Activist investors may be getting the most press, but Corsair Capital shows that screening for a combination of good value and great management is a winning strategy
Jay Petschek and Steve Major, co-portfolio managers at Corsair Capital Management, have decades of experience as value investors and the results to prove that their hard work has paid off (the main fund has 14% annualized returns since inception in 1991), and for the most part they are following the same principles they laid out nearly a quarter century ago. But one thing that has changed is their focus on finding great management teams to work with in addition to strong value propositions.
“While not in our original guiding principles, a management team we are comfortable being partners with has proven to be critical,” says Petschek in the latest edition of Columbia Business School’s Graham-Doddsville.
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Corsair wants management on their side
Their other three guiding principles are more typical of value investing: the goal is to stay a bit ahead of inflation and taxes so that compounding can take over in the long run, not to beat the market year-by-year; it’s important to take prudent risks and maintain a diversified portfolio; and good investments are hard to find, so you need to be disciplined and wait for them to fully play out.
But the some early experiences might have tipped them off that aggressive tactics weren’t a part of their investing DNA. In the interview, Petschek tells about how he and some friends bought 24.9% of Tri-State Motor Transit back in 1988 and fought a proxy fight to get control over the company’s valuable real estate. They lost the proxy fight, but pressured the company to sell itself afterward, an experience that Petschek didn’t care to repeat despite the solid return.
“I also wanted management teams that would work for me instead of against me,” he says.
Passing on bad management
Now, having confidence in a company’s management is a key part of their process. They start by looking for strong cash flows, a healthy balance sheet, a business moat, and a good entry point, but that’s no longer enough.
They give the example of Clearwater Paper, spun off from Potlatch in 2008, as a business they liked with an attractive price – and a CEO who they considered to be weak at capital allocations. Some value investors might have made a small investment anyways because of the low price, and activists might push for change of management, but Petschek and Major just kept an eye on the company instead. After a management shake-up brought a new CEO and CFO onboard, they took another look at Clearwater paper and decided to invest now that the business they liked was being led by people they had confidence in.