Daniel Gehlen & Marc-Lennart Bräutigam (GBC Value): How to find the best European stocks?

Daniel Gehlen & Marc-Lennart Bräutigam, GBC Value

“I think if we are not very excited about an idea very quickly, then we don’t look at it in depth because there are just so many ideas.”

[00:48:12]

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Who speaks in this transcript

Daniel Gehlen

Co-founder, GBC Value

Marc-Lennart Bräutigam

Co-founder, GBC Value

Tilman Versch

Interviewer, Good Investing

Tilman Versch [00:00:35] Good day or good morning, dear audience. Today, it’s great to have you back on Good Investing Talks. I’m very happy to have two young and inspiring fund managers on here…Marc-Lennart Bräutigam and Daniel Gehlen from GBC Value. Good morning to you.

Daniel Gehlen [00:00:58] Good morning, Tilman. Thank you very much for having us

Marc-Lennart Bräutigam [00:01:02] Hey, good morning, Tilman. Thanks so much for having us. Really nice to be here.

Tilman Versch [00:01:08] It’s great to have you here. And I followed your work already for a while. And it’s fascinating to finally talk to you. And as I like you and we know each other for a while, I’ve prepared especially hard questions for you. So we can have some fun with our conversation today.

Tilman Versch [00:01:25] Maybe let’s start with the why behind your fund. You started the fund with a focus on Europe and we’re going to discuss this in this episode of Good investing talks. Why did you start another fund with a focus on Europe?

Marc-Lennart Bräutigam [00:01:45] Yeah, that’s a very good question. And I think it goes back to when Daniel and I met at Barclays. We’d been working there together for a couple of years. And then after we decided to move on, we sat together and brainstormed around the idea of a fund. And at the time, it wasn’t clear if it would be a European fund, or if it would be focused on small and micro-caps. But the idea really was to, or our goal at the time, and still is to kind of maximize the performance over time for us and our investors. And then we kind of naturally ended up with the focus on Europe and small and micro-caps. So Europe, probably because that’s where our expertise and our experience lie. When we worked in banking, we were also covering Germany, the UK, and a couple of other markets. So you could probably say it’s our home market. So a bit of a bias there definitely. And, I think we felt that we have a very broad and deep universe there.

And we also saw that a lot of the broker coverage, with the MiFID II regulation and so on was kind of getting less and less. So small and micro-caps got less and less attention, especially in Europe with the new regulation. So we thought this is a good space where we can apply what we learned in banking, and what we saw in banking, and then hopefully uncover some gems there.

Daniel Gehlen [00:03:40] In addition to what Marc said, what I totally agree with is, we wanted to have some focus because the universe even in Europe is very, very large. And we feel it can be a big advantage to know a market quite well like the German market or the French market. I mean, even those two markets are a bit different. Different in cultures and companies are different. So yeah, getting familiarity with the countries we feel can be an advantage.

And at least until today, we haven’t felt that it’s a limitation to mainly looking at Europe. Maybe at some point, that will be the case. And we feel like we must look at other continents as well. But at this point, I think we see a lot of opportunities in Europe still. Our process definitely doesn’t lack the opportunities that we want to look at. It’s more the time that we need to look at single opportunities. So until now, we feel very happy with the focus and I think it’s good to be a specialist as well in some regard.

Marc-Lennart Bräutigam [00:04:48] And then maybe just to add on that point, we also saw that obviously the increase in ETFs in client’s portfolios, but then, on the other hand, we also saw that we could add value with a very focused and concentrated portfolio. That is kind of like acting away from the benchmarks in the markets. And you have to remember when we started out, we started out with family, friends, and a couple, probably semi institutional investors, family offices. They had very limited exposure to the European, small, and micro-cap space. And then, on the other hand, we saw this trend towards boutique funds and just a limited number of very compelling propositions there. So we thought there’s space, and there’s an opportunity.

Tilman Versch [00:05:50] There are many things to unpack in your answer.

Tilman Versch [00:05:54] But maybe let’s start at the point with Barclays. It’s not a typical German bank, I think. What made you go there in the first place? And what were your learnings of Barclays that still exists in your fund?

Daniel Gehlen [00:06:08] Yeah, so I can, of course, mainly speak for myself, but I got to know Marc during Barclays when I was there, in Frankfurt, in the German office, in the M&A department. So I think what brought me there was that I was generally interested in the investment banking space. I had two experiences before. I had two internships during my studies at Goldman, and Barclays. It was just a good environment to learn a lot about analyzing companies, also about process management in some regard. But I think what we took with us from the Barclays experience is especially looking at companies in deep detail, like some private equity firms, do it, doing their due diligence. And yeah, working together with them, was definitely helpful to get the right toolkit to analyze the company and to see how deep you can go at some points. Obviously, we also question all the time, where it makes sense to go very deep, and where you might just gain some conviction, which isn’t real. But yeah, that’s, I think, what I learned most from Barclays.

