Graham & Doddsville An investment newsletter from the students of Columbia Business School

Inside this issue: Issue XXXIX Spring 2020 Alex Captain 2020 CSIMA Conference p. 3 Cat Rock Capital

Alex Captain is the Founder and Managing Partner at Alex Captain p. 4 Cat Rock Capital Management LP, an investment firm based in Greenwich, Connecticut. Cat Rock makes CBS Students’ concentrated, long-term investments in public and Investment Ideas p. 16 private companies across a range of industries, including software, internet, telecommunications, aerospace, business services, and infrastructure. Cat Mountaineer Rock seeks to establish long-term partnerships with Partners p. 22 high-quality, well-aligned management teams as a core element of its strategy.

Prior to founding Cat Rock in 2015, Alex had been a Editors: Partner at Tiger Global Management for six years, where he sourced and led investments in industrials, Frederic Dreyfuss telecommunications, media, and technology globally. MBA 2020 Alex Captain Before joining Tiger Global, Alex had worked in private Sophie Song, CFA MBA 2020 (Continued on page 4)

John Szramiak MBA 2020 Mountaineer Partners

Rodrigo de Paula MBA 2021

Matt Habig MBA 2021

Alison Tien MBA 2021 Mark Lee, John Hallowell, and Greg Williams

Mark Lee is the Founder and Portfolio Manager for Mountaineer Partners Manage- ment, LLC, an opportunistic value and event hedge fund launched in 2012. Prior to founding Mountaineer, Mark worked at Contrarian Capital Management, a multi- billion dollar hedge fund firm, from 1999 to 2011. He joined Contrarian as a dis- Visit us at: tressed debt analyst, and then in 2003 founded and was the sole Portfolio Manager www.grahamanddodd.com for the Contrarian Long Short Fund for eight years until he departed to launch www.csima.info Mountaineer in January 2011. In late 2008, Mark also assumed management of the Contrarian Distressed Equity Fund, which he managed until his departure in Janu- ary 2011. Both Contrarian Long Short and Contrarian Distressed Equity utilized a similar analytical framework to Mountaineer Partners. Prior to Contrarian, Mark worked as an Associate at Blavin & Co., a concentrated, long-biased value fund, and as an Associate at Centre Partners, a Lazard-affiliated private equity firm. Mark began his career in finance in 1992 as an investment banker at Credit Suisse First Boston. Mark received an MBA from Harvard Business School and an AB, Magna

Page 2 Welcome to Graham & Doddsville

We are pleased to bring you the Founder, discussed his back- views since March, with guests 39th edition of Graham & ground in distressed investing including C.T. Fitzpatrick, Mi- Doddsville. This student-led at Contrarian Capital that led chael Mauboussin, Dan Da- investment publication of Co- to his investment framework vidowitz & Jeff Mueller ’13 from lumbia Business School (CBS) is centered on downside protec- Polen Capital, Francisco Garcia co-sponsored by the Heilbrunn tion across the capital struc- Parames, and David Samra ’93. Center for Graham & Dodd ture. Mark, John, and Greg also Investing and the Columbia Stu- shared two current ideas as We thank our interviewees for dent Investment Management well as how they traded and contributing their time and Association (CSIMA). Since our thought about picking stocks insights not only to us, but to Winter 2020 issue, the Heil- Meredith Trivedi, Managing amid the pandemic turmoil. the whole investing community. brunn Center hosted the 23rd Director of the Heilbrunn Annual CSIMA Conference and the We continue to bring you Center. Meredith leads the G&Dsville Editors Artisan International Value Stock stock pitches from current CBS Center, cultivating strong students. In this issue, we fea- relationships with some of Pitch Challenge. ture three of the finalist pitches the world´s most experi- We first interviewed Alex Cap- from the 2020 Pershing Square enced value investors and tain, Founder and Managing Challenge: Kyle Campbell ’21, creating numerous learning partner of Cat Rock Capital. Mr. Shaunak Misra ’21and Michael opportunities for students Captain discussed at length his Weng ’21share their long idea interested in value investing. private equity-like approach to on Sysco Corporation (NYSE: public market investing, which SYY), Ruth Chen ’21, Yi Cheng evolved from the beginning of ’21 and Mark Hu ’21 present his career at Blackstone Group their long thesis on Verisk to time spent at Tiger Global Analytics (NASDAQ:VRSK), before launching Cat Rock. Mr. and Manas Bajaj ’21, Akshay Captain provided us with a view Chawla ’21 and Amitaabh Sahai of how to think about high quali- ’21 recommend buy on EPAM ty, durable businesses that can Systems (NYSE:EPAM). compound capital over long periods of time in a concentrat- Lastly, you can find more inter- ed portfolio. views on the Value Investing with Legends podcast, hosted by We also sat down with Mark Professor Tano Santos. Profes- Lee, John Hallowell, and sor Santos took advantage of Professor Tano Santos, the Greg Williams of Mountaineer the stay-at-home orders to Faculty Director of the Heil- Partners Management. Mark, the conduct five exceptional inter- brunn Center. The Center sponsors the Value Investing Program, a rigorous academ- ic curriculum for particularly committed students that is taught by some of the indus- try´s best practitioners. The classes sponsored by the Heilbrunn Center are among the most heavily demanded and highly rated classes at Columbia Business School.

Professor Tano Santos and Meredith Panelists judge student pitches at the Trivedi at the Artisan International Value Artisan International Value Stock Pitch Stock Pitch Challenge Challenge

Volume I, Issue Page 2 3 Page 3

23rd Annual CSIMA Conference—February 2020

Best Ideas Panel. From left: Clifford Sosin, Brian Gootzeit, Alex Captain, Angela Aldrich and Guy Adami

Robert Shafir ’84 delivers morning keynote speech Matthew McLennan provides expert insight

William von Mueffling '95 (right) speaks with Professor Michael Mauboussin (right) speaks with Eric Almeraz '02 Anup Srivastava Page 4 Alex Captain, Cat Rock Capital

equity at The Blackstone of my parents’ savings. Mom spent every summer at school Group in the firm’s New later got me copies of Peter getting as much business York office. Lynch’s One Up on Wall Street experience as possible, and Robert Hagstrom’s The working in the sales Alex graduated summa cum Warren Buffett Way, which department of a medical laude from Harvard continued to kindle my equipment manufacturer, College with an A.B. in interest in investing. I was working in retail at the Boston Economics and from the fascinated by all the detail I Consulting Group, and Harvard Graduate School could collect on companies by ultimately interning with the of Arts and Sciences with pulling their 10-Ks from Yahoo Blackstone Group in Private an A.M. in Statistics. He is Finance – I could see where Equity. I graduated in 2006 a John Harvard scholar and they had warehouses, how with a Bachelor’s degree in a member of Phi Beta many employees they had, Economics, and I had also Alex Captain Kappa. what raw materials they gotten a Master’s degree in Cat Rock Capital needed to buy, the structure Statistics during my four years Editor’s Note: This interview of their contracts with at Harvard. took place on March 24th, customers, and all kinds of 2020. other details about their operations. It might have been Graham & Doddsville dry material for most kids, but “I was fascinated by all (G&D): To get started, can my parents would generally the detail I could collect you walk us through how you have us pulling weeds in the got interested in investing in backyard if we weren’t reading on companies by the first place and decided to something productive, so pursue it as a career? reading 10-Ks sure beat the pulling their 10-Ks...my alternative! Alex Captain (AC): I grew parents would generally up in the San Francisco Bay I also started several minor Area, near Silicon Valley. My businesses in high school, have us pulling weeds in dad worked in the tech including a newspaper, a car- the backyard if we industry in R&D, and my mom washing business, and a weed- stayed home and raised us. My control business. I pulled weren’t reading dad got stock options through books from my local library to his job, my mom learned about learn how to design good something productive, them, and she got interested in marketing material and read investing herself. She would Karrass’s books on so reading 10-Ks sure watch Nightly Business Report negotiation. I loved the idea of and CNBC through the day starting a company and beat the alternative!” and would trade various learning about how to manage stocks, so this was always all the details required to make something that was going on in it work. I think statistical thinking is our household ever since I can valuable for an investor remember. When I was 10 When I was applying to because investing requires us years old, my mom gave me a colleges, I went to the to navigate uncertainty. As an copy of William O'Neil's How websites of some of the investor, I look for companies to Make Money in Stocks. I biggest US corporations and whose earnings have fewer started using his CAN SLIM looked at where the CEOs had ‘degrees of freedom’ (variables formula to pick stocks at gone to school and what they that matter) and a lower around that age. I remember had studied. While Harvard ‘standard deviation’ of buying shares in American Business School did well by outcomes for those variables Woodmark, a cabinet maker, that standard, there was no that drive earnings. and Hot Topic, a gothic clear conclusion for undergrad, clothing retailer, which both and so I figured that getting an However, studying Economics screened well on the CAN Economics degree at Harvard and Statistics does not make SLIM criteria with a small part would be a good way to start. I you a good investor. Both (Continued on page 5) Page 5 Alex Captain, Cat Rock Capital

fields attempt to simplify the project and paid them in economic bust in my last year complex systems and quantify equity. Managing the there. I worked on so many them. If you believe the compensation and review deals – Travelport, Dollar predictions produced by these process became such a burden General, First Data, Bobcat, imperfect methods, you can that it interfered with running the Alltel divestitures from get yourself into a lot of the business. That experience Verizon, the ConAgra trade trouble in investing. informed the way that I built group, and a variety of energy Cat Rock, and it also informs deals. I had a great experience the way I evaluate other at Blackstone and worked with G&D: Were you actively businesses as an investor. incredibly smart and talented trading in your PA throughout people, many of whom college? And would you say continue to be good friends that, given your background, “You learn an today. you lean more towards the quantitative mathematical enormous amount After finishing my analyst approach to investing, or were about business and program at Blackstone, I joined you always able to marry the Tiger Global and started quantitative and qualitative investing by trying to investing in public markets. elements? Several Blackstone Private start a business...That Equity analysts had previously AC: I didn’t have much money joined Tiger Global, and I was in college, so no! My passion experience informed attracted by the fact that the has always been running and the way that I built Cat fund had a small, young, owning businesses. Investing is entrepreneurial team with a fulfilling because it involves the Rock, and it also great track-record. I knew that ownership of businesses. In I would learn a lot and be able college, I started an e- informs the way I to do some pretty interesting commerce company called work early on, and that’s Ezaria that imported crafts evaluate other exactly what happened. from emerging markets like Honduras, Egypt, India, Kenya, businesses as an G&D: Did you focus on a and a variety of other investor.” particular industry at Tiger countries. I hired other Global? Harvard students to source these goods from their home- G&D: It seems like you AC: Everyone was technically countries. It was one of the grasped this concept of being a a generalist, but I did spend two big internet companies at partial owner in a business more time in certain sectors that time at Harvard – the when you're investing very like industrials, cable, telecom, other was Facebook, which early on. How did you decide and alternative energy. But I was started by a classmate in to go to Blackstone after also worked on investments my year. I think we had about college? And then why you did completely outside of those the same amount of funding, you decide to transition away sectors, like Saudi dairy but alas the ROI turned out to from private equity and back producer Almarai and be much better for Mark! into public market investing? Domino’s Pizza. Ezaria was one of the first advertisers on Facebook, and it AC: Private equity was a great G&D: Do you think the had great demographic place to start my career generalist approach is better targeting for us because the because it gave me a chance to than a specialist approach? user base was almost all at see how businesses really How have you woven that into Harvard at that point. operate while also honing my Cat Rock? skills as an investor. I joined You learn an enormous Blackstone in mid-2006 and AC: There are clear benefits amount about business and spent three years there. I saw of the generalist approach. We investing by trying to start a a private equity boom in the can go after any one of 40,000 business. At Ezaria, we hired first two years and the addressable equities, and we about 10 people to work on (Continued on page 6) Page 6 Alex Captain, Cat Rock Capital

