Event Driven Investing

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Georgie

Welcome to the Ask AVI podcast series. I’m Georgie Frost. In today’s episode, we’re diving into the realm of event-driven investing. Joining me is Joe Bauernfreund, the CEO and CIO at AVI Global Trust, and Tom Treanor, the company’s Head of Research. We’ll unpack exactly what is meant by event-driven investing, the benefits that it offers to investors, and how AVI Global Trust leverages those opportunities.

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Georgie

Tom, Joe – welcome. Thank you for joining us. Joe, to you first. What exactly is event-driven investing and how do you leverage those opportunities?

Joe

Well in simple terms, what we mean by event-driven investing is investing in a company where we think something is going to happen to unlock value, or where we ourselves can drive an event to help unlock that value.

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So AVI Global Trusts invests in a portfolio of global listed companies. We’re focused primarily on companies trading at discounts to net asset value or some of the parts value. And it’s one thing to buy into a company that’s trading at a discount and hope that that discount gap closes, but really what we focus on is making things happen and trying to earn a return from an event that helps crystallise that discount.

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Georgie

Can you give me some examples of some successful investments?

Joe

So at the moment, our largest holding in the trust is a Norwegian-listed company called Schibsted. And Schibsted focuses on online classified businesses in Scandinavia and around the world. And it has a number of online, classified businesses that it operates. But it also has a stake in a listed, online classifieds business called Adevinta.

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Joe

It’s a large shareholder. It owns just under 30% of that company. But because the structure of Schibsted is quite complex – so you’ve got a number of different businesses operating in different geographies, and then you’ve got stake in a listed company – investors find that a little bit messy and sometimes off-putting. If they like Adevinta, they can buy it direct.

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If they don’t like it, well, if they own Schibsted they get it. And that’s not really popular with some investors. So the key here is whilst you can buy Schibsted cheaply relative to where its peer group is trading and relative to the quality of the business, because of the stake in Adevinta, as long as that persists, they’re probably always going to face that challenge –

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the structural undervaluation. So the key here is addressing that stake. And right now, it’s been released to the market that they’ve received an approach from some private equity investors who were interested in taking, taking over Adevinta and from Schibsted’s perspective, if that were to materialise, they’d release a lot of capital. They’d get the capital back onto Schibsted’s

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balance sheet, conceivably, they could conduct a big buyback, and it would make Schibsted more transparent, more streamlined, and more likely to trade in line where we think its true value is rather than at a discount. So that strategic review of the stake in Adevinta is the event really that we’re after.

Georgie

Tom, give me some more examples of some events that would happen and how you would specifically look, as the example that was given

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there, to find that diamond in the rough, can I call it?

Tom

We currently have an investment in a Mexican company called FEMSA. This is a company that’s been around for hundreds of years and has its roots in the brewing sector in Mexico. It has, we believe, to be a crown jewel asset in the form of the Oxo-branded convenience stores, which is by far and away the largest operator in Mexico and across the Americas, in fact, of convenience stores.

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The problem has been historically that the value of Oxo has been masked by lots of non-core assets. So, a stake in Heineken, which is listed clearly, a stake in a Coca-Cola bottling company as well, and in various unlisted non-core assets. Now we engaged with management and we’re already pushing into an open door there, I think. I’m making the view to them

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they can have you known to them rather, that we really felt they should be looking to dispose of non-core assets and in doing so, reveal the true value around that crown jewel Oxo convenience stores. Now it’s gone very well to date. They’ve taken a lot of our recommendations on board, and they have sold down the Heineken stake. They sold down unlisted non-core assets in the US as well.

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And we’re starting to see now increasing attention on FEMSA from investors looking to access the Oxo assets who weren’t previously interested or able to buy the more conglomerate structure that was there.

Georgie

In terms of your research, your analysis, the criteria that you employ – just walk me through the process.

Tom

Sure. We have a very long checklist that we go through for each investment to make sure we don’t miss any key aspects at all, and to highlight just a few of those broad areas–

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governance and alignment is incredibly important to us. We want to make sure investing alongside good actors, people who are aligned with our interests, people who have a strong sense of corporate governance and looking out for minority shareholders as well. Secondly, away from the more qualitative side of things, we focus very heavily, particularly in this environment, on balance sheet risks.

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We’re looking there at how much gearing has the company got. What rate it’s paying? Are those rates fixed or floating, and what sort of expiries they might be facing as well? A very easy way to turn a good investment bad is through excessive borrowing, and that’s something we try and avoid very, very closely.

Georgie

Why is corporate governance so important to you, as Tom mentioned there?

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Joe

Well, bad corporate governance destroys value. So when you think about our portfolio of companies trading at discounts to net asset value or the sum-of-the-parts value, if markets were efficient, then that discount is justified. And a key part of our research is to think about that question: is the discount justified or is it not justified?

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Now a situation where it would be justified would be where there’s bad corporate governance because bad directors can take value away from shareholders and give it to other entities or other stakeholders. And so when we’re looking to invest in a company, identifying good corporate governance really is key to unlocking value.

