the equity side?
Alex DeGroote 08:21
On the equity side, I would say always look to learn. Don't ever think you know it all, new things come along, whether that's technology, trading patterns, macro events, don't ever close your eyes or your ears to new developments.
You know, you never know everything, however clever you think you have as much experience you are.
There's always something coming along, that's going to teach you something new.
I guess at the moment that will probably be AI, Artificial Intelligence.
But just in general, don't switch off the market is evolving all the time and industries are evolving and macro is evolving.
And you never know, it all experiences a great teacher, but you've got to be fresh, you got to remain open to new ideas.
I mean, one of the great things about working with you, Peter, and some of the other guys is that I'm picking up from you, new influences and new information, which I hadn't had before.
So I would recommend everybody to remain open-minded about everything and willing to learn.
I mean, that will be my big learning. I mean, just to give you one anecdote, you know, when I started back in the 90s, with Phil Oakley, brokers and banks had big trading floors and you would have a morning meeting and you would give your stock ideas or talk about the news.
And everybody would then hit the phones and ring their clients and tell them what the news was and tell them what to do make a recommendation and try and generate some business.
It was quite a labour-intensive process.
Not that tech lead bit old school but that's the way the City worked.
Fast forward 20-25 years, you know, if you have a morning meeting, you'll probably do it on a Zoom call or on Teams.
There's no big trading floors. A lot of trading is done by algos or computers, forums are massive.
So the market has evolved hugely in my career, and will continue to evolve.
So, again, that's another aspect of sort of willing to be receptive to new ideas.
Peter Higgins 10:08
Absolutely. I think it's a very important point you make there about continual learning, we've all got to be students of this market, because every day's a school day, we're all finding out, we've got the economist coming out, we've got the Fed, the ECB are going scratching their heads going, we don't know, what we're doing, essentially, is what it's telling us, you know, and working with the market and the markets not working with us, it’s reactive, sometimes we've got to be but we've got to be open.
So like you say, it’s all about learning and not thinking we know it all already, because we're just going to get our heads smashed, you know, our portfolios will be empty as well.
Alex DeGroote 10:37
Yeah, absolutely and don't be afraid to admit you've made a mistake, or, you know, sort of had bad experiences.
I mean, it's a portfolio game and in a portfolio game, you're going to have one or two losers, you know, you can't have not every stock picks going to be a winner.
So you got to learn from those ones that go wrong. Yeah. So I mean, be receptive. I think that will be my main learning from my career, and things evolve and changing and try and go with it, if you can.
Peter Higgins 11:02
Brilliant. Thank you for that response now, but also similar to sort of question. Now, what are your greatest lessons and learnings with regards to your time in the highly competitive corporate broking finance side of the industry?
Alex DeGroote 11:14
Yeah, I mean, if I was to give advice, from my point of view, I would say to anybody at the beginning of their career or even midway through their career, look at your network. Is it how you want it to be? Are there any deficiencies? What are you doing to strengthen your network? Are you a good communicator? Not everybody is a good communicator, are you a social person? Are you in touch with the people you need to be in touch with?
Again, don't be afraid to reappraise your current situation, say, actually, you know what, I don't have any contacts from that firm I worked at 15 years ago.
That's a bit of a mistake. You know, let me reengage with those guys. See what the chat is see what's going on.
Because one of the things again, about investing in the City is that people move around and sometimes they move geographies, and they move overseas.
You know I moved to a French brand in my sort of mid to late 20s, great learning.
Look at your network reappraise develop, I think at the moment, we're live in post COVID in a great era for going to events, taking part in forums, for example, the forum you have a few weeks ago Peter, there's lots of things you can learn from, if you're in London for a few days, try and search out your private investor forum, or maybe a VC firms hosting a sort of demo evening, and finding out about these events is a little bit of trial and error.
But we've got more information flow property now than ever before.
So again, depending on your personality, I would say look at your network.
And is it helping me, don't waste time with people with negative energy, you know, personal bugbear of mine, and look to look to learn.
I mean, we're very privileged when we invest in tech or life sciences companies, digital companies, we're generally meeting people who are, let's be honest, a bit cleverer than we are.
And we can learn a lot from these guys, we may be able to bring the sort of investment piece and the finance piece, but they bring the sort of in in a deep dive understanding of AI or coding or genomes or something.
So yeah, I think being aware of your network and strengths and weaknesses and looking to refine your personality, I mean, none of us are the finished article, even if we're 45-50. We're still learning.
Peter Higgins 13:13
I love that that finished article. I think that's a brilliant, brilliant way of putting it, and we all need to continue to believe that we can improve ourselves as well. Very good point. Now, with regards to the advisory side of it, do you want to share with us really because I think it is a nuance that many people don't understand. Alex, how does the advisory side of the City actually work?
Alex DeGroote 13:34
Okay, great question. So, if you're quoted on AIM, as a company, public company, you're going to have to have what's called a nomad.