need to make sure that we've be more ‘marketable’ if it had a put the best 10 or 15 in our I also knew that the world did bigger team, more shorts, portfolio. There is no not need just another long- more liquid share classes, guarantee that the best 10 or short equity fund. I wanted to more impressive offices, and 15 opportunities among those do things differently and to do more marketing material. 40,000 are going to be them better. Every one of these choices concentrated in any given would have consequences for sector. our focus and ultimately for “At Cat Rock, our our investment performance. On the other hand, it is more We always try to prioritize difficult for a generalist to investment criteria are performance over figure out where to focus his very explicit: presentation. or her time, so a generalist needs to have a very clear set predictability, business, Third, I think a great firm of criteria that helps focus time would have a clear, measurable and research efforts on the people and price.” goal. At Cat Rock, we want to most compelling opportunities. beat the stock market by the At Cat Rock, our investment highest margin possible net of criteria are very explicit: fees over a 3-5 year period predictability, business, people First, a great firm will put itself while taking minimal risk of and price. in the shoes of the customer - permanent capital loss. We I wanted to be totally aligned won’t change the goal if we By applying those four criteria, with my investors. I put more miss it. We drive we can very quickly sift than 90% of my net worth in accountability and focus at Cat through potential investments Cat Rock, and I continue to Rock because we have this and narrow the list of have more than 90% of my net clear and measurable goal. We addressable opportunities to a worth in the fund five years won’t talk to you about our manageable size. I think the later. I have no other Sharpe Ratio after the fact if it combination of being a investments. happens to look good. The generalist and also having a goal is clear at Cat Rock. very clear framework for what Second, I wanted every This Cat Rock strategy you're looking for allows you decision at Cat Rock to be determines our tactics as we to focus your time and effort oriented around achieving the invest. The typical long-short on the most attractive best returns with the lowest fund could spend more than opportunities. risk. This sounds easy, even 50% of its time and research tautological. But it’s not. effort on shorts, and this G&D: We definitely want to Raising money is difficult, and activity will generate no return get into those four criteria a the process forces managers over a 3-5 year period even if bit more in depth. But maybe into making compromises that the manager is ‘outperforming’ first, can you walk us through ultimately hobble investment the market by a mid-high single your decision to launch Cat performance. Managers are digit margin. We therefore do Rock? often trying to reduce the risks little shorting of equities at Cat to their business by reducing Rock. The typical long-short- AC: I have always been their exposure in a drawdown, fund could spend 20-30% of its entrepreneurial, and I had excessively diversifying their time and research efforts always wanted to run my own portfolios, crowding into collecting ‘proprietary data’ firm. It’s always been a dream, investments owned by designed to give it an ‘edge’ in and it really was a question of ‘respected’ investors, and the market. We think that this when I was going to take investing in companies that are type of very short-term data action on it. I had learned a lot easy to justify to their limited has little predictive value for during the nine years I had partners. These tactics often stock prices in the short-term, spent collectively at Blackstone make sense for the fund and almost no predictive value and Tiger Global, and I felt manager’s business but can for stock prices over the long- prepared to start Cat Rock at severely detract from term. I don’t think you need a that point. performance. Cat Rock would Master’s degree in Statistics to (Continued on page 7) Page 7 Alex Captain, Cat Rock Capital

see that, but it certainly have some special advantage in are very standard in private doesn’t hurt! Buffett did not providing that good or service. equity models where you’re build his track-record because looking at highly mature he had access to special Then we're looking for good companies that are growing at satellite data or credit card people. These are good a very defined range, maybe it's data that his competitors operators, good capital 3-7% a year. Do you find any lacked. allocators, and people of challenges implementing this integrity. approach to businesses that Finally, we’re looking for a are growing much faster, which G&D: It sounds like there's a good price. We use a 10-year seems to be where you focus time arbitrage component to cash flow model to figure out more? that as well, where a lot of the whether a company’s price is proprietary data is focused on attractive. We realize that just predicting the quarter and predicting anything over 10 not necessarily focused on years is very difficult, so we try “If you need monthly what's going to happen in to be conservative and focus proprietary data to tell three years. on companies that meet our other three criteria – you what's going on AC: You can't figure out what predictable, high-quality can happen three years out by businesses run by good people. three years from now, using proprietary data that's on a monthly basis. If you need When assessing prices, we you've picked a system monthly proprietary data to draw a clear line between tell you what's going on three investment and speculation, that's probably not years from now, you've picked and we seek to avoid predictable over a a system that's probably not speculation. Investors buy predictable over a longer time assets for their future cash longer time horizon.” horizon. flows. Speculators buy assets in hopes of selling them for G&D: You mentioned the better prices to others in the AC: Estimating future earnings four key things you look for: future. Many public market is difficult for both fast-growing predictability, business, people, managers have speculative and slow-growing companies. price. Can you walk us through valuation processes because We focus on the customer those briefly? their price targets depend value proposition, the market significantly on their exit size, and the competitive AC: Absolutely. multiple, which represents the environment of a business to manager’s assessment of what judge whether it is predictable Predictability means that the other investors will be willing or not – both fast-growing and earnings of the company do to pay for an earnings stream slow-growing businesses may not depend significantly on in the future. We use a 10- score favorably on these factors that we know we year model where the exit criteria. In fact, fast-growing cannot predict, like the state of multiple has much less of an companies may be growing the macroeconomy, interest impact on our expected because they offer a rates, foreign exchange rates, returns than the interim cash compelling customer value most regulatory outcomes, flow and the trajectory of proposition in a large, under- most technology change. earnings. We therefore have a penetrated market with limited more stable view of intrinsic competition. Business basically means that value that is based on we're looking for good fundamental factors we can try We know we're not going to businesses, and good to predict, like earnings, be able to predict exactly what businesses have two criteria. instead of speculative factors the numbers are going to be Number one, they provide a we cannot predict, like the exit over long periods of time. We good or service that is going to multiple. can create ranges, but be needed for as far as the eye ultimately what we're looking can see. And number two, they G&D: A lot of those elements for is a huge margin of safety (Continued on page 8) Page 8 Alex Captain, Cat Rock Capital

that is based upon both the up with screens. We might And then, of those seven, two size of the addressable market look at every company that's might make it into the as well as the gap between the growing revenue over 20% a portfolio. value that the company is year. We might look at every The beauty of this method is it providing to its customers and company that is trading at less doesn't rely on looking at the the price that it is assessing for than 10 times cashflow with no portfolios of other investors. It the good or the service. debt or every company that doesn't rely on pitches or has more than 10% Value Investors Club. It really G&D: How do you approach management ownership. Or, doesn't rely on all these idea generation and sourcing standard sourcing techniques given that you have a relatively that others in the industry are lean team, and how do you “… by the time an using that we think are ensure you’re only allocating inherently flawed. Because by your time to the names that idea's being pitched by the time an idea's being pitched really have a chance to make it by someone or it shows up on into the portfolio? someone or it shows up the 13F and so forth, often the opportunity is much less AC: Everyone at Cat Rock on the 13F and so forth, attractive than it had been spends about 50% of their time when it was originally there, sourcing. That's really for two often the opportunity is waiting to be discovered. We reasons. Number one is we much less attractive think that there's a lot of value have to do the work of making to be added by sourcing from sure that the 10 or 15 than it had been when scratch. If you go back and companies that we've invested read about Warren Buffett in are the 10 or 15 best it was originally there, when he was running his possible opportunities that are Partnership, he would go out there. And secondly, we waiting to be through the Moody's manual think that it helps drive that had 10,000 stocks and flip intellectual honesty. If we're discovered.” through it, page by page. This constantly looking at company one-page process opportunities, we can actually we might look at every that we have is our own have more conviction in our company that has a 20%, 10- Moody's manual of stocks that own portfolio because we year total shareholder return. is customized to the factors understand how that portfolio that we find to be most stacks up to the rest of the These screens will give us relevant to determining universe. We think that if hundreds, or thousands, of whether we want to spend you're running a concentrated company one-pagers from all time on opportunity. portfolio like we do, 10 or 15 over the world. We'll go positions, it's possible to through those and we’ll G&D: How do you approach develop tunnel vision. narrow it down to 50 where holding periods and selling? we want to read the annual We source from scratch. report, read the transcripts, go AC: Our 10-year model gives What that means is that we through the analyst us an Internal Rate of Return, have designed a Cat Rock one- presentations on the company or IRR, and we will invest in a pager that has a business and figure out whether that company that meets our description, the capitalization, company meets our four criteria and yields an IRR of the valuation, the management criteria. From those 50, we 15% or better. When a stock ownership, the 10-year total will narrow it down to 15 goes up, the IRR in our model shareholder returns, the 10- where we go out and talk with goes down, all else equal. We year income statement, the management team and dig will sell a position when the cashflow statement, balance even deeper. From those 15, IRR becomes unacceptably low sheet, how the company has there might be seven that go or our research suggests we allocated capital. This one- into a deep private equity due made a mistake in assessing pager can be produced on any diligence process that takes predictability, business, people, ticker. We'll go out and come weeks or months to complete. or price. We do not sell a (Continued on page 9) Page 9 Alex Captain, Cat Rock Capital

stock just because its price cashflow basis. TransDigm was founded over rises, since its intrinsic value 25 years ago and has never had may have grown also, and the G&D: You mention that a full-year decline in EBITDA stock may have a cheaper opportunities are perhaps during that time, even through valuation despite having a better in companies not as September 11th and the Global higher nominal price. susceptive to coronavirus Financial Crisis. The company impacts. One name that you've has significant pricing power, a G&D: What is your view on previously had in the portfolio highly variable cost structure, the current market is TransDigm, which you and one-third of its revenue in environment, given the massive mentioned earlier and have the acyclical defense business. dislocation in the markets over seen its stock price get hit Its management team, led by the past few weeks with hard recently. What are your Chairman Nick Howley and coronavirus? [Editor’s note: this thoughts on them currently? CEO Kevin Stein, is world- interview took place on March class and incredibly 24th.] experienced. TransDigm’s parts are mission-critical and a AC: I think there are many “We think this is a very very small part of its things that are uncertain right interesting and customers’ cost structures, so now with respect to the company earns revenue coronavirus and its effects. attractive environment whenever planes are flying. However, I think a few Coronavirus has caused air propositions are reasonably for value investors traffic to decline precipitously clear at this point. First, this year, possibly as much as coronavirus has created panic looking for deals that 80% in the near-term. in both financial markets and TransDigm’s stock has across society more broadly. look good on a 10-year accordingly been punished Second, coronavirus and the cashflow basis.” severely, falling by more than associated behavioral changes 50% at points this year. will have a massive negative Investors are no doubt impact on the economy in the spooked by leverage of six coming quarters. Finally, it is AC: We continue to own times trailing EBITDA, even quite clear to us that two to TransDigm and we've actually though the company has no three years from now, added significantly to our maintenance covenants and coronavirus is very unlikely to position here. TransDigm fits very strong liquidity. Our view radically change the intrinsic our criteria quite well. The is simple – the current air value of the world's equities. If company sells aerospace parts traffic numbers are abnormal those three propositions are to aircraft manufacturers and temporary, TransDigm has true, there can be some very (‘OEMs’) for new production the capital structure to survive exciting opportunities that are and to airlines and the military this environment, and the created by the coronavirus and for the maintenance of their company is trading at a very the associated behavior aircraft (‘aftermarket’). attractive price on its earnings changes that you're seeing TransDigm derives over 75% in a more normal air traffic right now. That is particularly of its EBITDA from the environment. the case for companies whose aftermarket, which has earnings are not as sensitive to traditionally been stable and Specifically, TransDigm has the types of behavior changes correlated to air traffic. In over $3.4 billion of cash on its that coronavirus will cause and addition, over 75% of the balance sheet, or almost 20% not as sensitive to changes in company’s revenue is derived of its market capitalization, and the macroeconomy that will from parts for which it is the a $760 million revolver, with result from the coronavirus sole-source producer, which no maintenance covenants and response. We think this is a helps drive sustainably no covenants at all on a third very interesting and attractive attractive economics as long as of their revolver. TransDigm environment for value the company delivers high- also has strong cash investors looking for deals that quality parts on time. conversion, with almost 50% of look good on a 10-year EBITDA flowing through to (Continued on page 10) Page 10 Alex Captain, Cat Rock Capital

cash flow even after taxes. a permanent inhibitor to air underscoring the importance Capex is low and working travel, which we don't think it of maintaining our intellectual capital is minimal. With no will be. honesty and ignoring price debt maturities until 2024, the history. company has a really good G&D: When you see such a capitalization to go through a high-quality business like On the other hand, we temporary economic shock or TransDigm selling off over 50% significantly increased our a shock to air travel. Over in a few weeks, what do you position in TransDigm in early time, we think people will attribute that to? 2017 when short sellers return to flying and air travel. If attacked the company and that is the case, then AC: Panic, fear, and market claimed that it was the ‘Valeant TransDigm is incredibly psychology all play an Pharmaceuticals of Aerospace’ attractively priced right now, important role in driving because of its alleged price- trading at just 11x our stocks during periods like this gouging on parts sales to the normalized free cash flow one. Markets become less government. We suspected estimate over the next twelve efficient because investors are the short sellers were wrong months. We think TransDigm not behaving like rational because TransDigm’s defense grows intrinsic value 20-30% calculators of long-term business had been roughly flat per year through volumes, intrinsic value. Managers panic over the preceding few years, pricing, margin expansion, and and ‘de-gross’ to avoid larger consistent with the rest of the capital allocation. losses. They sell entire sectors industry – these results were (like aerospace) or factors (like not consistent with triple-digit “Panic, fear, and leverage). They make price increases. Nevertheless, assumptions about how other we hired an aerospace market psychology all managers will react to the consulting firm to analyze all news and try to react more the roughly 200,000 contracts play an important role quickly than their peers. A TransDigm had signed with the large stock price decline itself government over the past in driving stocks during can scare investors into seventeen years to figure out exaggerating the severity of a how much prices were actually periods like this one. company’s problems. rising each year. The results Markets become less It may be perfectly rational for showed that TransDigm’s mid- investors to sell stocks whose high single digit price increases efficient because earnings prospects have were consistent with those of deteriorated significantly peers. We increased our investors are not because of a macroeconomic position further and shared the shock like coronavirus. We results of this research with behaving like rational need to remain rational and the short-sellers, the company, intellectually honest to decide its top shareholders, the calculators of long-term whether to buy, hold, or sell Defense Logistics Agency, the intrinsic value.” after a stock price decline. Office of Inspector General, and several members of We certainly will sell a stock at Congress. Ultimately, the short a loss if we discover that we interest fell significantly and Insiders on the board have have made a mistake. In 2015, TransDigm’s stock made a bought about $230 million of we bought a meaningful strong recovery. stock at about $450 per share. position in the global cable That happened a couple of operator Altice at €27 per weeks ago, and the stock is share, discovered that there G&D: That’s a great example currently trading at about $330 were issues in both our of your differentiated research per share. Notwithstanding modeling and our research, process and investment that, the IRRs are more and sold it a few months later philosophy coming to fruition. attractive now than they ever at around €17 per share. The Could you walk us through a have been if you assume stock ultimately fell to €6 per current high-conviction idea coronavirus is not going to be share over the next two years, you have in the portfolio? (Continued on page 11) Page 11 Alex Captain, Cat Rock Capital

