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Capital Brief Feature: “How TDM Became an Australian Investment Powerhouse”

Article originally published by Jack Derwin, Capital Brief on 10-October-2023.
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Original Article

It was 2004 and on the floor of a one-bedroom Sydney apartment, Tom Cowan began work on a business idea heʼd been throwing around for years. Suffering from a bad back and having neglected to buy tables and chairs, he was splayed out on cushions with two of his closest friends, Hamish Corlett and Ben Gisz, sizing up investment opportunities.

“I would pick the guys up before work, and we would have our team meeting in the car and on the walk to work and then we’d do the same debrief on the way home,” Corlett tells Capital Brief. “We’d have lunch together. We were living in each other’s pockets the whole time.”

They had each been fascinated by financial markets from a young age. Cowan would fight with his younger brother and future Australian test cricketer Ed Cowan over who got to read the business pages first at the family breakfast table.

The three friends had each gone through the early stages of careers in finance at separate employers and each had been struck by how often investment firms didnʼt make great investments. Reared on books by Warren Buffett, Peter Lynch, Jim Collins and Philip Fischer, there was an obvious disconnect between the philosophies of their investing heroes and their first employers.

At the peak of the tech bubble, Cowan recalls asking his boss how he was meant to value a tech company with no revenue. He was told to base it on the number of clicks it was generating. A few months later the tech wreck began and Corlett, Gisz and Cowan all got a front row seat to what happens when investors lose their grip on reality.

The chapter solidified their resolve to do things differently and get back to the tenets of good investing: buy quality companies at attractive prices, and hold them for the long term. Passing around the hat, they convinced a group of families to entrust them to invest their cash. Perched on those floor cushions, the three were deciding where to deploy the first $1 million theyʼd ever raised.

“When we made our first little investment, we thought itʼd be the three of us forever, maybe a bookkeeper, and that would be it,” Corlett says.

He and his two friends had no idea that a couple of decades later they would be managing more than $2 billion and running what is arguably Australiaʼs most interesting fund. Whether it’s crowning the new co-CEO of Guzman y Gomez or pushing Australia’s fundie set into unlisted equities, the trio today are both highly respected and extremely influential.

Get Set

TDM’s young co-founders made some big strategic decisions straight off the bat. They would keep their investor group tight, only derive fees from performance, and invest out of a single fund with no end date.

The structure means they can effectively invest for decades without needing to periodically return capital. TDM has just 20 clients and hasnʼt taken on a new one in nine years. It doesn’t raise capital but says their existing investors can tip in extra cash when they want, bolstering their positions across the shared portfolio.

The slow and steady approach is so central that a basic first iteration of the TDM website prominently featured an image of a turtle and little else.

“The key advantage we do have is duration. With our structure and stable capital base, it allows us to deploy capital if and when it is appropriate for us to do so, and be very long term owners,” Ed Cowan, who joined the firm after retiring from cricket, says.

It sets TDM out in an industry where exorbitant management fees are charged irrelevant of performance and short term disruptions can upend entire funds.

Yet TDMʼs track record – compounding 25% returns year on year for almost two decades – proves its unique formula not only works, but can flourish. Every once in a while, they put pen to paper and send out a memo on how theyʼre positioning in the current market.

It has inspired more than a few comparisons to Berkshire Hathaway – the iconic fund still run by Buffett and Charlie Munger – but no copycats.

“The TDM model would be easy enough to replicate but itʼd take balls to actually do it,” one fund manager tells Capital Brief, arguing itʼs easier and more lucrative to chase scale and charge management fees.

Starting small and slowly building a track record is a far bumpier road to walk. TDMʼs founders didnʼt take a cent out of the business for the first five years.

Long gone are the days however where the founders used to manually update client portfolios themselves. All three still run the investment team and they still make all the big calls together but today, their roles are slightly more defined.

Corlett, described by one as the team “supercoach”, runs the twice weekly all-team meetings where companies are reviewed and agendas are set. Cowan formally leads the portfolio, synthesising investment views and presenting decisions back to the team. Gisz is the operational backbone, making sure everything is running smoothly.

The portfolio they oversee contains 10 to 15 high-conviction bets on the very best companies the now 15-person investment team can find.

It currently includes names like customer engagement platform Twilio, HR software provider Culture Amp, and healthcare platform League.

It’s most iconic investment however came in 2006 in the form of a little known mining company – the only one TDM has ever owned – called Mineral Resources. With an IPO offer price of just 90 cents, it has since ballooned to become a $12 billion giant. TDM still holds it today.

It ranks as the perfect case study for the firmʼs philosophy.

