Founders first: Geoff Wilson’s new bet on market leaders

The stock picker will put to test the notion that smarter investing is about backing the ones with skin in the game.

Wilson Asset Management chairman Geoff Wilson is going after founder-led companies. Picture: Britta Campion

High-profile stockpicker Geoff Wilson’s latest move is all about having skin in the game: An investment fund that bets on Australia’s founder-led companies.

With this, Wilson reckons he’s on to a sure thing. For founder-led companies that trade on the ASX have a reliable track record of outperforming their corporate rivals.

Many founder-led firms have delivered stunning growth and today count among some of Australia’s biggest companies.

These include names such as Goodman Group, Fortescue, WiseTech, ProMedicus or Xero. On a global stage there’s Atlassian, Canva and even News Corp (owner of this publication).

Founder-led companies have a history of outperforming the broader stock market. Picture: NewsWire/Gaye Gerard

The founder-led theme first came on the radar of Wilson as one clear trend kept coming up across his other funds.

Founder-led companies were often the stocks generating the bulk of returns, particularly among the small to mid-sized end. Digging deeper showed a broad basket of founder-led companies outperformed the broad S&P/ASX All Ordinaries by 12.5 per cent over the past seven years.

“All the empirical evidence is that founder led companies tend to perform better,” Wilson said.

However, the reason behind the outperformance does not need to be explained by science.

“It’s that obsession, the passion, the commitment to the business,” he said. “If you’re a founder, then you can take a longer-term view than if you’re employed to work with somebody.”

Wilson is talking from experience. The former stockbroker ploughed all his spare cash into starting Wilson Asset Management nearly three decades ago.

Chemist Warehouse founders Mario Verrocchi and Jack Gance were among those backing the move to merge with Sigma and list on the ASX. Picture: Nadir Kinani

Despite launching his first listed fund in the midst of the dot.com crash, he persisted and has since built his funds business to the point where it oversees more than $5.5bn across several listed investment companies, including the charity-led Future Generations Fund.

Wilson’s founder-led fund comes amid a big few weeks for founder-led companies. Chemist Warehouse is about to debut on the ASX as part of its merger with smaller wholesaler Sigma. The retailer still counts Jack Gance and Mario Verrochi, who launched the company, on the board.

Verrochi last week said he had “600 babies” in reference to the amount of stores he operates.

Elsewhere, billionaire Solomon Lew has sold the rump of his retailing empire to Myer, but has taken a cornerstone share position and a board seat at the department store retailer.

Wilson’s founders fund will have a value focus but has set itself three rules for investing. The founder must own more than 10 per cent or $20m in the company; the founder holds an executive or board position; finally, the founder can’t have sold down more than 25 per cent of their holdings in the past 12 months. (This should be a red flag for many investors).

Wilson said there were plenty of candidates in the Australian stock universe that could qualify for the fund, with at least 20 per cent of the 500 strong S&P/ASX All Ordinaries Index fitting the criteria. There were more stocks outside the benchmark index.

Names like ARB, Temple & Webster, the Stokes family’s Seven Group Holdings and Carsales are among those that could fit the bill.

Myer executive chair Olivia Wirth and Premier Investments chair Solomon Lew, who last month sold his domestic retail brands to Myer.

Initially, the fund will target $300m. Wilson has been quietly testing the fund among big investors in recent weeks, and says this upper limit is the right size for flexibility on opportunities and generating performance. The Founders Fund will be overseen by Wilson portfolio managers Toby Yao and Oscar Oberg.

In many ways, Wilson is also cashing up to take advantage of what he expects to be a rush of initial public offerings in the coming year, mostly in the small to mid-sized space. He points out many of the bigger companies start off as smaller players.

Wilson was a cornerstone investor in the buy now, pay later payments play Afterpay when it listed in 2016. They injected about $4m in the company run by founders Nick Molnar and Anthony Eisen. Shares were sold in the IPO at $1 each, where the payments company was value at a little over $120m. Afterpay shares eventually raced to as much as $160 each, and Wilson sold out at about $110 as it was starting to pull back, still representing a stunning return. Afterpay was acquired by Jack Dorsey’s Block three years ago in an all-share deal worth more than $36bn at the time.

Geoff Wilson’s funds were among early backers of founder-led payments play Afterpay. Picture: NCA NewsWire/Andrew Henshaw

Another founder outperformer for Wilson has been Tuas, the Singapore-focused telco launched by TPG founder David Teoh. Wilson bought in at 74c a share and is still on the register. It last traded at $6.57.

It’s not all smooth sailing for founder-led companies. Along with the more concentrated ownership, this brings with it key risk where all the momentum is tied up in the founder. In recent months, companies such as WiseTech with Richard White and even Mineral Resources with Chris Ellison shows this can hurt investors when the founder attracts controversy outside – or even inside – the business.

“When you’re investing, if you’re looking for higher rewards, then there are higher risks,” Wilson said, saying this can have a significant impact on valuation.

However, it comes down to doing the right research.

“When you buy a share of the company, you’re actually backing management – the person driving that company – whether it’s the founder or whether it’s the CEO. You’ve got to trust they can perform. A lot of our process comes down to backing good management. And it’s a lot of easier that people have got skin in the game”.

Originally published as Founders first: Geoff Wilson’s new bet on market leaders