Alatus Capital has developed a “modern value investing” approach that strives to combine a fundamental company valuation methodology with a disciplined and thorough portfolio construction process. The objective is to provide investors with superior risk-adjusted returns by compounding capital over the long term and outperforming equity indices, with less risk and volatility.

Through rigorous bottom-up fundamental analysis, Alatus seeks to capture significant capital appreciation by identifying companies with potential “inflections” in profits and cash flow generation over a 2-3 year time frame. Alatus mitigates risk by investing in companies generating strong free cash flow, operating in industries with positive dynamics and growth prospects and benefitting from substantial competitive advantages.

Alatus primarily invests in European equities and believes in investing in businesses, not stocks, and behaves as part-owner of its portfolio companies.

Investment Objectives

Alatus’ objective is to provide its investors/capital partners with investment vehicles compounding capital over a full business cycle (three to five years). Long-term annual returns should also be superior to the broad market averages (MSCI World, EURO STOXX 50). Alatus pursues this objective by investing into 15 to 20 compelling long-term value companies in public markets, primarily in Continental Europe. These Europe-based companies are often leaders in global niches and have substantial global exposure (Emerging Markets and North America), while benefiting from quality corporate governance.

Alatus primarily seeks to mitigate risk and volatility by investing in companies generating strong free cash flow, offering a solid balance sheet and providing a margin of safety against permanent capital loss. It also uses cash, shorts, futures and options to mitigate volatility and downside risk.

Investment Strategy

Alatus believes in investing in businesses, not stocks, and behaves as part-owner of its portfolio companies.

Alatus seek investments offering potential for significant value creation over a two to three year time horizon. Through the identification and thorough analysis of business strategies and operations, the firm diligently strives to invest in companies that offer a “free option” to significant capital appreciation. Such an “inflection” in value creation can be driven by a change in strategic direction, an operational restructuring, the investment cycle of the business and/or an entrance into new markets/products. Investee companies should offer a margin of safety on capital invested without the benefits of an inflection in their business.

Free cash flow is considered as the key driver of shareholder value creation. We seek to buy companies at an attractive equity free cash flow yield. We define free cash flow as recurring operating cash flow after maintenance capital expenditures, without the benefit of any future growth: it is thus cash available for shareholders’ benefit for distribution, share repurchase or reinvestment. To illustrate our objectives, if a company generates 10% of free cash flow yield every year and repurchases shares in the first year, only 90% of the company shares will be outstanding. In the following year, the cash flow yield will allow retirement of even a higher percentage of the shares. This process cannot continue for long without the stock price increasing substantially. Marginal return on capital expenditures is another driver, since the capital allocation process can create or destroy significant value.

Analytical Framework

From a industry dynamics perspective, Alatus Capital looks for companies benefiting from a lasting and defensible competitive advantage, operating in a sector in which they benefit from high entry barriers, strong pricing power and growth potential. The team looks for evidence of competitive advantages such as economies of scale, IP or control over distribution channels. Companies with leading market share in their markets and oligopolistic industry structures with cooperative behavior between key competitors are particularly favored. In cases of short positions, the opposite is also true.

From a financial perspective, a fundamental bottom-up analysis is carried out to assess the upside in a stock as well as the margin of safety protecting invested capital. In addition to looking at published financial reports (e.g. 10Ks, 10Qs, annual reports), significant time is spent in understanding business fundamentals by meeting/calling on company executives, industry participants, and/or other relevant people on the subject matter.

The team looks for companies with a solid asset base and an appropriate capital structure. We seek to identify unusual accounting policies and potential mismatch between P&L and cash-flow statements. A set of detailed financial projections and models is built internally. The length of the projections depends on the visibility of future top-line growth and the timing of the potential business inflection. The free cash flow generation capacity of a company is a key focus of the analysis.

Typical Investment Process

A rigorous step-by-step investment approach has been developed and can be provided upon request.