Published Last Week

1. Markel Reinsurance: Alterra Capital Case Study

2. Addtech: Managing a BU, M&A Funnel & Incentives

3. Tesla vs Toyota: Servicing & Repair

4. A History of Idox Group

5. Air Products: Blue & Green Hydrogen Investments

6. Safelite & US Auto Glass Repair: Relationships with Insurers

7. Informa: Industry Dive Acquisition

8. US Value-Based Healthcare: Physician Incentives

IP Research Recap

We have recently published or plan to publish material on the following companies in one of our IP research formats:

USA: Heico, Transdigm, Loar Group, Danaher, Progressive, Markel, Kinsale, Brown & Brown, Ryan Specialty, Spotify, Microsoft, Wayfair, Amazon, Veeva, Appfolio, Procore, Credit Acceptance, Old Dominion Freight Lines, Carvana, ACV Auctions, Copart, O'Reilly, Tesla, Watsco, Ferguson, Fastenal, Intuitive Surgical, CCC Intelligent, FTAI, Autodesk, Corpay

ex-USA: Constellation Software, Lumine, Terravest, Diploma, Howdens Joinery, Burford Capital, Judges Scientific, Spirax Sarco, Ashtead, Fever Tree, The Gym Group, Dino Polska, Basic Fit, Bergman & Beving, Lagercrantz, Lifco, Momentum Group, Vitec Software, Sartorius, Eurofins, D'Ieteren, Mainfreight, bioMérieux, Idox, Safran, MTU

You will find a recap of IP Research published in 2023 here and a list of the most popular interviews published in 2023 here.

How do we choose what to cover?

1. Owner-operator: management’s economic fate is intertwined with that of the business

2. Management has high integrity

3. Management focus on ROIC and FCF per share

4. High quality governance

5. Business is customer obsessed

6. Structurally advantaged business model (brands, scale economies, network effects, low cost operators, etc)

7. Companies with a long growth runway

8. Win-win dynamic: customers, employees, suppliers, shareholders, regulators, local community all win as a result of the growth of the business

9. Stable legal jurisdiction

Markel Reinsurance: Alterra Capital Case Study

In late 2012, Markel acquired Alterra Capital Holdings, a US-listed reinsurance operation, for $3.1bn. This was a slight premium to book value and one of the largest acquisitions in Markel's history. It was also its first real venture into reinsurance.

This interview with a Former Alterra Executive and reinsurance veteran explores the acquisition and Markel's reinsurance strategy. We explore the types of reinsurance lines that best suit Markel and Berkshire's model plus the challenges managing the asset-liability risk:

What Max Re favored above everything else was probably workers' compensation. It behaves similarly to life insurance. It involves long-tail liabilities and covers a huge number of people. All US workers have this arrangement where they have workers' compensation insurance, which includes a couple of hundred million people. This makes it highly predictable and involves long-tail liability. Other lines, like on the casualty side such as directors and officers and other types of professional liability, are less predictable. Typically, someone does something wrong, and it isn't until several years later, when the situation escalates, that any losses are realized. This allows them to hold onto premiums for a very long time. - Former Executive at Alterra Capital, Markel

We also discuss the differences in the claims process for insurance and reinsurance property and casualty lines:

On the reinsurance side, for property claims, there's a tradition of collecting premiums for, say, nine years and then in the tenth year, handling claims with almost no questions asked. This is because big catastrophic events hopefully only happen about once every 10 years. On the casualty side, it's permissible to audit and ask many questions about how losses were verified. For property claims, insurers often just send a bill, and as a good reinsurer, you typically pay it upfront to improve their cash flow. They might issue a cash call immediately after an incident, and you might pay them a quarter of the estimated loss to assist with their cash flow. So you estimate really early on that you're going to owe this particular insurer 10 million. You might give them two and a half million on day one to help with their cash flow. Later, the most you might receive is a list of claims with amounts, no other details, just a list that adds up to the estimated loss. - Former Executive at Alterra Capital, Markel

This interview is the first in a series to explore Markel's reinsurance and insurance operation. We plan to cover Nephila in detail this quarter.