And then obviously, I got to know Marc, who worked in the London office, and we had a lot of conversations together and projects together. And he was just the guy in London for me that I could call, late at night as well, who was in a good mood and it was just nice working together with him. So even though it was not planned at the time, it was great that we got together in the end and until today. It just makes so much fun to work together, which is also one of the most important things for me to do what we do at the moment.

Marc-Lennart Bräutigam [00:08:00] Yeah, and I think maybe just to add to Daniel’s point, when I moved to London, in 2015, I think it was just, on the one hand, super exciting for me to move to London, and to get the exposure there. And when I arrived, it was a fantastic team, great colleagues, super international, we had people from all over the world in the team, basically, every European country was there. Of course, also the locals, the UK guys but then we also had people from the US, we even had one guy from the Himalayas. So it was very international and obviously everything was in English. So for me, that was a great learning experience from a cultural standpoint, and from a team standpoint.

And then I interacted quite a bit with the German team as well. So that was great fun and very interesting because they were reaching out on different transactions from the corporate finance side, and I was working on the ECM side, so mainly IPOs, rights issues, block trades. We also sometimes used the bank’s balance sheet and in order to do this, we had to understand the risks of any transaction we were looking to get involved in, and the company and so I think that was a great learning for me. Also worked with other teams, but then also went deep into the situations I was involved with.

Tilman Versch [00:09:50] I also did my deep research on you and they found out that at Marc’s home, after school there were gatherings to discuss stocks very early and that friends often came to Marc to do after-school stock research. Did you also start that early, Daniel?

Daniel Gehlen [00:10:10] I wouldn’t say I started that early. No, to be honest. Until I finished school, I think I had little to do with stocks. My father definitely has a strong interest in the stock market. But that’s kind of it. And it only came when I studied finance for one or two years, and I went through an international bank in Germany, or a very large bank of Germany, went through different departments. And then, yeah, I’ve always found analyzing businesses, quite exciting. And one of the cool tasks where you look at the company from the top and kind of gather information to get a full picture, that always interested me very much.

And then, yeah, when I read a few books about investing in my first years, I got hooked to the stock market as well, because it’s just very interesting that from time to time, it offers these crazy opportunities. And even though I liked doing my studies in Frankfurt, and then in London, I learned a lot about efficient markets. And I believe, in large parts, I’d say it’s still crazy, what kind of opportunities we at least think we see from time to time.

Tilman Versch [00:11:25] So let’s go back into the recent past and discuss your founders’ journey. You two are young founders; what mistakes did you make on the way of founding a fund business? And which would you, looking back, want to avoid or try to avoid with doing things differently? I promised you, there will be some hard questions.

Daniel Gehlen [00:11:55] That is a very good question. Maybe I can have a go and then Marc can talk about the real mistakes we did. I would say I’m personally very happy with the way we launched the fund. We launched it small with a few people, like 20 people. Also with smaller and larger tickets, with €5 million. So with a very limited amount of assets for an investment fund, at least. Although we were always super happy to get these commitments from family and friends and just the trust, they put in us, it was enormous. And we always had the vision that this must be a longer-term project, so let’s say a three to five-year project and then we can see where we stand.

And from the beginning, we focus mostly, or mostly like 95% on the performance and the business, and not very much on kind of finding many new investors quickly. And I’m actually very happy that we did that. So I think we haven’t done too many mistakes in setting up the fund and growing it slowly until today. And it kind of pays off a bit now because now we have a track record and we get some more attention. Also from investors we want, which is the other thing, I think. Yeah, where we didn’t do mistakes. Oh no, I’m just talking about where we didn’t do mistakes.

Tilman Versch [00:13:25] I already realized that.

Daniel Gehlen [00:13:26] Then we tried to find the right investors. So if you asked about the mistakes, maybe from time to time, we could have tried to scale the business more quickly. But not really. I don’t really regret that we didn’t. I think it’s good that we didn’t until today. We kind of thought a lot about what we can do to engage with the right investors. And maybe we spend some time there that in the end, we wouldn’t have needed to spend. And probably I’d say the same on the investment portfolio, that we looked at a lot of companies in the past deeply as well, that we could have said no to very quickly. So we could have looked at a lot of new opportunities.

I think for me, the biggest learning is even though we had a good focus in the last three and a half years, we could have had even more focus and just focus on the two or three really right things to do. And yeah, in that way, have an even clearer path to what we do and grow. But I think overall, we did fine. I’m quite happy with it.