And you're probably going to have to have a broker.
A nomad is a nominated advisor and it's an obligation upon any public company that's on a to have a nomad.
And that nomad will help the company with regulatory requirements, disclosure requirements, and the whole sort of legal side of being a public company.
And there's no way around it, you got to have it. If you don't have it, your shares will be suspended.
Okay, so they are advisors, they're typically not advising on strategy on finance, but they are advising on market expectations, requirements around disclosure, and the technicalities with regards to fundraisings, for example.
So the advisors are working with the company, generally around a specific issue, but there's an ongoing role of maintenance care and maintenance that the nomad must fulfill.
The broker can often be the nomad but maybe a separate firm, the broker is generally more engaged in raising money fundraising.
So if a company needs to raise 10 million to build a new factory or develop a new product line, then the broker will be charged with approaching the shareholders taking soundings according to the appropriate regulatory requirements, and then, you know, raising the capital at whatever price is deemed appropriate by the company in the institutions.
So the nomad and the broker can be a row wrapped up into one.
But quite often when you look at an RNS in the morning, you'll see that there's a nomad and a broker.
Okay. Now on AIM away from I'm sorry, away from AIM on the main market, the regulatory environment is a bit different, you tend to find companies have two, maybe three brokers. No nomad, that's not a function on the main market.
And again, those guys to UK phenomenon, they're basically charged with advising the company in terms of its capital markets approach and the perception of the investor base towards that company, and how are they managing the company in terms of governance, best practice, and things like for example, the City code, so advisors tend to get paid a flat fee, which can be anything from basically 50 to 150 a year, but they make the real money on raises, capital raises.
So two to three years ago, 2021-22, there was a lot of capital being issued on the main market and AIM.
Generally, if you're a broker, you're earning between 3 and 5% of the raise.
So if the raise is 100 mil, then the commission paid to the broker is 3 to 5 million, okay.
And when you look at an RNS in the morning, and you see an IPO, you'll often see the gross money raised.
So that's the total money raised.
But then you'll see the net money raised, and the net money is the gross minus the commission paid to the advisors.
So advisors make their money generally through flat fees, and fundraisings.
That's how the City works.
So basically, on the equity side, if there's no fundraising going on, it's a tough gig, it's hard to make money.
Conversely, when there's a lot of capital flowing, and a lot of fundraising is going on, as there were two or three years ago, it's happy days.
And you know, the gearing, the operational gearing for these firms can be massive in a bull market.
Conversely, in a negative market, or a sort of depressed market, which is probably how we would characterize the UK right now is not a lot of business, then you get the negative effect of operational gearing, fixed cost base, not much revenue, loss making.
So that's in a nutshell, that's basically how it works.
There's all sorts of advisors in M&A, mergers and acquisitions, and strategy and PR and communications.
But in a nutshell, a public company is going to have a lawyer, an auditor, an accountant, a broker, possibly a nomad, possibly a PR company, maybe one or two others, it's a long list, there's been a lot of money on fees.
And people who aren't enamored with this, maybe they're onto something.
But nonetheless, there are a lot of advisors that sort of sit around the outskirts of a public company.
And it's important for investors to be aware of this because companies don't, they don't act in isolation, they generally do on the basis of advice from various stakeholders.
And of course, there's a cost to doing deals and that cost is the advisory fees.
So I've done that most firms I've worked for, depending on what the corporate finance function says, depending on what compliance is, you're more or less involved. Some companies are very tight on analysts getting involved, that historically that wasn't the case, they were very involved.
So it's a bit of a grey area, the extent to which there is a genuine Chinese war.
And in a way, there couldn't be a genuine Chinese war, if you think about it.
But nonetheless, you know, compliance is a much hotter topic today in the city than it was 10, 20, 30 years ago, that's for sure.
So I hope that summarizes how the advisory side works.
But as I say, companies don't act in invite the CEOs got to run the company, he hasn't got time to talk to all the shareholders about, you know, ESG that comes from the advisory base.
And you know, boards meet, what, four times a year, six times a year, depending on depending on what's up debate, and at those meetings, they will have an agenda and the agenda will be led often by the advisor or the non-execs. So that's really the advisory piece.
Peter Higgins 18:44
Brilliant. Thank you for that, Alex. Now I want to want to go on to talk about you being closely involved in the IPO and early years of Rightmove and the UK property portal, also advisory and broker to the likes of Reach, Gocompare, WPP and STV, so do you want to share some of your experiences of those sort of roles that you've had some massive roles that looks like to me.
Alex DeGroote 19:07
Yeah. Well, I mean, right? Maybe it's a really interesting one, I guess.
Because right now everybody's got a real downer on the UK stock market.
That actually right move is a good example of how the UK can evolve big growth companies.
So Rightmove was spun out of an estate agency group called Countrywide back in the mid-2000s.