time. Penetration is about 13% revenue, generally with market AC: Sure – let’s walk through across JET’s markets, when the share that is 3-20x the size of JustEatTakeaway.com (or Netherlands, UK, and China its next largest competitor. JET “JET”), which is our largest are at 25-30% already. Order benefits from network effects position. JET is an online frequency is about once per in these markets, where platform that consumers can month, compared to 30 consumers want to join the use to order food for delivery dinners and 90 total meals. platform with the greatest from restaurants. The food can Order frequency has already selection of restaurants, and either be delivered by the reached 2-5x per month in restaurants want to join the restaurant or by JET. JET earns markets around the world, platform that offers the revenue by charging including China, Kuwait, Korea, greatest amount of order restaurants a commission and New York. Commissions volume. High relative market ranging from 10-30% and a are currently at 17% but can share also drives marketing delivery fee to the consumer go as high as 30%, with efficiencies that are difficult to when JET delivers an order. restaurants earning more than overcome by smaller players. JET owns online food delivery 40% gross margins on the food Eating is a recurring activity, businesses in 23 countries they sell through these and customers stick to the around the world with an platforms. JET revenue would platform because they are addressable population of 450 increase 8-fold if penetration familiar with the offering, it has million people. JET is the clear reaches 25%, order frequency stored their old orders, and it market leader in countries increases to 2.5x per month, has stored their payment representing over 90% of its and commissions rise to 25%. information. JET also has revenue, including the UK, All these metrics have already pricing power because of the Germany, Netherlands, been achieved in other significant value they deliver Canada, Spain, Italy, Ireland, markets around the world, and for restaurants – restaurants Poland, Israel, and Brazil. At they continue to increase. earn over 40% gross margins about €63 per share, JET has We think JET is a high-quality on orders, while paying an an enterprise value of about business with strong network average commission of 17%. €9.5 billion, and we expect the effects, highly recurring There has been little or no company to generate about €2 revenue, pricing power, strong historical sensitivity to billion of revenue in 2020. Our unit economics, and proven commission changes. Finally, thesis is simple – JET is a high- profitability. JET is the clear JET has great unit economics. quality business with massive market leader in markets About two-thirds of revenue growth potential and excellent representing over 90% of its comes from the marketplace management trading at an business where restaurants do attractive valuation. their own delivery, and gross margins in this business are Let’s start with growth. Global 90%. R&D and sales and online food delivery “We think marketing costs are minimal if penetration is low-single digits, JustEatTakeaway.com you are not investing in which provides tremendous growth. The online food headroom for growth. JET is a high-quality delivery business has already grew revenue about 40% proven its profitability in organically in 2018 and about business with strong markets around the world, 30% organically in 2019. We with the UK, Netherlands, think that the company will network effects, highly Sweden, Finland, and Turkey all achieving EBITDA margins of continue to grow for a long recurring revenue, time. Revenue is calculated by over 50% in the last few years. multiplying population by pricing power, strong penetration by order Management is excellent and frequency by average order unit economics, and highly aligned with value by average commissions. shareholders. CEO Jitse Groen Penetration, order frequency, proven profitability.” started the company in his and average commissions can basement about 20 years ago increase substantially over and continues to own 11% of (Continued on page 12) Page 12 Alex Captain, Cat Rock Capital

the company. The rest of the competitive bloodbath, but we negotiating power with the management team is very think JET’s markets in Europe online platforms and drive less capable and highly are structurally different. We attractive economics. experienced, in many cases think the situation is having started online food comparable to that of Orbitz Finally, the US market has a delivery businesses of their and Booking.com – both lower share of restaurants that own. The company has proven companies were online travel provide their own delivery, itself to be one of the best agencies, but they had very which means that the online food delivery operators different business mix and platforms must compete to in the world over the past two market structures, which win consumers on the delivery decades, and Jitse’s clever translated to radically different fees instead of selection. The capital allocation has allowed outcomes for shareholders. unit economics of hiring him to build a billion-dollar There are three critical drivers and delivering food are fortune already. Jitse is in his differences between JET’s tough, and European markets early-40s – we think he is just markets and the US online are more attractive because a getting started. food delivery market. much higher share of restaurants provide their own Finally, we think JET has a First, the US online food delivery. highly attractive valuation. JET delivery market has three trades at only 16x our relatively equal players: JET competes primarily against estimate of maintenance free DoorDash, Uber, and UberEats and Deliveroo in its cash flow over the next twelve GrubHub. None of these core European markets. JET months with a revenue growth players benefit from the offers greater selection and rate of 25-30% and significant network effects associated lower average delivery fees additional runway for growth. than its competitors in these We think our 35% markets, and yet it earns a maintenance operating margin profit while its competitors assumption is conservative – “When JET spends on endure significant losses. JET is recall that several important sales and marketing, able to accomplish this feat markets already have because it has much greater meaningfully higher margins they're not spending it relative market share and despite their growth because so many restaurants in investments. In addition, JET to re-acquire a its markets offer their own owns a one-third stake in delivery, driving attractive unit Brazil’s largest online food customer. They’re economics for JET. This delivery operator that is not situation is clearly very captured in its financials. This spending it to add new different than GrubHub’s stake could be worth over 10% customers and thereby predicament in the US. of JET’s market cap and has a clear buyer in Prosus, which is grow the business G&D: Given the fact that a lot the majority owner of the of restaurants have their own Brazilian business. efficiently.” delivery network and that JET has such high relative market G&D: Many investors in the share, they don't have to keep US are probably wary of this with this business. By contrast, spending to re-acquire repeat space given the competitive JET is 3-50x the size of its next customers. The incremental struggles and issues that largest competitor in markets margins must be companies like GrubHub have representing about 90% of extraordinarily high here. faced. What distinguishes the total revenue, so the network competitive dynamics in and scale effects are significant. AC: That's exactly right. One European markets from what of the things that we've we’ve seen here in the US? Second, the US market has a thought about online food disproportionate number of delivery is as the consumer AC: The US online food restaurant chains and QSRs, downloads the app, they start delivery market has been a which have much more making orders and they stick (Continued on page 13) Page 13 Alex Captain, Cat Rock Capital

to the platform that they've right now should increase Evolution trades at about 27x been using because their awareness and usage for online 2020 expected consensus payment information is there, food delivery, just as these earnings with a net cash their historical orders are shutdowns are benefitting position, with revenue and there for repeat orders. They other forms of e-commerce. EBITDA growth in 2019 of know how to navigate the Different countries have 49% and 70%, respectively. platform. They know that the different ‘food cultures’ and platform is going to have the levels of penetration of online Evolution derives 70% of its food that they're looking for. food delivery, but the business from Europe and 30% Therefore, the cohort trajectory in all markets is the of its business from other retention rates in online food same and positive. regions, which include North delivery in Europe are very America, Latin America, and high and attractive, with 80- G&D: Are there any other Asia. The European online 90% cohort retention rates on new additions to the portfolio gaming market was €107 an annual basis. that you’d like to walk us billion last year, of which 25% through? was online. Casino games in That means that when you Europe represent a €9 billion spend sales and marketing, AC: Sure – we invested in a market, of which 24% is now you're not spending it to re- Swedish company called live gaming. Live online gaming, acquire a customer. You're Evolution Gaming late last year which is Evolution’s market, is spending it to add new and have continued to build therefore about €2 billion in customers and thereby grow our position this year. the €107 billion European the business efficiently. Evolution is the leading global provider of live gaming G&D: You mentioned that services to online gaming delivery today globally has low- operators. The games include “When JET spends on single digit penetration. Do roulette, blackjack, baccarat, you have a view on what that and a variety of other casino- sales and marketing, could get to over time? And style games. The company runs are there other cultural factors production studios with live they’re not spending it in Europe that are different dealers, hosts, and croupiers from places like New York – is who can deliver a gaming to re-acquire a there a cultural cap to how experience that feels like a customer. They’re much people will order food physical casino. Consumers delivery as opposed to going like this format because it is spending it to add new out to restaurants and more trustworthy, interactive, socializing? and familiar than playing an customers and thereby online game based on a AC: We think online food computerized random number grow the business delivery is e-commerce for generator. Consumers do not restaurants. The low-single pay more for this superior efficiently.” digit current penetration can experience, so naturally live grow by many multiples as gaming has been rapidly taking more people use the service share from computerized gaming market. Online gaming and those who are using it do online gaming. Gaming is taking share from offline so more often. Consumers are operators pay Evolution a 10- gaming, live online gaming is increasingly getting acclimated 15% share of their gaming taking share from to ordering goods online and revenues to offer Evolution’s computerized online gaming, having them delivered, and games. At about 310 Swedish and Evolution is gaining share online food delivery from Kronor per share, Evolution within live online gaming. The restaurants is clearly has an enterprise value of just markets in North America, benefitting from this trend. over €5 billion with about Latin America, and Asia are €490 million of expected 2020 less penetrated by Evolution The coronavirus-induced revenue and €250 million of and are growing even faster shutdowns occurring globally expected 2020 EBITDA. than the European markets. (Continued on page 14) Page 14 Alex Captain, Cat Rock Capital

think management is excellent Live gaming is difficult to and well-aligned. The track- Online gaming is much more execute. Evolution must record speaks for itself — convenient than traveling to a deliver high-definition streams Evolution has compounded casino, and the current with low-latency and high equity value at 86% per year coronavirus-lockdown is only reliability. It must hire since its IPO in 2015, with accelerating the consumer thousands of employees and earnings growing by a factor of tendency towards online train them to provide an seven. gaming. Evolution is a clear effective streamed casino beneficiary of this trend. experience in the studio We think the upside in the format. Evolution has mastered stock is clear and substantial. G&D: Shifting gears - what the details of this process since Evolution has been growing advice would you give students it was founded in 2006, which earnings between 30% - 80% at Columbia Business School has allowed it to consistently per year over the past five interested in pursuing a career gain market share. Today, years, and we think it can in the investment management Evolution has over 50% market continue to grow earnings at a industry? share in its core European high rate given 2% penetration market and continues to gain in the European gaming market AC: Great question – I do share. Competitors like and even lower penetration in have two pieces of advice that NetEnt and Playtech have built Asia and the US. In the US I think can be helpful. their businesses on simple, specifically, online gaming is computerized games and face only currently offered in New First, approach your job as if an innovator’s dilemma in Jersey and Pennsylvania. you are an entrepreneur shifting their customers over Evolution is operating in both running a business, with your to live gaming. Moreover, live states, but the market could boss as your customer. Your gaming economics depend grow by an order of magnitude business will grow if you can significantly on scale, so in a short period of time if find ways to add more value to entrants face a big barrier to other states follow in their your customer than you success in the market. footsteps and legalize online demand as a price. Invest early Evolution’s Chairman Jens von casino games. Evolution trades in developing a reputation for Bahr is a co-founder and owns at less than 30x earnings and quality and integrity, which is 15% of the company together has a net cash position, so we like building your brand as a with the other co-founder. think the stock is trading at a business. When your customer CEO Martin Carlesund, and very low multiple of its likely complains, handle it like CFO Jacob Kaplan have served earnings a few years in the Costco would, and your since 2016 and executed future. business will grow. admirably during that time. We G&D: Do you view the online Second, embrace the details of gaming population and the the craft. Details often make “Competitors like people who go to the physical the difference between success casino as the same – is there a and failure in investing. When NetEnt and Playtech lot of overlap between those someone says that a stock is have built their two cohorts? cheap, are they using a levered or unlevered metric? What businesses on simple, AC: There is definitely some portion of capex are they overlap but it's actually pretty assuming is growth-related? computerized games hard for us to tell for sure Are they using a normalized what portion of the Evolution tax rate or a realized one? and face an innovator’s user base is going to land- How are they treating finance based casinos as well. In many leases in their free cash flow dilemma in shifting cases throughout Europe, the calculation? Are the company’s people who are playing the supposedly non-recurring add- their customers over to online games don't have access backs actually non-recurring? live gaming.” to a land-based casino in their How are we treating the local area. (Continued on page 15) Page 15 Alex Captain, Cat Rock Capital

convertible debt in the share 10, and I have a great time count? These are some of the with them. I bring the older questions we need to answer ones to the office with me on just to figure out whether a Saturdays and they do their valuation is attractive today homework or play online based on reported numbers. chess while I read up on stocks The conclusion may be simple – we all have a blast! I'm also – the stock is cheap – but the on the board of Greenwich process of arriving at a reliable Academy, which is a girls' answer to that simple question school here in Greenwich. I try may require a lot of detailed to work out every day and play work. Many investors will seek squash whenever I can – I love to avoid that detailed work, the sport, the workout, and which creates opportunity. the competition.

