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Understanding the 4 Pillar Framework Underpinning a High Conviction Strategy – an Interview with Hearts & Minds Podcast

As core fund managers, in this podcast we share our insights about HM1's newest private holdings: Rokt and Guzman Y Gomez.

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“In this episode, CIO Charlie Lanchester engages with TDM Growth Partners, a HM1 Core Fund Manager. Meet Ed Cowan, a former Australian Cricketer with a knack for investing, and Fraser Christie, a tech investing aficionado. They share their unique investment philosophies and delve into two high conviction stocks recommended for the HM1 portfolio – Guzman y Gomez and Rokt. Ed discusses the art of building high-performing teams, while Fraser shares his expertise in supporting tech startups. Whether you’re an investor or simply curious about finance, this episode offers a wealth of knowledge.”

Maggie (0:08)

Welcome to the Hearts and Minds podcast. I’m Maggie O’Neill, head of Marketing and Operations. Thank you for joining us today. On the Hearts and Minds podcast, we have a series of interesting and curious conversations with the brilliant minds that are part of hearts and minds. We are lucky enough to work with extraordinary individuals and we want to invite you to join these conversations on impact and investing. Today I’m joined by Hearts Minds Chief Investment Officer, Charlie Lanchester for a chat with one of our core fund managers, TDM Growth Partners. Hey Charlie.

Charlie (0:35)

Hey, Maggie. I’m Charlie. Pleased to be here. A little bit nervous. It’s my first ever podcast, but I’m an avid listener of podcasts, so it’s really great to be actively involved in one.

Maggie (0:45)

Yeah, It’s quite different sitting on the other side of the mic, isn’t it?

Well, today we’re lucky enough to be joined by two members of the t Dium Investment team and T Dium have been heavily involved with Hearts and Minds since 2019. So it was a real joy to listen to this conversation and learn more about their unique approach to investing and why they love being part of the Hearts and Minds family. Not to mention we get to do a deep dive on two of their H M one portfolio holdings, Guzman and Gomez and rt. Before we jump in though, Charlie, do you want to intro these guests?

Charlie (01:13)

Yes, of course. Thanks Maggie. I really love this conversation as well. Today we are joined by Ed Cowan and Fraser Christie. Now, I think most people will know Ed Coen as the former Australian cricketer. He led an impressive career as a professional athlete for over 15 years before transitioning into the world of funds management. You can really hear his passion for not only investing but nurturing high performing teams and culture. Ed is also on the conference curatorial committee and has moderated a few impressive conversations on stage, including most recently, a panel on investing in sport as an asset class. A truly interesting conversation that we touch on a little later in today’s chat.

Maggie (01:48)

And don’t forget, Ed’s also the host of one of our favourite podcasts Scaling Up, where Ed chats to impressive operators about how they grow and scale their businesses, and so many lessons can be drawn from those conversations. We were also joined by Fraser Christie, another impressive member of the investment team. Tell us a bit more about him.

Charlie (02:04)

Yes, and Fraser is certainly an impressive individual. He joined the TDM team back in 2019. He’s passionate about supporting tech founders and management teams as they navigate their growth journey. And prior to joining TDM, Fraser spent time in the world of private
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Maggie (02:17)

Equity. Yeah, an impressive manager. And he wouldn’t believe that it was his first time being on a podcast today. Fraser absolutely knocked the lights out. Alrighty, let’s get to the good stuff. Take it away.

Charlie (02:28)

Welcome Ed and Fraser to the Hearts and Minds podcast. It’s great to have you here today with us.

Ed (02:33)

Charlie, awesome to be here and to speak on behalf of Fraser and myself and everyone at TDM, as you know, pretty selective on where and how we show up in the public eye. But one thing I do know is we’re really proud of our commitment and energy to Hearts and Minds and SOHN conference and we take our job as core managers very seriously. And that’s not just on the investing side, of course, that’s on the charitable side of the fence as well. We’re very purposeful in the impact that we can hopefully make. So excited to be here.

Charlie (03:10)

Yeah, absolutely Ed. And look, thanks for being such a big part of it, not just through tdm, but being on the committee as well and you’re giving your time away for free, so we really appreciate it. So maybe let’s start with getting a better understanding of TDM Growth Partners. It’s not your typical fund manager by any means. No. And you’ve put your very unique stamp on the business of funds management actually and how you manage other people’s money. And as I understand it, at TDM, you’re all generalist to some extent. You stray away from traditional job titles, there’s no VP or director or analyst and all that sort of stuff, which people get very obsessed about. You’re both part of the investment team. So maybe let’s start by understanding a bit more about your roles within it. Ed, do you want to go first and give us some background on the team structure?

Ed (03:54)

Yeah, I can. And Fraser, who’s here with me, jump in if I miss anything or you think I’m misrepresenting anything. Of course. But you’re right, we are all generalists. And I guess where I’d probably start is just a step back because this one team investing as a team sport comes from a basic principle and that is one portfolio very concentrated, so only 10 to 15 companies at any one time, one strategy. And so it really makes sense to have one investment team. And we really do believe it’s a foundational belief that investing is a team sport. And so everyone needs to be across the entirety of the portfolio. Some people obviously have more specialist roles within that, but it’s like any team sport, you need your goal scorers, you need your playmakers and your blockers and tacklers in many respects and your defensive players as well.

