Whenever we are interviewing potential portfolio CEOs and get onto the topic of values, always top of my mind is the question ‘are their values real?’. I constantly find I am filtering their responses; would a new employee notice the values within a week of joining? Are the values more than a list on a wall? Do they lean on the values when they need to make a tough decision? Can they articulate what’s difficult about living the values – the trade-offs? I’m always hoping that I’ll get asked the same question about our values at TDM – I feel we live and breathe them – but one of our values stands out to me as truly pervasive and impossible to miss: “We are Owners”.

I recall the mental gymnastics we went through to describe this value in a few words. We could see it everywhere but weren’t 100% sure how to explain it.  What we knew was that it permeated every aspect of our business – from how we look after our office (I don’t know of many teams with a slack channel dedicated to encouraging people to treat the office like they would their home), to team members across functions actively putting their hands up to go on secondment to portfolio companies in need, often with significant personal sacrifice.

Where the value was very tangible, was in what we now simply describe as “Ownership Investing”. It is at the heart of our philosophy. In words, it is our maniacal, ultra long-term focus on our very concentrated portfolio of companies. Similarly, our most successful relationships – be it with executive teams, employees, boards, other investors and even service providers – can often be traced back to this common value of ‘ownership’.

The Origin of “Ownership” at TDM Growth Partners 

Before TDM’s foundation, Tom, Hamish and I would discuss our frustrations with the shortcomings of the investment management industry and how we would do things differently if we started with a blank sheet of paper. We would talk a lot about businesses rather than “stocks” and “names”. Already, this was a different thought process to what is typical for budding investors. Although our idea about what constitutes a “great” business has moved on a lot since those formative years, the principle was always the same – look for companies which we could understand back to front and own for the long term. We were mesmerised by the stories of Berkshire and Templeton compounding growth over 20 and 30 years, and that’s what we wanted to do.  

As we left university and entered the ‘real world’, we struggled to find peers who shared our value of thinking and acting like true business owners. It was this struggle that brought us all back together at TDM some years later.  

In 2006, on a somewhat chaotic apartment floor, Tom setup TDM in a way that allowed us to invest as long-term owners. From a young age, Tom’s dad drilled into him to pave his own path, and in that sense he threw out the traditional funds management playbook.  Instead, TDM was built on four critical foundational pillars that make “Ownership Investing” possible:  

1/ TDM would only have clients who we knew and trusted and who valued long-term investing. They needed to have the patience and courage necessary to ride the many bumps that come with growth company investing.  We took the time to educate our clients on each business in our portfolio to ensure that when share prices fell they were thinking more about “has anything changed in the business”, rather than “I’ve lost money”. If the business hadn’t changed, we wanted them to realise that a lower share price was a good thing not a bad thing – as Warren said for socks and stocks: “I like buying quality merchandise when it is marked down”!

2/ TDM was steadfast on a performance-only fee structure. We do smooth our fees by clients pre-paying performance fees on a quarterly basis but in the long term, we are only paid performance fees. We only make money when our portfolio companies perform well and our clients make money. It never made sense for this incentive structure to be anything but in perfect alignment between portfolio companies, our clients and us as the manager of their money.

3/ TDM invests from an evergreen pool of capital. This aligns our objective to compound money at high rates indefinitely, with the objectives of our clients. It also means we are never forced into a position where we might need to sell a business to satisfy an institutional requirement, for example at the end of a fund life. We have actively avoided the need to have an ongoing program of raising separate funds, a dynamic which we believe can lead to shorter term decision making and create significant distraction from our core role as investors. Both are at odds to our final point…

4/ Focus! Without a concentrated portfolio (maximum of 15 companies) and a highly focused approach, ownership investing breaks down. We have one fund, one strategy, and very few new investments each year. Our approach requires the patience to wait for the right opportunities, sometimes going years without making an investment (it has been over three years since our last new investment made its way into the portfolio), and the conviction to hold large positions in the face of major share price falls. By being focused on a very small number of companies, we can play an active role in helping those businesses. We can lean in for when there are challenges and can understand our businesses in great depth.