And the sort of visionary estate agents had worked out that customers were increasingly searching for properties to buy and rent online.
This is web 1.0, so Google was in its early days, Rightmove's genius was you didn't have to google search it you just went straight to Rightmove, you know, in your toolbar, and it became a default setting for many people, so they didn't have to pay away in search engine optimization didn't have to pay away a lot of money, just high margin and it became a brand and they were all over TV brand building and Countrywide and the other holders which included Skipton Building Society decided to monetise this asset they developed problem was back then was not that long ago, but it feels like a million years ago.
Back then, people didn't really know how big a company like Rightmove or Auto Trader could become.
They didn't realise it would do like 200 million of EBITDA, was it sustainable?
Was it vulnerable to the housing market, blah, blah, blah. In fact, the model has proved remarkably resilient over a long period of time.
And the shares have basically been a one-way bet.
I mean, from memory, that IPO price was about three pounds.
It was a relatively easy IPO to do, most people sort of got the model, although nobody really imagined it would be as big as it is today.
And the CEO at the time was a genius called Ed Williams, ex management consultant who had a lot of vision, and was quite pure in his vision.
He didn't want to expand in the US, he didn't want to expand overseas, he just wanted to dominate the UK property market.
And really, his target was the classified advertising revenue that the newspapers used to have for selling houses.
He thought, I'm going to get that because I can provide better return on investment 24/7 feedback loop, you can stick all your houses on there, ‘Dear Mr Estate Agent’, and we're going to charge you 300 quid a month, depending on how many houses the model was genius, it worked very well. And the IPO was a success.
And it's largely never looked back. And it was an absolute pleasure to be involved in that at the beginning.
And then subsequently, because it really gave me an insight into how internet businesses make money, good internet businesses, and where the dependencies might be where the weaknesses might be, for example, being SEO dependent is always going to put you at risk slightly.
That was never the case with the big branded portals like Rightmove and to a lesser extent, Zoopla and Auto Trader, where people would go direct to site.
So the other thing it taught me really was that you don't need to, if you've got a genius idea, you don't necessarily need to go and launch in Denmark or the States, just focus on what you're doing.
And in your market. And sure enough, Rightmove became a 50, 60, 70% operating margin business, really through best practice, and through looking after their customers.
And their customers were property developers, new home developers, estate agents, basically. So that was early on in my career, that was a that was a good client to have good client to work with, and a lucrative client to have.
And it gave me an insight into digital businesses, really, before they became mainstream.
So that when the likes of Money Supermarket and Go Compare came along later, I understood, you know, what the key variables were, I understood what the key drivers were, and really gave me an early look at these business models, which have gone on to be very successful, albeit they haven't scaled internationally, they've tended to stay in the UK.
And a lot of people have said, well, why is that?
Why don't they go and launch in France or something.
But really, the management have said, no, we're going to stick to this market, because this is what we know. And it's good, because they haven't done M&A.
And the M&A therefore hasn't sent them down a cul de sac or down a, you know, blind alley.
So that was great. I've worked with lots of other good corporates, mainly in the tech and media sectors.
Some of them have been a bit old school and a bit challenged, some of them have been high growth, I think the common denominator has basically been with the exception of Rightmove, most sort of digital media or media companies are fairly cyclical, in terms of their revenue and their performance trends.
And so you got to know where you are in the cycle, because things don't go up in a straight line. Rightmove’s, obviously different but most of them have advertising revenue. And that tends to be quite tightly correlated with the advertising with the economic outlook.
So it's a question of sort of peaks and troughs, and knowing when to invest through the cycle as well.
But I've been privileged to meet some real entrepreneurs, and work with some geniuses, you know, Sorrell, obviously, is the one everybody knows, but Ed Williams at Rightmove was great as well.
And you know, even amongst the smaller companies I've worked with, I've met some really high-quality businessmen, many of whom remain friends to this day, and many of whom have gone on to do other things.
So a guy called Barrie Brien, who is the CEO of Creston, which was a PLC, taken over by private equity about eight years ago, he's gone on to do very well in private equity marketing.
So you know, again, back to the point about having a network. These are the clients I work with as an advisor. And I've learned from them, and I've tried to keep those relationships going through my career.
And likewise, I think, I hope, I've provided some value to these guys about the market about what do investors think how we value business.
And, you know, I like to think it's a reciprocal relationship. But I think what's important for this podcast is that investors understand that management is really key when you're investing in a business management is key. It can be the difference between, you know, a company outperforming and a company just flatlining.
And the management piece is sometimes overlooked. I'm a great believer in you know, only invest in a company.
If you've met the management. I think investing without meeting management is reall,y you're letting yourself down a little bit. So that's my learning now.
Peter Higgins 25:09
Brilliant, thank you for that full response. I really appreciate it. Now, you've covered most of this, I think in that response you've given me but I'll ask this question anyway, you can add a little bit of nuance to it.
