2023 Performance
What was US SCG Performance in 2023? Did we outperform?
+23%... +4.4% Outperformance!
Top 15% of Morningstar peer universe.
How many businesses in the portfolio are profitable?
All of them but one (Warby Parker). Warby is investing heavily in capex to build out is retail footprint (which we feel is the right decision). If not for that, it would be profitable today.
What are the two key sides of the business?
Corporate Restructuring.
M&A + Advisory.
How would you describe Wingstop's business model?
Asset-light & franchise-centric.
This is the rare business that gets paid to grow. Franchises spend $20k to acquire a restaurant and invest all the capital required.
What does Alight do?
Alight is the #1 player in the global benefits administration & management outsourcing business. Basically think of them as UKG (HR/benefits software), Principal (401k), and any other vendor related to benefits at Polen all rolled into a one stop shop.
What line of business is PGNY in, and why do we find it attractive?
Fertility Health Benefits Manager.
Revenue model is recurring, customer churn is non-existent, and it has a long runway for growth as companies becoming increasingly willing to offer to treat infertility as a medical benefit.
Name some of the things that contributed to relative performance in 2023.
Having a consistent, balanced portfolio
Avoiding banks & energy
Quality & EG of our companies
Gross margin is revenue less cost of goods sold. Sustainably high gross margins tend to signify a company has pricing power, which in turn could be (not always) indicative of competitive advantage. And practically speaking, all else equal, it tends to point us to businesses conducive to generating cash flow.
Houlihan Lokey has a business model that was built for resilience.
How do the two sides of the business contribute to the firm's resilience?
During economic challenges, the restructuring business picks up, while Transaction + Advisory tends to be more muted.
When economic activity picks up, Transaction + Advisory pick up, and restructurings decline.
What kind of growth in store count are we expecting out of Wingstop over the next 5 years?
Potentially a tripling in its store count.
What is a key reason 70% of Fortune 100 companies and 50% of Fortune 500 companies work with ALIT?
These customers tend to have complicated benefits structures often varying by region country, or employee type.
Large companies have found that the tedious work of managing benefits and particularly employee requests doesn’t scale well with organizational complexity, leading many to outsource the administration of these benefits
What line of business is APPF in, and why do we find it attractive?
Provider of property management software to small- and mid- sized property managers.
Its software is easy to use, has a loyal fan base, and the company is investing strategically in moving up-market - already driving accelerated top-line growth. We expect margins to further expand as investment subsides.
Top 4 contributors to 2023 performance in US SCG? (Name at least three...)
Goosehead Insurance: +121%
Wingstop: +87%
Hamilton Lane: +81%
Appfolio: +64%
We talk about concentration as a way to express conviction, but why is it important as it relates to quality?
Being concentrated allows us to not have to make trade offs on quality (or growth). In a universe of companies, many of which are unprofitable, highly levered, or cyclical, we need to be very discriminating on quality and concentration in that sense becomes a way of keeping the hurdle high.
Acquisitions tend to be a major focus for HLI. In what ways does the management team demonstrate good stewardship of shareholder capital?
HLI has a clear and repeatable formula, and deploys capital with intent to support balanced growth in all economic environments.
They also consistently buy back more stock than they issue, and pay a dividend.
What does Wingstop's customer base and loyalty program look like?
WING has built up a 35mil customer database with no loyalty program in place.
Management views loyalty as "low hanging fruit" and we expect them to continue finding new ways to engage the customer.
How much of ALIT revenue is recurring?
80%
What line of business is HLNE in, and why do we find it attractive?
Hamilton Lane is a leading private markets investment management firm.
Its 30 years dedicated to private markets + management investing in bringing data & transparency to this opaque market have led to remarkably consistent and durable earnings through cycles.
R2000G performance inflected up +22% in the final 2 months of 2023. What drove this rip in performance in the index, and how did Polen US SCG do?
Low quality leadership as the higher interest rate & economic fears that marked the first 9 months of the year abated.
SCG only gave up -1.1% in relative performance in the final 2 months of the year. We attribute this to balanced exposures across the portfolio!
What is the current estimate for Long term EPS?
18.7% vs 8.0% Historical Averages for R2000G
What were the growth trends in Corporate Finance + Restructurings in the most recent quarter (CY4Q23)?
Corporate Finance is still depressed, but was up y/y for the first time in 5 quarters.
Restructuring business is growing + accelerating.
Why did we pare back our allocation to WING in Jan and again in March 2024?
Not for lack of confidence in the company. To the contrary, we believe WING is an outstanding company.
That said, shares have traded up +100% over the last year, +40% just YTD, and are currently priced for perfection.
This made the firm a logical place to trim and deploy profits to a name with greater expected returns.
What is ALIT's customer retention?
97%
The legacy benefits administration business has been around since WWII, and is a very sticky cash cow.
Multi-Decade relationships lead to near 100% customer retention.
What line of business is QLYS in, and why do we find it attractive?
Qualys is a cloud-based IT security solutions company focused on vulnerability management software.
QLYS benefits from secularly growing cybersecurity demand. Additionally, they have chosen to pursue profitable growth over time, which is unique vs faster growing peers that might not be able to sustain growth. Superior platform integration vs peers and bundling will allow them to acquire more customers and grow market share over time.
Why SCG now? Why 2024?
Exposure to Small Caps should be structural.
SCG has not been this cheap relative to LCG since pre-GFC.
Small cap companies have been slower to cut costs, which sets the stage for future acceleration in EG.
What is Polen SCG's Cash Flow ROIC and what does this tell you?
18.3% (vs 8.4% for the index). ROIC is a good way to evaluate if management is allocating capital effectively. If investments in the business can be achieved at high rates of return in excess of the cost of capital, that should create value over time.
Identify at least 2 headwinds that may slow down M&A business momentum for HLI in 2024?
Geopolitical risk in Europe & Middle East
Companies may wait as it's a US election year
While HLI think we've seen peak rates, rates are still high
Bid/Ask Spreads
Uncertainty over financing / deal structure pushback
Name one of the investments they made in 2022 to help position the company to deliver very strong SSS growth in recent quarters?
Wingstop made 3 key investments in 2022:
1. A significant step up in the annual advertising budget beginning in 2Q22
2. The addition of Uber Eats in 3Q22
3. The launch of the chicken sandwich in 3Q22
How many employees + dependents does ALIT provide some kind of service to?
Across its health, wealth, payroll, HR, and workforce management businesses, Alight touches north of 36mm people.
What line of business is GSHD in, and why do we find it attractive?
Personal line brokerage, primarily focused on homeowner & auto insurance.
Goosehead has a unique franchised model with centralized customer service. This means high performing brokers can focus on what they do best, with a superior suite of insurance products from 80+ carriers to offer.
GSHD still in early innings of penetrating a $300mm in premiums TAM. Franchise model leads to extremely high returns on capital and almost zero reinvestment required to grow the business.