What we like

1. Understandable and simple. We must be able to deeply understand the business and its industry. We stay within our circle of competence and are humble about what we cannot predict.

2. Primarily B2B businesses with highly differentiated & mission critical solutions making them the plumbing in their industries. We picture it as a gear in a clockwork. Without the gear - no clockwork. B2B businesses often benefit from long-lasting customer relationships with low price elasticity, recurring revenue and high barriers to entry. On a weighted average basis, our companies generate operating margins around 30% on average, underscoring the value of their products and their pricing power. This compares to around 12% for the MSCI ACWI World Equal Weighted index.

3. Razor & blade models. Installed-base economics where the initial sale is the beginning, not the end, of the customer relationship. Many of our companies earn the majority of their profits from high-margin contracts on aftersales service, consumables, or royalty fees. These revenue streams are deeply embedded in customers' operations with renewal rates typically around or above 95%, and grow predictably year after year. On a weighted average basis, +80% of earnings in our companies are recurring and also resilient to macroeconomic cycles.

4. Minimal disruption risk. We prefer industries with a very slow pace of change and thus businesses with a high degree of robustness. We seek low disruption risk often in "boring" industries - we take such notions as a compliment. The weighted average age of our portfolio companies is approximately 100 years. They have passed the test of time surviving world wars, technological shifts, pandemics, economic depressions and numerous other crises.

5. Consolidated industries with duopolistic or oligopolistic market structures. Our companies are typically #1 or #2 in their industries, holding a high relative market share against the rest.

6. Durable competitive advantages such as scale economies, network effects, switching costs, culture, or proprietary assets (e.g., data, regulated assets, loyalty programs) built up over decades or centuries. These moats must be expanding, not eroding.

7. High returns on invested capital (ROIC). Many of our companies are asset-light, growing with minimal reinvestment and working capital needs (franchise models, service businesses, brokerage models), deriving a ~40% ROIC on a weighted average basis across our portfolio with profits converting close to 100% into real free cash flows. Massive amounts of free cash flow can therefore be returned to shareholders annually through dividends and share buybacks. In comparison, the average company in the MSCI ACWI World Equal Weighted index generates below 10% ROIC.

8. Value-creating growth. Growth typically comes from a combination of steady industry expansion, ongoing consolidation, expanding customer relationships, pricing power that at minimum offsets inflation, and operational leverage often from a growing base of recurring revenue. On average our portfolio companies grow earnings per share around or above 10% annually at high ROIC.

9. Owner-minded, long-term management that thinks in years instead of quarters, driving a strong results-driven culture throughout the organization. Compensation must be aligned with long-term value creation.

Want to read an example of one of our investments?

What we avoid

1. Businesses we cannot understand or that are too complex/unpredictable. Such businesses often competes in industries with rapid technological change or high disruption risk.
2. Industries with undifferentiated products and/or low barriers to entry driving fierce competition that pushes down profits.
3. Companies requiring heavy capital investment with uncertain future returns or industries with significant influx of hopeful capital (e.g., AI infrastructure, frontier tech buildouts).
4. Speculation on trends regardless of how exciting the narrative. Historical examples (railways 1840s, internet 2000, shale oil 2010s) show that society-changing technology rarely translates into good investor returns
5. Businesses with low accounting quality and/or managers of low integrity chasing growth at any price - often through expensive M&A followed by convenient (recurring) "one-offs".
6. Countries with unacceptable corporate governance standards and/or with revenue primarily in volatile developing-market currencies

Why it matters

1. If we don't understand the business, we cannot own it with conviction. Without deep understanding, we cannot value a business, we cannot distinguish a temporary setback from a permanent problem, and we cannot act rationally when the market panics. Understanding is the prerequisite for everything else. It is what allows us to buy more at bargain prices when others are selling and trim or sell when the market is overly euphoric about the business.
2. B2B over B2C. The business-to-consumer space is at the mercy of a forever-changing landscape of tastes, trends, and behaviours. Brands that seem invincible can lose relevance in a few years. Certain B2B businesses, by contrast, can be deeply embedded in their customers' operations, often mission-critical and difficult to replace. In rare cases we will own a B2C business but only when its brand, pricing power and customer loyalty are so deeply entrenched that we see strong similarities to a B2B model.
3. Recurring revenue makes the future visible. When +80% of earnings are recurring and contractually protected, next year's earnings are largely locked in before it begins. The alternative - project-based, transactional, or one-off revenue - requires the business to effectively rebuild its revenue each year.
4. High margins and high returns on capital are the financial signature of a strong moat. A business with 30% operating margins and 40% ROIC is telling you something important: its customers value the product enough to pay a premium, competitors cannot replicate the offering, and the business creates enormous value relative to the capital it consumes. 
5. Cash conversion separates real earnings from accounting earnings. A company can report strong profits while generating little actual cash - consumed by working capital, heavy reinvestment, or aggressive accounting. We prefer that reported earnings convert close to 100% into free cash flows because cash is what compounds, cash is what gets returned to shareholders. Cash is king.
6. We avoid heavy capital investment in uncertain technologies because history punishes the capital providers. Transformative technologies - railways, the internet, shale oil, and now AI infrastructure - can reshape society while simultaneously destroying investor capital. The value tends to accrue to the users of the technology, not to those who finance the buildout. We would rather own the businesses that benefit from these shifts without bearing the capital risk. To learn more about our thoughts on this subject, click here.
7. Consistent earnings growth as downside protection. Even if we are wrong on some aspects of our valuation, a company growing earnings at 10%+ per year will, over time, grow into and beyond our purchase price. As Warren Buffett says, time is the friend of the wonderful business.