Addtech: Managing a BU, M&A Funnel & Incentives

Addtech, the ~70bn SEK Swedish industrial group, is one of the best performing companies in Sweden over the past 20 years. In this interview, a Former Addtech and Storskogen executive shares the trade-offs between sourcing acquisitions via brokers vs the company's internal network:

Ultimately, I believe it's beneficial that brokers are out there seeking mature sellers, as this helps maintain momentum in acquisitions. Relying solely on proprietary acquisitions can lead to complaints about insufficient EBITDA growth due to not acquiring enough. It's a good combination, and I've already seen examples of this. For instance, Lagercrantz has a higher share of acquisitions through brokers, while Addtech, at least during my tenure, found acquisitions through brokers less appealing compared to opportunities where you've known and followed a company for years. That approach was generally seen as more advantageous. I'm not sure if it's still the same at Addtech, as it's been about two to three years now, but they really valued proprietary acquisitions and took pride in that. This is where you see differences among various players in the industry. - Former Addtech and Storskogen Business Unit Manager

One key variable we consider when evaluating acquirers is how the company sources acquisitions. Does it source transactions through brokers where price is typically set in a competitive auction? Or does the acquirer source deals directly through its operating subsidiaries? Deals sourced through brokers versus directly from operating companies may be of different quality and price.

Our recent analysis suggests that how a company is organised and incentivised also may determine how acquisitions are sourced. Whether the acquirer is sector-focused or sector-agnostic may also determine the sourcing strategy:

Personally, I often looked into who the best competitors were and whether there were other market players with a complementary product portfolio. After identifying them, we would initiate contact and, hopefully, acquire the company if it was a good fit. (..) The Addtech BU management team, often coming from subsidiaries themselves, already has a network, facilitating many of these meetings. This constant engagement helps in building a robust pipeline. - Former Addtech and Storskogen Business Unit Manager

All acquirers approach sourcing differently. On one hand, Röko, the private Swedish acquirer ran by the former Lifco CEO, sources 100% of its acquisitions from over 1,000 brokers across Europe. On the other hand, companies like Addtech and CSU both source ~40-50% of acquisitions directly. In our previous analysis on Röko, we explore the advantages and disadvantages of sector-focused vs sector-agnostic acquirers and the impact on growth and ROIIC.

This interview goes on to explore the importance of deal sourcing in more detail which is relevant for all companies that use accretive M&A as a core growth strategy. Why and how acquirers use brokers or source deals direct is a topic of exploration for us over over the next 6 months.

Tesla vs Toyota: Servicing & Repair

In this interview, a Former Collision Repair Manager at Tesla sheds light on the advantages and disadvantages Tesla faces in servicing its cars compared to a legacy OEM such as Toyota.

While Tesla's gigacasting manufacturing process may drive lower capex per vehicle, it may increase the repair cost of minor collisions:

With Tesla, the structure is different because it uses aluminum gigacasting, which does not allow for repairability. If a Tesla is placed on a bench, which mimics the manufacturing setting, and any bending is detected—even if it's just a few millimeters—it necessitates an automatic replacement. Unlike traditional ICE vehicles or other aluminum unibody structures, where a bent frame rail can be pulled back into alignment using cold straightening without heat, Tesla does not allow for pulling. Any bent structure in a Tesla is replaced outright. - Former Collision Repair Manager at Tesla

Also, in Tesla-owned repair shops, higher cost per mechanic drives the unit repair cost 2-4x higher than third-party Tesla-approved collision centers.