“Our core value is that we are owners first and foremost. All 40 staff are owners of TDM and TDM becomes an owner of whichever business it invests in,” Corlett says.

In nearly 20 years, the fund has picked just 60 such companies. Around 20 of those have since been taken over by a competitor, something that has netted TDM a tidy profit but also frustrated it as a long-term buyer.

Corlett pitched workplace software Slack at Sohn Hearts & Minds conference in 2020 only for Salesforce to swoop in a few weeks later and buy it.

The fund made a tidy profit out of a surging stock price – but no one at TDM is searching for short-term flings. They want to partner for life.

Waiting game

TDM has a long checklist when it comes to what an ideal partner looks like.

They want a management team they can grow old with, a vision for the future, drive, sustainable growth, a respectful and eecient culture, happy customers. The list goes on.

But perhaps the most sought after quality however is patience. The TDM team actively counsels against a growth at all costs mentality. It takes time to build something properly.

The mentality extends to TDM itself, where due diligence is legendary. The fund stalks companies, sometimes for years, before it goes in for the kill.

It tracked analytics tool RiskMetrics for three years and through more than 10 direct meetings before making an offer.

Three analysts worked full-time for six months going through ecommerce platform ROKT with a fine tooth comb.

If push came to shove, they say due diligence can be completed in as little as ten weeks – but you get the feeling theyʼd rather take their time.

There are of course missteps.

“We have lost money, we have had some really painful losses but weʼve made more mistakes than that,” Corlett says, admitting that heʼs made bigger ones in the last few years than any other time in TDMʼs history.

After crunching the numbers on his track record, Corlett classifies one in four of his investments as “an unequivocal mistake”. Some didnʼt perform, on others he got the thesis wrong even if they produced a decent return.

In some cases, good companies simply fell through the gaps, like when TDM tracked Salesforce for years only to forgo investing in it during the depths of the GFC. The software giant has since returned around 3,500%.

A sense of caution certainly pervades their strategy. With such few positions, they “canʼt afford a zero”.

“Our own data shows we tend to sell six to twelve months too early.” Corlett says.

Block meanwhile is one example where Corlett believes the thesis is right but the market hasn’t appreciated it yet, with the out-of-favour tech platform down 40% in five years.

“It is still growing at an attractive rate, it spits out free cash flow and it is trading at a very, very attractive price. Block is as good an opportunity as we’ve had in the listed space in our 20 years in my opinion.”

Partner up

Good investment opportunities are the name of the game, but genuine business partnership remains TDMʼs bread and butter.

“We spend most of our time as an investment team supporting the portfolio companies. That’s actually our competitive advantage, to have that focus allows us to act as co-owners of those businesses and help them, hand in hand, grow the right way,” Ed Cowan says.

Itʼs not just a pretty sentiment. If a company has a problem, TDM is usually the first port of call. Board seats are common and actively used.

Take Mexican fast food chain Guzman y Gomez and ROKT for instance, where Tom Cowan is a director. Both are multi-billion dollar companies that TDM backed early and helped build, with the two today taking up a disproportionately large portion of the portfolio.

Supported by a number of staff, two full days of Cowanʼs week are dedicated to GYG alone, with much of that time spent on the phone with the management team. Meanwhile heʼs the only director to have a standing weekly meeting with ROKT CEO Bruce Buchanan as the business prepares for a Nasdaq IPO next year.

“We’re very upfront with management before we invest. We tell them, ʻthis is how we’re going to operateʼ and I think theyʼre still shocked with just how hands on we are,” Ed says.

Itʼs not for everyone, he admits. Some businesses just want a cheque and to be let alone just as some investors want to sign one and walk away.

It narrows TDMʼs options and sometimes eliminates otherwise good investments.

Case in point is Spotify. Initially investing in 2019, Corlett reveals TDM eventually had to walk away from the streaming platform despite still believing in the investment thesis.

“Weʼre always looking for two-way engagement with management and in Spotifyʼs case, we weren’t able to make that work,” he says.

“We really tried to try and help them around investor relations and capital allocation but we just weren’t getting the impact that we were looking for.”

For the right business however, TDMʼs toolkit can be far more useful than a dollar figure.

Ask management and professional investors what their experience with TDM has been like and youʼll get the same answers repeated back to you. Words like “insightful”, “generous” and “collaborative” pop up time and again.

One prominent Australian investor said heʼs not seen anyone more thorough.

“As true minority owners, we donʼt hold a control lever and weʼre never telling any portfolio company they should do something. Weʼre just saying, here are five ideas you might want to consider and hereʼs the data behind it, letʼs discuss it,” Ed says.

They have counselled, mentored, and even helped operate their portfolio businesses at different stages.