Marc-Lennart Bräutigam [00:14:35] Yeah, look, I think, and thanks Daniel for giving me some time to think. What I think is and I think you touched on it already, is the point that we probably spent; like when we started out we were or we are in a big universe. We have probably 5000 companies to look at. In the beginning, you get then invited to all these conferences where you can meet companies. And there’s basically an unlimited amount of time, you could spend on researching ideas, looking into companies, meeting companies, taking up meetings with brokers, and so on. And I think what’s really key is to be very quick in deciding if something is for you or not. So be very clear on your framework and what you’re looking for. And then be very disciplined in just saying no to something that is not as compelling as it may be and not spend a week or two researching a situation, which you could have probably canceled out way earlier.

And that probably goes, then back to a couple of other things as well. So we’ve spoken to a lot of potential business partners. We spoke to a lot of different investors, where probably in hindsight, it just didn’t feel so right. And these are the things that took quite some time. So we could have been more efficient. But to be fair, it was also a learning experience for us. And I think today, we are probably more efficient in that sense.

Tilman Versch [00:16:45] What are you optimizing your fund for? There’s this dichotomy of assets or return? I think you partly gave an answer to this already, but maybe let’s line it out explicitly.

Marc-Lennart Bräutigam [00:17:00] Yeah, it’s definitely have been returns from the start. So we’ve always said, it’s just the two of us. And the amount of time we want to spend on the research should just be way more than spending time on telling the story, especially in the beginning. Because we started out with a couple of ideas, which we basically invested straight from the start in but then we had some cash left in the portfolio. So we wanted to make sure that we deploy this in the best possible way for us and our co-investors.

Therefore, we knew that it’s gonna take a lot of time to deploy this. And so we didn’t want to be distracted by doing too much marketing. And therefore, we always said, when we talked about the strategy and so on; we were always saying like, the number one goal is to focus on the return and not the growth in the assets. Because we believe that if the performance is right, the money’s gonna come anyway, sooner or later. And that’s why we’ve been focusing on the returns on the first hand.

Tilman Versch [00:18:25] Maybe then let’s go to your definition of Europe. What do you see as Europe? There are different definitions of Europe out there. So is it with Russia without Russia? How do you see Europe?

Daniel Gehlen [00:18:40] I’d say it’s probably the broadest definition you can make of Europe that we see. So including the UK, including Eastern Europe, where we haven’t made an investment at least yet. At the moment, two other people are working with us, Kory and Tristan, who are fantastic team members and, super smart and super helpful in the analysis of additional companies and also in just managing the portfolio. And Kory is based in Poland, so he has looked at Polish companies for probably one and a half years now and got a lot of companies in that space and it just looks like there could be a lot of compelling opportunities because some companies are quite good. But the valuations are fairly modest, to be honest.

It’s still, what I also wanted to say in the beginning is, it’s kind of a new market. It’s a bit different than investing here in Germany, maybe it’s just a home bias. But we want to be very comfortable with an investment that we make there. Especially given that we are fairly concentrated. So we look at the entirety of Europe, but the largest part of our investments at the moment is definitely invested in Europe, countries like Germany, France, Italy, UK, and also Spain.

Marc-Lennart Bräutigam [00:20:02] Yeah and maybe, just to add a couple of points. We believe in this concept of the circle of competence. And I think that’s evolving over time and that needs time. So as Daniel said, we started out in our home markets, and then kind of built from there. And also, there are probably a lot of interesting opportunities in the Nordics as well, which are at the moment, not so strongly represented in our portfolio. We’ve been looking into a couple of companies, and we have one in the portfolio.

But for now, we just weren’t able to find too many great ideas for the right price. But that’s evolving, your watch list is growing, your knowledge is growing and it’s going to be really exciting for us. And that’s also something that excites us a lot about the job; that you’re just constantly learning and evolving and getting to know new companies and new countries, and you’re building connections with investors locally when you meet them on field trips, or maybe just randomly, or maybe even in your network, which is amazing to get to know other investors. Just yesterday, I spoke to someone who’s based in France, but he’s actually from the UK and covering also a lot of the US and UK micro-caps. Good Investing is definitely a great spot to get to know investors.

Tilman Versch [00:21:44] Thank you very much.

Tilman Versch [00:21:46] Maybe let’s go back to your fund. I tried to describe it a bit. In the beginning, it was a German fund also investing in Europe. And you’re planning to transform it into a true European fund. Is this your game plan a bit?

Daniel Gehlen [00:22:05] I mean, the fund structure is German, but we’re always focused on Europe, so on all countries in Europe. We have even made two investments outside of Europe. We are not in these, I’d say institutional limits that we say we cannot do a company above a certain market cap, or if it reaches a certain market cap, we have to sell it. We don’t want to have these limitations. But yeah, until now at least, we fully focus on Europe. And if there’s something we learned a lot about by looking at a European company that trades in the US or Canada, but it’s also a European business, we might invest in it, if we think it’s an amazing opportunity.