I am an analyst first and G&D: Thank you so much foremost, and I love the Alex – really appreciate you analytical work of investing. taking the time to speak with Warren Buffett built his record us today. by being a great analyst. Do not begrudge the detailed AC: Thank you – I have been work of an analyst – to be a reader of your publication truly successful, I think you for a long time and have need to genuinely enjoy learned from it – keep up the reading the 10-Ks, poring good work! through the financial statements in detail, and conducting the 50th customer call to learn more about a business.

“Approach your job as if you are an entrepreneur running a business… Invest early in developing a reputation for quality and integrity, which is like building your brand.”

G&D: Finally, how do you spend your time outside of work?

AC: I have five kids, all under Page 16

EPAM Systems (NYSE: EPAM) - Long 2020 Pershing Square Challenge - 1st Place

Manas Bajaj Akshay Chawla Amitaabh Sahai [email protected] [email protected] [email protected]

Capitalization Summary Valuation Summary Share Price ($) 192.3 Price / FY19A EPS 35.5x Shares Outstanding 55.2 Price / FY20E EPS 38.3x Market Cap ($ Mn) 10,612.0 Price / COVID-19 Adj. FY20E EPS 29.8x

Manas Bajaj ’21 (+) Debt 25.1 EV / FY19A EBITDA 22.8x (-) Cash & Equivalents (936.6) EV / FY20E EBITDA 25.4x Manas is a 1st year MBA student Enterprise Value 9,700.5 EV / COVID-19 Adj. FY20E EBITDA 19.2x at CBS. He started his career with Credit Suisse in their investment banking team cover- ing consumer and TMT in Asia Investment Thesis: Pacific. He then worked at Recommendation to long EPAM Systems (“EPAM” or the Samara Capital, a buyout and “Company”) with a 3-yr target price of $430 (~24% IRR), led growth equity firm investing in consumer & retail, healthcare, IT by (a) strong growth potential based on robust industry tail- & business services in India. winds and best-in-class service standards, (b) asset-light oper- ating profile, and (c) attractive valuation versus historical lev- els and intrinsic value.

Business Description: EPAM is a best-in-class digital software engineering company that works with clients in building their software capabilities and transforming their UI/UX (user interface / experience). Clients are primarily based in the US and Western Europe (90% of revenue), while employees are primarily based in offshore locations in Eastern Eu- rope (>75% of all employees and India). Underpinned by strong demand for digital software engineering and 90%+ client retention, EPAM has seen rapid organic growth of ~25% CAGR from 2014 – 2019 and 36 consec- utive quarters of 20%+ YoY growth, all while maintaining EBITDA margins between 17-19% and FCF/EBITDA

Akshay Chawla ’21 conversion between 50-60%.

Akshay is a 1st year MBA stu- dent at CBS. He started his Key Investment Factors: career with Deutsche Bank in Core addressable market sized at $150 Bn and growing at 13% annually led by strong structural their investment banking team covering Diversified Industrials tailwinds sector. He then worked at • EPAM operates exclusively in the digital IT services industry, Madison India Capital, a growth which includes new-age technologies such as mobile app stage equity fund investing in technology, consumer and development, software enablement, internet-of-things, UI/ business services. UX transformation, and digital IT modernization • Global spend on digital product and platform engineering is sized at $150 Bn and expected to grow at a 13% CAGR over the next 5 years, led by increased demand for digitiza- tion, software-enablement, and UI/UX transformation • Outsourced component is sized at ~$30 Bn and expected to grow faster at 18% CAGR as digital technologies gain greater adoption and outsourcing penetration increases • As a focused and pure-play digital vendor, EPAM has con- sistently taken share from competitors and is well posi- tioned to benefit from the rapid wave of digitization Amitaabh Sahai ’21 Amitaabh is a 1st year MBA EPAM is a market leader with demonstrated abilities to scale student at CBS. Prior to CBS, he and blue-chip client base worked at Baring Private Equity Asia covering buyouts in the • EPAM is the largest pure-play digital IT company globally (3x as global technology and business large as no. 2 player) with a demonstrated ability to scale services sectors. Prior to Baring, • Market position is validated by blue-chip client base consisting of he worked in investment banking at Greenhill & Co. in 120 Fortune 2000 companies and strong client retention (top 5 their M&A team in New York clients average life of 12 years and top 10 clients life of 10 years) and London. • Best-in-class service capabilities is validated by industry analysts (Gartner, Everest, IDC and Zinnov) and client testimonials • Strong service capabilities also illustrated by growing account sizes and increasing average revenue per client (demonstrating increas- ing demand for EPAM’s services from existing clients)

Page 17

EPAM (NYSE: EPAM) - Long

Revenue growth is supported by asset-light operating profile, high ROCE and strong operating metrics • Strong 5-yr revenue growth from 2014 – 2019 of 25.7% CAGR (total) and 25.0% organic CAGR • Revenue growth supplemented by annual pricing increases of 4.2% due to EPAM’s market-leading service delivery capabilities; pricing power has enabled stable gross margins of 37% and EBITDA margins of 18-19% • Asset-light operating profile: (a) minimal capex at 2.3% of revenue (5-yr average), (b) high cash conversion from EBITDA at 58.2% (5-yr average), and (c) high pre-tax ROCE of 51.9% in 2019 (50.6% 5-yr average) and 76.0% tangible pre-tax ROCE • Asset-light operating profile and strong cash generation has resulted in minimal debt requirement ($25 million outstanding) and large cash balance of $936.6 million as of December 2019 • Large cash balance of ~$1 billion provides insulation from COVID–led dislocation in the near term and inorganic growth potential in the medium to long-term

The Street is underestimating EPAM’s current pipeline and growth potential by ~300bps • Demand for EPAM’s services is currently outpacing supply (i.e. EPAM’s ability to hire and staff new employees) by ~300bps • Excess demand is highly related to existing projects at EPAM and provides a pipeline of future revenue, which results in strong growth potential in future years and the ability to maintain recurring 20%+ growth • The street has consistently failed to give credit to this pipeline, and as a result EPAM has con- sistently outperformed street estimates over the last 5 years • We believe that the street continues to under-estimate EPAM’s pipeline and demand, and the Company will therefore continue to outperform estimates going forward

Base Case and Exit Valuation: • Base Financial Case: FY2024 EPS of $13.00 (EPS CAGR of 19.1% from 2019 – 2024) • Exit Assumptions: Exit in December 2023 at 33.0x NTM P/E (based on an intrinsic DCF valuation) • Projected Returns: Exit price of $430 / IRR of 24% / MOIC of 2.2x (unlevered) • Other cases: IRR range of 17.9% - 30.% assuming entry share price between $175—$210 and exit NTM P/E multiples between 30.0x—36.0x. Returns expected to hold across cases with 6.1% in bear case and 38.2% in bull case

Risks and Mitigants: EPAM provides highly differentiated services and inability to maintain a strong talent pipeline would be detrimental to the business • EPAM’s typical cost/FTE is $52k, which is higher than the average but helps them maintain their competitive advantage • The company has had low attrition rates of 12% compared to an industry average of 18-20% over the last 5 years

Large IT players such as Accenture, Cognizant and TCS can deepen their capabilities in the digital space and take EPAM’s market share • Unlike large IT majors, digital product development drives 95%+ of EPAM’s revenue • Large Indian IT majors such as TCS and Cognizant do not have the DNA and culture to drive excellence in software engineering • Companies such as Accenture are highly acquisitive and could look to acquire EPAM to deepen their capabilities

Services-led business could limit ability to drive margin expansion (current GM of 37%) • Focus on digital IT enables pricing power (4.2% 5-yr CAGR in rev/FTE) • EPAM can raise utilizations from 78% to ~80%, which is in line with peers, but it is reinvesting in the business to keep a deep bench, maintain digital expertise and drive high-quality organic growth • 60%+ of SG&A expenses are fixed G&A expenses, which should benefit from operating leverage Page 18

Sysco Corporation (NYSE: SYY) - Long 2020 Pershing Square Challenge - 2nd Place

Michael Weng Kyle Campbell Shaunak Misra, CFA [email protected] [email protected] [email protected]

SYY Price $53.08 Mkt Cap $26,992 2015 2016 2017 2018 2019 2020 52 Wk Hi-Lo $86 / $26 Debt $9,557 Revenue $48,681 $50,367 $55,371 $58,695 $60,303 $54,827 Cash/shr $1.03 Pref. $0 YoY 5% 3% 10% 6% 3% (9%) Bk Val/shr $4.97 Cash $525 EBITDA $2,345 $2,630 $2,844 $3,261 $3,499 $3,054 Tang Bk Val/shr $4.62 Short-term Inv. $15 Margin % 5% 5% 5% 6% 6% 6% Michael Weng ’21 Dil. Shrs. OS 518.5 Ent. Val. $36,009 EPS $2 $2 $2 $3 $4 $3 Float Shrs. 507.4 YoY 5% 10% 22% 22% 16% (11%)

Michael is a 1st year MBA Daily $ Vol (mm) $384.6 EBIT Cov 7.8x Valuation student at CBS. Prior to CBS, he SI (% float) 2% Debt/EBITDA 2.8x TEV/Fwd Sales 0.7x Fwd. P/E 17.1x worked in accounting and credit Div. yield 3.4% TEV/Fwd EBITDA 11.8x P/FCF 17.3x risk consulting for 10 years. Pre- MBA and during his first semes- Recommendation ter, he interned at a fund led by a former MD from Blue Ridge We are recommending a long in Sysco with a 3-year price target of $92, representing 73% upside or 20% IRR. Capital. He will join T. Rowe Price as an intern for summer Business Description 2020. Sysco is the global leader in distributing food products, equipment, and supplies for the food service and hospi- tality industries. The company services over 650,000 customer locations, including restaurants, healthcare, and educational facilities, lodging establishments and other foodservice customers. Sysco commands approximately 16% market share of the U.S. foodservice distribution industry, operating as a business partner for restaurant, leisure, and other client locations through its network of 330 distribution centers in 13 countries and 13,000+ fleet of delivery vehicles.

Our Variant View • SYY’s strong balance sheet ensures survival while under-capitalized competitors buckle under pressure • Once-in-a-lifetime industry consolidation opportunity will enable SYY to capture significant market share.

Thesis Kyle Campbell ’21 1) Massive catalyst for industry capacity consolidation • Sysco has the highest capacity to suffer: With its scale, geographic diversification, and strong bal- Kyle is a 1st year MBA student at CBS. Prior to CBS, he served ance sheet, Sysco has the highest capacity to suffer and ultimately come out ahead of its competition. Our 13 years in the US Air Force. analysis of small to medium sized distributors’ business economics uncovered that many of these compa- Alongside his military service, he nies cannot withstand more than 12 weeks of industry independent case volume declines of 40% or managed his family office, making decisions in equities, bonds, and greater. In comparison, we estimate that Sysco can withstand up to a 77% decline for 30 months, a reflec- real estate. He interned at tion of prudent leverage and superior economics. StackLine Partners during his first semester and accepted a • COVID-19 impacts force weaker distributors to exit: Under-capitalization is common amongst return offer for summer 2020. small to medium sized distributors, many of which have cash balances covering 23 days or less of operat- ing costs. Restaurant closures are making it hard for suppliers to cover fixed costs, with one contact tell- ing us, “This is an extinction level event for these smaller distributors.” With limited cash balances and shrinking access to liquidity, even a small increase in doubtful receivables would cripple these companies.