So it is important to kind of understand where it comes from. And this is vis-a-vis other investment firms that you may have spoken to on this podcast that individual members might have their own pool of capital to look after or you might have investment managers who report to an investment committee and there’s a portfolio manager that sits over the top of that. So this evergreen pool of capital that allows us to make very long-term decisions also means that we can make decisions as a team. And some people might argue that that’s probably not the most effective or efficient ways to make decisions, but it really goes to the heart of what we do and believe and believe it actually promotes better outcomes for our clients.

Charlie (05:45)

Yeah, it’s interesting. I think great investment teams have a real mix of people, diversity of thought as much as anything. It’s good to have optimists there. I’m sure you’ve got a few of those, but equally you need a pessimist who’s testing that investment case. So maybe turning

Ed (06:00)

To hear Fraser before we get to Fraser. We don’t call him Fraser, the razor for nothing. And so he is sometimes our bear. But it’s a good point you raised because everyone has strengths and weaknesses and Tom Cowan, one of the founders is a market animal. Fraser is one of the great analytical minds wrapped in with this commercial acumen that you could probably only dream of. And so everyone has strengths and weaknesses and we play to that. But sorry, Fras to jump over the top of you

Charlie (06:30)

Turning to you Fraser then, how did you come across TDM in the first place and how would you describe your investment style?

Fraser (06:37)

Yeah, I mean I was working in more traditional leveraged buyout private equity land before coming to TDM. And I mean I love that experience and the people, but in my personal time I was researching investing in all these weird and wonderful US and European public investments. And at the time my best friend was working at TDM and so we’d be bouncing ideas around and then one day he said, Hey look, we’re actually hiring. Why don’t you come in and meet the team? And as soon as I unpicked the wow, look at the track record of the business over a long period of time, look at the quality of the three leaders in the team and look at the quality of the broader organisation. I kind of just jumped at it. And I think it was about two weeks from when I found out TDM was hiring to when I’d signed a contract in terms of how I fit into the team. I think Ed sort of explained it reasonably well. I’d probably from a more analytical finance background, and so that’s where I fit in. I was also very lucky in prior roles to have seen the benefit of having investment team members with very different backgrounds and how that can be very complimentary to the process. So I’m very mindful that while I am strong at certain things, it’s important to celebrate the strengths of others as well who might have a different background to someone like me.

Charlie (07:53)

Yeah, interesting. One of your other partners, Hamish wrote a really good piece recently on his punch card of investments and how few investments you actually make at TDM as a newcomer to the team. Has it been hard to get any of your ideas across the line?

Fraser (08:08)

It does feel hard sometimes, but I think that’s because we have a great process and because the bar is so high in terms of what is already in the TDM portfolio, but certainly we have a very rigorous due diligence process. And as Ed mentioned, TDM investing is a team sport. So it’s not just about convincing one person that you might have a good idea, you have to convince the whole team. And so it’s really important part of our process that you’ve looked under every single rock before you deploy a dollar.

Charlie (08:36)

Yeah. Look, I think your high conviction approach obviously really suits the hearts to minds portfolio. We are looking for a very concentrated portfolio, ideally holding those stocks for many years in a similar vein to you guys. But when you’re looking at those businesses, ed, what characteristics are you looking for?

Ed (08:53)

Yeah, we could go wide and deep here and thankfully a bit like Hamish’s content piece, we do put out quite a bit of work around our frameworks and how we think about the world. So I’ll give this a good solid go, but I am also mindful that I’m not going to explain what makes a great TDM investment in five minutes and probably do it justice. So I recommend either the content on our website or the other podcasts that we’ve been on. But you’re right, we are very aligned to the philosophy of hearts and minds. And when we talk high conviction, it’s very rare for a funds manager to have 65% of their portfolio tied up in three positions. And that is a situation that we find ourselves in at the moment and are very comfortable there. And so this highly concentrated focused approach provides a couple of benefits, one of which is to be able to provide great portfolio support and particularly with our private company investments that we will get to.

And Fraser plays a massive role in that. But when we’re looking for a great TDM investment, we use a four pillars framework and you’ll get a sense of this. And as I said, it’s only just a snapshot, but let me walk through each of these four pillars. So I might start with probably our deepest and most important belief. And this might come as a little bit of a shock to many listeners, probably not you because you’re familiar with how we think about the world, but that pillar is people and culture and we actually believe that great people and culture is what drives amazing outcomes over the long-term. And we are very long-term investors and we’ve seen this time and time again of incredible operators achieving incredible outcomes over the long-term. And also the inverse is true. And so we’re growth investors. A lot of the people and culture issues that pop up in these businesses are scaling that function or the systems and processes around the people and culture of the business.