Marc-Lennart Bräutigam [00:22:52] It probably goes along the lines of just finding the best ideas. So wherever they are or wherever we see them, we go for them. Probably, as we said in the beginning, we started with the home bias. But then I remember there was a time when like Portuguese stocks or Greek stocks were like really, really cheap in the crisis they had there locally, and I could very well see that we go back into these situations or go into these countries and situations and made them a bit higher. I think at the moment we just see interesting situations in Germany, France, UK. We have a company in Spain, we have companies too in Italy and one that’s based in Sweden. So it’s quite a broad exposure and well-diversified over Europe, I would say. But not saying that that could be skewed to another country way higher in the future. It just always depends on where we see the best situations for us and our investors.

Tilman Versch [00:24:12] You already mentioned that you have now two teammates already. In my eyes, you’re still quite early in your fund journey. Why did you decide to add teammates that early? And what value do they bring? And who are they?

Daniel Gehlen [00:24:28] Marc already said in the beginning, we always thought of ourselves as a team of two and never really had the plan to expand the team early. And we didn’t actively look for someone to add to our team. The fund was also still very small, and we also felt that we could handle the job with the two of us. That being said, Kory Kaunisto, who is our third team member, he’s an American who has studied at LSE together with me in 2015, in the master’s program, so I knew him very well and he’s a very good friend. And then he approached us about two and a half years ago, that he wanted to move from Hong Kong, where he has been with a very large international bank for four years, to Poland, for personal reasons, and that he would be very interested in working with us, which honestly surprised me a little bit because we were just very small at the time. And it was obvious that we couldn’t offer, like at least the same salary as a large bank.

Tilman Versch [00:25:40] Just bread and water.

Daniel Gehlen [00:25:42] But we what we talked about this, and Kory was just very passionate about what we do and about the strategy of the fund. So in the beginning, we just made it a kind of a loose cooperation, where he helped us analyze investments. And that went so well, that we very quickly, just integrated him fully as the third team member. And he adds a lot of value in analyzing new companies. And it’s just great to have more eyes. And we are still a team that is small enough to have the advantages of a small team of quick decision ways and of quick discussions.

Marc-Lennart Bräutigam [00:26:28] Yeah, I remember when Kory wrote to us. Kory studied with Daniel, and Tristan as well in London at the LSE. And Daniel brought him forward at the time, and we discussed it in depth. It came unexpected but I think we are very, very glad to have him on board. I think he’s doing a fantastic job. He is basically fully working on his own. We do a lot of sparring internally where we help each other on the decision-making part and the research part. But it’s just super helpful to have him on board; A because he’s a great guy and B, he’s doing a great job on the investing side. He’s picked a couple of very, very good investments so far and he’s monitoring them very well. I think I’m just very glad to have him on board.

And it also gave us the opportunity to focus a bit on marketing, which you could see in the last couple of quarters, it kind of paid off when we managed to onboard some very, very long term thinking and very wonderful investors. And so we were able to accelerate on both sides, not just the returns, but also on adding to the AUM of the fund. And I mean, to be fair, we also had a couple of fantastic interns over time. Also, Tim, our working student did a fantastic job in the time he was with us. So we had some support on that side. But with Kory, it’s really fantastic as he is like a full team member.

And now also adding Tristan to the team gives us a lot more flexibility also again on the marketing side. And then he brings on a lot of expertise from his prior experience in the hedge fund where he was mainly focused on software, SaaS companies, and payments companies where Daniel and I as generalists are not too deep into the topic, but it’s obviously very important for the future. So we also have to evolve and it’s again, fantastic to have him on board and it works. It works really well.

Daniel Gehlen [00:29:06] With Tristan, it’s similar to Kory. We have studied together at LSE, all of us, and then Marc got to know him I think already four years ago as well or five years ago even and we talked about several investment opportunities all the time, even though he didn’t work with us. So at this point, we kind of thought it could make a lot of sense that he works full time with us. And we knew him very well before he joined the team. So now it’s a very smooth transition and it’s just great to have another opinion on some stocks with us, but also someone who can look at a lot of new companies independently.

What we were always, or what we are very concerned about is that we lose the edge of what many say, is the edge of a one-man shop, that you have the guy who does the research, who also does the decisions. And I think we’ve seen it in banks, probably also in PE firms that you can have hierarchies, and the decision process might not be optimal. So we feel like with four members, and with the way we have structured the company, it works very well. But I think we are also, at least very cognizant that we don’t want to grow a huge team where people are not responsible for decisions and it’s just kind of a consensus decision all the time.

Tilman Versch [00:30:38] So thanks to Kory and Tristan for keeping our back here that we can do a podcast. No, just kidding.