Shaunak Misra ’21

Shaunak is a 1st year MBA student at CBS and has 5 years experience in public markets and investment banking. Prior to CBS, he worked at a value- focused $4B AUM fund looking at investments across the con- sumer, financial services, and technology industries. He holds a CFA charter and interned at 3G Capital’s Dumont Fund during the semester. He will join • Accelerated market share capture: Sysco stands to be a major beneficiary of capacity consolidation, T. Rowe Price’s London office as capturing additional wallet share from current customers and new market share from washed out com- an intern for summer 2020. petitors. The market punished Sysco as a result of COVID-19, but we believe this is a once-in-a-lifetime opportunity to accelerate share capture and estimate 290 bps of incremental share over the next 5 years. Page 19

Sysco Corporation (SYY US) - Long | 2020 Pershing Square Challenge

2) Sysco will survive and thrive, emerging from the crisis stronger • SYY has a strong balance sheet capable of surviving a prolonged downturn: Assuming zero revenues, full operating costs and no working capital benefit for the next 3 months and only ~70% of FY19 volumes for the remainder of FY20, SYY still has enough cash to survive (as shown in the chart above). If COVID-19 impacts persist for an extended period of time, SYY should have no issue further accessing credit markets, given its current debt is unsecured and there are substantial physical assets on the balance sheet. • National contracts help cover fixed costs: With smaller independent restaurants feeling the most pain, we forecast slower local case volume recovery than the overall industry. We estimate a peak to trough decline of 93%, recovering to a net ~7% decline at the end of our forecast period (Jun ‘24). In such a scenario, SYY’s scale becomes key, leveraging its scale and reach to serve the large chain restaurants that are likely to see a more rapid rebound. • No heroic assumptions needed for Sysco to be a winner: Despite modelling industry volume declines of ~25% in FY20 and assuming SYY merely maintains its current market share within the top 3 distributors—we still see returns in excess of ~20% annual- ly, owing to the large market share gain opportunity that will naturally present itself in this industry shake-out. • Free option on international expansion opportunities: We have not modelled in any benefit from international expansion or future acquisitions. International margins are currently ~1.1% vs ~7.7% margins for the US foodservice operations, implying sufficient headroom to grow once integration efforts are complete. This free option is worth ~$7 in additional value per share if management is successful in expanding margins to just half that of the U.S. operations.

Valuation • Assuming a forward EV/EBITDA multiple of 11x, we derive a 3-year target price of $92 under the base case. We estimate a higher- than-consensus growth in revenues, attributable to market share gain and resultant operating margin expansion from increased pri- vate label penetration and operating leverage. This implies a 73% 3-year investment return, or 20% IRR. • Under a Bear Case scenario, we model ~1% market share capture vs 3% in base case, compressing overall revenues and margins, leading to a 3-year investment return of –30%.

Key Risks • Prolonged impact of COVID-19 could change consumer behavior, reversing a secular shift from in-home eating to food away from home. While certainly negative for the industry overall, we believe SYY’s scale and value proposition provide a competitive advantage that will enable the company to weather the storm. • Amazon Foodservice could disrupt SYY’s traditional distribution model, resulting in lower sales and operating margins. Based on our primary research, we believe the Amazon threat is overstated, with the greatest impact being felt by warehouse club stores. • Regulatory scrutiny over acquisitions could limit SYY’s ability to expand market share moving forward. While certainly a factor to keep in mind, the shakeout from COVID-19 will allow SYY to accelerate market share organically. Page 20

Verisk Analytics (NasdaqGS: VRSK) - Long 2020 Pershing Square Challenge Finalist

Ruth Chen Yi Cheng, CFA Mark Hu, CFA [email protected] [email protected] [email protected]

Share Price $ $180 $160 $140 $120 $100 Ruth Chen ’21 $80 $60 Ruth is a 1st year MBA student $40 at CBS. Prior to CBS, she $20 worked in consulting for biotech $0 & pharmaceutical companies. Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Jan-19 Jan-20 She will be interning with Arti- san Partner's Global Equity Team this summer. Recommendation The recent market selloff provides an opportunity to invest in a high quality compounder. Our investment thesis is threefold: 1) Verisk has a dominant and sustainable economic moat leading to strong pricing power, 2) the company operates in a large and growing total addressable market with potential to cross-sell, and 3) the company’s energy segment is expected to stabilize after recent downturn. We have a price target of $221 for 53% upside/17% IRR.

Business Description Verisk provides mission critical data analytics products to the insurance (71% of revenue), energy (22%), and financial services (7%) industries. In its core insurance segment (“ISO”), Verisk aggregates premiums and claims data from P&C insurance companies, analyzes this data, and calculates expected losses to help insurers price their policies. The company has amassed a dataset over 47 years that is over two times larger than the nearest competitor’s. Verisk sells its insurance products through a recurring subscription model (80%+ of revenue) Yi Cheng ’21 with 3-5 year contracts and retention rates over 95%. The company is the market leader with all of the top Yi is a 1st year MBA student at CBS. Prior to CBS, she worked 100 US P&C insurers as customers. as a sell-side equity research associate at UBS in New York, covering U.S. medical supplies Thesis 1: Dominant Economic Moat and devices equities. She will be Verisk has a significant data advantage, which creates a dominant and sustainable economic moat. The P&C interning at BlackRock Global industry is highly fragmented with the top insurer (State Farm) having less than 10% market share and a long- Allocation Fund for the summer. tail of over 2,500 insurers. Accurately calculating expected losses is important because loss ratio is the biggest driver of insurer profitability. Individual insurers only have information on customers in their book of business and therefore rely on Verisk’s database, which captures over 90% of industry premiums, to price accurately. There is no competitor of scale to Verisk ISO as alternatives are non-profit rating bureaus (AAIS, NCCI) that have significantly less data compared to Verisk. In-sourcing is also often not an option: 1) the cost of using Verisk is only ~2% of an insurer’s operating expenses and 20%-80% less than in-sourcing for most insurers, and 2) insurers do not have the same depth of data that Verisk does. This creates high customer lock-in that allows the company to sustain annual price increases.

Mark Hu ’21 Mark Hu is a 1st year MBA student at CBS. He previously worked in private equity and asset allocation at CPP Invest- ments and ICONIQ Capital. For the summer, he will be interning at Fidelity International UK in equity research.

Thesis 2: Cross-Selling in a Growing Total Addressable Market Verisk has been acquisitive from 2015-2018, growing its addressable market by offering new products to its existing insurance customers. The average number of products an insurance customer uses has increased 40- 70% from 2013 to 2018 and the company has a high win rate for new contracts (50%-75%). M&A and cross- selling will grow Verisk’s total addressable market size and the company’s share of wallet. The total addressa- ble market for Verisk is approximately $1 trillion of gross written premiums in 2019. Verisk’s take rate has grown from 0.07% in 2007 to 0.18% in 2018 and we expect this to grow to 0.28% in 2024 driven by M&A activity and cross-selling.

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Verisk Analytics (NasdaqGS:VRSK) - Long (Continued from previous page)

Thesis 3: Stabilization in Energy Segment There have been market concerns regarding Verisk’s energy segment given the industry headwinds. Verisk’s energy segment consists of Wood Mackenzie, PowerAdvocate, Genscape, and several other specialized businesses. The products are primarily recurring research subscriptions that are sold to energy companies (upstream, downstream, utilities), financial services firms (PE firms, trading firms), and metals/mining companies for financial/strategic planning and fundamental/investment research. Historically, 70% of revenues have come from subscriptions, and it is a sticky product (90%+ retention rates). In the 2015/2016 downturn, with capex spend declining by 41% and oil prices declining 52%, Wood Mackenzie still grew organic revenues in the low single digits (1%) on a constant currency basis. Since then, the company has further diversified its customer base through acquisitions. The PowerAdvocate acquisition expands Verisk’s customer base to utilities and the procurement departments of oil and gas companies seeking to streamline their procurement spend. The Genscape acquisition expands the customer base to commodity hedge funds and trading firms seeking real-time data on inventories/commodity movements. Verisk’s energy business today offers a sticky subscription product to a diverse set of customers, which is a mitigant to the headwinds faced by the upstream energy sector.

Valuation Verisk currently trades at a multiple (20.1x forward EV/EBITDA) slightly above a comp set of data analytics/information services comps (~17x forward EV/EBITDA). However, we believe Verisk is a fundamentally better business that merits its premium multiple. First, Verisk operates in a more attractive end market and offers a unique value proposition to customers. This has allowed the company to drive faster growth than the comps (5.5% organic versus comps around 3-4%) and resulted in stable organic revenue growth during the last economic downturn (~9.2% organic versus comps between –2% and 5%). Second, a higher percentage of Verisk’s revenues come from sticky and recurring subscriptions (~80% versus comps between 50%-80%). Third, Verisk’s data sources for the core ISO business are proprietary (i.e. directly from insurers), while comps rely on both proprietary and publicly scraped data. Publicly scraped data invites more competition and Verisk’s insurance margins are substantially higher than the comps’ (54% versus 20%-42%). Finally, while the company trades at a high valuation relative to historical levels, the multiple is justified by improved fundamentals in the insurance end market. Both US P&C premium growth and pricing growth have accelerated to mid-high single digits in 2019 after the catastrophe events in 2016/2017. This should be a tailwind for Verisk’s customers and allow the company to continue driving price increases/cross-selling. We have a base case target of $221 and believe the fan of outcomes (bear/base/bull) is highly attractive. Bear Base Bull

2022E NTM EBITDA $1.41B $1.79B $1.87B

NTM EV/EBITDA Multiple 15x 21x 23x

2022E Enterprise Value $21.1B $37.5B $43.0B

2022E Net Debt and Leases ($3.0B) ($2.6B) ($2.6B)

2022E Market Cap. $18.1B $34.9B $40.4B

Shares O/S 164.9M 164.3M 164.2M

2022E Target Price / IRR $113 (-8.5%) $221 (17.0%) $254 (23.2%)

Key Risks and Mitigants 1. There can be potential disruption from insurtech players. However, Verisk’s insurer customers have very high switching costs. From our VAR calls, any potential switch would involve a costly multi-year transition in which an insurer needs to pay for two providers (legacy and new) to reconcile model input/outputs. Furthermore, Verisk’s core ISO database was developed over 47 years and man- agement estimates that it would take at least 20 years for a new entrant to amass a dataset comparable to Verisk’s. 2. Verisk has been paying high prices on recent acquisitions, driving down ROIC. Despite high purchase prices, recent large acquisitions are high quality businesses: proprietary data sets, subscription model with high retention rates, embedded into workflows, and access to new customers. Increased cross-selling can increase returns on assets over time. The company has been able to drive meaningfully higher ROICs for its acquisitions historically: the AIR acquisition grew ROIC from 15% in 2005 to 31% by 2017. The Xactware acqui- sition grew ROIC from 12% in 2009 to 27% by 2017. Page 22 Mountaineer Partners Management

Cum Laude, from Harvard Graham & Doddsville phy that we had at those two College. (G&D): How did you get your funds - we're looking for com- panies that are going through Mark Lee start in investing? John Hallowell is a Princi- fundamental changes. So we're pal and Assistant Portfolio ML: I joined Contrarian Capi- looking for companies that are John Hallowell Manager for Mountaineer tal in 1999. When I joined, it going through cyclical changes, Partners Management, was a smaller firm than it is or secular changes, or some Greg Williams LLC. From 2005 until leav- now. Contrarian, right now, is type of hard event or financial ing to launch Mountaineer, a $4-5 billion hedge fund fo- change. It's our view that a lot John was a Senior Vice cused primarily on distressed of backward-looking analysis President and Analyst at debt. When I joined it was a has been automated at this Contrarian Capital Man- much smaller firm and I point, so you really need to agement, a multi-billion worked directly for the found- find companies that fundamen- dollar hedge fund, where ers Jon Bauer, Janice Stanton, tally look different in the future he worked with Mark Lee. and Gil Tenzer. I was there for than they have in the past. From 2003 to 2005, John quite a long time - until the was an Analyst in the Pri- end of 2011. And John was And we think the types of vate Equity Division of there for five years with me. changes we are looking for Lehman Brothers and be- We've worked together quite mark the turning points in a gan his career in 2002 as a a long time. company's evolution. If you Junior Analyst in the High look at cyclical changes, we're Yield Department at Bear G&D: Did you have any men- looking for supply and demand Stearns. John received a tors early on who shaped how and imbalances within an in- BA from Georgetown Uni- you think about investing? dustry - bottlenecks in produc- versity. tion or overhangs in capacity. ML: As far as mentors go, I We find that people underesti- would say Jon Bauer, who's the mate pricing power around Greg Williams is an Ana- managing partner at Contrari- those inflection points. With lyst for Mountaineer Part- an, has been the greatest influ- secular changes, we're looking ners Management, LLC. ence on me. He taught me for long-term shifts to how From 2011 to 2014, Greg about company analysis, but he goods or service are delivered. worked at Symphony As- also helped really frame how We're looking for really long- set Management, where he to think about investing. He term changes in how business- was an Analyst supporting always used to say, "Worry es are operated. Those kinds absolute return products about the downside and put of changes are hard to find and investing across the capital yourself in a position to get can get rapidly priced in, so it's structure. From 2007 to lucky." That shapes how we a lot of digging through food 2009, Greg was a Senior think about asymmetry, and chains of companies, trying to Associate at Stanford Man- how we think about both the find underappreciated compa- agement Company amount of downside compared nies that have exposure to (Stanford University En- to the amount of upside, as those second order changes. dowment) focused on real well as the probability of the For hard events our two favor- assets. He began his career downside, compared to the ites are financial distress and as an Analyst in the Equity probability of the upside. spin-offs. We've been investing Capital Markets group at in distressed and spin-offs for a Banc of America in 2006. When I was at Contrarian, I well over a decade now, and Greg received an MBA ran two different funds for those two areas continue to be from Stanford University them. I started the Contrarian incredibly fruitful for us. and a BA from Yale Uni- Long Short Fund and ran that versity. for eight years before I left. I think everyone comes with a For two years before leaving, I predisposed view on investing; Editor’s Note: This interview also ran the Contrarian Dis- for me it was really learning took place on March 24th, tressed Equity Fund. Moun- how to deal with incomplete 2020. taineer Partners invests with information. I started out as a the same investment philoso- private equity investor, and as (Continued on page 23) Page 23 Mountaineer Partners Management

