Episode Summary
Executive Summary: Scott Hendrickson, co-founder of Permian Investment Partners, discusses his firm's focus on management quality in investing, particularly in Western Europe. He emphasizes a long-short strategy where longs depend on CEO execution and shorts on structural industry forces. Permian uses a proprietary screening tool to identify CEO changes, leverages a network of 250 CEOs for due diligence, and employs a 'power rank' system for position sizing. The conversation covers his background from music to finance, the importance of patient capital from LPs, and macro views on inflation and Europe's relative attractiveness.
Main Topics: Scott's Background and Path to Investing (Priority: 3/5): Scott describes his evolution from a musician to a finance professional, influenced by his father's advice and his own business-building experiences in a band. He worked in investment banking, private equity, and then attended Columbia Business School before joining Brahmin Capital and co-founding Permian. Investment Philosophy: Management Focus (Priority: 5/5): Permian's core philosophy is to invest in companies with new CEOs who can unlock value through cost-cutting, capital allocation, and operational improvements. They avoid revenue turnarounds due to lower diligenceability. The firm seeks situations where management execution drives long outcomes, while shorts are based on structural industry challenges. Screening and Due Diligence Process (Priority: 4/5): Permian uses a data-driven screening tool that searches for CEO changes and other catalysts, filtering by geography, governance, and liquidity. They prioritize outside hires and cross-reference new CEOs with their network of 250 CEOs for warm intros and references. Value-added research involves backward-looking (former colleagues) and forward-looking (industry competitors) analysis. Portfolio Construction and Risk Management (Priority: 4/5): The portfolio holds 15-20 core long positions with a 25% annual turnover, averaging 4-year holding periods. The 'power rank' system force-ranks investments based on factors like market dislocation and business quality to size positions and mitigate management bias. A macro-aware risk framework sensitizes the portfolio to scenarios like higher rates or inflation. Short Strategies and Market Views (Priority: 4/5): Permian shorts fall into four categories: FADs (fads), frauds, asset bubbles, and structural decliners. They focus on niche commodities with supply responses and structurally challenged businesses. Scott expresses concerns about U.S. fiscal dynamics, private market allocations, and population decline, but sees Europe as relatively attractive due to lower valuations and cost-cutting opportunities. Teaching and Learning from Students (Priority: 2/5): Scott teaches applied value investing at Columbia Business School and finds the process keeps him academically honest. He gains fresh perspectives from students with diverse backgrounds and uses CEO guest speakers to broaden his own thinking. Recommended Books and Final Advice (Priority: 2/5): Scott recommends 'Investment Biker' and 'Adventure Capitalist' by Jim Rogers, 'The Mystery of Capitalism' by Hernando de Soto, 'You Can Be a Stock Market Genius' by Joel Greenblatt, 'Margin of Safety' by Seth Klarman, and 'The Outsiders' by Will Thorndike. He advises reading widely and learning from mistakes through real or mock portfolios.
Key Arguments: Longs should depend on management execution; shorts should be structural and independent of management control. Europe offers unique opportunities due to family ownership leading to bloated cost structures that new CEOs can cut, and because most competitors have short-duration liquidity that prevents them from investing in multi-year turnarounds. The 'power rank' system helps avoid falling in love with a CEO by forcing objective comparison of all investments based on factors like market dislocation and business quality. Value-added research focuses on diligenceable cost cuts (e.g., SGA, interest, taxes) rather than revenue turnarounds, as the former are easier to verify through competitor and former employee interviews. Shorting asset bubbles in niche commodities requires real-time supply data to anticipate supply responses before consensus adjusts. The current macro environment (high rates, inflation) favors Permian's strategy because it allows CEOs to differentiate more, buy back cheap stock, and cut costs with less political resistance. Private market allocations by endowments may lead to capital call defaults and ripple effects into public markets, a key concern for the future.
Data Points: Fund size: $2 billion - Permian Investment Partners manages a global long-short and long-only fund. Core long positions: 15-20 - Number of core long positions in the portfolio. Annual portfolio turnover: 25% - Average name turnover per year, implying a 4-year average holding period. CEO network size: 250 - Permian's network of CEOs used for cross-referencing and warm introductions. European fund liquidity: 90%+ - Percentage of European competitor funds with daily or weekly liquidity, which hinders long-duration management turnarounds. Federal debt to GDP ratio: 4 times higher than Volcker period - Scott's comparison of current U.S. federal debt to GDP relative to the Volcker era. U.S. interest expense: $2 trillion per year - Current annual interest expense on U.S. federal debt. U.S. birth rate decline: From 5 to low 2s over 70 years - Scott's mention of falling U.S. birth rates. Japan population decline: From 128 million to 123 million in last decade - Japan's population decrease over the past ten years. China population decline: First year of decline - China experienced its first population decline in 2022.
Pivotal Quotes: "We want the outcome of our longs to depend on management execution and the outcome of our shorts to be structural and therefore dependent on dynamics outside of management's control." — Scott Hendrickson: Explaining Permian's core investment philosophy for long and short positions. "CEOs are the most promotional people on the planet, with the exception of hedge fund managers." — Scott Hendrickson: Emphasizing the need for external validation of CEO claims during due diligence. "Mistakes are the greatest gift and learning from their mistakes and trying to, trial by error, figure out the right way to do it." — Scott Hendrickson: Advice to aspiring investors on how to improve odds of success.
Implications: This episode underscores the value of patient, long-term capital in less efficient markets like Europe, where management-driven turnarounds can unlock significant value. Investors should focus on diligenceable cost cuts and CEO incentives, while being wary of macro risks like inflation and private market liquidity. The power rank system offers a disciplined approach to avoid bias.
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Value investing is more than an investment strategy — it's a fundamental way of thinking about finance. Value investing was developed in the 1920s at Columbia Business School by professors Benjamin Graham and David Dodd, MS '21. The authors of the classic text, Security Analysis, Graham and Dodd were the very pioneers of their field and their security analysis principles provided the first rational basis for investment decisions. Despite the vast and volatile changes in the economy and securities markets during the last several decades, value investing has proven to be the most successful money management strategy ever developed. Value investors' success over the second half of the twentieth century proved not only the validity of the value approach, but its preeminence over even the most widely taught and practiced modern investment theory, which was developed in the 1950s and '60s and remains dominant even today. Our mission today is to promote the study and practice of Graham & Dodd's original investing principles and to improve investing with world-class education, research, and practitioner-academic dialogue. In this podcast you will hear from some of the world's greatest investors, their views on the investment management industry, how they developed their investment process and how they see the field changing over time.