Marc-Lennart Bräutigam [00:30:45] Yeah probably a lot. But no, it’s also good to bring in fresh people. We also appreciate Tristan kind of challenging the current investments we have which he doesn’t know so well. So he’s getting up to speed there and sharing his views which is helpful, also in terms of the weighting in the portfolio and how he sees those investments. I think that’s also very helpful to bring in some fresh mindset at some point.

Tilman Versch [00:31:22] It brings me to the question; how do you see yourselves as leaders or maybe leader isn’t the right word, it’s maybe manager of the flow it seems to be better describing for you?

Marc-Lennart Bräutigam [00:31:38] That’s a very interesting question and obviously it’s still relatively new to us. I think what I really enjoy about it is that I think what Daniel and I really have to do is make sure we set the framework for the team so the team can operate within the framework. And then just to make sure that everyone has enough time to focus on what they really want to focus on and what brings them joy and happiness and what excites them. I think that’s very important.

And I think it’s just great when you have people on board that you don’t have to lead too much, actively. So they are pro-active themselves, they are looking out for situations. But when we are a bit time-constrained, and we have a potentially interesting idea, then they can also help us out on the research side if they’re interested in the situation as well, obviously.

Daniel Gehlen [00:32:40] To add on to what Marc said with the framework, maybe to add some details. How we think about it is, it’s very important for us that all of us are incentivized in the right way so we’re all incentivized and focused on the success of the fund and especially on the returns. As mentioned, also incentivized in that way and that’s also why we made Tristan and Kory partner because we think that makes the most sense.

We are a team of four partners that want to grow this fund and business successfully. In the end, it’s also just for people that really love their job. So Marc and I have done it while being at Barclays in the few hours that we had left in the week just because the job was so cool. And Tristan and Kory feel the same way about it. So I think if we put out the right framework, as Marc mentioned, it’s not so difficult that everyone is just motivated and doing the work because people really like the work and you don’t have to control if someone is working for example, and we want to have it that way. And no one is free-riding because just loves what we’re doing anyway.

Marc-Lennart Bräutigam [00:33:48] Probably also just providing them with the right tools. So making sure that you have the right systems in place, that they have access to expert platforms and stuff like that so that they can accelerate on their job. I think that comes in addition to the framework and making sure that they have the freedom to leverage their expertise on that platform.

Tilman Versch [00:34:25] As we already learned, due to this podcast, you guys are really serious Germans and it’s also reflected in your fund positions and your research. So if you look on your website, there are case studies on gaming companies and wine companies; so how did you come to research these ideas? And what is so interesting about the game industry and the wine industry for you?

Daniel Gehlen [00:34:55] Maybe I can start with the gaming industry which is something I’ve looked at for a lot of years. I think somewhere here, there are some poker books as well because in the past, I’ve personally played quite a bit of poker and that’s why I got to know several platforms. That’s how my interest in the topic in general sparked. And then when I looked at the stock market, it seemed obvious to me to look at some of the companies I know already from potentially using them as a customer. We’ve looked at quite a lot of these companies in Europe, especially the B2C companies in that space. And in the end, we had one gambling company, but I recently added two gaming companies if you look at Endor and Guillemot.

Marc-Lennart Bräutigam [00:35:50] I think, we can’t say too much obviously but I think Daniel’s done a lot of work on the gambling side with Barclays so he gained a lot of expertise there and was able to leverage that then with the fund. And then more recently, we came across gaming hardware space. So we started looking into Endor and we started looking into Guillemot thereafter. I think when Kory first came up with the idea of investing in a gaming hardware company that does steering wheels, paddles, and so on; that was very new to us. So we didn’t have any prior experience.

I played Gran Turismo very early on, on the PlayStation so I was kind of aware, and probably Need for Speed as well. But that was many, many, many years ago. And I think a friend of mine even had one of those steering wheels, but they were very, very basic. Then we started looking into the space and we’re quite excited about the products and how that’s evolving and also how the virtual world and the real world are coming together at the moment which is totally groundbreaking and new. So it’s very exciting for us to see that.

Thomas Jackermeier, the founder and CEO of Endor, he’s driving that and there are some very, very interesting tailwinds for this development, where all the big racing series, they recognize that they need to do something in order to win new customers especially on the younger side. And therefore, you probably saw the F1 Netflix series that is one of the big things that they were doing in this regard.

Gaming is obviously something that is great to involve young fans as well. It’s also the technology that’s helping a lot, with Twitch where you can stream the races and you can sometimes even compete with Formula One drivers or other professionals. We already saw some youngsters getting into professional teams by winning certain competitions on the simulator. We believe that these are very interesting tailwinds and something that has recently started to take off but it’s not really something everyone’s kind of aware of. So that’s a very interesting situation.