And if that isn’t done successfully, we really believe it can inhibit growth and operational outcomes and ultimately the value creation for shareholders. So that’s where a lot of our conversations start. And if it doesn’t really fit in a bucket that we really want to look any further at, that conversation can stop. But there are three other pillars. A big pillar is growth investors is of course growth opportunity. And you can imagine we’re trying to compound capital as you know, at very high rates of return and have done thankfully for almost two decades. And by that I mean 25%. So it is a high hurdle rate and the funds returns have been driven by top line growth of our portfolio companies. So there’s no financial engineering, there’s little or no debt in our businesses. And so we are fundamentally looking for fast growing businesses. And so the opportunity for these businesses to continue to grow at high rates of return is very important for us to assess.

And so as part of this framework, we’re not just looking at the size of the market, we’re looking at the friction of the adoption of the product or the experience of the customer and also how these companies can in fact create new products or enter new markets with these products. And so we’re looking at the growth opportunity. We’ve got a third pillar around structural competitive advantage, and this is based off Hamilton Helmer’s work around the Seven Powers framework and a phenomenal book for anyone that hasn’t read it and I’d recommend it deeply. And those seven powers that he wrote a whole book on it. So I don’t think we need to go into that particularly deeply. And then of course, the fourth pillar, like any investor, we are not valuation agnostic. We are very focused on looking for great growth businesses at attractive prices. And of course we are both public market investors and private market investors.

And that can look slightly different in the public markets. As you know, there are lots of opportunities or not lots of opportunities, but you do get opportunities where there’s a dislocation between price and fair value. And we’re structurally set up to take advantage of that as an evergreen pool of capital. We can hold cash for long periods of time and be very patient to wait for those opportunities. And in the private markets, we’re more reliant on compounding fair value, and so we’re more comfortable buying into a company a chunky minority stake that we think is a fair price, but over a 5, 7, 10 year period that fair price is going to compound at 25% or more. So that’s kind of how we think about those pillars and maybe we can apply it with an example a bit later.

Charlie (13:41)

Yeah, we’re going to dive into a couple of the stocks that you are invested in the second part of this podcast, but I’d be interested in your thoughts there on public versus private markets. I’ve just come out of the public markets where I think my view is a lot of thinking at management level had become quite short term and there are a lot of concerns around meeting the next quarterly earnings, so to avoid disappointment, whereas when you go and meet private companies, I’m investing in a couple of these as well, it is very noticeable that you’re able in a private setting to think 2, 3, 4 years ahead. Now you have both in your portfolio. I was just interested to find out what you think about both of those situation, which one’s better, which one’s worse, and how do you advise those companies about when to go public?

Ed (14:27)

Fras, do you want to take this one?

Fraser (14:28)

Yeah sure. Very happy to jump in. I think the first general thing I’d say is that’s perhaps why we tend to back founders in a lot of instances, whether both public or private. We find they often own a lot of stock and they bring that long-term mentality. We totally agree with your view that we’d prefer to be backing these management teams that have a long-term time horizon when they’re thinking about the strategy of their business in terms of actually when a business should IPO and should they stay private? We definitely subscribe to the idea that IPOs are just one step in a company’s journey and that the IPO isn’t the finish line. And so anytime we’re a shareholder in a private business, we want to remain shareholders for as long as we possibly can, whether they are still private, whether they’re public.

And so we really let the maturity of the business determine when it’s ready to i p o. And there’s a whole kind of laundry list of pros and cons that we could talk through. But I do think there is a common misconception among these private company founders that public shareholders Wall Street will make them focus on short-term quarterly earnings. And we just disagree with that idea because again, we think that if you can communicate a very clear long-term growth plan with key milestones that you need to hit, then shareholders will come along for the ride. And so you can think about store rollout stories, software growth stories, mining businesses with a series of new projects. So we ultimately think if you perform your share price will reflect the intrinsic value of the business. So that’s where we tend to focus our time is finding leaders that are targeting those big audacious plans.

Charlie (16:02)

Yeah, look, there’s definitely great examples in the listed market of management teams and boards who do own a lot of stock behaving in that manner and being very successful over decades. So maybe a very hard part of being such a high conviction portfolio is that occasionally you get it wrong. I mean, you’ve got an incredible track record, so congratulations.

Ed (16:23)

We make lots of mistakes. There’s no doubt about that. It’s a question of ensuring there’s a margin of safety to start with to make sure the loss of capital isn’t either permanent or doesn’t give you an opportunity to move on. But continue, sorry to,

Charlie (16:38)

Yeah, I guess the hard part is anchoring to there’s been so much work that would go into putting a stock into the fund or a business into the fund. How as a team, and maybe give an example to bring it to life when you’ve realised, oh, actually that thesis was wrong, we have to get out of this.

Fraser (16:56)

We are constantly thinking about anchoring and revisiting the companies in our portfolio. I’d say it’s a mix between culture and process. So if I think about culture, we debate all of the companies in our portfolio very rigorously, and that will extend to the 22 year old who has just joined the team arguing with Tom Cowan about a business at one of our founders in the portfolio. And when you think about obviously Tom’s track record versus the 22 year old, that might sound a little crazy, but that is the type of culture we are trying to foster where all the voices and opinions are thrown onto the table and hopefully that gets us the best outcome. In terms of actual process, we do a lot of things. We bake a lot of things structurally into our process to constantly revisit where these businesses are at. So for example, we do quarterly reviews on all our businesses where we throw up, this is what we said the businesses were going to do, this is what it has done both strategically and from a numbers perspective.