You've been doing this now let's for nearly three decades, 26-27 years, which of the companies which you're involved in, or you've seen in the market that have surpassed your highest expectations and why?
What did they have you mentioned management already mentioned, Sir Martin Sorrell, you've mentioned Ed Williams, regarding Rightmove, which other companies have surpassed and thought, wow, they've done amazingly well, I never thought they'd do as well as they did.
Alex DeGroote 25:44
Well, I have to say Rightmove does stand out like a sore thumb without going on about it too much.
And I think the reason is that they had a very clear sense of their addressable market and, and we're able to build their business model around the addressable market.
I'm sure a lot of people watching or listening to the call will know the phrase, TAM, Total Addressable Market.
And I think if you can define that accurately, it can then enable you to shape your internal resources to attack that market.
So rightly, would stand out like a sore thumb. I mean, I think most of the others, it's a bit hard to categorise.
I mean, I've worked with some marketing services businesses, which were buy and build stories.
So the objective, I mean, Creston is one I've name but there were others.
The objective was always to scale a business through M&A and then at the right time exit, so every every story is a bit different.
So Rightmove was always going to be a pure play digital growth story.
Creston was always going to be a buy and build marketing services story, where we doing lots of little deals.
And the strength of the story is around how well you do those deals, and how well you integrate them, I repeat, M&A can often be a bit of a make or break.
For a lot of companies. A deal done well can give you a step up a deal done badly can lead to impairment charges, and sort of lots of unintended consequences. I've also worked with some problem children, I mean, the funny thing is, is that you can actually make money out bad companies.
And that may sound counterintuitive.
But for example, right now, in the UK market, we've got a situation where a lot of small and micro caps are getting written off or just absolutely creamed on a daily basis.
And then they end up trading on incredibly low multiples, and people give up the totally unloved there's often value in some of these companies. But it takes a bit more strategic vision to realise that value. And in this current interest rate cycle, I think we're going to find a lot of companies have a bit too much debt, and they're paying a bit too much interest.
But under the right refinancing conditions, there can be value in these companies, if they can refi.
Maybe through issuing equity, maybe through asset sales, you can generate value, sometimes from transferring value from debt to equity, basically.
So I guess what I'm saying is, Rightmove for the pure play, Creston and WPP for the M&A little newspaper company I worked with a few years ago, Johnston Press, it's now called National World was basically passed or in a really bad place.
But through a combination of refi and some clever management, it was recapitalized and lived for another two years.
So it is very much horses for courses. And you can make money as an investor out of bad companies.
But you've got to be aware what the plan is, what's your exit strategy.
With a company like Rightmove, there was never an exit strategy, because it was always going to be a long-term digital growth story.
With a lot of companies that get listed, there is no such long-term plan. It's a sort of three to five year plan based upon certain corporate actions.
So I hope that doesn't over complicate it. But again, my experience has benefited hugely from working with a variety of companies.
Peter Higgins 28:37
Thank you for that. I think one of the difficulties that investors currently have, and an ongoing problem that we all have, is how we go about valuing these companies.
Some of them are on the knees, like you say, completely unloved and undervalued.
But it's getting to that particular position where we've learned so much, or we've learned enough to be able to qualify in ourselves, what is the value of this company?
And what's the value of somebody out to somebody else with this company?
Is there a simplified way that you've learned Alex over 26-27 years, as to how to go about valuing any company? Obviously, tech companies are more difficult to value because of intangible assets, and so on, so forth. But what's your simplified strategy for valuing a company? And you can share that with our listeners? Maybe?
Alex DeGroote 29:21
So you're absolutely right, Peter.
So my natural biases towards growth companies or tech companies or media companies, digital companies, are tend to steer away generally from asset backed valuations.
But just because you say, a lot of the companies I know and be familiar with, they don't have any PPE, so all intangible assets, look at Rightmove’s balance sheet, there's nothing on it.
So that's my natural tendency, in terms of what I would look for in terms of red flags or things to analyse.
I'm a great believer in margins, you know, and what is the sustainability of a margin for a given company and how does that match with where we are in a cycle.
So to give you an example, the company listed in London about a week ago called Cab Payments, which is a forex provider.
If you look at the screen, you'll see that their EBITDA margin last year was very high.
I think it was like mid-40s.
So the key question for investors with a company like this, is that margin sustainable?
If yes, up to what level? If no, what's the downside?
Because that margin on the sales is really what determines your earnings.
And so that will feed through into your valuation.
So the thing I look at probably above all else, for most companies, is sustainability of operating margin.
And I guess it may be quite topical, because of course, at the moment, a lot of companies are seeing quite big inflationary pressures.
So margin for me above all else, you know, what's the old expression, profit for sanity, turnover for vanity, and I believe that elsewhere, I mean, DCF, are used by a lot of investors and analysts discounted cash flows, they have a value, it's a little bit geeky, if I'm being honest, but they do have a value.