Daniel Gehlen [00:38:46] And if you ask how we kind of find these situations; I think those are actually pretty good examples. Gambling is just something that we found personally interesting. But then there are also a lot of decent companies actually and three years ago or so they weren’t very popular, the business models weren’t very popular, but they were decent. So we just looked at most of the companies in that space. Whereas with Endor, I think that came through Kory who read an article at a decent value blog online.

Italian Wine Brands in the wine space came from another investor that we talk with a lot. And yeah, that’s actually a very good source for investing ideas is talking to other fund managers and investors. And then there’s Naked Wines who’s also owned by a few investors that we value very highly. And there’s a lot of content on Good Investing, for example on it as well. So just the community and the connection to a few investors that we talk with regularly give us a lot of ideas. But then it’s also just quite random where the ideas can come from and we tried to be very open to different channels.

Tilman Versch [00:40:00] Maybe you can pick one of the stocks you mentioned and give some more light on the due diligence you do before you let them in your portfolio and also, you do while they are in your portfolio as a long-term-oriented holding. Maybe something with bottles.

Daniel Gehlen [00:40:20] Well, maybe we can do Italian Wine Brands because Naked Wines is already known so well. We came across the idea first when we talk to Fabian and Dimitri from Squad Aguja, who are investors we value very highly and talk to fairly regularly.

Tilman Versch [00:40:40] Best wishes to both, greetings to both.

Daniel Gehlen [00:40:48] That was probably three or maybe four years ago. And then we researched the company and found it quite interesting in general because the CEO is kind of the founder and merged the business into it and still owns a decent part of the shares. So management owns around 9% of the shares. And he’s extremely driven in our view and passionate about the business. So every time there’s an earnings call, he tries to sell some of the bottles and you can really feel his energy. Marc can talk about it a bit as well because he visited them a few weeks ago. And so we thought the stock was always interesting. It was always pretty cheap, especially for a defensive company. And it had some very interesting characteristics, especially that one of the business lines was growing very decently and the other one wasn’t. So the group growth looked low. But the company overall was profitable, and we thought it was well managed.

Now we also talked or heard from investors and talked to a few of the suppliers which are Aldi, Lidl, and Edeka, and they’re just very tough suppliers we always thought. We always thought it was positive that they had high margins with these suppliers and from people who actually bought from Italian Wine Brands. We got to know that they are one of the few wine suppliers that you can’t really get around as these companies because they are very reliable and offer good quality and have like brands that are fairly well known, as well-known as you can be in that part of the wine space probably. So that was very positive.

And then around one and a half years ago when Corona hit, we took another look. We never thought it was that cheap or fulfilled our return expectations. But when Corona hit the business actually got a tailwind because they don’t sell via hotels, restaurants, or catering. They just sell via wholesale and directly to the end customer. And it turned out fairly quickly that people don’t drink much less wine. They still drink similar amounts; they just drink it at home and not in restaurants. So that was a nice tailwind for Italian Wine Brands and could lead to some more structural developments as well. On the other hand, the stock went down, and we felt that was the time when we got very good return expectations and back then build our position.

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Marc-Lennart Bräutigam [00:43:25] Thanks Daniel. And maybe just to add on the recent field trip; so it was really impressive to see simply the size of the production facilities there. I’ve been to wineries before obviously but that’s just on another level and everything is huge, extremely professional, and well-integrated. So they have their own laboratory. Then they have their own products and then their own filling machines or bottling machines. And basically, it was just really impressive to see that. And then afterwards, the CEO, he spent some time with us over dinner where they served us amazing food and great wine and gave us a tasting. I just broadly also got a very good feeling about the guys again and also, I think if they treat their customers that way, so very, very well, I think that’s helpful for such a company.

Tilman Versch [00:45:30] Maybe we could also spend a few minutes on idea generation. You already mentioned some points where you get your ideas from but when I look at your portfolio, even for European there are some companies and names in it that are unique and different from other portfolios of investors I see. Is there anything you focus lead doing differently when generating ideas?

Marc-Lennart Bräutigam [00:46:00] I think there are a couple of aspects to the idea generation process and I think one is definitely, what Daniel mentioned, speaking to other investors and reading their letters, their fact sheets and so on. Because obviously there are very smart investors out there. So it’s always good to see what they’re doing. And then reading a lot of specialized blogs, newsletters, and so on, so staying on top there. Then obviously, again Good Investing is a great place to do both.

But then we also do some screening in certain cases, where for example, we had the feeling towards the end of 2018 and beginning of 2019 when we saw that the automotive market was in a bit of turmoil due to issues in China. And then we thought there might be some very interesting contrarian plays in that space. So we launched a screen where we looked for all the companies in Europe in that sector within our focus area and we probably had something between 35 and 50 potential investments. And we dig deep into them and at the end, we narrowed it down to a handful and ended up investing in two of them; which was Le Bélier at the time and Akwel. Akwel is still in the portfolio. Le Bélier got taken out by a Chinese investor, or competitor. And I think these are times when screens work really well. But obviously also in other cases.