And so there is just nowhere to hide. There is no way to change rewrite history and change what was said six months ago or 12 months ago or 24 months ago. And so we’re constantly trying to keep ourselves intellectually honest through good process so that we can avoid anchoring. If I give you an example, it’s always a bit scary to talk about times we’ve made mistakes, but I think we’ll pick on the toughest kid in the school yard, so to speak, and we’ll use a public investment where our thesis didn’t quite play out and it’s a company we’ve been very public talking about, and that would be Spotify. So this is still an amazing business that we expect to do really wonderful things, but our investment thesis was predicated on building out a really large advertising business and taking share from radio ad dollars. But if you sort of look at their progression over the last few years, obviously it’s been a very tough advertising market, but they haven’t really made any progress on that kind of advertising gross profit piece.

And so our view was that our investment thesis wasn’t really playing out the way we expected, and so we should exit the position. So the mistake wasn’t necessarily driven by the outcome of making or losing money. If you look at Spotify share price this year, it’s actually done pretty well, but more that the evolution of the business was different to our expectations. And so because of that, we had to hold each other to account. I would just reiterate, Daniel is obviously a wonderful founder and we’re all Spotify customers and it’ll be a very successful business. It’s just the story didn’t play out as we expected.

Charlie (19:29)

And sadly, I think they’ve stopped investing in podcasts as well, so they won’t be calling me with a big check

Ed (19:35)

The big payday. Yeah, you’re a natural for someone that hasn’t done this before, you’re doing just fine, just fine.

Charlie (19:42)

Oh, thanks Ed. Thanks. You’re a bit of an old hand at this stuff. So maybe on the flip side, let’s talk about a company that you’ve been invested in actually that you’re most proud of. Maybe this could go to you, Ed.

Ed (19:55)

Yeah, sure. I’ll, I’ll have first crack here and it might take you a little bit by surprise, the type of company, but it’s actually what started as a mining services business and that’s mineral resources and sure, in many respects you could argue proud, has it changed the world or is it doing, it’s not an amazing technology company that we all use each and every day like Spotify, but this is an incredible Australian success story that in fact, the whole country should be proud of. We’ve been lucky enough to be invested for the whole life of our fund. So invested into the I P O is a hundred million dollars market cap business, I think. I haven’t checked the share price today, but it’s probably a 14 billion business or there thereabouts and a S X top 30 company. So when we talk about backing incredible founders who can execute for long periods of time with aligned incentives and build a wonderful business, look no further than Chris Ellison and Emma Fisher pitched Mineral Resources at the 2020.

SOHN Hearts and Minds conference or there or thereabouts, we had to fight her to who was going to pitch it because we have obviously been invested for a long time. But it wraps everything that TDM believes into a bit of a bow, very long-term supporting great management teams who know how to allocate capital. And Chris over the life of the business as a public company, I think has achieved an incredible return on invested capital over 25% and hence the returns on the share price as well. So when we meet management teams bet public or private, we say we are very long-term investors, but to walk the walk for that or in that regard is something that we are proud of because there aren’t many public market investors that can say they’ve been invested in a company for 18 years.

Charlie (21:56)

Great answer. And Fraser, do you have an investment? It could be any time of your career that you’ve been most proud of?

Fraser (22:01)

I was just going to reiterate the mineral resources pick. I think there’s a few things I really love about that investment. I think one is it just shows the flexibility in our process. We very publicly say we’re looking at consumer tech and healthcare, and yet the longest running, one of the most successful investments in our portfolio is a mining and mining services conglomerate at this point. I think it’s also an interesting example that kind of debunks the very common investing ideology that a great investment has to, or a great business has to have very predictable earnings and higher returns on invested capital. I think Mins is a great example that has very high average return on invested capital and is therefore an amazing business. But can I pick what the earnings are going to be in six months or 12 months? Absolutely no chance. And obviously there’s the commodity price piece in there which impacts that. And so I think it is just a constant reminder when I’m doing work on that business that predictability does not equal quality.

Charlie (23:06)

Yeah, that’s a really good point. And I think finding those management teams that reinvest capital consistently in a smart way, they’re hard to find, but if you’ve come across them, sticking with them certainly pays off.

Ed (23:19)

For us, over the course of 18 years, we only made about 65 investments, so good ideas are few and far between, and so when you find them, you might as well watch them run.

Charlie (23:31)

Fantastic. And maybe Ed, you could perhaps share some thoughts around hearts and minds. How did you come across it? How did you get into it and what is it that it means to you?

Ed (23:40)

Yeah, so where to take this, I think where it came across our desk initially was through the conference and it was probably looking down thinking, oh, this is just another opportunity for funds managers to talk their book. And that would’ve been the first impression. And it wasn’t until we scratched a little bit further that we really deeply understood there was a greater purpose to both the conference and then what became Hearts and Minds the listed investment company. And it’s become something that we’re, as I mentioned, at the top, really proud to be associated with ’em. Can I talk to maybe an example of one of the medical research organisations that we support, and it has a thread right through the heart of TDM because for many people they don’t know. Tom Cowan suffered chronic back pain as a, he was probably 22, 23 working in Investec.