a private equity investor you bit of equity. Our insight was cured recovery. That one have enormous access to in- that your deficiency claim was worked out great for us, and it formation. In the public mar- not just the amount that your helps demonstrate how we kets, you have a lot less infor- bond wasn't paid, but also the think about downside and our mation. A lot of how my in- amount that the junior bond idea that it's not necessary to vesting has changed over time and the equity had contributed know exactly how much up- is, learning what information is in the structure. People were side you have, if you can quan- important, how much infor- dramatically underestimating tify the downside. mation is important, and how the size of the deficiency claim. to really streamline the pro- And if you did your math right, G&D: Tell us about your deci- cess to focus on the things that it was pretty easy to see that sion to start Mountaineer Part- matter quickly and ignore the you are going to get close to ners noise. Some of that is digging for information and a lot of ML: I'd always wanted to start that is eliminating opportuni- “...it helps demonstrate my own hedge fund. I had a lot ties where you'll never get to a of freedom at Contrarian, but suitable conclusion. I think how we think about there's nothing like doing it on we've gotten much better at your own. The timing was real- looking at situations, knowing downside and our idea ly driven by having the oppor- what is important and what that it's not necessary tunity to do it right. Starting a isn’t, and digging for that infor- hedge fund now demands a lot mation quickly. to know exactly how of infrastructure, and a lot of time to do the fundraising, and G&D: Could you walk us much upside you have, build up to scale. And so it was through an example of an early really when I thought I had investment? if you can quantify the enough resources to give our- selves a legitimate chance. ML: When I was at Contrari- downside.” That's when I left. And John an, I was leading an unofficial joined me, we left together to creditors committee for an par, at least, on the recovery start Mountaineer. Enhanced Equipment Trust of those bonds. The other Certificate in Northwest Air- insight we had was that if you JH: One of the things about lines. This was essentially a had your claim recognized by Mountaineer that is probably securitized structure that the court immediately, you very unique in today's world is owned a number of airplanes could then turn around and that we were an old-fashioned when Northwest Airlines was sell your unsecured claim ra- hedge fund startup. When bankrupt. The two insights we ther than waiting for the bank- Mark asked me to go with him had there that were variant ruptcy process to be resolved. and leave Contrarian, we didn't from the market were that the In the end, we were able to have seed funding in place at deficiency claim would be make a 50% return in six the time. We left and started much higher than people ex- months. with friends and family money, pected, and that you could our money, and then all the receive your recovery much Now going back to thinking main partners of Contrarian faster than the marketplace about downside, I spent a lot Capital invested and we start- was expecting. We were the of time calling used plane bro- ed with that small base. It was first people to really push a kers and asking them what the really Mark's substantial per- restructuring of these certifi- liquidation value of these air- sonal commitment to starting cates like this. The basic notion craft were. The broker would Mountaineer that gave it the is that, you own the airplanes tell me, "I think the planes are chance to succeed. So, we so you have asset value in the worth X." It was pretty clear started day one, despite having airplanes. We were buying that the planes were worth a small amount of capital, with bonds at 70 cents on the dol- pretty much what we were an institutional infrastructure lar. Those bonds were senior paying for the bond, and we with analysts and employees in the structure, and there was were getting a chance to get a that we needed to be a success also a junior bond and a little chunk of upside on the unse- from the start. As a result, (Continued on page 24) Page 24 Mountaineer Partners Management

we’ve been able to grow our tions where operating compa- in distressed were the oil crisis AUM up to around 150 million nies and physical assets are and Pacific Gas. We did own to date with two great anchor separated, and at times of some Pacific Gas bonds briefly, partners. stress, both the physical asset but they rebounded quickly after the company filed for JH: And then regarding align- bankruptcy, and the over- ment of incentives, I think “Our comprehensive whelming best risk-reward Mountaineer is unique because view of a company’s then was in the equity of an- of its culture. Mark has made a other company, Clearway. point of implementing a culture capital structure, which of honesty and rigorous analy- In the oil crisis, we researched sis, and when you're looking at many others generally many different high-yield and special situations and dis- distressed oil bonds. And we tressed investment opportuni- do not incorporate, is concluded that the opportuni- ties, things can change on a fly. ties were better in the equity And you have to be able to say key to our investment markets than in the debt mar- we need to stop, and that's process and sets us kets during the oil crisis. We hard to do. And you really wanted companies that had the need to have a level of honesty apart.” ability to weather low oil pric- and trust with each other to es for a while without having be able to do that. And be- entity and the operating com- to restructure. In the restruc- cause of Mark really stressing pany entity sell off at compara- turing process, there's a lot of that culture, I think that's why ble rates. But risk and upside leakage for fees and also as a we're able to be successful. are substantially different be- company enters distress, tween the two. Our compre- there's a chance that as an GW: Also, versus a lot of my hensive view of a company’s unsecured bondholder, you friends in the industry and the capital structure, which many can be pushed down the capi- prior places that I worked, I others generally do not incor- tal structure as DIPs come in think the intersection of debt porate, is key to our invest- or second liens come in, or and equity that we have at ment process and sets us other securities. So, we didn't Mountaineer differentiates us. apart. want to take that kind of risk. We all come from a back- And we wanted liquidity. ground of substantial debt in- G&D: Given your back- We’re very aware that com- vesting, and as a result are very grounds in debt investing, what modities move very quickly focused on dimensioning and is the typical debt/equity com- and you don't want to be understanding the downside. position of Mountaineer’s trapped in the security, want- That focus as well as under- book? ing to sell it for months and standing convoluted cap struc- being unable to sell it. You tures results in a pretty differ- ML: Prior to starting Moun- want to be able to turn around entiated book. We get in- taineer when we were at Con- and sell when you want to. volved in a lot of situations trarian, about half of what we We knew we could do that that peers generally steer away did was equity and half of what with the equities that were from or outright ignore. And we did was debt. When we buying, and we weren't as con- that that generates a lot of started Mountaineer, it was fident that we could do that opportunities and creative after the financial crisis (we with the bonds. thinking. We’ve had prior ex- launched in early 2012) and periences where I think equity there really wasn't and hasn't All of those things led us to markets did not understand been much distressed debt for invest in equities during the oil bankruptcy-remote debt, and us to do. So, we’ve purchased downturn, not distressed debt. so thought certain subsidiaries one or two bonds since start- We looked at a lot of dis- could tank a company. And ing Mountaineer. Until recent- tressed debt during the oil without being able to diligence ly, there haven't been many downturn, but we ultimately the debt, you wouldn’t know good opportunities to be in- decided that equities are bet- that it was actually bankruptcy- vested in distressed. The only ter risk reward at that time. remote. You also see situa- two big opportunities to invest We tend to be very agnostic (Continued on page 25) Page 25 Mountaineer Partners Management

about what part of the capital spend time on things that will structure we're buying. We're GW: It is also helpful that we not be fruitful. very aware of how they trade all have substantial experience differently and what the risks reading and even originating Three areas of focus when are. We take all that into ac- new credit docs. In oil and gas, we're starting analysis are count when we do our analy- there were a lot of weak docu- asymmetry, safety and analyza- sis, but we'll look through a ments that if things muddled bility. Asymmetry is pretty whole capital structure when along you could get primed, straightforward, and safety I we need to, to find the posi- and there are grey areas on think is pretty straightforward. tion that we like best. the security side that are very A situation is analyzable when state by state driven. When I a small number of factors will We're anticipating a better say security, I mean whether drive the outcome of an in- distressed market going for- or not you have a perfected vestment and we are able to ward, and we've been looking lien in the underlying assets research and have an opinion at a lot of the distressed situa- and how that evolves as you on those factors. tions, but we're still finding drill out a field. It is not auto- better opportunities in the matically clear that you would Then as we start to dig fur- equity market right now. have a perfected lien in holes ther, we're really focused on We're hopeful that we'll find drilled after documents are trying to figure out how much better distressed opportuni- signed and UCCs are filed. downside there is in a position ties. Given that the spreads are There are also critical ques- and the probability of the blowing out and we'll be in a tions about what agreements downside. The downside esti- recession for at least a number could survive bankruptcy like mates drive our position sizing. of months, there should be prior royalty deals. You need a Our largest positions are not lot of feet on the ground to the ones that necessarily have really do the proper deep most upside, but are the ones “We're anticipating a work there. And so that is a that we think have the lowest better distressed market nuance that you don't neces- downside and the lowest prof- sarily have in some of the oth- itability of downside. going forward, and er distressed scenarios that also made us a little more ap- G&D: On the analyzability we've been looking at a prehensive looking at the debt point, does that mean you tend side. to avoid with heavy macro or lot of the distressed commodity exposure? G&D: Can you describe the situations, but we're investment process you follow ML: If we think we can have a still finding better at Mountaineer? legitimate opinion on a com- modity or a macro point, we opportunities in the ML: In terms of idea sourcing, will take a position, but we we're looking for those secular only tend to invest in those equity market right changes, those cyclical changes, types of situations when and those financial changes. they're really dislocated. For now.” When we find things that meet instance, we typically don't those criteria, that's when we have much oil exposure, but more to look at. Whether or start getting interested in the during the downturn a couple not it becomes very interest- industry. For hard events, we'll of years ago we had a big ing, we'll just have to wait and actively look through compa- chunk of oil exposure. When see. We love distressed debt; nies that are doing spin-offs, we think things become analyz- it's probably our single favorite and companies that are going able, we'll be in those indus- type of investment. But we're to financial distress or some tries, but they're not industries not going to force it. We're other types of abrupt hard that we'll run with constantly. going to do it when it's there financial changes. I think the and when it's good, and we're key to the idea process, for us, G&D: Do you have hurdle not going to do it when it's is being able to evaluate ideas rate or risk-reward skew that not. quickly. Our goal is to not you look for in an investment? (Continued on page 26) Page 26 Mountaineer Partners Management

stock is appreciating. Some- some very good store comps. ML: It manifests itself in posi- times we have situations If it survived, it would go up tion sizing. Our core positions where a stock's outrunning a multiples. But there was no will be 4-6% of the fund at ini- thesis and we'll start to exit way to really diligence what tiation. For those we're look- the position, and then there'll was driving comps, and say ing for 50% or greater upside be times where the thesis is with certainty that those over a two-year period with evolving exactly as we hope, would continue. So you had no more than 25% downside, and the stock price will be a kind of a one down, six up and we'd like to be right 70% trailing, and then we will be scenario with a very difficult of the time. Then we have po- holding it or increasing the probability of downside to sitions that we call outsize position size. predict. positions, which we'll initiate at 8% or bigger. There we're G&D: What causes a specula- G&D: Can you share some looking for 30% upside of or tive position situation to arise, thoughts on quantifying down- greater over two-year period. is it just because the downside side and how you’ve navigated The key to those positions is is based on something that is today’s Covid-19 world? that we're looking for no more unknowable? [Reminder: interview conducted than 10% downside, and we'd on March 27th]. like to have a 90% hit rate with ML: Sometimes there are bi- those. And then finally, we nary things that occur in a ML: At the beginning of the have speculative positions, and bankruptcy or in a legal pro- year, valuations were high. We we're really looking for posi- cess. Sometimes there's just a didn't feel like we needed to tions that could go up multi- level of due diligence that you be leaning into that at all. ples - two, three times. Realis- can't achieve to get a higher We're usually 45 to 75% net, tically you can't have a hit rate likelihood of success on the and we came into the year at of more than 50% in something probability side. Those are the the very low end of that range. like that. Those tend to be types of situations that arise. When we saw the virus hitting much smaller, no more than So, for instance, there was in China, we pulled back a little 2% of the fund at initiation. once a retail company that we more based on how we were thought could file for bank- thinking about the future’s G&D: How do you think ruptcy, but that was showing prospects. Then when the vi- about when to sell? rus hit Italy, we started reduc- ing net exposure further. We ML: When we go into an in- “We are actually quite got down to less than 10% net, vestment, we'll talk about both and now we're about 40. In 16 the timeline and the price for bullish on a number of years of managing money, the exiting. Then we'll also talk names right now. And last time net exposure was about what would confirm or that low was before the finan- refute our thesis. So we go if you have the view cial crisis. into an investment with a roadmap of how we hope it that we will emerge We are actually quite bullish plays out. We are flexible in on a number of names right that sometimes positions from a quarantine or now. And if you have the view evolve better than you ex- that we will emerge from a pected, so you can't just ad- social distancing within quarantine or social distancing here to a strict price target. a two-quarter period, within a two-quarter period, But what we have no tolerance there are companies that we for is thesis drift. If the thesis there are companies know well that are priced as if breaks, we get out as fast as they will go bankrupt. So if you we can. that we know well that can do a bit of work on their liquidity, on their prospective As far as on the upside, it's are priced as if they will cash flows, even under the dire really an interplay between situation that we're in now, how rapidly the thesis is play- go bankrupt.” and have the view that they ing out and how rapidly the survive, these companies (Continued on page 27) Page 27 Mountaineer Partners Management

