Dave Waters (Alluvial Capital): Illiquid Stocks, Process, and Investing in Tactile

Episode Summary

Executive Summary: Dave Waters discusses how his opportunity set has shifted from U.S. OTC microcaps toward global deep value, especially illiquid, neglected markets and special situations in Europe, Canada, Japan, and the UK. He explains how illiquidity shapes process and discipline, reviews mistakes and behavioral lessons, and outlines his new long-term vehicle, Tactile Fund, built to own durable, asset-backed businesses with patience.

Main Topics: Idea sourcing in neglected markets (Priority: 5/5): Waters says the best value opportunities now are where capital has fled or conditions look hopeless: bombed-out commercial real estate, office REITs, the UK, and small foreign markets. Expert market and OTC liquidity constraints (Priority: 5/5): He explains the current OTC 'expert market,' how many names are inaccessible to ordinary investors, and why that both creates opportunity and limits exit/liquidity. Illiquidity as a process advantage and risk (Priority: 5/5): Illiquidity forces deeper diligence before buying and can produce mispricings from non-economic selling, but it also makes exits harder and requires careful position sizing. International market behavior and local investor preferences (Priority: 4/5): Waters emphasizes that stock performance depends on local market norms—dividends in Australia, security in Japan, growth in the U.S., and mixed/underfollowed conditions in Europe. Behavioral mistakes and post-mortems (Priority: 4/5): He cites his handling of P10 as a major mistake, attributing it to anchoring and overconfidence in future potential over present fundamentals. Special situations and capital-structure opportunities (Priority: 4/5): He highlights cases like preferred stock repurchases, liquidation situations, and merger-driven arbitrage as recurring sources of returns. Tactile Fund launch (Priority: 5/5): Waters describes a new long-term fund focused on tangible, durable assets and businesses with enduring economic value, designed for investors who can tolerate long holding periods.

Key Arguments: Value still exists, but it has migrated from crowded U.S. microcaps/OTC names to neglected global markets and distressed sectors. The expert market and OTC illiquidity create both a moat and a handicap: fewer buyers, but potentially more mispricing and less competition. Investing in illiquid names requires understanding that you may not be able to exit quickly, so the thesis must be right before entry. Local market structure and investor preferences matter as much as fundamentals; the same company can be valued very differently across countries. The best opportunities often come from capital being forced out of a sector, market, or security class, which depresses prices below intrinsic value. Behavioral errors are most dangerous when investors fall in love with future upside and ignore deteriorating current execution. The new fund is meant to own assets with durable physical/economic value where returns may take years, but where long-run IRRs should be attractive. Even asset-heavy investments must ultimately be supported by cash flow; pure book-value discounts are not enough if value bleeds away.

Data Points: Time since last podcast appearance: 4 years - Brandon notes the previous episode was January 24, 2020. Minimum screen size used for idea generation: 50 million to 500 million market cap - Waters scans companies in this range across foreign markets. Research cadence: Hundreds of companies per week - He says he looks at at least a few hundred companies weekly, spending 3-4 minutes each. Current fund holding period preference: 5-year lockups - Tactile Fund is planned with long-term capital and limited interim liquidity. Private assets allocation cap: 10% to 15% of NAV - He wants the option to allocate a minority portion to private assets. P10 holding period impact: 3 years - He says the stock went sideways for roughly three years, hurting IRR. Crawford United share move: 35 to 14, then back over 40 - Example of non-economic selling in an illiquid stock. Tower Properties purchase: 14-15K per share - He bought shares during COVID panic below a prior clearing price around 22-23K. Tower Properties prior price: 22-23K per share - Referenced as the earlier clearing price before panic-driven buying. NLOP move: About 70% gain - Brandon says he is up roughly 70% after discussing net lease office properties. Domino's stock move: 16 to 36-40, later 417 - Brandon cites an early investment as an example of missing a multibagger. Google post-IPO position: 2 shares - Waters says he bought two shares in college after the IPO. Tactile Fund focus: Long-term, 5+ years - Built for assets where value may be realized over a long horizon. AW transaction pricing: 37 and 34 - Canadian A&W situation: partial cash-out at 37 while shares traded around 34. Italian tax incentive period: 2019-2021 - Government incentives drove flows into Italian SME-focused funds during this period. P/E example for Atlisia Acrobatica: 12x - Waters cites valuation after selloff in Italian small caps. EBIT multiple example for Atlisia Acrobatica: 8x EBIT - He describes it as cheap for a quality company. UK energy tax rate mentioned: 80% marginal rate - Used to illustrate how punitive policy can push capital away from a sector.

Pivotal Quotes: "You have to look where there's a reason for value to pop up." — Dave Waters: Explaining why he focuses on sectors and markets that have been crushed or abandoned. "I want to own businesses and assets that are going to be around forever." — Dave Waters: Describing the philosophy behind Tactile Fund and its long-term, asset-backed mandate. "If you can't handle that, then illiquid stocks are not for you." — Dave Waters: Discussing violent price swings in illiquid microcaps and the need for emotional discipline.

Implications: Listeners should expect future value opportunities to come from global neglect, illiquidity, and policy/capital-cycle distortions. Waters’ new fund reflects a shift toward patient ownership of durable, asset-backed businesses rather than quick-turn public-market trading.