Daniel Gehlen [00:48:12] Yeah, I fully agree. I think there are a lot of sources where we can get ideas from and it’s just very important for us to quickly focus on the right ones, which we’ve mentioned previously as well. But in the past, we’ve had some ideas where we thought yeah, this could be interesting if there are some good findings in the due diligence process, and we looked at it and there weren’t. By now, I think if we are not very excited about an idea very quickly, then we don’t look at it in depth because there are just so many ideas. I mean, you can also basically go from A to Z through the French market and look at companies but that would take so much time.

So we focus on companies that either have high returns on capital and could do very well but are not too expensive or which are just absolutely cheap for some reason. And just these companies where we think we can earn a very good return over a few years. And we look very quickly at corporate governance and management and how that is structured as well. Because especially in micro-caps, I think you have a lot of orange or red flags there from time to time. But on the other side, you also have a lot of companies where the founders are still involved or where there’s a very passionate management that also owns shares and there are very many positive examples in this space as well and we want to look for those.

Marc-Lennart Bräutigam [00:49:40] And maybe just to add on Daniel’s thoughts is that in certain cases, we also like working with very specialized brokers. So some that are just focused on the small and micro-cap space for example and that understand what we are looking for. And every now and then, we get a great idea from there as well, which we then explore further, obviously.

Tilman Versch [00:50:05] Is that also a plus for you that there’s less research and less coverage in Europe, or are you also losing something because you can’t rely on other research sources and other insights?

Daniel Gehlen [00:50:22] Maybe, in the beginning, you are losing something because you have to do some more work to get to know the company a bit better. But in general, I think it’s one of the major reasons why we value that space so much. It’s still, in some regards, very underdeveloped in the investor space and there can be extremely good opportunities in that space because so few people are looking at it and can look at it. So even the ones that have broker coverage sometimes, yeah, the broker coverage is just steered by the company or the broker just updates it once a year. And then you also have some examples where investors just don’t look very much.

Marc-Lennart Bräutigam [00:51:05] So basically you have to do your own research and that obviously is very time consuming, but it also gives you the chance to gain an edge; also by speaking to the shareholders and management teams involved as well as experts and so on around it and other investors of course. And I think that’s a very interesting aspect on the one side from the broker side, but then also in terms of how the companies are dealing with their own investor relations things.

Like some are considering broker coverage, some don’t, and obviously, that can be really interesting if the company may consider adding broker coverage and making their shares a bit more visible, especially over time as they might grow and get a bit more mature. And maybe start at like 50 or 100 million market cap and then they go maybe to 200, 300 and then they might add more and more research and then the shareholder structure also changes. And when that happens, that can also change the valuation of a company because some investors might be willing to pay a bit more for a company.

And there can also be super interesting situations where companies may be just listed on the wrong stock exchange where it’s probably maybe listed in Germany, but there might be a good case for the company to list on NASDAQ or somewhere else where investors are just willing to pay more if certain things are fulfilled in the first place. That’s all the stuff we dealt with in the bank, as well. And what we saw a lot on the large-cap side, where everything is run mostly very professionally and so on, or where the companies just get very professional and educated advice from banks. And then we can also try to kind of transfer that knowledge and expertise into the small and micro-cap space where it’s oftentimes very underdeveloped. And so these can also be good catalysts for companies and our investment.

Tilman Versch [00:53:30] How are you going about assessing the fair value of a company? You have this nice chart where you compare the fair value of your portfolio against the current price of the portfolio in your letter. Is there a risk that it leads to false security if you own great compounders?

Daniel Gehlen [00:54:00] So, I’ll start with the first part. In the chart, you see we definitely also talk about it if we want to include it’s our view of the fair value of the companies we own and it’s kind of based on a base case that we think is very reasonable. But obviously, there’s more to valuation than one case. We also look at different cases. But we want to have some idea of the value of a company or the return potential of the company because we also use that to invest in companies or not. And we thought we want to be more transparent to our investors, which we try to be with our quarterly letter where we talk about the portfolio and especially about the companies in the portfolio because then investors know what they’re invested in. And then we also wanted to give them an idea of what we think the portfolio should be worth at the moment. It might only be a rough idea, but yeah, that’s our view on it.

And we value most or nearly all of our companies with a discounted cash flow model because that’s the intrinsic value of the business. I think we know about all the shortcomings of the model, but it still helps us to get an idea about the embedded expectations and what we can expect from returns from a company. And then the qualitative part of these models is much more important.