And if you don't know how to do a DCF, it may be worth spending half an afternoon, trying to learn how to do one. But apart from that, you know, I'm happy to stick with P/E multiples, or EBITDA multiples, always look to see if a company's got a pension deficit, or any non-financial debt, we all know what net debt is, we can find that from the balance sheet, gross debt minus cash.
But sometimes they might have a pension that you don't know about.
Or they may be on the hook for a deal that you don't know about.
Or there may be some other liabilities that you don't know about.
So before you rely too much on the P/E, the price earnings, just check the balance sheet, because you don't want to come across with a big pension deficit, which isn't in P/E, but it's taking cash out the company.
So you do you know what? One of the great things is you just learn all these little tricks, and try and build up a picture of the company in your mind, and then work out what the relevant metric is.
I wouldn't steer too far away from P/E, frankly, as long as you've got a feeling for, are those earnings sustainable?
Are they growing? If so, why are they growing? Is this margin sustainable? And then the other thing, which is not really financial, but important to equity stories, who owns the company? Who owns the company, do the management have a big stake?
To me, generally, that's ticking the box to private equity, or strategics have a stake? Hmm, that's interesting, what does that mean? You know, look at the structure of an IPO. How much of the IPO was companies selling, and how much was them raising new money?
Always a bit suspicious of companies where the shareholders are bailing out at the IPO, but not raising growth capital. So that's not financial as such, but it's an important part of the story.
Because as a private investor in particular, you know, you don't want to be the guy that picks up the pieces.
You know, you don't want to be the guy that's a mug.
And so looking at the shareholder base, and how that's evolved, if a company comes to market a billion, but it was last transaction at 500 million, how was it increased 500 million in value, what have been the levers?
A little bit of cynicism can help without being too cynical, because being too cynical, I think probably, it's not a good thing. But a little bit of cynicism can help.
And again, try and get in front of the management, whether that's on one of our podcasts, or on an earnings call, or just on the telly or whatever. But you've got to look at the eyes, you got to see the management.
Peter Higgins 33:14
Make some brilliant points that I love the fact that touched on pension deficits there is rarely ever talked about.
And we've got so many companies now that are going, you know, we're on the hook for this tension, and we can't deal with it.
And they're basically selling the pension book off, you know, and moving on to try and get away from it.
So yeah, fantastic points there Alex, very well made.
Now, I want to touch on some personal stuff now with yourself.
Because obviously, you've worked inside of investment banks before European banks, etc. What do you do about your own personal investing? What's your methodology? What's your strategy? What sort of research do you do? What's your asset allocation? Just give me Alex's downlow on investing for himself. What do you do?
Alex DeGroote 33:53
Okay, so first thing to say is I try and avoid too much home bias.
So what I mean by home bias is I live in the UK, I'm a British citizen. I've worked mainly in the UK, but you know, the UK is not 100% of my portfolio, right?
And the UK is only 4% of the MSCI global benchmark index.
So, you know, I would encourage anybody to look closely at the makeup by geography of their portfolio.
And so I am unashamedly overweight, the US in terms of my own pension and personal funds, and that's a mixture of company direct company investing, and quite a lot of funds. Some of the funds are locked up, some of them I can access this afternoon.
The ETF market for me has been a big eye opener over the last few years. And I would encourage people to look at any of the providers Vanguard, Blackrock, State Street, but there's loads and if you want to play AI at the moment, it's probably easier to do it through an ETF than it is through a direct equity play certainly in the UK, so not to question I try and avoid home bias.
I am unashamedly overweight, the US not just because I like the US, because it's where the most innovation comes from. And it's where there's the most liquidity.
I'm increasingly turned on to markets like Japan as well, and to some extent the other Asian markets like Vietnam.
So I hope that gives you a feeling for what to do. We've got loads of great robo platforms, our platform industry in this country is really good. I think we've got great forums, the information flow with YouTube and podcasts is very good.
But you don't need to stick to UK micro-caps, you really don't. I mean, I've worked in UK micro-caps, so I know how it works. And I love to find a good one.
But if you've just been in the UK for the last 10 years, your performance will be very different to if you'd followed Warren Buffett, S&P tracker.
Fees are the other thing that my real bugbear fees, so keep an eye on what you're paying in terms of fees.
It's getting more competitive, but there are people out there that will still gouge you.
So it's worth looking at. I also think investment trusts are sometimes overlooked.
They're a big part of our market in the UK. A lot of them right now trading pretty meaty discounts.
You know, I've got a sort of soft spot for Polar Capital, for example, but there's loads, and I will also impact if people want diversified exposure.
You know, I'd recommend sort of closed end investment trust.
So yeah, I mean, the liberal look around look at different markets.
Don't be afraid of things you don't know Vietnam is an amazing country. Look at the Vietnamese stuff that you can I mean, does that help? Yeah, it's broad based. But I guess…..