would go up two to three there'll be a reasonably rapid times in value. Some of them recovery coming out of this, G&D: How do you approach are small mid cap companies and that valuations and earn- hedging? that we've known for a while, ings will recover pretty quickly. and some of them are things ML: We're directionally short, like Boeing. Boeing was essen- G&D: How do you think single name securities. There tially trading as if it was going about trying to time the bot- will be times when we'll be to have a massive liquidity tom amid all the market vola- using derivatives, but our goal problem. And now, in just a tility? is to be directionally short matter of days, it's gone up stocks that we think will be 70% in a one week session. ML: There are many different return generating. We're not answers to that question, but big fans of pair trading. We We think that in this type of what really drove us to buy think it's a really good way to environment you can find high were compelling valuations in convince yourself you don't quality companies with very things that we were familiar have risk and it introduces an good market positions, that with. For instance, there is a enormous amount of basis risk will survive and that have the materials company that we into your portfolio. We tend opportunity to go up two or think the equity's worth north not to pair trade. We prefer three times in value. While it of $20 that's in a very, very to look for things that we think can be difficult given the ex- good market position, and that are going to make us money treme volatility, we actually stock was down in the low on the short side. think it's a good time to deploy single digits. If we think that capital. company will survive, from its G&D: How do you think current stock price it's going about shorts in the context of We are believers that there'll to be a double or triple pretty your focus on downside pro- be some resolution and that it easily. And it's those types of tection for longs? may take a couple quarters, valuations that really got us but on the backside of that, interested in getting longer ML: Shorts are tricky because you're going to have an econo- again. With the valuations we you're kind of inverted on that. my that went into a recession were seeing there wasn't a lot We manage that by keeping with no fundamental, real is- of room for them to move on our short position smaller. sues. We had some bubbles in the downside, given the quality You need to have room for venture valuations. We had of the company, and they had your shorts to go against you a high valuation in terms of the an enormous amount of up- little bit. Our short positions equity market, but we didn't side. are half the size of our long have any structural problems positions, and we don't do in the economy. We didn't There are some other indica- things that we’ve characterized have rapid inflation. We didn't tors we look at for a market as speculative shorting. We try have financial institutions with bottom. Some of those things to avoid valuation driven issues. We had a solid econo- were satisfied. Some of them shorts. We're really looking my that was humming along have not been satisfied. for things that have supply when we went a recession. So There's absolute stock levels overhangs that are developing, coming out you'll have an that we would be interested in secular stories working against economy that's been damaged, and just flat out being as long them, those kinds of shorts, obviously, by a multi-month as possible. We haven't hit rather than looking at things shut down. You'll have some those levels yet. We may not that are overpriced, which we destruction or balance sheet hit those levels. We may, we find to be a dangerous way to damage done, both to personal may not. We were looking for short. balance sheets and to corpo- the correlation to breakdown rate balance sheets, but you'll in the marketplace. We want- JH: You have to trade them a also have 0% interest rates that ed to see some stocks go up, little bit more, in addition to will exist into the foreseeable and some stocks go down, and keeping them smaller. You future, and you will have had a that hadn't been the case for have be willing to just recog- multi-trillion dollar stimulus over a month - the entire mar- nize that the market is going package. We think that ket sold off. (Continued on page 28) Page 28 Mountaineer Partners Management

against you and get out of it, or ject level debt for the projects and two when PCG comes out when it's successful you've got of bankruptcy, the dividend will to cover and take your profits. go back up to where it was An example there that we've “...we looked through before, and even under the looked at in several industries, depressed valuations that exist just structurally, is certain in- all the different Pacific in the marketplace now for dustries supply chunks come their competitors, there's on in meaningful amounts. And Gas securities, and we more than 40% upside in the there are times that securities looked at other stock just from comp valua- don't reflect those new, mean- tions right now, without a nor- ingful amounts of supply hitting companies that were malization in the marketplace. the market. And you can take If the market normalizes, the a short position ahead of that getting hit because of stock is almost a double from supply hitting the market, and current trading prices, just then cover as it comes in. And the Pacific Gas south of $20. And mind you, we've done that with a number we were buying the stock at bankruptcy. After of names. $15 a year ago. In the case that doing that review we the power contracts are re- G&D: Can you talk about an jected, which we think is highly idea you are excited about decided the Clearway unlikely, Clearway would get right now? an unsecured claim in the Pa- equity offered the best cific Gas bankruptcy, and be- ML: Our biggest position is in cause of the size of that claim, a company called Clearway, risk-reward.” we think that the company which is an independent power would be no worse off than if producer that produces elec- that were supplying electricity those contracts were renewed tricity. It has a lot of renewable into Pacific Gas. Pacific Gas on a cash-flow basis. energy capacity, so a lot of was and continues to perform solar and wind. It's a company on those contracts, so Clear- Then in order to get to our that we found through the way is getting paid, but because downside scenario of mid- Pacific Gas bankruptcy. We of the technical default, the teens, the harshest assumption had been following Pacific Gas cash that they're generating at was that the Company would for over a year when it filed those projects is trapped at get a 50-cent recovery on for bankruptcy. We hadn't the project level. As a result, those unsecured claims; how- been involved with Pacific Gas, they weren't able to fund their ever it's pretty clear that those as we didn't think the risk– dividend, so they had to cut it. unsecured claims are worth reward was very appealing, but That caused the stock to drop par right now. After really when Pacific Gas filed for 40%. punishing our downside sce- bankruptcy, we looked nario, we thought we came to through all the different Pacific In an extreme downside sce- a stock price that was higher Gas securities, and we looked nario, we thought the stock than where it was trading, at at other companies that were was worth $16-17. At that only a dollar or two lower getting hit because of the Pacif- time the stock was trading at than where it's trading right ic Gas bankruptcy. After doing $15, so we thought it had way now. That's what really drove that review we decided the overshot even a horrible the additional sizing of the po- Clearway equity offered the downside scenario. We sition, and we think it's still best risk-reward. bought it, and because of the one of the best risks-rewards downside protection, it was in the marketplace. Clearway sells about a quarter and is our largest position at of its generating capacity into this point. G&D: Do you think forced Pacific Gas. As a result of that, selling due to the dividend can- the company had to cut its The analysis on that is twofold: cellation was what caused the dividend because the bankrupt- One, we don't think that the initial 40% sell-off or more cy at Pacific Gas created a power contracts will be reject- fundamental concerns? technical default on their pro- ed in the bankruptcy process, (Continued on page 29) Page 29 Mountaineer Partners Management

ML: They're fine on cash flow had made a strong commit- cashflow loss was, but you and liquidity. I think that it's ment to renewable power, and couldn't dimension the claim owned by income driven funds it seems very unlikely that they that you would get. And since and as they cut the dividend, it would blame the California was punted out by the retail forest fires on global warming investors or long-only vehicles and then turn around and re- “...California has put that are in it for dividends. ject renewable power con- tracts and embrace natural gas regulations into place GW: It's also worth noting, or coal. saying they need to be we've talked to a lot of people who have been and continue GW: Also, in a standard bank- at 100% zero-carbon by to be involved in PG&E, and I ruptcy, as you all know, the think there was a lack of company has the right to reject 2045 and there are awareness on how analyzable contracts and correspondingly Clearway was. Clearway has create deficiency claims against interim goals that they private contracts with PG&E the estate. Rejection is based and their other buyers, and on business judgment, and have as well. In order to PG&E isn’t going to give them there's a lot of deference pro- to you, but if you go to the vided to management in that reach those metrics, we Public Utilities Commission, process. What was unique didn't think it would be you can acquire all those con- here is that PG&E, while being tracts via effectively Freedom the legal counterparty, actually possible for them to of Information Act requests. takes no monetary risk on We got all the contracts, and these contracts. By statute in walk away from these went through each contract to California the contracts are build up what the claim was, 100% pass through to custom- contracts.” and to really understand what ers as a result of the Enron all those underlying cash flows crisis California dealt with 20 all of these projects have debt were, and that was a level of years ago. So there's strong associated with them, it was work I think most people were reason to believe that even if unclear to the average investor unaware you could actually do. PG&E attempted to cancel if you could hold onto those these contracts in court, that projects in a cancellation sce- G&D: What motivation would the judge would disallow that. nario. Would you receive Pacific Gas have to reject the The judge himself even laid out enough in a claim value to pay contracts? this logic in an adversary pro- off the debt? Our analysis was, ceeding that basically made generally speaking, you would ML: California has put regula- clear to PG&E that he probably actually receive more than tions into place saying they would not let them cancel enough cash to pay off the need to be at 100% zero- these contracts if they tried. debt. carbon by 2045 and there are And that's relatively unique in interim goals that they have as bankruptcy. If they cancel G&D: When do you expect a well. In order to reach those these contracts, no cashflow resolution of the PCG bank- metrics, we didn't think it or EBITDA improvement ruptcy that will allow your would be possible for them to would be achieved at the com- thesis to play out? walk away from these con- pany, but a material claim tracts. In our downside scenar- would attach to the company’s ML: June 30th is when they io, we assumed that they estate. And so that's why it required the bankruptcy to be would re-contract these re- probably would not pass the resolved. The disclosure state- newable energy plants at mar- business judgment test. ment was just approved by the ket pricing and they would get court. It's getting mailed out so an unsecured claim for the But again, we could dimension they're on track for that right difference. But it's really diffi- the size of the liability because now. The risk right now is that cult for them to simply just we had all the contracts. With- they need to issue some new reject these things and walk out the contracts you could securities to come out of away from them. The governor dimension what the immediate bankruptcy, and given the mar- (Continued on page 30) Page 30 Mountaineer Partners Management

ket conditions, I don't know from your gas tank so that JH: I think it really speaks to how easy it will be to place when you open your gas tank the analyzability aspect of in- those securities, but there are to refill it, the vaporized gaso- vesting for us. As we dug into some backstop agreements, line doesn't evaporate into the Ingevity, everybody knew of and some bridge agreements, air. Gasoline in the air com- the Pine Chemicals business, and so we think that they bines with other pollutants to and it had a recently acquired should be able to get through make smog, so this is some- public comp that everybody it all. That's our favorite posi- thing that's heavily regulated by was looking to as a reference tion. It's difficult to find things the EPA. case. People weren't doing as with that limited downside and much work on the entire busi- that much upside. What we were able to identify, ness, specifically this Perfor- which was not highlighted in mance Material segment that G&D: Are there any other any of their SEC documents, created the wood-based acti- ideas that you are excited was a regulatory change in the vated carbon going into the about right now? United States that takes us to gasoline emission canisters. near-zero emissions on gaso- And the reality was, it wasn't ML: The other one that we line vapor emissions. What easily identified in SEC docu- really like is an old position that meant was that Ingevity, ments. If you go through the that we just reinitiated. We who has almost a monopoly Form 10, this huge regulatory exited because it hit our price position in this product was ramp was mentioned maybe target last year. We reentered five times very much in passing. it because it's gotten to a com- However, if you do a deeper pelling valuation. It's a company “If you go through the dive as we did, you could see it called Ingevity. We started was going to be a big factor. It buying it when it spun out of Form 10, this huge just took a lot of digging. You WestRock, the paper and regulatory ramp was had to focus on the Perfor- packaging company. We identi- mance Materials segment’s fied it early on as something mentioned maybe five demand driver being regulato- that had an incredibly good rily driven and figure out new secular story. The company times very much in regulations were coming into does two things. It takes waste effect. You then had to go from trees and makes specialty passing. However, if through the environmental chemicals, and then it takes regulations and read the EPA sawdust from trees and it you do a deeper dive as Tier 3 regulations and even go makes a specialty charcoal that we did, you could see it back through the details of goes into a filter that's in every prior Tier 1 and Tier 2 regula- car in the United States. was going to be a big tions to understand the eco- nomic impact of each step to When it was spun out of factor. It just took a lot really build up the model. After Westrock, because of issues it doing all this digging you find was having on the chemical of digging.” out that the newer Tier 3 solu- side of the business, it was tion requires an additional viewed as a declining commod- going to double its content per product that builds on their ity chemicals manufacturer. But vehicle as a result of this regu- Tier 2 product to provide a we'd done a lot of work on it, lation that was on the verge of higher capture of vapor emis- and what we had identified was rolling out. The filter business, sions. We also had to do an incredibly strong secular which was half the profitability technical research on activated growth story on the auto filter of Ingevity, we expected to carbon to better understand side. On that side of the busi- double in profit in the near why their wood-based product ness, they take sawdust and term. When the company was a better fit for this type of they make a high-end specialty started trading, initially, we solution. So, it was really all charcoal. That specialty char- saw that ramp-up was not rec- encompassing, and once the coal goes into a device that's in ognized at all in the market- company spun off we were people's cars that captures place. really in a position to under- gasoline that's evaporating stand the huge growth tail- (Continued on page 31) Page 31 Mountaineer Partners Management

