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Idea Brunch with Dan Roller of Maran Capital Management
Dan Roller on being an unconventional fund manager, buy and build compounders, and his top three ideas
Welcome to Sunday’s Idea Brunch, your weekly interview series with underfollowed investors and emerging managers. We are very excited to interview Dan Roller!
Dan is chief investment officer of Maran Capital Management, a Denver-based fund he founded in 2015. Before launching Maran, Dan worked as an analyst and portfolio manager at Scopus Asset Management, Avesta Capital Advisors, and Impala Asset Management. Maran Partners Fund returned over 50% net in 2021 and has compounded at a ~19% net rate over the last five years. You can find Dan’s letters to partners on his website and sign up to receive future letters via email here.
Dan, thanks for doing Sunday’s Idea Brunch! Can you please tell readers a little more about your background and why you decided to launch Maran Capital?
When I was an undergraduate at Duke University studying electrical engineering and computer science, I happened to come across a sign in the student center that said, “make money.” It was for the investment club. I joined the club, a real-money investment fund managed by students, and was immediately hooked.
I read every book on investing in the library: Buffett, Munger, Graham, Fisher, Lynch, Neff, Whitman, Greenblatt, etc. I added an economics minor to my technical double major, and started to intern, both during the summers and school year, in the investment industry.
I went on to serve as co-president of the investment club at Duke and helped transition it to a research-driven, value-oriented philosophy. Incidentally, one of the other co-presidents I served with now manages about $100 billion, and while I’ll never compete with him in terms of assets under management, you can bet we have a friendly competition about who puts up better returns (on my fund’s smaller asset base, I think I have a real advantage).
After I graduated from Duke, I moved to New York and began to work in the industry. I worked at a handful of hedge funds in NYC, first as an analyst and later as a portfolio manager. I had the interesting experience of working for both a “Tiger Cub” as well as a fund that spun out SAC [now Point 72] – firms known for having different approaches, but that each value analytical rigor and thorough research.
After over a decade of managing money for larger hedge funds in NYC, in 2015 I quit my job, had my second daughter, moved across the country back to my hometown of Denver, and launched Maran (which I named after my daughters).
I launched Maran with the idea that every decision I made would be in the service of optimizing investment performance, rather than “marketability.” These decisions include having a sole decision-maker rather than teams of portfolio managers or investment committees; keeping the fund small, to better take advantage of less liquid investment opportunities; concentrating capital into my best ideas rather than diversifying broadly; and seeking to align incentives with my LPs.
While Sunday’s Idea Brunch seems to focus on interviewing fund managers who live in the same philosophical neighborhood, it is worth remembering that concentrated stock-picking firms reside in an extremely small corner of the broader investment management universe.
A fellow emerging manager put some data out a few years ago: something like fewer than 1% of funds have a portfolio manager with the majority of his or her net worth invested alongside that of his or her clients, and fewer than 1% have the conviction to have a single 10%+ position. Mohnish Pabrai has also shared some data that fewer than 1% of fund managers outperform the market by 3%+ annually over longer periods of time.
I want to be in that last 1%, and I think the structural choices I’ve made will help me get there.
In your excellent first letter to investors back in 2015, you talked about being “an unconventional investment manager” with a focus on special situations, an intense research process, and being an “engaged” shareholder. What has contributed most to your success and if you were starting over again what would you do differently?
I formed Maran to take advantage of a number of competitive advantages, which fall into four broad domains: structural, behavioral, informational, and analytical.
Our primary structural advantages are our small size, which allow me to hunt for ideas in less competitive corners of the market, as well as the quality and alignment of our limited partner base. The vast majority of our limited partners are in our five-year lock-up share class, which allows me to invest with a long time horizon and in the concentrated manner that I believe will optimize results. Further, I have kept the firm lean: there are no investment committees at Maran, and we have no institutional imperative to look or act a certain way.
Our behavioral advantages – patience, decisiveness, an outsider mentality – are reinforced by our structural advantages. Additionally, I, as the portfolio manager, have the majority of my family’s capital invested in the fund alongside that of my partners. I invest the fund like my own money is at risk, because it is.
I believe that our focus on smaller cap stocks and special situations can lead to informational advantages. Given this hunting ground, I feel that I frequently know the companies we are invested in better than any other outside investors. By digging deep and doing thorough fundamental research and due diligence, I frequently unearth information about a company that I do not believe is reflected in its stock price.