Peter Higgins 36:21
That’s a really good, good reply. What I'm going to touch on though, for our newer listeners, and less experienced listeners, how would somebody go about accessing the Vietnam market? Or the Japanese market? Are you talking about ETFs there, talking about investment trusts? How do you go about accessing those, Alex?
Alex DeGroot 36:39
Yeah, so ETFs around themes and concepts, and sometimes geographies.
And the big suppliers are the ones I name check. So you can just Google that, you know, check them yeah, or alternatively go by or any of the platforms Hargreaves Lansdown, II is very good, they're all good.
We've got a very good personal finance framework in this company, Vietnam. I mean, Dragon Capital is a very good fund manager, UK based, but specializes in Southeast Asia, Japan, Schroeder's Japan, very good.
Most of the big fund management groups will have equity strategies around these markets, you tend to only hear about the UK ones, because we're in London or the UK.
And they're very good. But they also run global strategies, multi-asset strategies.
And so the information is normally there on the website with the prospectus. You just need to search it out, really, but ETFs are a great, great way to get exposure to concepts and themes and provide very good liquidity so that's a sort of taster of how I would do it.
Peter Higgins 37:38
Thank you for that. I fully appreciate it. Now, investors should always aim to be rewarded for long-term investing in the market versus trying to time the markets.
I think we're agreed upon that Alex, which stocks have you held in your own investing portfolio for the longest? And what are the characteristics that helped you to maintain your conviction through in the market cycles that we've had over the past decade or so?
Alex DeGroote 37:59
Yeah, I mean, really, that is largely U.S., I must be honest.
And that's generally been companies like Microsoft, you know, what we used to call Google, but which is called Alphabet, obviously, our friends Nvidia that we've talked about in other pods, I was a big buyer quite early on into large cap tech, what used to get called FAANG, or FANMAG, and what gave me conviction, I think, really just the sense that they had sustainable and diversified business models.
So for example, with Microsoft, you not only had office 365, but you had the gaming side of it.
You had the LinkedIn side of it, do you know what I mean, you had BING for search advertising, for those that don't know, so these tech companies, they are often more diversified than you think.
And often they have revenue streams, which are sort of hedging each other. So you sort of anticipated that would play out.
But as the years have gone by, it has played out.
And then the other narrative, which I think really played out for me, I'm in my late 40s Now. So really timing, the market for me is money that was put into my funds in the early 2000s, and then into 2010. And of course, that coincided with the GFC global financial crisis and zero rates.
And so basically long duration assets, tech companies did very well from zero interest rates between about 2009 and like two years ago, because you were valuing things on like, very low discount rates, tech companies, where the cash flows might not be for 10-20 years, but really building up value in the terminal value.
So I got lucky Pete, to be honest, I knew a bit about tech 10 to 15 years ago, I didn't know the GFC was going to happen.
But I sort of accepted the Warren Buffett logic, which is the US is just this amazing country full of innovation.
And I basically switched to the US and I've sort of largely stayed there since.
Closer to home, it's been a bit more about being nimble, to be honest, I wish I could say we've got the UK FAANG but we don't so it's often a question about being nimble around themes and concepts and, and trends.
What we tend to have in the UK that they don't have in the US, we tend to have companies that scale to a certain size, and then get taken over.
Sadly, you and I've talked about this a lot.
So your exit strategy for a lot of companies, maybe NCC, for example, your exit strategy for a lot of our mid-caps will be, it will get taken over.
And that will generally lead to a fairly hefty premium over where the shares have been trading at.
And that's your sort of happy goodbye to those to those stories.
I can't point to many UK compounders, compounders, a company that does the same thing year in year out as one called 4imprint which is a UK quoted US promotional goods company.
It's got a great business model and it's compounded steadily over a 10 year period.
I used to work with them. But that side, right if I can't think too many, to be honest, in the UK, it's tend to be U.S. lead. But what I'm looking for is recurring revenues, emote scalability, that's important and good management.
Peter Higgins 40:53
Brilliant I love that reply, you’ve asked my question as well, because I was going to ask you about what your favorite companies at the moment and sub sectors right now but I think you've covered that.
I want to ask now because I think you've touched on it a little bit. What do you make of the lowly plight of the UK stock market? Versus that obviously its U.S. peers because we've seen sort of huge disparity going on regarding the valuations of US companies, not only the tech companies that ordinary companies as well, versus our UK listed companies, you know, some of them we've got massive revenues in the US, there seems to be a massive discount.
Why is it continuing Alex?
Alex DeGroot 41:27
Do you know what it's quite sad.
And it sort of needs to be corrected. I mean, I think we're now 252-6 months of nonstop redemptions from UK equities, what, 500 mil a month, every month.
I mean, that's billions and billions and billions of pounds of assets under management, leaving the UK market. Why is it happening?
I mean, it's a bit of everything, isn't it a bit of Brexit, bit of the UK political situation being a bit sort of sub optimal, a bit of other markets being more attractive.
