Idea Brunch with Basil Alsikafi of White Brook Capital
Welcome to Sunday’s Idea Brunch, your interview series with great off-the-beaten-path investors. We are very excited to interview Basil Alsikafi!
Basil is the chief investment officer of White Brook Capital, a concentrated, mid-cap-focused Chicago-based firm he founded in February 2016. Before launching White Brook, Basil worked as a senior analyst at MSF Capital, earned an MBA from the Kellogg School of Management, and worked as a telecom analyst at BBT Capital Management.
(Editor’s Note: On Friday, September 8, at 2pm ET Sunday’s Idea Brunch will be hosting a live Twitter Spaces stock pitch event with several up-and-coming fund managers. Event details are available here.)
Basil, thanks for doing Sunday’s Idea Brunch! Can you please tell readers a little more about your background and why you decided to launch White Brook Capital?
Thanks for taking the time, Edwin.
I’m a bit of a thoroughbred. I’ve been interested in finance for a long time. When I was in middle school, my older brother was at Wharton and would bring home copies of his pre-investment banking reading. I would pick up Den of Thieves, Liars Poker, Barbarians at the Gate, etc - as he laid them down. By the time I graduated high school, I was fooled into thinking that investing was the most exciting thing in the world.
I went to a college that is notoriously anti-vocational, but while I was at the University of Chicago, I worked for a couple of law professors during my sophomore summer, which was formative. I learned about the bankruptcy process, the machinations of credit committees, and the decisions to push companies towards Chapter 7 or Chapter 11 processes, and was introduced to game theory, and the bastardizations of business concepts. For instance, I recommend everyone read The Razors and Blades Myth by Randall Picker - which retells the rise of Gillette in a truthier way than I think many might believe.
After graduation, I joined the Technology, Media, and Telecom group at JPMorgan in 2004 as an investment banking analyst. I developed a work ethic, learned about breaking down businesses to the core drivers, and of course, modeling, but would leave work on Friday nights and stop at a bookstore just to engage my mind. It was in a Midtown bookstore that I read Greenblatt’s “You Can Be a Stock Market Genius” and picked up The Essays of Warren Buffett on the way out and started to understand the discipline of public market investing.
I left JPMorgan after a year to join the buy-side at a market-neutral, multi-strategy, TMT partnership for BBT Capital Management. I covered Telecom and spent probably 80% of my time thinking about the short side of the book. While I don’t short today, the skepticism I bring to each potential investment was wrought at BBT.
After about four years there, I went to Kellogg for business school. While I’d been able to scrounge together a non-traditional finance education in college, I benefitted from a more thorough business education. One formative conversation occurred on the first day during orientation: In the first 5 minutes of a level-setting class to help the career switchers, the professor asked, “What is the point of a business?” My class, like most of the ones that had come before, duly answered, “To make money.” That 10-second exchange in our class later became more substantive and turned into a debate about whether societal good should at least be a consideration of business as well. It stayed with me.
I also had the opportunity to intern at several businesses that rounded out my practical education and changed the trajectory of my career. I interned at a deep value, balance sheet-focused public market fund and a healthcare venture capital firm that bought companies in distress, but my most impactful internship was a summer in the Value Group at RS Investments. They took an honest-to-goodness fundamental, Buffett-like approach, thinking over a 3-5 year horizon, with a somewhat concentrated portfolio. By the end of that internship, I knew what I wanted to be in public markets and how I wanted to do it. I’d found a bootleg copy of Margin of Safety, and it set me off spending the next six months reading value investing literature while in business school.
After graduating from Kellogg, I joined EnTrust Capital in their long/short hedge fund in New York, as a generalist. My PM there did a great job of allowing the analysts to be autonomous and develop our own style. It was an awesome experience and I did well there over the next several years. In the fourth quarter of 2015, as we were starting to organize a trip to see clients about seeding a Fund I would run, my father was diagnosed with stage 4 cancer. I knew I immediately needed to be back in Chicago where he was receiving treatment or I’d regret it for the rest of my life.
I formed White Brook Capital as an RIA one night in early 2016 when I couldn’t sleep, moved back to Chicago soon after that, and as friends and family heard what I was doing, started to raise some capital. In 2019, our pooled fund, White Brook Capital Partners, launched after I realized that a number of potential clients needed or preferred a pooled fund.
Today, White Book Capital’s primary activity is as General Partner to White Brook Capital Partners. White Brook Capital Partners is a long-only, concentrated, mid-cap focused Fund that uses ESG principles on an exclusionary basis. Despite shorting my whole professional life, after analyzing my performance, I hadn’t created that much alpha by shorting, while I had created significant alpha on the long side. I didn’t think it was right to use the blanket of a short book to charge an incentive fee and instead decided to charge an incentive on outperformance over the index.
I also use what is now called ESG as an exclusionary principle with a particular focus on the E and S. The unpopular ones. Right off the bat, that means we don’t own vice or defense stocks. I don’t outsource the decision on what qualifies as ESG. I think of the world as a global village, and if I would be embarrassed if my and my family’s legacy were built on one of our investments being our only contribution to the world, White Brook Capital Partners won’t own it. One of the thought experiments I like to go through is, if there were a god-like executive of one of these companies, would the skill he had selling the product be a good or bad thing for the world? That can change over time. For example, Uber, with electric cars, at the extreme may mean you’d have a car on every block, idling, not killing the planet, just convenient. While with ICE engines, it's a significantly worse member of society. With only about 10 positions in the portfolio at any time, there are a lot of opportunities for alpha generation, even with those companies excluded from the universe. The portfolio is currently mostly “value,” but it varies depending on the environment. As growth becomes more expensive, it rotates to value, and as growth becomes relatively less expensive it becomes more GARPy.
