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Alternative Market Briefing

Global equity manager focuses on symbiotic value chains

Thursday, April 21, 2022

Mark Walker
B. G., Opalesque Geneva:

A global equity manager has made a point of focusing on the phenomenon of shrinking supply chains and avoiding zero-sum business models.

London-based Tollymore Investment Partners is a private partnership that invests in a small number of publicly listed businesses. Tollymore compounds partners' capital over the long term by investing in a concentrated portfolio of undervalued high-quality businesses. The firm's philosophy is patience and independent thought. It partners with investors who think like business owners rather than traders.

The founder and managing partner, Mark Walker, was previously a global equity investor for Seven Pillars Capital Management, and also worked at RWC Partners, Goldman Sachs, and Redburn Partners. He will present at the Manager Discovery Panel webinar on May 3rd at 11 am ET.

Shrinking supply chains

In his last two letters to partners, seen by Opalesque, Mark Walker describes how he tackles shrinking supply chains.

The events of 2020 and 2021 have had a huge impact on supply chains across the world - and so have this year's. Some believe that future higher trade restrictions and climate change risks will affect supply chains greatly. One outcome is shrinking supply chains. "Smaller chains, smaller risks" for companies.


"We seek "non-zero-sumness", or symbiotic value chains, in the small collection of companies we own," writes Walker. "A symbiotic value chain is one in which multiple stakeholders participate in a company's value creation; success is shared with customers, employees, and owners through thoughtful and transparent incentives. Value chain symbiosis (VCS) cannot be achieved while one component's profits are another component's losses."

Zero-sum is a situation in game theory in which one person's gain is equivalent to another's loss, so the net change in wealth or benefit is zero. In financial markets, options and futures are examples of zero-sum games (as are poker and gambling elsewhere). Zero-sum games are the opposite of win-win situations-such as a trade agreement that significantly increases trade between two nations - or lose-lose situations, like war, for instance.

Seeking value in strong companies

As value investors, Tollymore, rather than seeking value in weak companies, tries to find it in strong companies. Business strength here is defined in terms of durable corporate vitality. Therefore, conventional business quality frameworks such as Porter's Five Forces seem somewhat unstable. Porter's Five Forces is a model that identifies and analyses five competitive forces that shape every industry and helps determine an industry's weaknesses and strengths.

"Concepts such as supplier and buyer bargaining power imply a zero-sum value chain, whereas VCS has at its heart the idea of win-win-win. Rather than investing in the customer and supplier proposition, Porter's forces connote an adversarial relationship between the company and its vendors and consumers.

And the first of the five, competitive rivalry, has left most corporate leaders to obsess over competitors at the expense of delighting customers. The popular adoption of military texts by business executives is the result of, or perhaps driven by, an intense focus on existing competitors."

Game theory, or the economics of strategic behaviour, has little to say about value creation for value chain constituents, he adds. Here too, there is an overwhelming focus on competitive behaviour and incentives.

Customer captivity in the long run

Walker believes that it is hard to conclude, from first principles, that businesses which suppress competition with switching costs or patents have a moat over a very long period. This is because these situations lead to disgruntled value chains. The goal of customer happiness may be consistent with VCS; the goal of customer captivity is unlikely to be.

Dominance acquired via customer captivity may last a long time, as in the case of Gillette, which had around two thousand patents made to protect incremental tweaks to its product in an effort to stifle competition rather than delight customers. It took about a century before Dollar Shave Club offered a pay-as-you-go, cancel anytime razer supply. "I suspect that the speed of Gillette's market share reversal was not just down to DSC's viral commercials, but also the pent-up frustration from a customer base that felt overcharged and under-served."

Customer-driven disruption

Shrinking supply chains are consistent with both this idea of customer-driven disruption and value chain symbiosis.

Meal kit delivery business models such as HelloFresh offer a good example. In this business model, the supply chain pulls demand from the consumer. Orders are only fulfilled when the customer places their order, vs. a traditional supply chain in which products are pushed from the producer.

"In the shortened supply chain products are distributed directly to home, vs. the traditional model in which there are multiple components such as wholesalers, warehousing and stores with whom value add must be shared. Shortened supply chains are faster - typically a few days from order to delivery. Because there are fewer steps, there is typically less waste and more margin, so they have the capacity to be better for the environment and owners as well as suppliers and consumers. Management also seems to understand VCS and intends to share HelloFresh's growing scale and better margins into product and service improvements."

So, in their search for value-creating supply chain shrinkage, Tollymore made one addition to the portfolio in 2021: Naked Wines is a platform that connects wine drinkers in the US, UK, and Australia with independent winemakers. Its model is to agree on orders in advance at a fixed fee per bottle, paid upfront, mitigating winemakers' business risk associated with demand uncertainty and working capital depletion.

Next Opalesque webinar:

Manager Discovery Panel: London

Meet five brilliant hedge fund managers and hear their presentations in this interactive webinar.

• Theron de Ris, Eschler Asset Management
• Richard Simons, Derby Street
• Mark Walker, Tollymore Investment Partners
Christian Putz, ARR Investment Partners
• Mathias Wikberg, Agera Capital

When: Tuesday, May 3rd, 2022, at 11 am ET
Free registration: www.opalesque.com/webinar/

Related article:
19.May.2021 Opalesque Exclusive: Spotting red flags in equity investments, a lesson learned

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