Georgie

But perversely, aren’t you more likely to have an event with a company that’s got a few bad issues with it?

Joe

Yes, but you know, you might have a bad event.

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Georgie

Absolutely! How do you mitigate against those?

Joe

Yeah. Look, a bad event could be, simply, a company choosing to sell an asset at a knockdown price to a friendly investor. Taking value from our hands to somebody else’s hands. So we have to make sure that as a shareholder in these situations, our voice gets heard.

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If we’re going to push the company hard, it can be helpful to have a larger stake. And all of this really is designed to make our voice heard above other bad actors. But in reality, if the governance structure is poor, it’s generally a warning sign for us to stay away.

Georgie

So listening to you both speaking there, it seems that you obviously take a lot of care, a lot of due diligence.

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Talk to me more about your strategy and the discipline that you have when employing it.

Tom

So we spoke earlier on about the importance of pre-investment research and checks. So looking through our checklist, looking at the balance sheet and so on. What feels equally important is having a disciplined approach after investing. Things don’t always go your way. In fact quite often they don’t,

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even on the pathway to a successful investment in the end, and having a very strong non-emotional lens with which to look through investments is very, very important. Making sure that you don’t have investment thesis creep, for example, making sure that you stick to your discipline around sell targets and price targets and making sure you continue to evaluate and monitor management

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and the company itself the whole way through the investment holding period.

Georgie

I know that we’re discussing event-driven investing, but it’s not only about an event. We’re not relying solely on an event happening to invest in companies. Right?

Joe

Absolutely right. We oftentimes want an event to happen. We think we can identify an event. And in some situations, we will be in the driving seat to help determine that event.

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But, that’s not always the case. And so, that’s why our research really focuses on the quality of the business, the idea that the value of what we own is going to go up regardless of whether an event happens. The event, as we said, is really icing on the cake, and it can help accelerate the returns, but it’s never solely reliant on an event.

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Georgie

You said you were involved in driving sometimes an event. Talk me through that.

Joe

Well, that really gets to shareholder activism or constructive engagement. And a lot of the situations we’re invested in, around the world, we will interact with management, we will make suggestions, we will point out to them that their shares are trading cheaply, and we will suggest a pathway to a higher valuation.

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And oftentimes that pathway includes an event, and we will help encourage management to pursue that event. But there’s no guarantee that they will listen to us. There’s no guarantee that they want to listen to us. So depending upon the situation, we can we can have greater or lesser influence on management. And that will determine whether we can actually help deliver an event or whether we can encourage an event.

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Georgie

Just broadening this out a little bit to the wider economic situation at the moment, higher interest rates for longer, how is that affected? And everything else that’s happened over the last few years? It’s been very eventful. How has that changed your approach?

Tom

Where it has changed our approach is more a change of emphasis in our investing checklist and re emphasis on what’s important.

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And while balance sheets have always been a key focus for us, and making sure that we don’t invest in companies of excessive leverage, it’s obviously even more important in a rising and, in absolute terms, higher rates environment that we are in now. Rates have gone up incredibly quickly and if your company does have excess leverage, it could find itself in a state it would rather not be in.

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So we’re very much focused on looking at details around maturity of any leverage outstanding, looking at interest rates paid, are they fixed or floating, have they got hedges or caps in place perhaps? So balance sheet risk is really first and foremost for us in this sort of environment.

Georgie

We’ve spoken a lot about risk. How do you safeguard investors?

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How do you manage that risk so that you can benefit from the opportunities?

Joe

Well, first and foremost, our objective is to provide our investors with exposure to equity markets. So we’re always going to take on some kind of equity risk. But to us, risk is really defined as losing money. We want to generate positive returns for our investors.

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And to that end we’re focused on valuations, on fundamentals. We want to make sure that we’re buying good quality businesses and we’re buying them at cheap and attractive valuations. And that to us is the best and most effective way of managing risk. On top of that, when you think about our portfolio, it’s diversified across industries, across countries and also across the kind of events and the timing of those events that will help crystallise that value.

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So it’s another way of thinking about risk controls in the portfolio.

Georgie

I just wanted to add that while we talk about a very eventful past few years, and probably many to come, actually, this isn’t a new strategy for you, is it? It’s something that you’ve employed for decades now.

Tom

We took on the investment management contract for what is now known as the AVI Global Trust back in 1985.

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Joe’s been with the company for in excess of 20 years now. I’ve been here for 12 years myself. We have a very long tenured, long-experienced team as well. And we have learned a lot over the years.

Georgie

Joe, Tom, thank you for your time and thank you for talking to us about event-driven investing. And thank you for joining us for this episode of ask AVI.

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We hope you gain some valuable insights into AVI Global Trust’s approach to event-driven strategies, and how they use these as catalysts for potential increased investment returns. For more episodes of

Ask AVI and information on different investing strategies, then please explore the website AssetValueInvestors.com. And remember, informed investing leads to empowered decisions.