Finally, what I do with the information that I uncover during the research phase – the analytical component – is a further competitive advantage. We could get into a much longer interview (and I’d be happy to circle back for a full podcast at some point), but I have developed a process for both security selection and portfolio construction over the last almost 20 years of doing this that has contributed to our results. This involves the use of an investment checklist, pre- and post-mortems, active idea tracking, the use of decision trees, and a risk-reward framework.
As part of the research process, I get to know our companies very well – speaking to both current management teams as well as, frequently, former employees, competitors, suppliers, vendors, customers – I try to really understand the entire ecosystem in which a company operates. And as an aside, I do believe that it is important to talk to management teams. Warren Buffett is the GOAT [greatest of all time], but he did many investors a disservice when he said investors shouldn’t be talking to management teams because CEOs are excellent salespeople and may frequently paint too rosy a picture about their business. Yes, we have to be cautious about introducing bias into our process, but overall, I think that getting to know how executives think is important.
As I wrote in my “Founder’s Letter,” I do take an engaged, and sometimes “suggestivist” or “constructivist” approach to interacting with management teams of our portfolio companies. I love investing in well-run companies where I am confident in and aligned with the management team. In these cases, I still frequently have an active two-way dialogue – perhaps sharing my viewpoints on capital allocation or corporate strategy. And in cases where I don’t believe that management is making decisions for the benefit of all shareholders, I think it is important for shareholders to stand up for their rights and protect their interests, whether through conversations, letters, proxy votes, or other avenues.
You have a pretty diverse portfolio – ranging from a Portuguese mail carrier to a microcap Community Development Financial Institution. How are you able to come up with off-the-beaten-path ideas in an industry with so much groupthink?
I wouldn’t say I’m contrarian for the sake of being contrarian, but I just try to be an independent thinker and maintain a bit of an outsider mentality. It is important to remember that good companies are not necessarily good investments. We need to be second-order thinkers in this business.
I turn over a lot of rocks, and honestly, the top of my idea funnel can be pretty haphazard. I read broadly and just try to follow my curiosity. And I read both to source ideas and to try to get smarter about the world more generally. Sources of ideas, as well as research into those ideas, can come from Twitter, blog posts, YouTube videos, podcasts, LinkedIn, various periodicals, and of course company financial reports, presentations, and conference calls.
I also have a large network of fund managers, executives, and entrepreneurs, including many of my LPs, with whom I converse frequently. While I will always overlay my independent research, valuation, and analysis, I do follow the holdings of a number of fellow investors whom I consider to be smart.
After having been doing this for 20 years, I have a large universe of companies that I know well, which each have their own sets of suppliers, customers, and competitors, which can all be sources of ideas.
I tend to be on the lookout for certain situations or set-ups where change is occurring that can yield interesting opportunities. When I was managing larger sums of capital in New York, I developed an edge by focusing on “special situations,” including spinoffs, post-bankruptcy situations, tenders, mergers, reverse Morris Trusts, and other corporate actions. What these situations have in common is that there is typically no or limited sell-side research coverage — you have to go to the source documents and do your own work and primary research. There is less competition in this hunting ground. And frequently there is an embedded catalyst, which could lead a stock to re-rate as the special situation or event played out.
So, I still look at a lot of special situation categories as potential sources of both event-driven and core positions. Within our top handful of core positions (we typically have 8-12 of them), we own a “broken” IPO, a spinoff, a former NOL shell, a broken deal, and an activist-driven sum-of-the-parts value unlocking situation. We have positions where insiders own 70%, 50%, 20%, and 10%+ of the shares outstanding, and we own companies that are returning as much as one-third of the market capitalization in the form of share repurchases.
Your focus on special situations makes a lot of sense, but you have also written about investing in “buy and build” compounders. You have held several positions for 5+ years. Tell us about that.
Special situations can lead to shorter-term “event-driven” types of trades, such as tender arbitrage or stub trades, but they can also lead to compelling entry points for my favorite type of investment, a well-run, quality business, with a superb operator and capital allocator at the helm. A number of our investments are what I would characterize as these “buy and build” models – solid cash-generative companies with good organic growth outlooks that can layer on additional growth through well-priced, accretive acquisitions.
For our core positions, I typically underwrite for mid-20s IRRs or better, which may take the form of “three-year doubles” or “five-year triples” or stocks that I think can 10x in 10 years. The performance of an investment can be thought of as the starting free cash flow yield, the expansion in valuation, and the growth in free cash flow, whether driven by organic revenue growth, margin expansion, or self-funded acquisitions. I love set-ups where each of these three components are working in our favor, say a 10% starting FCF yield, 20% growth, and the prospect of multiple expansion on top of that.