He’d previously had a stress fracture in his back and he had seen, I saw this firsthand as his younger brother, but he’d seen every doctor essentially in Australia to do with this back pain and it was debilitating. We’re not talking about, oh, I’ve got a little pain in my back. This is a guy that could not sit down for longer than 30 seconds at a time at times, couldn’t drive a car, couldn’t sleep at night, couldn’t stand up, couldn’t be active. He loves golf and grew up in a household of three boys, very active fella, and was absolutely the exact opposite. His life had become lying down and in many respects not being able to enjoy life at all. And he actually came across the Pain Management Research institute, which is based out of North Sydney and attached to Royal North Shore Hospital there. And they incredibly rewired his brain and the neural system and the pathways to get rid of his back pain. He now leads a perfectly normal life. So this gives an example of an organisation we can now support through HM one through the TDM Foundation that has had a huge impact on not just Tom, but essentially TDM, because without Tom being the person he’s today, TDM wouldn’t exist either and neither would the jobs of 40 people in Sydney. So it’s close to our heart for variety of reasons. That’s just one example.

Maggie (26:15)

Well, what a perfect way to take a pause in this conversation. A lot was covered in that first half. You certainly pick up parallels between the high performing sports teams that Ed were are a part of and the high performing culture that he’s driving at TDM Growth Partners. Absolutely fascinating stuff to hear more about their structure and unique approach to investing, don’t you think?

Charlie (26:31)

Yes, they’ve certainly put a unique twist on the world of funds management and built an incredibly impressive, not only that, their performance numbers have been fantastic, I think around 25% per annum since inception, nearly decades ago. So incredible for those clients. Lucky enough to be invested with them. I was also really interested in their take on public versus private markets, particularly as they play in both fields

Maggie (26:54)

And it was indeed topical as two of their three stocks that they’ve recommended for our portfolio are indeed unlisted. Before we dive into the stock stories of Guzman and Gomez and Rokt, just a quick note that Ed did mention a couple of resources and other content pieces that TDM have put out. So just letting you know that these will be linked in the show notes in case you’re curious to learn more, which I highly encourage you to do. Alrighty, let’s jump into the stock, shall we?

Charlie (27:20)

TDMs unique amongst our fund managers in that they invest in private and public stocks, and two of the stocks we currently have in the fund are actually unlisted. So maybe Fraser, I think you’re going to talk about Rokt to start with. You’re the Rokt specialist within the TDM team. I understand. Maybe you could explain to us exactly what Rokt does.

Fraser (27:39)

Yeah, sure. So Rokt is an e-commerce personalization engine. What does that mean? Well, if you are on say, ticket tech, you’re a Taylor Swift fan, you’re buying tickets to her recent concert, there’s a bunch of other things that you are considering purchasing as part of that experience. So maybe you need Wilson parking at the venue, maybe you need flights in a hotel, if the concert is in a different city, maybe you need HelloFresh food or a Disney+ subscription for the kids while they’re with a babysitter. Maybe you want a New Points credit card to pay for the concert. And so Rokts, product powers these complimentary offers for these various products throughout the e-commerce checkout flow. So maybe you’ll receive a 10% off booking.com for your flights and accommodation, six weeks HelloFresh, those sorts of offers. That’s the core offering that Rokt has today. But over time, they have extended that to actually build products and embed them in the e-commerce flow.

So instead of getting an offer for Wilson Parking, you can actually purchase your Wilson parking on the Ticketek website and it all feeds into the ticket tech cart. And so Rokt has this vision of bringing in all these various e-commerce providers into the one flow so that you can buy a single experience in one single checkout. So Rokted is this awesome two-sided network matching billions of e-commerce transactions with all these relevant and personalised third party offers and integrating them into one experience for the consumer. And they do this for the biggest brands in the world. We’re talking Uber, Lyft, a m c, theatres, live Nation, Ticketmaster, gap Pizza Hut, Poshmark, Western Union, six Flags. I could sit here for 20 minutes and talk about the partner network. And so it’s a business where really excited to be partnered with and the founder and CEO Bruce Buchanan has built a very, very impressive business in a very short period of time.

Charlie (29:59)

That’s good. So how did they build that business? And just maybe talk a little bit more about the management team. Where are they from based, what is it that attracted you to them initially and just how did they, you’d think there’d be thousands of companies trying to do the same thing. How did they succeed in this space?

Fraser (30:17)

Yeah, so Bruce Buchanan, the co-founder and CEO, I think if I were to describe him colloquially, he’s an absolute weapon. You haven’t met an operator quite as impressive as Bruce when he was in his early thirties. He was working at BCG and wrote the strategy paper for Qantas on how to build a low cost airline. And Alan Joyce said, Hey, you seem pretty smart. Do you want to build it for me? And so Bruce took Jetstar from a few bullet points on a piece of paper to a multi-billion dollar revenue, massive low cost carrier international carrier across Asia Pacific. He’s only in his early forties at this point decides he’s finished there and I’m going to go start my own business. And 10 years ago he has this sort of realisation that, hey, the airline checkout experience is probably the most optimised of almost any e-commerce experience in the world.

