Q: What is the history of the fund?

The fund came about as a result of my time spent working at Mutual Series for Michael Price, a well-known value investor. I interned with him and worked my way up. When Price sold his fund and later left, I began overseeing half the firm’s assets.

In 2000, I partnered with a Swedish billionaire to create a hedge fund investing in European value situations. When he died, I shut down the fund, returned the capital, and helped his family build their family business by successfully restructuring some public and private companies, which proved invaluable in terms of learning how businesses are managed. 

In 2004 I returned to stock-picking, taking large stakes in small companies in Europe, good businesses that were struggling, and helping them fix themselves. 

After the global financial crisis, when investors were panicking, I re-evaluated. Michael Price had shown me how to take advantage of market opportunities with an eye toward creating value, a business where the client, employees, and the owners all make money. With that in mind, Eric LeGoff and I co-founded Evermore Global Advisors, LLC in 2009, and launched the Evermore Global Value Fund the following January. We have a single philosophy—one approach, one style of investing.

Today, the firm manages about $1.1 billion, of which approximately $600 million is in this fund and another $500 million is in separate accounts. While we don’t mimic it, the MSCI All-Country World Index is our benchmark.

Q: What core beliefs drive your investment philosophy?

There are many types of value investors, but they essentially fall into two camps. One is looking for cheap for cheap’s sake, to buy a stock for half of what it’s worth, and over time those stocks revert to the mean. That’s not us.

The other camp, our camp, is catalyst-focused. Catalysts can be breakups, restructuring, selling of assets, buying back stock, focusing on core businesses and getting rid of those businesses that don’t play a significant role in the company’s success, improving management quality, etc. It is companies going through strategic change as well as being cheaply priced. 

It’s all about compounders: cheap plus catalyst equals real opportunity for value creation. That, particularly family-controlled companies, is where we focus. Our compounders are family-controlled conglomerates, or holding companies, that have had significant total return over many years and are trading at a discount. 

Another thing that differentiates us is that we are not just stock pickers. We have operating experience from sitting on boards and helping to restructure businesses, coupled with an extensive network of individuals and families that control businesses globally, especially in Europe, whom we source for ideas.

We want stocks that have these characteristics: cheap, plus catalysts, that along with our operating experience, and our network, we believe results in a sustainable investment edge. 

Q: What is your investable universe?

Our fund is global, meaning we can go anywhere in the world, including the U.S. We are pure, opportunistic, unbiased investors. About four years ago we had 40% of the fund in the U.S. and another 40% in Europe. Today, it’s about 16% U.S. and 72% Europe. 

We generally invest in developed markets. While we don’t dislike emerging markets, we prefer to sneak into them. For instance, we own Bolloré SA, a nearly 200-year-old conglomerate of transportation and logistics, energy storage, and communication companies. Although French, they own more ports in Africa than any other public company, which generate half their earnings. So, I get high-growth Africa at a low-value European price.

We do look here in the U.S. but, again, we have no interest in mimicking the index; instead, we want to beat it over time. We step out of the mainstream and look at Germany, France, Norway, Italy, etc. It boils down to understanding who the players are, how they create value, and whether we can align ourselves with them as investors.

Q: How would you describe your investment process?

We don’t screen numbers. We screen key words like “post-reorg equity,” “breakups,” “spinoffs,” and “restructuring,” and use different combinations of words to find change going on early in situations. 

If a company has underperformed for 10 years, it just shows as a cheap stock. That’s great, but it’s been on that list forever. We want to see if it’s changing. We want change plus value. 

A company might announce at its annual meeting that they are reviewing their operations when they spin off non-core assets. But we perform keyword searches or talk to the participants and/or the bankers helping such companies sell non-core assets. If there are family problems in public companies, a breakup might be coming. We track these kinds of things to help us source ideas.

Once we find the idea, the first question we ask is whether the name is cheap, so we assess the valuation to see if it is cheap on cash flow or sum of the parts if we break it up. But we only do a breakup analysis if it is actually breaking up. 

Next, we want to understand why something is cheap. And once we are comfortable with that, we look to see what might make it less cheap—what are the catalysts that might increase its value and how long might that take. 

If it’s only a good compounder in two years, but not in three, it’s probably not for us. Also, when we buy something for a reason and that reason doesn’t pan out, we don’t make the mistake of trying to come up with a new reason to justify holding onto it. If company management is not doing what they said they were going to do, we move on. There are plenty of other ideas out there.