So why isn’t every investment firm set up like this?

We don’t think it takes a rocket scientist (quite the opposite!) to structure an investment firm in the way we have set up TDM. Deeply understanding the businesses you’re investing in, trying to invest in the best businesses for as long as possible, helping them when they need it, and aligning incentives along the way, are all strategies that feel like common sense. It begs the question though – why are virtually no other funds management businesses set-up like TDM?

We can’t speak for others but we believe it stems from the advantage of being able to start with a blank sheet of paper with the foundational goal to enjoy investing in wonderful businesses, not maximising profits. Most funds management businesses start off with the need (or desire) to generate income from management fees on their assests under management. This kicks off a snowball effect; a natural incentive to accumulate assets increases the need to accept more clients, and larger ones (generally institutions). Inevitably the more clients you have, the less selective you can be, so the more you are buffeted by their need for liquidity and/or other restrictions, such as the need for diversification. More clients and more companies, plus more ‘fund’ marketing, means less time educating clients, understanding businesses, and helping portfolio companies. You can see how this cycle unfolds time and time again.

We are certain there are plenty of investors that are smarter than us, however I believe we have generated an unfair advantage for ourselves via the structural building blocks to Ownership Investing as described above. Over the past twenty years, we have experienced these pillars in action.

The Big Bet That Tested ‘Ownership Investing’ 

Reflecting on our journey, one standout moment that epitomises our commitment to Ownership Investing, was our decade-long ownership of Baby Bunting, which started in 2009. 

It was our first private investment and many clients urged us to avoid it at all costs.  

Soon after we invested, with the lingering effects of the Global Financial Crisis, Baby Bunting began to really struggle. The banks were all over it in the new world of low liquidity. Its financial performance was declining, and I think most investors at that point in time would have walked away. That was our time to lean in and try to turn the fortunes of the company around.  

Tom joined the board and we immediately went into action recruiting several board members, hiring a new CEO and spending every night and day thinking about that business in an effort to help them turn the ship around.  

We took our ownership from 5% to more than 45%. We got the banks off the company’s back, and we created balance sheet flexibility, which was the platform for the company to begin to succeed. 

What I feel most proud of is how we deployed our time, energy, and money to help make Baby Bunting into Australia’s dominant baby goods retailer. The business grew 10-fold by every measure while we were invested. 

Aside from the early mornings and weekends spent on various parts of the business, one of the best stories to come from this era was when Hamish volunteered to be a security guard on Boxing Day (Australia’s original version of Black Friday) due to staff shortages. Ownership Investing takes some surprising forms!   

Ownership in the Boardroom

Where we have possibly seen the widest spectrum of “ownership” – that is, from none at all to signifcant – is on the boards of the public and private companies we have sat on. We have been both let down and inspired by the actions and decisions of Non Executive Directors (NEDs) over the years.

Our experiences encouraged us to publish a “Board Members Handbook” in October 2023, in which we said: “The hardest (and most important) attribute to find is to have a NED think like an owner and for them to deploy the significant time, energy and mindshare that allows them to align this mentality with their actions.” In writing this, we were trying to emphasise that boards grossly underweight the character trait of “ownership mentality”, and instead, overweight specific skills and domain expertise. How do we know “ownership” when we see it in the outstanding NEDs we have worked with?

• All decisions and views expressed have a long-term lens
• A deep desire to roll up the sleeves to make the Company better
• Significant discretionary time allocation, especially in a crisis  
• Balancing governance and growth with a commercial lens
• Willingness (and desire) to make tough decisions
• Not avoiding risk, but taking the appropriate risks
• Intrinsically motivated beyond Directors fees and resumé building

Unfortunately, these attributes are generally in short supply, but when we see them we feel a deep sense of alignment and gratitude. We have learned time and time again that having a good representation of genuine ownership mentality on a board makes all the difference to its effectiveness. 