I mentioned Japan, Japan was flatlining for many years, but has now come back into focus.
That'll be sucking money out of UK funds into Japanese equity strategies, a bit not many interesting companies listing in the UK, you know, why bother?
If there's nothing to invest in that you want to the UK has always been very value oriented.
So it's always been good for dividends, banks, insurers, the big oil companies, that profile hasn't really changed.
As long as I've worked in the UK market, I can't really see it changing, to be honest.
How do we get more people interested in the UK?
Well, just the other day, I think there was some reforms announced by Jeremy Hunt about getting, you know, the long-term insurers to invest more in unlisted equities.
I mean, I don't know if that will happen. But it but it sounds good. Scrapping method to for me is a no brainer.
For anybody who doesn't know what that is, basically, six or seven years ago, there was some regulation that basically said, you can't really distribute or publish research, unless there are sort of onerous regulatory agreements between fund managers and suppliers.
Unfortunately, what it's meant is that there's a real dearth of coverage on companies below market cap of 200 mil, and they are the very companies that need research that need promotion that need help, that may need to raise capital.
And often there's almost nothing to talk about with them, because nobody writes about them.
There's no liquidity. So I think, short answer to your question, I think everything needs to turn around, it looks like the government and the regulators are on the case, which is good, but I won't hold my breath, because it's been going on a while.
And I think my message to UK investors would be when you're looking at the fundamentals of a small cap, or a mid-cap, or micro-cap, that's great.
And that's necessary work. Also consider things like liquidity, what's the volume, if you buy 100,000 shares in company X 50 million quid, you're going be able to sell them?
Or is it just going to have to take a price from the market maker, which may be on the back of a massive spread, no volume.
So liquidity, unfortunately, has become quite a big issue in the UK market. I don't see that changing in the short to medium term. Frustrating should be better than it is, but we are where we are.
And you know, I'm hopeful that it will turn we could do some more good IPOs that will help. Terms of the valuation disconnect.
I mean, UK has always been a relatively lowly valued market, again, reflecting the sort of low growth big dividend payers, is that going to change? I mean, not really, I don't think so it might change a little bit on the upside. It doesn't appear to be sucking in capital at the moment.
Peter Higgins 44:12
Let me just ask you this, then what do you foresee then as a possible catalyst for positive sentiments going forward for the UK market? Because we need something as a catalyst going forward? And it's not going to be solely down to Jeremy Hunt saying pension funds. You know, can you invest in these small companies and the startups and these AIM listed and scaling companies need something else?
Alex DeGroote 44:31
I mean, at the time we're recording this Pete the inflation rate is what eight and a half, you haven't the macro and we're not growing, at zero.
So we basically got stagflation.
Yep. So stagflation is not an attractive calling card for investors. So we need to get inflation down. I think that will happen. Maybe not for a little while, but it is it is going to happen. And I think we need to stimulate the supply side to generate more growth because if you're growing at 1 or 2% as an economy, it's just not very attractive.
So there's loads of them. I think, personally, it's easy for me to say but I think there's loads of minor micro reforms to the supply side for degrees qualifications.
Apprenticeships, make it easier to employ people, you know, teach people digital skills.
I mean, there's lots that these things are not very sexy, but there's lots of little things we can do to make the economy more robust.
I worry slightly that we don't have enough digital skills amongst our sort of younger cohorts of kids.
I mean, they're very good at TikTok, but I mean, how many of them do you know what I mean, how many of them are solid natives? [Peter] Yeah, yeah, UK macro, we've got to grow up more than two. And we've got to get inflation down.
We're going to sell London to international investors and give the impression of political stability, not getting involved in politics on this podcast.
Peter Higgins 45:45
Now that’s not go there, that's a good call.
I'm consciously I’ve got you here for a little while, I've got two questions for you remaining for you to expand on and tell people where you are and what you're doing.
So talk about all the social media stuff that you're doing, or the media content, you're working on, blogs, etc? There’s a particular podcast know that you're working on as well?
So share people, tell them where you can find you, etc. And I've got one final question after that.
Alex DeGroote 46:08
Thank you. Well, I'm working with you and Henry, on the Twin Pete’s Podcast, which is fortnightly, and you know, we're liking that format.
And that's going well, and we're talking about the market and companies in a sort of user-friendly, good-natured way, that's really enjoyable for me, I post bits and pieces on things like LinkedIn, and Twitter, my background is mainly in sort of media and tech and publishing.
So I work with a friend of mine, Colin Morrison on a blog called Flashes and Flames which is published every Friday, which is really for people that work in the sort of media or publishing industry, but nevertheless, I think, has broad appeal too and I get asked to, you know, to go on CNBC, every now and again to talk on Sky, Comcast, Google, the tech scene, generally consumer tech, rather than business tech. And I take part in various conferences, and I'm working on a few other things behind the scenes, which hopefully will see the light of day later this year.