We strive for longer-term gains. And while we stay alert to the tax situation for investors in order to net them the highest after-tax returns we can, we don’t manage with taxes in mind.

Q: Can you provide examples of your catalyst or valuation analysis?

One name we own is ThyssenKrupp AG, a German multinational conglomerate. While we don’t like the steel industry and are not into commodity-type businesses, it had many of the buzz words we look for—asset sales; restructuring, both financial and operational; and spinoff.

It is a steel company with other industrial assets, and we see its future as a specialty business, elevators and escalators and key auto parts with a legacy steel business that we anticipate will trade at a substantially higher valuation than a typical steel company. There are also talks that Tata Steel wants to merge its European operations with ThyssenKrupp.

A few years ago, this German company was heading toward a financial crisis, so they brought in a new management team from Siemens aimed at restructuring the conglomerate’s non-steel businesses. We are betting on this new management, which means we spent a lot of time not just to understand the business but who is running the business—their history, track record, and whether they’re doers or just talkers. 

We also own Vivendi SA, a French multinational mass media conglomerate of which Bolloré owns 25%. They brought in Vincent Bolloré as chairman of the supervisory board over the company’s restructuring, and have started selling assets, buying back stock, refocusing on media and telecom, and getting rid of key assets that no longer fit. They own Universal Music Group, the biggest music company in the world, and are talking of a music business IPO next year, here in the U.S. Vivendi has doubled in the last four and a half years, but it didn’t happen overnight and there remains scope for improvement. 

Another holding is Codere SA, a gambling company headquartered in Spain, and one of the largest gaming companies in Mexico, Chile, Colombia, Argentina, Uruguay, and a bunch of other markets. It was a post-reorg equity that came out of bankruptcy a couple of years ago with operational and balance sheet restructuring. When companies emerge from bankruptcy is often the best time to look at them. 

We believe in Codere’s management and understand their business. Also, they are about to do a reverse stock split. When we saw that creditors were exchanging equity for debt, we started buying shares from the creditors before they were widely available. Management knows what they’re doing and has learned their lesson. Sometimes those who get into trouble are the best to restructure their business because they know where they went wrong. 

We see ourselves as independent thinkers. Sometimes, when an activist investor attacks a company, we will support the company against them if we believe in their plan, because we only care about one thing: what will maximize value in the long run for shareholders. We’re not interested in making a quick buck.

Q: What is your portfolio construction process? Does diversification play a role?

We maintain a tight, focused portfolio where we allow no more than 40 positions, and look at our gross exposure to a sector, a country, and an industry. We cap individual sector exposure at 25% and any individual position at 7%—that’s market, not cost—and we pare back as needed. 

We cap industries at 25%, which is very broad, and unlike many other value investors, we have less than 5% of our entire fund in energy. And we might vacillate anywhere between 3% or 4% cash at the bottom up to 15% at the high end. 

We are primarily focused on data mining—we want to understand as many characteristics of the portfolio as possible. We look at everything that can hurt or help a company and aggregate it. We do the same with leverage. We’re not afraid of levered companies but we don’t want a portfolio full of them. 

We have specific percentage limits, so if we want to buy something new, we have to sell something. And we set ranges, not precise price targets. We also exit earlier than other investors, before a company fully realizes its value, when it’s at about 85% to 90%. We’re not afraid to hold onto cash for any period of time, waiting for the right opportunity to arrive.

In addition to our ongoing communication, I hold weekly research meetings and quarterly intensive off-sites with my team to review the portfolio, parse through our names, and spot anything new or bad. Topic areas are also assigned, where somebody tracks spinoffs or restructuring, for example, so we don’t miss new opportunities. 

We revisit what has and hasn’t worked to create rules of thumb and guidelines, and at the beginning of each meeting, we review all the prior lessons learned. One rule of thumb is that weak management plus leverage is a lethal combination. The only thing more lethal is weak management in a company with net cash, where they’ve made some of their worst investments in early years, when they had tons of cash and squandered it.

We are not looking for a ridiculously diversified portfolio, but to invest in various kinds of value with catalyst companies. We set a price range and buy, targeting the low to midpoint of that range for a reasonably conservative outcome.

Q: How do you define and control risk?

For us, risk is not volatility. It’s primarily permanent loss of capital, followed by execution risk. We want conviction in each name. We have exposures, and internationally we have currency risk. I fully hedge my currency, which few funds do, because we are stock pickers, not currency gamblers. Without hedging currency exposure, it’s implicitly making a currency call.