It’s fully disaggregated. You purchase the ticket, but then you sort through seats, food, entertainment, do I want insurance? Do I want a car? All these various aspects. Again, this idea of I want to buy one experience in one go, and Bruce said, well, why can’t every e-commerce business have that experience? I’m going to create that. And rather than saying, okay, I’m going to now recreate Shopify, he said, well, how do I get a leg in with the biggest e-commerce businesses in the world? Well, I’m going to help them make money because it’s one thing to go to Uber and say, Hey, do you want to spend a million dollars on my piece of software? It’s another thing to say, Hey Uber, I’m going to make you 10 million a year by helping you monetize your e-commerce flow. And so the initial product that Rokt created was essentially a 50 50 revenue share, which said, Hey, if an advertiser makes an offer for their product on your e-commerce flow, 50 cents in that dollar will go to, in this case Uber and 50 cents will go to Rokt.

And so Uber all of a sudden is making free money that is sort of sitting in their backyard just by turning on the Rokted piece of software. And so it sort of immediately had this product market fit where e-commerce businesses just rushed to sign this onto their website because it’s just such an easy value prop. It’s one of the only pieces of software that you turn on and you make more money. In terms of the team that Bruce has brought together, I think there’s a of factors that we really love about this team. I mean, Bruce himself is the third largest shareholder. He still owns a very material part of the business, which is sometimes different to what we see in US founders. They often get diluted down so materially, they’re actually quite a small shareholder. The other thing I’d say is he’s rewarded employees in the business and heavily incentivize them with equity as well. So employees own about a third of the business. The second thing I’ve touched on, but is this track record of high performance that starts with Bruce and extends through the organisation. Again, this is now a multi-billion dollar business that’s been created in less than 10 years. And I think it also extends to work ethic. This is a team and a business that works extremely, extremely hard. And so Bruce has been able to attract a great talent out of places like Amazon, Microsoft, Google to his relatively speaking, smaller startup and is executing flawlessly today.

Charlie (33:38)

One follow up question on Rokt Fraser, how’s it trading currently? How has it been post covid? I certainly was caught holding a few e-commerce names as we traded out of Covid to my disadvantage. How’s Rokt gone over the last couple of years?

Fraser (33:52)

Yeah, the benefit of Rokt, as I mentioned is that because it’s helping e-commerce businesses make more money, there is a degree of countercyclical growth to this business where when an e-commerce company all of a sudden needs to find more profits, their shareholders are potentially pressuring them to improve margins, they turn on the Rokt software and it immediately improves their bottom line. And so what we found in early 2020 when Lockdowns began and then also coming out of Covid is a sort of mad rush from a number of e-commerce providers to sign up and launch very, very quickly weeks instead of months.

Charlie (34:31)

Fantastic. And are there any competitors in the space? It sounds like it’s quite hard to replicate, but how do you think about that?

Fraser (34:36)

Yeah, so Rokt is the clear market leader in this category. Bruce invented this category and it is a business that benefits from two-sided networks. So you’ve got the advertisers turn up on one side and you’ve got the e-commerce providers on the other. And of course the integration with Rokt is all on an exclusive basis. And so in the short term, we think that this business is very defensive and very unlikely to face competitive threats. But I think as with any technology business, the biggest risk is not innovating. To the extent Rokted doesn’t continue investing in all their AI ML algorithms to try to match advertisers and e-commerce providers, you always face a threat that someone else could unseat you. But in the short term, we’re very, very comfortable with the competitive position

Charlie (35:23)

And it sounds like it’s an amazing team, which hopefully we’ll find out more about in the future. So thanks for that phrase. That’s great. So maybe turning to you, ed, and we’ll talk about our second stock, which has been in the newspapers a little bit somewhat unfortunately, but actually is a wonderful company. Guzman, I Gomez. I think everyone knows what that one does. It’s a healthy Mexican food. It’s certainly taken Australia by storm. But maybe give us an overview of the business.

Ed (35:46)

Well the business as you quite rightly point out has a lot of brand love in Australia. And so you only need to go down to Australia Square at lunch in Sydney or any one of their strip locations or drive-throughs where they might be opening and the car line is 50 or 60 deep. So this is a business that I think most people listening would know, but as you very succinctly put fast, clean Mexican food, fully customizable that I think as the slogan says, fast food your mom says yes to it is preservative free and clean. And to be able to replicate that at McDonald’s speed is incredible. And so almost 200 stores, I think 199 stores with one opening last week, they’re opening a store on average, call it one every two weeks or a little bit faster than that and growing quickly. And a team, as I’m sure will touch on that, has executed upon a vision and continues to do so. And this is a business that is on train tracks to some degree, has a great system and process around identifying great sites, has a great process around operationalizing those sites and bringing them to market and has done now for many years.