In your investor presentation, you mention that all the management teams you invest in must have “heart” and be “driven to work for their stakeholders.” What did you mean by this? And what’s an example of a management team that exemplifies having “heart” in your view?
I invested in Groupon several years ago. For some of your readers, that might be all I need to say.
The thesis of the Groupon investment is no longer important, but its success required that the board and the CEO cared to do their jobs. I thought that logic, sound business strategy, and a sense of shame would motivate either the board or the C-Suite to do the right thing, which would ultimately lead to investors making money. I was wrong.
I still believe that most of the verbiage around who the Street thinks is “good or bad management” lacks rigor and boils down to how the stock price did at the time, rather than the process and intervention of the management team. In Groupon's case, I believed that the board was receiving information that operational execution was bad, that there were multiple initiatives within the company, some initiated by the board, that would generate very positive returns, and that the CEO was basically absentee. If either management reversed course and went along with the board’s efforts, or the board refreshed the C-suite, we’d make money. But rather than move to make changes, there was inaction by all involved. It was maddening but also obvious to me that the company’s relevancy had a timeline, and we exited with a bad outcome, but before it became truly awful.
Now, before I invest a dollar, I check for C-suite culture. I don’t need a mentat in the C-Suite, but a decent human being who builds a culture of accountability is required. I do this by conducting channel checks with business partners, former employees, and, if possible, former colleagues; by observing company performance and actions and putting them in the context of previous statements; and by understanding incentives. This is now part of an exclusionary process so that companies that don’t have this can’t be considered for long-term investment.
How are you able to come up with off-the-beaten-path ideas in an industry with so much groupthink?
I don’t enjoy being consensus or non-consensus, I do work on potential investments that interest me, where there’s seemingly the largest opportunity with the least amount of risk, and that I can understand and explain with a simple thesis. I’m striving for great risk-adjusted returns, not necessarily for anyone to argue that I’m extra clever.
It would be true, though, that I’m happy not to have a common portfolio. By mandate, I don’t own common large-cap stocks and that prevents a lot of overlap. Midcap stocks are often in the gathering phase, to use a basketball metaphor, and for whatever reason, there seems to be a number of small and large cap investors, but not a lot of us that focus only on mid-caps. Then you put on an ethical framework and a concentrated portfolio and there just aren’t many managers wired the same way as White Brook.
You have a pretty diverse portfolio – ranging from a large fertilizer company (MOS) to a small Brazilian Medical School (AFYA). What are two or three interesting ideas on your radar now?
I look for ideas in the same places everyone else does, I screen, follow 13Fs, read widely, listen to podcasts, talk to other investors… I have no limits to how I’ll source an idea. I have a number of qualitative and quantitative exclusionary filters that I go through almost like a checklist to eliminate ideas. That BENCH filter, that “Heart” is a part of that you alluded to earlier, is one.
I go where my curiosity goes. I go where the risks are manageable. I go where I think there’s a significant opportunity. Most of the time, that means a business is inflecting, but you mentioned Afya (NASDAQ: AFYA — $1.50 billion), so let’s talk about that one soup to nuts while also recognizing that I did the bulk of the work in Afya a year or so before the Fund invested. That also isn’t unusual.
I came across Afya by first starting with a blank piece of paper and thinking about the US education system, the escalating costs, and the closures of smaller universities. I had a sense of how I believed the industry could evolve but with relatively low probabilities assigned to my beliefs. I had never looked at the space. In doing the research, it quickly became clear that the American-centric companies might expand access, but it was in their interest for tuition to continue to increase, and they absolutely were not cannibalizing their partners’ revenue streams.
Afya was just a comp on a table, and a company to become familiar with in that context. So I started with the annual filing. When I read it was a medical school company in Brazil that traded in the US, it became a focus. My background knowledge going into that filing was that my parents were doctors before they immigrated, and then reran their residency in the US, and that my brother is a doctor today. I tangentially knew that rolling up doctor’s offices was an area of focus for several private equity strategies. I also knew that universities relied on law and business schools to make money for the university and that a lot of smart people liked the 8-year medical programs in the United States.
Afya’s primary business is as a vocational school for medical doctors in Brazil. In that business, it competes against other private schools, but really the most highly sought-after option is the public schools which are free to students. Being a doctor in Brazil is like being a doctor in the US, they are financially in the top 1% of the population and are able to pay back the cost of their education fairly quickly. Afya competes by providing best-in-class facilities and a proven and uniform curriculum across its campuses.
Unlike the US, where the number of doctors is controlled by the certification board, the Ministry of Health controls the number of new doctors by regulating the number of new medical education seats that are available in the country (there is also, of course, a licensing exam). And that makes it somewhat politically sensitive. Within this context, however, there has been remarkable consistency, with a history and continued recognition that Brazil is under-doctored and an apolitical desire to grow the number of doctors in Brazil.