One of my early mentors in this business was Warren Kanders, who built and sold a company called Armor Holdings. Armor was a tiny bulletproof vest manufacturer when Warren took control of it in the late ‘90s. At the start, the company had book value of $5mm and revenues of ~$11mm. But Kanders took this and executed a buy and build strategy, rolling up related and eventually unrelated businesses in defense contracting, and grew the business over the course of 11 or 12 years to over $850mm of book value and $2.4bn in revenue. The stock was greater than a 100-bagger in this short period of time, culminating in its sale to BAE Systems in 2008.
Watching this story play out in real-time was a formative experience for me as an investor. It taught me the lesson that we don’t have to be early in Microsoft or Amazon or the next tech darling to have incredible performance. If we can partner with the right owner-operators who are successfully growing businesses and allocating capital, fantastic results can be generated, even in seemingly mundane industries.
What are two or three interesting ideas on your radar now?
Two of our five largest positions are chaired by Warren Kanders. Following the sale of Armor Holdings in 2008, Kanders started to build another public company called Clarus Corp (NASDAQ: CLAR — $795 million). Clarus was a cash and NOL shell that he used to purchase control of Black Diamond Equipment, the climbing, hiking and backcountry skiing equipment maker, and later several other “super-fan” brands in the outdoor equipment market. The company has strong secular tailwinds, is taking share in a fragmented industry, and is using internally generated cash flow to purchase additional growing businesses. It is a quintessential “buy and build” story.
We invested in Clarus in 2015 when it had approximately zero dollars in EBITDA, a figure that I think will have grown to over $100mm by next year. I look out three or four years and think that Black Diamond could be worth approximately $1bn, or $25/share on $400mm+ of sales at a 15% EBITDA margin. Rhino-Rack, a roof rack and “overlanding” business, could be worth approximately $500mm, or $15/sh, on $40mm+ of EBITDA. And Sierra and Barnes, Clarus’ sporting segment that makes bullets and ammo, could be worth $350mm+, or $10/sh on $125mm+ of high-margin revenue. Free cash flow generation and capital allocation could generate another $10/sh of value, putting total upside at $60/sh over a few years, compared to the recent stock price in the low-$20s.
Separate from Clarus, Mr. Kanders was able to privately buy back a small piece of Armor Holdings from BAE in 2012, and over the last decade has grown this business from under $10mm of EBITDA to over $70mm. He brought this business, now called Cadre Holdings (CDRE — $864 million), public last year via a small, quiet, IPO. It is the same business, same chairman, and essentially the same playbook as Armor Holdings. While we can’t count on another 100-bagger (for one, our starting size is much bigger), I still have confidence that the business will be much larger and more valuable in five- and ten-year’s time than it is today.
CTT Correios de Portugal (Lisbon: CTT — EUR655 million) is another top-five position and has been for several years. CTT is the privatized postal carrier in Portugal. CTT also owns a bank, a portfolio of legacy real estate assets, a leading Iberian parcels distribution business, and numerous additional “hidden” assets. The company has 148mm shares outstanding and last traded at 4.38 Euros per share, for a market cap of EU650mm. It has little net debt at the parent company level. I believe Banco CTT is worth EU200mm and the company’s real estate is worth EU250mm. The company may monetize parts or all of each of these assets over the coming years.
Ex the bank and real estate, investors are paying less than four times operating earnings for the core monopoly mail business and the parcels business, which I believe can grow profits at a double-digit rate well into the future. The company recently announced a share repurchase authorization for 3% of shares outstanding and has been buying back shares daily at recent levels. My good friend Steven Wood of GreenWood Investors joined the board several years ago and has been instrumental in reshaping the company’s strategy and capital allocation approach.
What would you like Maran Capital to look like 10 years from now?
I named our partnership Maran Partners Fund for a reason: I really do view this as a partnership in every sense of the word. Having the right limited partners who understand my philosophy, believe in my approach, and share my time horizon, is critical to the success of the fund. Many of my partners have been invested in the fund for the last 5+ years, and if, ten years from now, I have many of the same clients that have by then been with me for 15+ years, I would consider that a win.
The way that I will attempt to achieve this is by holding up my side of the bargain: continuing to protect our competitive advantages, remaining disciplined, working to continuously improve as an investor, and ultimately generating the best returns I can over the long term.
Dan, thank you for the great interview! What is the best way for readers to follow or connect with you?
Past Letters: marancapital.com/insights
Future Letters: marancapital.com/contact
Sporadic tweets: @Dan_Roller
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