I'm a massive believer in social media, massive believer in YouTube, democratisation of content, and personal finance, I do believe there's a job or work to be done in the UK, marrying personal finance, with a better understanding of the stock market, I think we're sort of we've got the bits in place, but we haven't linked them up.
And that's one of the things you and I have talked about, I believe in that.
I’m in a luxurious position now where I don't really need to work, but I still want to work.
And I love markets and technology and finding out new stuff.
So intellectually, the passion is still there. But thank God, I don't need to get up at six o'clock in the morning anymore, or all that stuff, which you can do it, I think you can do it, but it has a cost. And the cost is physical, a little bit mental and also in terms of the family life.
And you know, I've got kids and a wife and aging parents like most of us.
So I've got lots of other responsibilities that I need to sort of turn to and be part of my community and help give back. I do a bit of football coaching, but of cricket coaching, and various other chores for people. So you know, all of this is very fulfilling for me and it's easier to do when I don't have to sort of go to the office every day.
Peter Higgins 48:03
But I love the fact you’ve touched on life balance there.
And also giving back to the community and being part of the community. I think it's very important that we all show some kindness to what's going on around us as well and being alert to it.
I think when we're so focused on our work and having to travel and we miss everything else that's going on outside of it, we end up so blinkered.
So you know, knowing what's going on your community so important and been able to do something about it.
Alex DeGroote 48:31
You know, it's very important to how I really feel that strongly too, and I sort of feel as though COVID was a two-year period where we're all sort of locked up.
And I want to come out the other side of that now and be a bit more open and help where I can.
And I love the fact that we've got these platforms and channels that we never used to have, which gives us connectivity, and I like using them.
Peter Higgins 48:48
Brilliant. I'll look forward to hear more about Flashes and Flames as well.
Listen, I've got one final question for you, Alex and I think I've covered this a little bit, but I'm going to ask you to expand on it. If you have if there's one thing within your power, I'm giving you the magic one now to do whatever you want to do, that you could change for the long-term betterment of all investors, including your children, you know, when they inherit your wealth, no doubt when your wife's well, what would you do? And what and why Alex, what would you change for the betterment of all investors?
Alex DeGroote 49:17
Okay, so I would give all kids at the age of 16, two to three hours a week of personal finance, teaching, you know, can you fill in a tax return? Do you understand how tax works? Do you know what a pension is? What's your basic arithmetic like?
And all that stuff, it may not be very sexy, but I think as a society our kids are struggling, you know, with concepts in personal finance, so I would institute education, I mean, I'm a big one for things like learning mechanics as well, but I would pick one for practical skills and I think that's probably what I would do.
I will try and get into the schools and colleges, the building blocks for managing your personal finances and you know, the classic stuff about footballers earning loads of money and then sort of spaffing it all the way that should not happen.
So I think that's probably what I would do. Yeah, I think that would be my that would be my main contribution to the debate.
Peter Higgins 50:06
Brilliant. I love that reply. I think financial education is so vital. We've got so many people that are financially illiterate.
And as a consequence, now, you know, they're looking at their, their mortgages are looking at their rents, and they're looking at the cost of living and going, I don't know what to do, you know, and there's not enough support for them.
So yeah, I think that'd be great. Especially if you've learned that at 16. Not, you know, not trying to learn it now, at our age, you know, late 40s, or, you know, mid 50s, it's very, very difficult to actually attain that.
It's not, it's not on doable, you know, it's possible to still learn our age, but it's easier to learn it earlier, you know, to prevent the mistakes happening later on.
Alex DeGroote 50:39
I think putting the building blocks in place, I mean, these days, you know, if you graduate college these days, 21,22, you're probably going to have an auto enrollment pension, you know, what is it? What are you going to do with it? How much should I put in? How much can I afford to put in? Or does it actually mean? What are my options?
You know, timing the market is better than timing the market as we agree. And so therefore, if you started that process, mid 20s, power of compounding means things could look pretty good by the time you're in your mid-40s.
What does that then mean for the next phase of your life? I mean, first, that's where I'm getting it.
And the other thing that's changed since we were much younger, of course, is that you've got to pay to go to uni these days.
So yes, you've got to be savvy about how this is going to play out. So yeah, personal finance at a young age.
Peter Higgins 51:23
Brilliant. No, I love that response. Ever so pleased that you came on here with me on the Investing Matters Podcast Alex, it's been an absolute pleasure to speak with you ladies and gents that's the conclusion of my interview with Alex DeGroote, the former sell side TMT specialist analyst with numerous investment banks, finance houses, brokerage firms, stockbrokers nearly three decades of experience for you to listen to. I hope you enjoy this and we look forward to hearing your feedback. Alex, thank you so much. Take care. God bless you Sir.
Alex DeGroote 51:51
Thank you. Thank you so much.
Peter Higgins 51:53
Thanks.
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