When the CFO of GYG Rebecca Lowde left in June, TDM stepped up to offer partner and former Accent CEO Hilton Brett. This week, Hilton became co-CEO alongside founder Steven Marks.

Having formerly helped lead Deputy and Culture Amp, Jacqui Purcell similarly packed her bags and moved to New York to fill in as CFO at ROKT last year. Today she is still serving as interim COO there.

The firm is also a sounding board for companies not even in its portfolio. “TDM have always been the most forward thinking private growth investor in the country,” Tim Doyle, founder of consumer health startup Eucalpytus says. “So when I have needed that perspective, theyʼre always been my first stop.”

Operating capital

In finding and investing in fast-growing companies, TDM has ironically become one itself.

Itʼs unlikely the business’ current 40 staff would have fit in Cowanʼs original apartment, let alone have been able to work from it.

Theyʼre now comfortably housed in three floors on a leafy street in Sydneyʼs Double Bay. Thereʼs ample space for future hiring – one entire floor of boardrooms is largely reserved for portfolio companies – but thereʼs little appetite for further expansion.

For one, the number of positions isnʼt growing, the portfolio is relatively illiquid at the moment and spare cash has largely been deployed.

For another, new investments are always infrequent. Just three to four per year is common to replace sales or compensate for takeovers. In years gone by, just one deal might scrape through.

TDM is acutely aware of its own constraints. It believes that to go beyond its current headcount would hinder its operations more than it would help.

Spend a minute with the team and it also becomes evident itʼs obsessed with culture – an element they concede remains a little too ʻtouchy feelyʼ for many in the industry.

Yet itʼs the main focus of any initial investor meeting. If a company has poor culture, itʼs not even considered. The opposite can prove to be a gold mine when investing.

“The reason that [Mineral Resources] has gone from a $100 million market cap to a $12 billion market cap is purely down to people and culture,” Corlett says.

“[The CEO] Chris Ellison is a special person but more than that heʼs created a special culture around him that is really something. Thatʼs why weʼve kept owning that business through all of the ups and downs over the years.”

In house, TDM has tried to replicate that kind of environment. It has a set of core values that are meant to be taken as gospel. There are ten investment principles that guide decisions and attempt to maintain cohesion across the mountains of research being conducted.

The language that underpins those values can lend themselves to the dramatic . “We hunt in a pack” and “everyone needs to be in the arena” are just two examples.

But while alignment is evidently crucial, thereʼs ample room for divergence of opinions. If people want to speak against the status quo or be vulnerable, thereʼs a special yellow hat in every meeting room to wear while you do it.

One VC who invests alongside TDM said its culture is “elite”. Another described the leadership of the fund as “incredible”.

The pay apparently isnʼt bad either. All staff share in the fund’s profit pool, with bonuses rumoured to be extremely generous.

Future growth

Past performance is naturally no guarantee of future results as TDM hurtles towards its third decade.

As the size of the fund has grown, so too have the challenges involved with beating the market. Corlett is confident the team can keep chasing their benchmark but acknowledges TDMʼs clients come first.

“We’ll always optimise for those returns rather than the funds under management. If we get to the point where we don’t think we can achieve that type of 25% return target, we’ll most likely start to slowly give money back to clients,” Corlett says.

In that pursuit, TDM outgrew Australia long ago.

Today, itʼs obvious that the US will hold more of the opportunities that it needs to keep growing. But to do it in TDM fashion, the fund will need to be able to open doors across the Pacific. It represents an ongoing brand building exercise the group is working on.

“ValueACT [Capital] got involved with Spotify in exactly the same way we wanted to get involved but they had the track record, the brand, the office in San Francisco et cetera. We need to put ourselves in that position but itʼll take time,” Corlett says.

It already has team members rotating through New York but the question of retaining permanent boots on the ground is a live one.

When asked on what he hopes to see TDM achieve longer term, Corlett is quick on the draw.

“When people think of great investors, they always think of individuals. But investing is a team sport. What we want is in decades time, for people to think of the whole TDM team as great investors but weʼve got to earn that.”

On the founders themselves, he says theyʼre as passionate today as they were in 2004 when TDM began.

Given the parallels to their heroes at Berkshire, does Corlett think theyʼll all still be here in a few more decadesʼ time?

“If Buffett can drink seven cherry cokes a day and still be investing at 93, I think weʼre in with a shot.”

Hamish Corlett, TDM Growth Partners

About the author

After spending more than a decade sharing a passion for investing with Tom and Hamish, Ben joined them officially as TDM’s third owner in 2011. Growing up in country Australia, Ben has embraced the values of passion, hard work and humility. It’s these values that make Ben’s take on companies and cultures so different from your typical investor partner.

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