winds that were present in the was very hard for us to have a those were the regulatory performance material segment. view as to the likelihood of change and the impact that We were the largest buyer of timing of those changes. Later, that would have on Ingevity. the stock early during the after we had established a po- And that change was very cer- when-issued period, almost sition in Ingevity, they institut- tain and very material. It was 70% of volume we think. ed those rules, which were so material it would swamp a pretty strict. And that in- lot of other possible We also wanted to really creased our upside estimates downdrafts that Ingevity might stress test our downside, so in of what the company was incur. So, it made the company that case we assumed that we worth. to us, analyzable and incredibly would have an auto OEM pro- asymmetric. duction decline almost on-par Then relating back to a couple with the financial crisis and points that we had discussed We also talked about putting found that they were still able earlier, that's why I said you yourself in the position to get to grow earnings as a result of can't just have a price target lucky or un-priced in free op- the regulatory-mandated con- and not be flexible and incor- tionality. In Ingevity, that takes tent that only Ingevity could porate new news. Because it the form of further regulatory provide. Then once we were was a really material increase tightening for gasoline emis- comfortable with the down- in possible profitability when sions and other geographies. side, we put ourselves in posi- the Chinese regulations were The US is quite tight, China tion to have further good put in place. has adapted our prior gasoline things happen to us. With In- emission standards. Europe is gevity, they were able to ac- We also talked about analyza- still on a very loose gasoline quire Georgia-Pacific's Pine bility – our Ingevity investment emission standard. There's Chemicals business, further is a great example of analyza- even further opportunity for consolidating that industry into bility because it has a limited the company on a go-forward an oligopoly with Arizona number of things that would basis. Those are the kinds of Chemical. Then on top of that, things we're looking for. they were able to get their products regulatory-mandated “...our Ingevity G&D: Did you see the rise of into China, where China cop- electric vehicles as a risk to the ied the older US Tier 2 regula- investment is a great thesis? tions, which really used Ingevi- ty's activated carbon as the example of JH: That was one of the big- base and one of the few mate- analyzability because it gest risk factors. We have rials that can really meet the been constantly watching elec- performance characteristics has a limited number of tric vehicle adoption. When that were designed into those we first invested in the compa- regulations. Not only did we things that would really ny, for us, the ability for global get the identified US tailwind, auto production to really shift but as that was starting to drive the business, and to being all electric was really work, we get a second boost technologically limited. But, it's those were the from China. clearly a risk and something we regulatory change and continue to watch. Also, as ML: Just to clarify that, when you move to hybrid vehicles, we initially made our invest- the impact that that they will need Ingevity's prod- ment in Ingevity, in our for- uct. So, a lot of the step chang- ward projections, we had not would have on Ingevity. es will still include Ingevity's incorporated any sales in Chi- product, and that gave us com- na. We were aware that China And that change was fort even if you had a more was considering enacting auto- rapid shift, as long as it wasn't motive air quality emissions very certain and very to 100% EV battery vehicles, regulations that resembled the material.” you were still going to have regulations that the United the regulatory growth tailwind. States was moving off of, but it really drive the business, and (Continued on page 32) Page 32 Mountaineer Partners Management

ML: We initiated the position though they'd all kind of ments in China are quite high. at $24 and exited the position looked into it. So that gave us And in the US, as we saw, es- at nearly $100 last year as we comfort when we initiated the pecially with Volkswagen, not had hit our price target and at position. just the financial penalties, but that point, at the price it was also the hit to your brand's trading at, it didn't really ac- ML: There was a competitor reputation. count for the electric vehicle that a number of years ago risk. Now the stock is down to tried to enter this Tier 2 mar- There is also a unique pricing $33, so we re-initiated it. At ket in the US, and that com- story that may play out in the this lower price, it now re- petitor failed miserably to pro- near future. Now that China flects the risk from electric vide the quantity and quality is reaching full adoption of vehicles, as well as a lot more that OEMs needed. Even their Tier 2 regulations on July risk that we don't think is war- though Ingevity’s Tier 2 carbon ranted, so we're back in it. is not patent protected, it's been very difficult for competi- “ ...the regulatory G&D: Did this regulatory tail- tors to enter the marketplace. wind entice any competitors to It's difficult for a competitor to penalties for failing to enter the market and increase come into a market like the meet these capacity? United States because of the automotive cycle. New auto environmental JH: For the newer Tier 3 solu- models roll on over a number tion it is an additional product of years. It's not like the en- requirements in China that builds on their Tier 2 tire fleet of cars gets rede- product to provide a higher signed every year. If you were are quite high. And in capture of vapor emissions. to try to build a plant in the The EPA is requiring 100% United States, even if you were the US, as we saw, compliance with Tier 3 regula- a winning business, it would especially with tions by 2022. Ingevity has a take a number of years before patent on that product you could fill that plant just Volkswagen, not just through 2022; however a re- because of the contract cycle cent ITC ruling may weaken in the United States. the financial penalties, their IP protection. That's one of the other new risk issues In China, it was a little bit of a but also the hit to your that Mark talked about as different story as they were they'll have competition in that launching. When China brand's reputation.” piece of the market. So that's launched their Tier 2-like regu- something that they're manag- lation all OEMs had to be com- 1st, we think Ingevity has a ing to, as competition in Tier 3 pliant by a certain date. There unique opportunity to raise will come. However, we be- were a lot of jump ball possibil- pricing for its Tier 2 products lieve Ingevity can offset any ities in China, and the company globally. Ingevity’s Tier 2 car- future competition in Tier 3 dealt with that by building a bon product using round num- products by leveraging their scale facility in advance of the bers is only $10 a car. Given monopoly like position in their regulations in China, so they its monopoly-like position Tier 2 product. were able to satisfy that mar- globally we think Ingevity could ketplace. There are other increase that number and Ingevity’s product to meet Tier competitors who are trying to more than offset any potential 2 regulations is no longer pa- compete, but nobody can offer future competition in its Tier 3 tent protected and hasn’t been the quality and consistency and product. for a while. Anybody can try to quantity that Ingevity has, so enter. We've talked to all of Ingevity has enormous market ML: Since we're talking about the various activated carbon share in China as well. Ingevity and it's a spin-off, I competitors to gauge their also wanted to highlight, just ability to produce the products JH: In addition, the regulatory doubling back on our short at scale, and none of them had penalties for failing to meet discussion that spin-offs will really been able to do it, even these environmental require- both provide attractive long (Continued on page 33) Page 33 Mountaineer Partners Management

and short opportunities. Obvi- want. In the spin-off world, at corporate partners to both ously, spin-offs can and will you have to be much more get real-world working experi- oftentimes include relatively selective than you were 10 ence and help pay for their small underappreciated assets. years ago because people I education. It will also oftentimes include think are much more comfort- assets that are jettisoned be- able with the reputational dam- It's a wonderful school. I've age that they're going to take been involved in it since before by spinning-off a failing busi- Mark and I started working “The spin-off market in ness, or spinning-off chemical together back at Contrarian. liabilities. And what that means And it's amazing. These are the last few years has is that you cannot be a passive families that make on average investor in spin-offs anymore - $30,000 and are living in New changed pretty you really have to do the work York City. Cristo Rey is able in order to not get caught to give them the opportunity dramatically. If you go holding the bag in one of these of a college-prep education. things. All of its students in the 2019 back 10 years, graduating class all went to companies would spin- If you go back a number of four-year colleges, a lot of years, most spin-offs were suc- them on full-rides or just with off good businesses. cessful to some degree. Either aid. they were okay or they were Cristo Rey is even supporting And more recently, you really good. And now you're families now being hit with the seeing value creation for the virus spreading all throughout see some of that, but parent company by spinning- New York. With all the off, call it environmental liabili- schools being forced to close you see a lot of people ties. And those kinds of things because of the Governor's just getting rid of bad didn't really take place if you orders, Cristo Rey and its sup- go back years and years. Peo- porters really stepped up. businesses—just punting ple seemed hesitant to take There are kids whose families that kind of reputational dam- needed help just getting food. what they don't want.” age and spin-off the failing busi- Some families needed help ness; whereas now they're getting internet access and the quite willing to do it if it bene- school was able to step in and cause they're about to turn fits the surviving entity. give them laptops or help give down, or sometimes assets them hotspots that can allow that are attached to really un- G&D: Are there any activities them to access internet and do desirable long-term liabilities. or organizations you take part the e-learning that all these Spins are a fertile hunting in outside of the investing private schools are currently ground for both long and short world? transitioning to, which enables opportunities. Again, that re- them to continue getting a quires generally a lot of work JH: In part of my free time - I great education. that's not obvious in a 10K or have two young children, so a 10Q. And so it builds upon it's kind of limited - I work on G&D: Do you have any advice our ability to dig deep into the advisory board for Cristo to share with MBA students ideas and themes. Rey New York High School pursuing a career in investment which provides a college pre- management? The spin-off market in the last paratory education for families few years has changed pretty who otherwise could not af- GW: My main recommenda- dramatically. If you go back 10 ford it. The way the school tion is just get reps and pay years, companies would spin- goes about creating that op- attention to the market. Even off good businesses. And more portunity is through both the if you're not putting money to recently, you see some of that, support of a number of great work, trying to pick ideas and, but you see a lot of people just education focused foundations and dig on them anyways, just getting rid of bad businesses - and charities, as well as its stu- to get mental reps and see why just punting what they don't dents working one day a week things fail or why they work. (Continued on page 34) Page 34 Mountaineer Partners Management

Then you have a base of knowledge to leverage when ML: I would say, look for things that can survive automa- tion. We're in a world where “...look for things that information technology is auto- mating a lot of security analy- can survive automation. sis, equity analysis. And so real- We're in a world where ly listen to what people's strat- egies are, and be honest about information technology whether or not that's some- thing that will be enduring for is automating a lot of a number of years, because the change is happening, and it'll security analysis, equity continue to happen. We would love to do things analysis. And so really that were written about in listen to what people's Klarman's book, but a lot of those types of opportunities strategies are, and be don't exist anymore. You have to find value. You have to dig honest about whether harder and be a little faster to find the value that that exists or not that's something out there. And you have to be more prospective because that will be enduring…” anything that's retrospective pretty much can be automated. you're talking to investors So yeah, that's how we view looking for a job. If you come the world. in with one idea and that's all you can really talk to, that's G&D: Thank you very much not that helpful for a manager. for your time. But if you could talk through three things that you followed in detail and had a thesis, even if you weren't putting money to work, if you can show a depth of understanding, I think that is very helpful.

JH: I would say just from my personal, professional experi- ence, obviously you want to get to an opportunity, and I imagine coming out of business school you will have a target industry or firm. What I would say is, people really matter, and I would strongly recom- mend working with better people over trying to maybe do something that you think is exactly what you want to do. If you work with good people, great things are much more likely to happen. Get Involved:

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Contact Us: Graham & Doddsville Editors 2019-2020 [email protected] [email protected] Frederic Dreyfuss ’20 [email protected] Fred is a second-year MBA sponsored by Columbia (Columbia Fellow). He spent the summer working in the Equity Investment Group at Capital Group. Prior to Columbia, he was an Investment Manager in the Principal Investments de- partment of BNP Paribas, where he invested across the capital structure of unlisted companies active in various industries all over Europe. Fred graduated from Sciences Po Paris with a Corporate Strategy concentration. He can be reached at [email protected].

Sophie Song, CFA ’20 Sophie is a second-year MBA student and a member of Columbia Business School’s Value Investing Program. During the summer, Sophie worked in the Fixed Income group at Capital Group. Prior to Columbia, she worked at the Royal Bank of Canada and the Office of the Superintendent of Financial Institutions in liquidity and market risk management in Toronto. Sophie graduated from the University of Toronto with an Accounting and Economics concentration. She can be reached at [email protected].

John Szramiak ’20 John is a second-year MBA and is a Columbia Fellow. He is currently interning in the Digital Investments team at Sony Music. He spent the summer working at a leading e-commerce company in India, where he built a new credit scoring engine for the company’s lending platform. Prior to Columbia, he worked in the Private Credit group at First Eagle Investment Management. John grad- uated from Boston University with a concentration in Finance and a minor in Eco- nomics. He can be reached at [email protected].