Idea Brunch with Tom Bachrach of PFH Capital
Idea Brunch with Tom Bachrach of PFH Capital
Welcome to Sunday’s Idea Brunch, your interview series with great off-the-beaten-path investors. We are very excited to interview Tom Bachrach!
Tom is currently the chief investment officer of PFH Capital, a globally-focused Philadelphia-based fund launched in November 2018. PFH Capital has a flexible mandate, albeit with a bias towards undervalued micro/small cap businesses with strong insider alignment and healthy finances. The fund is not shy about venturing off-the-beaten track into unloved sectors and under-followed emerging and frontier markets.
Tom, thanks for doing Sunday’s Idea Brunch! Can you please tell readers a little more about your background and why you decided to launch PFH Capital?
I came about investing by accident. My early “career ambition” post-college was travel and adventure. Having studied Arabic as an undergraduate, I managed to land a job at one of the largest publicly traded companies in Egypt. I was essentially hired as an accountant, despite the fact I had never taken a single course in accounting… but the whole episode was incredibly fortuitous because, after a bit of a learning curve, I discovered that (A) I enjoyed accounting and was good at it and (B) it was way more useful than the Economics I had studied in college.
I returned to the US after half a decade in Egypt, and I figured I should put my accounting knowledge and experience inside a public company to work by trying my hand at public markets investing. What started as a naïve attempt to make money soon became a full-fledged passion.
Until I formally launched the PFH Capital Fund, investing was a part-time gig and I was only managing personal and family capital. The weight of being entrusted with the irreplaceable capital of those outside your immediate family demands a full-time focus, and I created the PFH Capital Fund to afford me just that opportunity.
What are some structural advantages PFH Capital has compared to other equity-focused funds?
Our structural advantages are three-fold.
One, we are small in terms of AUM. If we ever get big, it will be on performance, not fundraising. Being small allows us to attack a much larger investment universe than our billion-dollar AUM competitors.
Two, our global custody relationships enable us to hunt for great investments in all sorts of markets around the world that are typically inaccessible to many of our small fund competitors. We are also comfortable doing so given my early career experience operating in these markets.
Three, we are picky about the individuals we admit to our partnership, most importantly ensuring that they share our long-term orientation. We are a bad fit for investors looking for detailed explanations on why their quarterly statements went up or down.
Can you tell us a little about your favorite international markets today and what makes them attractive?
Relative to the rest of the world, Poland has a plethora of high return-on-capital businesses, run by skilled and aligned management… and available at relatively bargain prices. While some businesses (e.g. Dino Polska) have attracted an international following, there remain a huge number of underfollowed micro and nano caps in Poland. PFH Capital is lucky to have a wonderful, young analyst in Poland helping us sift through the opportunities.
Hong Kong is another market I have been digging through this year. There are understandable reasons that the market is beaten to hell, but I feel it is all a bit overdone at this stage. Much of the Hong Kong market should be avoided (weak management, murky corporate structures, related party transactions, etc)… but I believe there are some brilliant investments hiding there and I intend to find one or two this next year.
What are some of the biggest mistakes you see other investors make when investing in developing markets?
It is very important to establish strong connections with local investors when you venture into a new market. It is important to remember you are a tourist, and tourists get scammed without trusted locals looking out for them.
Validating that the income statement is supported by cash flows, and that cash flows are being meaningfully directed towards capital returns also takes on added importance in developing markets. This isn’t just about minimizing the risk of accounting fraud. If after five years, a holding hasn’t re-rated or a substantial geopolitical risk materializes, you will be grateful for the dividends received along the way.
How do you evaluate the management teams you invest in? How important is meeting management in person and what do you look for in these meetings? Any common red flags you avoid?
The very first thing I check is alignment at the levels that matter (generally speaking, the Chairman and CEO positions). What is a CEO’s total compensation as a percentage of the market value of their equity? There is a world of difference between a CEO with one million in annual comp plus one million in stock held versus a CEO with one million in annual comp plus one hundred million in stock held. The first wants to keep their job, even if that requires short-term thinking and cooking the books. The second is much more likely to remain focused on maximizing the long-term value of the equity.
Of course, aligned management can still lack skill and/or integrity, generating poor long-term returns for passive shareholders like us. A long-term record can give us confidence in management’s skill and integrity… but typically by this point the business’s most attractive valuation and growth profile is behind it. This is where meeting management is typically of immense value.
We seek to develop a strong understanding of a business before talking with management. This doesn’t just help us identify the right questions to ask, it also allows us to ask questions we already know the answer to as a test of management forthrightness. Dishonest management can kill you.