One of the problems I faced while running one of those centers was motivating technicians to be productive. Technicians are assigned hours the same way they would be in a traditional shop, and that's how we monitor productivity. The benchmark was 140%. The goal for any collision center opening was to reach 140% efficiency. From what I know, when I was there, very few shops actually reached this. My shop, the one I was running, achieved up to 165% productivity, the highest in collision history. No other shop reached those numbers. I saw the averages of other shops; most operated at 80%, 90% to 100%. Very few maybe reached 120%. We were one of the few shops that exceeded 140%, hitting a high of 165% in one month. That is not normal. Most shops across the board operate at 80%, 90% to 100%. The reason being that they are not incentivized to move faster. - Former Collision Repair Manager at Tesla

The interview goes on to explain the challenges for Tesla to build an internal repair network and the potential advantages compared to legacy OEMs.

A History of Idox Group

Idox is a £200m UK-listed software company serving local councils. It offers local planning and geospatial software across the UK. Put simply, each time a company or household requests planning permission, Idox’s software runs the back end process to ensure it’s fully compliant. Over the last decade, it has acquired other software solutions that serve local councils:

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For its core solution, Idox has ~100% retention and generates annuity-like revenue. However, the company isn’t growing organically.

This interview with the company's Former CEO explores the complex history of the company, its failed acquisitions, and growth opportunity ahead. We plan to publish additional research on Idox this month.

Air Products: Blue & Green Hydrogen Investments

Air Products is one of the three largest industrial gases companies alongside Linde and Air Liquide. A Former Business Development Director at Air Products shares the company's historical investments in blue and green hydrogen and the drivers of incremental demand:

It's always interesting to consider green hydrogen or blue hydrogen within the context of the established business. Currently, about 60% of hydrogen is consumed by the refinery sector to desulfurize crude oil and produce gasoline, diesel, kerosene, and similar products. These are the main existing users and will continue to dominate even as we transition to a decarbonized hydrogen industry. That's the first factor. - Former Business Development Director at Air Products

Safelite & US Auto Glass Repair: Relationships with Insurers

In this interview, a Former Executive VP at Safelite sheds light on the importance of third-party administrator (TPA) agreements between insurers and auto glass repair shops and the main differences between the US and EU markets.

"That's probably one of the big differences between the US and Europe. I would say the biggest difference is the nature of the TPA, or third-party administrator models. In the US, Safelite has TPA relationships with most major insurers. What TPA means is that they handle the intake of the claim. Whereas in Europe, the TPA model really doesn't exist. That's the fundamental difference.- Former Executive VP at Safelite

Informa: Industry Dive Acquisition

Informa Tech acquired Industry Dive, a B2B publishing business, in 2022. Now, Informa Tech is merging with TechTarget. A former Senior Account Director at Industry Dive gives an overview of the business and where TechTarget's B2B marketing capabilities could be leveraged:

I can see where they're going with it because these campaigns are often very much tied to leads. If TechTarget can enhance the ability to drive quality leads, which means different things to different people, but high intent is particularly valued by marketers. For Industry Dive, we're driving contextual, mid to high funnel leads, such as downloading an eBook or attending a webinar. The intent here is to draw people into the marketing funnel, hoping they'll take a meeting with a salesperson and eventually convert over a long time horizon. - A former Senior Account Director at Industry Dive

US Value-Based Healthcare: Physician Incentives

Past interviews on US value-based healthcare focused on understanding the dynamics between payors, healthcare providers, and physician enablement companies as the industry migrates from fee-for-services to value-based care. In this interview, a former VP of Corporate Venture Capital at Anthem shares insights on the different approaches by payors (i.e partnerships vs acquisitions of healthcare providers) and the role of incentives amidst this industry transformation.

But the reality is, particularly in specialty medicine, which is likely the target because specialists command high salaries. So, you offer them $1,000 to change their practice, but they don't care when they're earning nine figures, seven figures, or high six figures. Your incentive model doesn't really work with standalone contractual physicians. However, if they are employed by you, you can significantly influence their decisions or push them to return to independence. - Former VP of Corporate Venture Capital at Anthem