December 15, 2022
As the world enters a more challenging economic environment characterised by low or negative GDP growth, finding companies that can grow earnings regardless of macro headwinds becomes particularly important. Fairlight first profiled Acquisitive Compounders in 2020 and in the three years since has continued to find and purchase for the Fund businesses that fit this investment type. These companies often operate in slow or no growth industries but have counterintuitively been able to compound shareholder value at double-digit rates for decades due to management’s excellent capital allocation skills. One of the key attractions of this business model is that revenue growth is primarily sourced from acquisitions, a growth lever that is cycle agnostic. Indeed, as global interest rates rise it is likely that market valuations for acquisition targets will decrease providing a fertile deal environment for prepared management teams with a well-honed process for acquisitions and dry powder on hand.
Portfolio holding Interpump
An Acquisitive Compounder first purchased by the Fund in 2021 is Interpump, an Italian industrial group which operates in mature market niches where it already benefits from leading market shares and high margins. Despite this seemingly unexciting backdrop for growth, management, thanks to a carefully crafted acquisition strategy, has been able to transform a highly profitable but mature business, characterised by mid-single-digit growth, into a double-digit grower. Since its IPO in 1996, Interpump has grown EPS at a 13% CAGR while maintaining a return on capital well above 10%.
Low-risk acquisition strategy
Interpump’s origins date back to 1977 when Chairman and major-shareholder Fulvio Montipò came up with a better design for high pressure piston pumps which considerably lengthened their lifespan. Today Interpump has a 40-50% global market share in this niche market but this business accounts for less than 30% of the Group’s total sales.
Montipò has always been a believer that growth, in his own words, ‘brings safety’. So once market share gains in the original business were exhausted, he supported a policy of reinvesting profits into acquiring many niche industrial businesses following a low-risk formulaic approach:
Business diversification and quality steadily improving
Interpump’s business has performed particularly well during the last few years despite the COVID-19 pandemic, supply chain disruptions and rampant inflation. Overall sales for the current financial year are expected to be 50% higher than in 2019 and margins have proven resilient through the period (Figure 1). This was due to several reasons:
The Fairlight View
Fairlight’s strategy is centred around finding businesses that can generate earnings growth over the long term while maintaining high returns on capital. While strong organic growth is one avenue for creating shareholder value, it is our view that businesses, such as Interpump, that can ‘create’ their own growth via a repeatable, low risk acquisition strategy can provide underappreciated countercyclical characteristics to a portfolio.