Jonathan Brolin – Edenbrook Capital (Manager Meetings, EP.14)

Episode Summary

Executive Summary: The episode explores John Brolin’s highly concentrated micro/small-cap investing style at Edenbrook Capital, emphasizing a private-equity mindset applied to public markets, deep company-level engagement, strict valuation discipline, and patience. Ellen Ellison explains how she sourced and underwrote Edenbrook as an off-the-run manager, while Brolin details his process, portfolio construction, LP selection, risk management, and aversion to short-termism, media noise, and asset gathering.

Main Topics: Sourcing and underwriting an off-the-run manager (Priority: 5/5): Ellen Ellison describes finding John Brolin through gradual relationship-building, extensive reference checks, and direct verification with portfolio company management teams, his family, and colleagues before seeding Edenbrook. Baseball as an investing framework (Priority: 4/5): Brolin uses baseball to explain process, patience, rhythm, and the superiority of long-run sample sizes over short-term noise, which mirrors his investing philosophy and quarterly letters. Private equity lens on public markets (Priority: 5/5): Edenbrook seeks to act like a constructive owner: working with management, focusing on long-term value creation, and understanding industries deeply rather than trading around market narratives. Concentrated portfolio construction and risk control (Priority: 5/5): The fund holds a small number of positions, may build positions to large weights, and manages risk through price discipline, early thesis trimming, options, cash, and avoiding leverage. Building the firm and selecting LPs deliberately (Priority: 4/5): Brolin intentionally grew slowly, preferred referral-based capital, avoided seeder dependence, and prioritized patient LPs who understand volatility and long holding periods. Board involvement, activism, and potential privatizations (Priority: 3/5): Brolin explains when Edenbrook may join boards or even explore take-privates, framing these as rare, alignment-driven opportunities rather than a default strategy. Preparing for bear markets and late-cycle risk (Priority: 5/5): He argues current markets show bubble-like behavior and that the right response is cash, hedges, and readiness to deploy capital rather than overpaying for growth or chasing momentum.

Key Arguments: A concentrated, high-conviction portfolio is appropriate when the investor can deeply know the businesses and act like a long-term owner. Short-term mark-to-market volatility is not the same as risk; risk is primarily overpaying, being wrong on the thesis, or losing permanent capital. Public-market investors can create alpha by using a private-equity playbook: helping management improve operations, strategy, communications, and capital allocation. Edenbrook’s edge comes from investing in overlooked micro/small caps where management teams often lack strategic bandwidth and sell-side coverage. Cash is an option, not a drag, because it allows the fund to buy more aggressively during drawdowns without forced selling. The firm’s LP base is best built slowly through referrals and education, because the strategy is volatile and unsuitable for many investors. Performance should be judged over multi-year cycles; month-to-month results can be misleading and should not drive decisions. Board seats are generally avoided because they restrict trading flexibility and information access, unless the situation is unusually compelling. In frothy markets, the best defense is to avoid chasing valuation and to maintain dry powder for dislocations. Learning from mistakes requires intellectual honesty and a willingness to diagnose process failures rather than just sell and move on.

Data Points: Edenbrook Capital assets under management: $400 million - Described in the episode introduction as the size of John Brolin’s firm. University of Illinois Foundation size: $2.4 billion - Ellen Ellison led the foundation, cited as the first CIO of the now-$2.4 billion institution. Manager meeting duration before investment: About three years - Ellison said she met Brolin in 2013 and got to know him gradually over a three-year period before allocating. Position sizing starting point: About 2% - Ellison said a starting position in the strategy would typically be around 2% of the portfolio. Position cap: 15% at market - Brolin said positions can be built up to 15% and then are generally allowed to run. Portfolio size / manager count: 40-45 managers - Ellison said Brolin was one of 40 to 45 managers across the University of Illinois Foundation portfolio. Cash before March 2020 selloff: Low double digits - Brolin said the portfolio entered March 2020 with low-double-digit cash plus puts. Current cash position: 20+% - Brolin stated the fund currently had more than 20% cash. Average net cash on Wall Street: About 2% - Brolin contrasted his cash level with what he claimed was the average across Wall Street. Portfolio return impact in 2020: Strong year due to hedges and cash - He said the puts and cash prevented an early-year drawdown and enabled buying during the pandemic selloff. Position outcome example: 15% position up 300% - Brolin cited a prior year where a 15% position appreciated 300% in the fourth quarter. Acquisitions in portfolio history: 15 companies acquired - He noted that 15 portfolio companies had been acquired over time. Fund economics threshold: $300 million - He referenced a fee break point set early, originally when the fund was tiny. Fund growth cap: $500 million of raised institutional capital - Brolin said the fund has capped itself at $500 million in institutional capital, with room for compounding above that. Potential ideal scale: High hundreds of millions of dollars - He suggested the right stopping point is somewhere in the high hundreds of millions. Founder age when started firm: 37 - Brolin said he started Edenbrook when he was 37. Holdings horizon: Three to five years - He repeatedly framed the investment horizon for value creation in that time range. Board meeting restrictions: Two business days / 48 hours - He mentioned typical trading restrictions after certain events when sitting on boards.

Pivotal Quotes: "The next step after excess is rarely moderation. It's collapsed." — John Brolin: He used this line to explain his concern that frothy markets often end abruptly rather than gently. "Well bought is half sold." — John Brolin: He described price as the main risk control and argued that buying cheaply is the best defense against losses. "Who I am is enough, but I can always be better." — John Brolin: In the closing lightning round, he summarized his personal philosophy of self-improvement and self-acceptance.

Implications: The episode argues for patient, owner-minded investing in overlooked small caps, with success driven by deep research, alignment, and discipline rather than activity. For LPs and managers, it shows that selective capital, cash, and long horizons can be a durable edge when markets get crowded.