And the last thing I want to say is it’s obvious if you do very detailed models there can be a false sense of conviction that you gain and you just update these models and maybe don’t think enough about the qualitative part of the business and we try to balance that quite a bit. And the later stage is definitely the more important part of our analysis.

Marc-Lennart Bräutigam [00:55:56] Yeah, I would add that it also helps. So I think there’s definitely a risk to fall in love with the company once you’ve researched it in-depth, once you’ve followed it, and maybe in some cases even gives you a very good return. So it’s really hard to kind of step away from the company that has brought you great joy for the portfolio and therefore we also have a weighting system. So how we weigh the companies in the portfolio and price is definitely something that’s very important here besides the quality and the growth prospects of the company and a couple of other aspects.

And then also, it helps in terms of the team we have. So usually one or two of us are in the lead for an investment and the others are trying to challenge that and we have regular discussions around it and that really helps. Even if one of us would fall in love with the investment, there are still two or three guys that can challenge it with fewer emotions involved. So I think that’s very helpful in that sense, and it’s good fun. But I heard many times that selling is probably the hardest part of investing and I would definitely agree. It’s just not easy.

It probably helps to be disciplined and when you invest for the first time like really write down why you’re buying the company, what’s your investment case there, what are you looking for, what do you have at hand? So then once your case is played out, you can revisit that and reevaluate the case, compare it with other opportunities you have and then make an informed decision on, do you want to sell it completely, do you want to sell a part of your investment? Or you maybe just hold on to it because it’s still a great investment or maybe the company has come up with something new that excites you and that gives you good prospects for the future. So yeah, it’s definitely something we spend a lot of time on. Especially also, individually but also amongst the team.

Tilman Versch [00:58:35] Is there a certain hurdle rate you have before letting a company in? Like the return expectation 20% of an initial investment?

Daniel Gehlen [00:58:44] Yeah, so we look at it on a long-term horizon. So we invest with a mindset of at least five years, I would say. And then there are two things. On the one hand, we try to get an idea of the value of the company and then we apply a margin of safety. And that should be big enough for us to buy the company. So we usually want a discount of 40% or higher to the fair value. And if you want to say it in a different way, then you can also look at what we expect for the return for the next five years if our case materializes.

And I’d say in general, our expectations, they are above 15%, we like to be conservative. 20% is probably a good hurdle rate that you mentioned, but it definitely depends on the investment as well. If we can be totally sure that it’s a double in four years, we will always be very happy with it I think. Otherwise, if there are risks, then maybe our return expectations should be or are a bit higher. We also care about how risky the investment is; if there’s a downside. And we try to find these that are, to us, at least very obviously too cheap, way too cheap and just invest in these situations and don’t try to be too smart about some very difficult situations.

Marc-Lennart Bräutigam [01:00:15] There’s not much to add from my side.

Tilman Versch [01:00:17] Then is there anything to add for the general interview? Do you have a point we haven’t covered? Some greetings to Tristan, to Kory, to Dimitri, to Fabian. Do you have something to add?

Marc-Lennart Bräutigam [01:00:35] I mean, maybe just to highlight that we have a concentrated portfolio of around 20 stocks. We, both Daniel and I are invested in the fund. We strongly believe in it and we are very happy to have Kory and Tristan on board now. So definitely hi to them.

Marc-Lennart Bräutigam [01:00:58] But I guess also, a big thank you to you, Tilman for having us here today. We started out with our fund three and a half years ago and it just feels amazing to be here now and be interviewed by you.

We started out so small and so definitely also a big shout out to our seed investors who helped us ramp up the fund and just get a foothold into the industry, which was definitely challenging for us and without them, it wouldn’t have been possible. So definitely a big thank you to also our friends and family who have supported us so far on the way on all sorts of occasions and times.

Daniel Gehlen [01:01:50] I can’t add anything to that.

Marc-Lennart Bräutigam [01:01:55] I would add obviously to our partners at Hansa Invest, Donner & Reuschel, and everyone who we might have missed. Thank you very much for that, for your support and ongoing support.

Tilman Versch [01:02:06] I hope they also enjoyed the interview as I did. It was fun to have you on and I hope you survived many of my bad jokes very well.

Daniel Gehlen [01:02:18] It’s not the first time.

Tilman Versch [01:02:20] Yeah, I’m always terrorizing you with bad jokes. It was fun to have you on. Thank you very much for coming on and bye-bye to the audience.

Daniel Gehlen [01:02:33] Bye-bye. Thanks so much.

Marc-Lennart Bräutigam [01:02:34] Bye-bye.

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Daniel Gehlen

Co-founder

Gehlen Bräutigam Capital (GBC Value)

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Marc-Lennart Bräutigam

Co-founder

Gehlen Bräutigam Capital (GBC Value)

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