 Ownership Investing as a Team Sport

Ownership Investing works best when all stakeholders are philosophically aligned. To summarise what this means in practice:

• We expect our clients to understand the businesses they own (to circumvent short-termism and share price focus);
  
• We expect our fellow team members at TDM to be laser focused on our portfolio companies (and hence are not permitted to own equity investments outside of the TDM portfolio);
  
• We expect our management teams to think of themselves as long-term equity owners (which they are in substance);
• We expect the boards of our portfolio companies to do the same (see TDM Board Handbook); and
• We expect ourselves to act in accordance with the ownership value in every decision we make.

Ultimately: ‘You Gotta Care’

To quote my friend and colleague Hamish Corlett, “being an owner means you gotta care“. Sometimes I wonder if we could simplify the value to be “we care….more”. This is ultimately what it comes down to.

One test I have for whether or not you’re thinking like a true owner of a business is how often you’re thinking about the business in which you’re invested. I can’t name a company in our portfolio over all these years that I haven’t thought about day in, day out, and I believe this to be true for all of my colleagues at TDM. Not many investors have the setup to allow for this luxury. No doubt there are some that don’t desire it!

I recall years ago Hamish flew to the US to sit in a courtroom for days on end to hear proceedings of litigation brought against one of our portfolio companies. This was important to us not just to assess risk but to show support for and solidarity with the CEO.

Our team eats, lives, and breathes the companies we invest in. Our portfolio concentration means every company matters a lot. Their success and failure is tied directly to ours. And that’s the mission every individual on our team has bought into (both figuratively and literally given that TDM team members cannot invest in any businesses outside of those in the portfolio).

Is There a Dark Side to Our Value “We are Owners”?

When you care about something as though your life depends on it, invariably you can take things to extremes. One CEO described TDM as setting an “uncomfortable pace” when asked what it’s like to work with us. New joiners at TDM have often described our work environment as “intense”. We regularly see TDM team members put our clients’, companies’ and TDM’s interests ahead of their own by making personal sacrifices. There is a huge commitment and investment of mental and physical energy that goes with our values. We have found there is a balancing act to make sure how we are operating is sustainable for the long-term.

Another watchpoint we have recognised as inherent in our approach is what Richard Thaler labelled the “endowment effect”, or divestiture aversion. With our self-imposed portfolio limitation of 15 companies, some of which we have owned and cultivated relationships with for over a decade, we can to tend to prefer what we already own, even when a compelling new opportunity presents itself. Adding a new punch to the card at TDM isn’t trivial. There is indeed merit in the subjective weight you place on your depth of knowledge and relationship with management with tenured portfolio companies. Sometimes though, when maintaining the status quo, we have to remind ourselves that what might feel like avoiding a decision, is in fact an investment decision in itself.

Our ownership mindset has also resulted in great comedy and questionable judgement. I once ran the famous Sydney fun run the ‘City 2 Surf’ in a large toothbrush suit to promote the brand of one of our portfolio companies – unfortunately, with limited eye holes, I nearly snapped an ankle. That certainly would have counted to the shadow side of living our values!

Gratitude

We didn’t set up TDM to be a money-making enterprise for ourselves, or in fact a business at all. I’ll never forget the quizzical look Tom and Hamish gave me in the early days when I told them I could bring on a bunch of clients to boost our funds under management and they said “how about just the two best ones, forget the others”.  We get equally perplexed looks when we ask our clients if they would like any of their money back to make sure we don’t get too big, and can continue to compund their capital at high rates.

We set up TDM to own great investments, enjoy what we do and who we work with, and in doing so deliver outstanding investment returns for a very long period of time in a unique way that made sense to us. Ownership Investing is at the very core of this.  

We are so grateful that we can invest our way, with the freedom we have and without compromise. We are also grateful that whilst also generating sufficient financial rewards, that in itself is far from the objective.

Ben