Research dispatch from Europe

For investors, the first half of 2025 delivered what has seemed an endless torrent of bad news with newspaper headlines filled with trade wars, unprecedented partisan politics and several escalating regional conflicts. It would be difficult for an investor not to conclude that we live in an increasingly volatile, uncertain and risky world. During this period, the market has demonstrated both extreme optimism as well as fear with the pendulum swinging rapidly between the two extremes (the S&P500 recently notched its fastest ever recovery from a 15% decline).

At times of great uncertainty like today, at Fairlight we remind ourselves to focus on what we can control, which includes reducing risk by owning companies that do not require a macroeconomic or geopolitical crystal ball. While the risks are particularly salient currently, our belief is that the future remains as unknowable today as it was in 1939, 2007 or 2020; and that an increasingly volatile market may be uncomfortable in the short term, but this ultimately provides more opportunities to a disciplined and patient investor.

What we can control, is ensuring we stay disciplined to our process of finding quality businesses and investing in these at reasonable prices for the long term. To that effect, in recent months the Fairlight team has been busy visiting prospective and existing investments in the UK and Europe, and learning about competitive advantages that will likely endure for many years, economic cycles and political administrations. Below we summarise our findings from our meetings for Auto Trader and Reply, two important Fund investments.

Auto Trader – Lessons on pricing power

In June, Fairlight visited London and met with the management of long term portfolio holding, Auto Trader (we profiled the business in depth last month). Given that Auto Trader operates in a mature, ‘no-growth’ industry, our meeting focused on management’s ability to balance growth through price increases, product upselling and increasing the value delivered to customers by bundling more products with the core service.

Since the IPO, Auto Trader has raised annual prices on average by 4% p.a., delivering excellent outcomes for shareholders (Figure 1). Through this period the business has also invested significantly in improving the product to ensure Auto Trader delivers more value to its customers each year. Auto Trader’s success in raising prices while maintaining strong customer retention rates is ultimately driven by the high value to cost ratio it delivers to customers.

Figure 1.

During the recent inflationary period, many companies across various sectors and countries leaned heavily on price increases, to extract greater value from their customers for providing the same product. A walk down your local supermarket aisle will quicky display that many consumer product companies have priced themselves out of their consumer’s budget. As inflation normalises, we are now seeing negative impacts including disgruntled customers and market share losses. While Auto Trader has the latent pricing power that could have enabled it to raise prices significantly through this period, we are pleased that the business was managed with a view of prioritising long term customer relationships rather than short-term financial gains. Our recent meeting suggested that this mentality remains in place today.

Reply – AI tailwinds

In May, members of the Fairlight team attended the Xchange conference in Milan, an event organised by IT consultancy and portfolio company Reply. The event included large sessions, breakout sessions with experts, and live demos which helped us to further our understanding of Reply’s broad Generative AI offering.

One aspect that particularly impressed us was the ability of Reply’s representatives to simply explain the benefits of Generative AI to their clients today, using plain language and tangible examples rather than bold predictions filled with buzzwords. We also noted that while Reply’s workforce skewed noticeably young, the company still benefits from the wisdom of older leaders who provide guidance drawing from lessons from the past, particularly the key boom and bust years around the year 2000. A balanced approach to growth and margins is what we believe has been allowing the company to successfully navigate the last few years where demand for IT services surged and then cooled off (Figure 2).

Figure 2.

Reply began operating in 1996 to help large Italian corporations embrace new technologies. Since then, as technology progressed, so did Reply’s expertise. This ability to adapt has earned the company the reputation of a trusted partner that clients can rely upon throughout their digitalisation journey. We left the conference feeling that Reply is likely to continue to be that trusted partner with broad, product-agnostic expertise that can help them flourish in an increasingly complex technologic environment.

The Fairlight View

In recent months the team has been active on the ground, with members spending prolonged time across the US, Europe and the UK. Despite the uncertainty and risk in today’s global economy we continue to encounter new opportunities in dull or unloved sectors with companies that can prosper in any economic environment.

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