Charlie (37:14)

Yeah, look, so there has been a change of management,

Ed (37:16)

Not really. Steven is still running the business after healthcare. So what has been reported is that there’s a search for a new C E O, but Steven Marks is still the founder and CEO of that business and still very active in that business.

Charlie (37:31)

Yeah, yeah, obviously, I mean that comes back to your core fundamental way of investing is those people driving the business forward. So it’s great to know that he’s still heavily involved in the business. And I guess what attracted you originally to that G mini Gomez’s business?

Ed (37:46)

Yeah, so we have been invested in this business since 2018, and I’ll just mentioned 199 stores at the time, I think there were about 110 stores globally, but 104 of those stores were in Australia. And if you look around the Q S R quick service restaurant market in Australia, there’s been, or globally in many respects, little to no innovation and in any industry that has had no innovation, that screams ripe for disruption. And we saw a business that was growing exceptionally fast. But you can look around and see McDonald’s a thousand stores, K F C 700 stores, Domino’s, 700 odd stores, hungry Jack’s, 450 stores. When’s the last time you had a hungry Jack’s burger a long time ago? Or Red Rooster for instance. I have not eaten there since I was about 10 years old, 330 stores. And so little old GYGat the time with 110 stores, you didn’t have to be particularly switched on to realise there was a massive opportunity to serve.

As I mentioned, clean, healthy, fast food. That’s delicious. And I deeply believe in the product and you only need to look at, as I said, the brand love and the loyalty that has been created around that brand. So you feel great eating it, but it’s also providing value. And so for the young adult in Australia to drive value, they’re much more health conscious than previous generations. And combining this with, as I said, McDonald’s like speed, there was something to definitely about this business upfront. And if you kind of walk through that framework that I played out earlier around our four pillars, there’s great people and culture. So it as founder led, Stephen Mark’s Vence in every sense, but also a great board, so good people around him. Guy Russell who ran McDonald’s in Australia for a very long time, Steve German, who was the C F O of McDonald’s Australia, Bruce Buchanan who we’ve just touched on was on the board.

And so having built this business from one store to, as I said at the time 110, there was this huge growth opportunity to mark off that pillar. There was a great people and culture and when you look at competitive, a vantage, I’ve kind of touched on the brand, but behind the scenes there was a lot of process power in terms of how do you get this fully customizable food or order out quickly, but also around food innovation. How do you make food quickly that has no preservatives, that it’s clean? And there are multiple examples of this even right down to something that you might not think is clean and healthy. They’re soft serve, for instance, that they released recently took them two years to perfect that full dairy, clean dairy with real chocolate rather than processed chocolate sauce. So random example, but that you can look at every ingredient and go through and it has taken years of testing and food kitchen innovation to bring what is then brought to the consumer on mass across now 200 stores essentially.

So there was a lot to initially, but what we like now is we thought, okay, they should be able to get to 500 stores. We now think that’s baseline. We think we can in Australia get to a thousand stores. There’s no reason why this business can’t be the McDonald’s of the next generation. And so we are so excited about the opportunity of this business and we’re structurally set up, as I mentioned, to own businesses for very long periods of time. This is one of those opportunities that we hope becomes a mineral resources of the T DMM portfolio.

Charlie (41:39)

Wow, that’s very interesting, isn’t it? And the ice cream example is a great example of that sort of long-term thinking that you were talking about earlier, and they’ve just started going into the US I think as well. I mean, how big is the opportunity potentially over there if we want to get really excited?

Ed (41:53)

I’ll break this down. So there are three stores at the moment all around the Chicago area. For those that travel to the states or even follow the QSR market, Chipotle has over 3000 stores, very large business. It’s kind of odd to think an Australian Mexican business selling Mexican food in America, but the opportunity is there. But make no mistake for us, our returns are going to be based on the opportunity in Australia alone. And so we see the opportunity in America as cream, so to speak, on top of hopefully a delicious cake that over long periods of time can compound capital in Australia only. And this American opportunity is, as I said, the cream to, if this is going to be in 10 years time, the McDonald’s of the next generation, it’s going to have to have a larger global footprint and why not have that global footprint in the biggest Q S R market? And so it’s slowly, slowly over there and for the HM one shareholders to know that the brand and its growth in Australia is what’s going to drive their returns, I think gives probably more comfort than trying to tell an American growth story and baking in those returns into the success.

Charlie (43:14)

And maybe coming back to our previous conversation about public versus private, this is a company that has a huge growth runway ahead of it. It probably will need capital at some point, particularly if they want to accelerate that growth. How do you feel about a potential IPO for this stock?

Ed (43:29)

Yeah, well it makes good money at the moment and we can maybe touch on that, but they have historically said it will look to come to market sometime in 2024. That is not necessarily the case as we see it. We’re always when is right for the company. At the moment, capital markets are shut, so it’s kind of irrelevant, but this is going to be hopefully a great public company and it operates at the moment, it’s a unlisted public company, so it already has the cadence and reporting of a public company. And so it’s set up to transition to the public markets hopefully seamlessly.

Charlie (44:09)

Fantastic. And it’s great that you can get access to this via an investment listed investment company h m one. And just to finally cover off on GYG I did note there was a healthy fast food company that recently listed in the US despite markets being relatively closed, it’s called Carver and the stock is up, I think well over a hundred percent. How does that compare with GYG

Ed (44:31)

Yeah, well, I don’t want to make comment whether carver’s cheap or expensive, but if you were a GYG shareholder or a hearts and mind shareholder, this might make you feel a little bit warm and fuzzy. Yeah, as you mentioned, it’s a casual fast chain, but Mediterranean in focus rather than Mexican, but very analogous to GYG in many respects, very customizable bowls. And Peters and the numbers are surprisingly very similar. So in the last financial year, Carver did about 560 million in, it’s growing about 30%. So these are kind of ballpark GYGfigures, the size, the scale, the margin profile, very similar to G Y G. Interestingly, GYG actually has a larger A U V or sales per unit, materially larger, maybe the only difference to call out is Carver is a hundred percent corporate owned and only 70% of GYGstores are corporate owned and 30% are franchisee owned. Of course, as a rule of thumb, the quality of lows earnings attract a higher multiple, usually about twice, as I said, as a bit of a heuristic, but the market cap, so having kind of lined these two businesses up as like for businesses, Carver, 8.3 billion market capitalization, US GYG 1.5AUD. So there’s a disparity somewhere, and I don’t know at which end it is, but as I said, if you’re a HM one shareholder, you’d be feeling I think a bit warm and fuzzy just to hear the side by side.

Charlie (46:11)

Yeah, fantastic. That’s really interesting. Thanks Ed. Alright, well thanks guys for those deep dives. I think just one final question for you both, and we’ve been asking this of all our guests. I think a common thread of the people that come on this podcast is an innate curiosity, and I think you’ve both displayed that here today. And so maybe tapping into something else away from the portfolio, what’s really piqueing your interest at the moment? I might go to you first further.

Fraser (46:37)

It’s interesting, I’m in the very privileged position to work alongside a former professional athlete. And so this year in particular looking at things like live golf, PGA tour issues, various sports team being sold for record amounts of money, I’m very lucky to be able to bounce those sorts of ideas around with Ed and get his insights. So given he’s far better place to talk about it than me, maybe I’ll throw it across.

Ed (47:04)

No, it’s interesting point because I was lucky enough at the last sewn conference to host a panel with Cara Norman who’s out here for the FIFA soccer World Cup at the moment, but owns Angel City, Jerry Cardinal, who’s literally the legend of investing in sport. And so this sport as an asset class, when you talk about what’s peaking my interest, that was last November, it is only accelerated in a time of economic doom and gloom. The institutional capital that is racing into sports leagues and clubs and various means of monetizing sport has blown me away. It really has. And maybe there’ll be a reckoning at some point now that the cost of capital is a little bit higher. But I would probably agree with the phrase, if you asked me the same question, what’s peaking my interest every time I open up the paper? It’s institutional money flowing into sport, be it in the IPL and seeing that grow or assets changing hands in the states with their change of regulations around private investment rather than sole owners. And so it’s fascinating to see real time the institutionalisation of something that we have always loved and never really thought of as an asset class now becoming big business.

Charlie (48:24)

Yeah, look, it’s interesting. One of our biggest positions in the fund is actually Formula One, which has probably led the way at some of these media deals. And it does seem that sport and particularly live sport is one of the few areas where you can get lots of eyeballs in one place.

Ed (48:39)

It’s one of the few appointment television moments. Now, of course with streaming and the like. Live sport is still appointment television.

Charlie (48:50)

Yeah, and I think when you see the viewing figures for the next Matildas game, they’re going to be some pretty impressive numbers. And we’ve got through this whole podcast without mentioning the ashes. So thank you both for appearing today on the Hearts and Minds podcast. It was an absolute pleasure spending some time with you and look forward to meeting you in person soon, Fraser, and thanks for coming in, Ed.
&nbp;

Ed & Fras (49:09)

Thanks Charlie. Thanks for having us, Charlie.

Maggie (49:13)

And that concludes the first episode of the Hearts and Minds podcast. Today we’re joined by TDM investment team members, Ed Cowan and Fraser Christie, and we heard a fascinating range of topics today from private to public listed companies, the unique approach to investing, the parallels between high performing sports teams and the culture at TDM Growth Partners. It was great to get an insight into two of the stocks we hold in the HM1 core portfolio, Rokt and GYG, both clearly very well, love stocks by the TDM team, with plenty of opportunities ahead. I’d like to say a massive thank you to the entire team at TDM Growth Partners who support hearts and minds in a number of ways behind the scenes and most prominently as the core fund manager as we’ve heard today. And a big thank you to you for listening and joining us today on our first episode of the Hearts and Minds podcast. I hope you enjoyed it and found it as insightful as I did. We’ll be back next week with another episode to ensure you never miss a conversation. Please subscribe wherever you’re listening to this right now, and better yet, send it on to someone in your network that you think will enjoy the conversation. Thank you for your support. Until next time, stay curious.

Sohn Hearts & Minds Podcast

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