Investing in companies with strong management teams is crucial for long-term value creation.
Permian Investment Partners focuses on the European market due to its improving economic outlook and undervalued companies.
Assessing CEO quality and their ability to drive change is essential to identifying potential turnarounds and undervalued companies.
Deep dives
Scott Hendrickson's Background and Path to Investing
Scott Hendrickson, partner and co-founder of Permian Investment Partners, shares his journey into the world of investing. Growing up in Connecticut with parents in finance, Hendrickson initially pursued a passion for music before realizing his interest in finance and business. After working in M&A banking, private equity, and earning an MBA from Columbia Business School, he entered the world of investing. His background as a value investor and teacher at Columbia brings a unique perspective to his investment approach.
Permian Investment Partners' Focus on Management and European Markets
Hendrickson explains that Permian Investment Partners prioritizes investing in companies with strong management teams and focuses on the European market. They seek out opportunities where management can drive change and improve operational efficiency. While Europe has historically underperformed, Hendrickson believes there are significant opportunities in the region due to its improving economic outlook and undervalued companies. The firm leverages their deep research and network to identify high-quality businesses and invest in areas where other funds may have liquidity constraints.
Investment Philosophy and Strategy of Permian Investment Partners
Permian focuses on a long/short investment strategy, with a portfolio of 15 to 20 core positions on the long side and a similar number of short themes. They prioritize companies with exceptional management teams and high-quality businesses that can deliver long-term value. On the short side, they target structurally challenged businesses, asset bubbles, and fading trends using data-driven analysis. They employ a power rank system to prioritize and size positions based on factors such as market dislocation, business quality, and valuation. Their risk management framework helps assess portfolio exposure to macro dynamics.
The Importance of CEO Quality and Management Turnarounds
Permian emphasizes the significance of CEO quality and its impact on value creation. They look for new CEOs who can drive change and improve businesses from the moment they join. The firm focuses on evaluating the CEO's track record, incentives, and leadership qualities. They seek opportunities where the outcome depends on management execution and operational improvements. Permian identifies potential turnarounds by analyzing cost structures, liquidity, corporate governance, and the ability of the new CEO to effect change. Through their research and analysis, they aim to uncover undervalued companies on the brink of transformation.
Challenges and Opportunities in the Current Market
Hendrickson highlights several challenges and opportunities in the current market. He is concerned about the potential impact of artificial intelligence and automation on employment. The rapid rise of AI technology could lead to significant job displacement. He also raises concerns about the allocation of capital to private markets, where investors may face risks and potential defaults. However, he remains cautiously optimistic about the investment opportunities in Europe, driven by improving economic conditions, undervalued stocks, and the potential for value creation through operational improvements and management turnarounds.
When evaluating a company, getting a clear picture of all the relevant factors can be challenging. That’s why today’s guest, Scott Hendrickson, heavily emphasizes management quality and companies where diligence can provide a high level of conviction.
As a Columbia Business School graduate and adjunct professor, Scott is both a practitioner and a teacher. He has been an integral part of the investing program for almost a decade.
Scott Hendrickson is a Partner and the Co-Founder of Permian Investment Partners, a $1.2 billion management-focused global long/short investment fund. Before co-founding Permian, Scott worked as an Investment Analyst at Brahman Capital. Prior to Brahman, Scott worked as an Associate at Industrial Growth Partners, a middle-market-focused private equity fund. Scott started his career as an Analyst in Merrill Lynch’s Investment Banking Program. Scott graduated from Emory University with a BBA in Finance in 2000 and Columbia Business School with an MBA in 2007. Scott serves on the Columbia Business School adjunct faculty, teaching Applied Value Investing since 2014.
In this episode, Scott, Tano, and I discuss Scott’s journey to a career in investing, why Permian has management as their core focus, the three main business quality metrics they employ, risk management for short interests, characteristics of transformational acquisitions, how teaching has expanded Scott’s perspective, and so much more!
Key Topics:
How Scott’s interest in investing evolved from his love for music (1:57)
Scott’s learnings from his time at Brahman Capital (5:35)
Criteria Permian seeks in longs and shorts (7:01)
Why Permian has management as a core focus (8:08)
How the quality of Permian’s LPs has become an advantage (10:53)
Permian’s approach to screening (12:49)
The three main business quality metrics employed (15:38)
Permian’s portfolio construction and power rank system (17:20)
Breaking down the four short frameworks (22:01)
Risk management for short interests (24:46)
Factoring in the macro view (26:31)
How Permian applies value-added research (30:00)
What it means to be “diligence-able” and why that matters (33:38)
Characteristics of transformational acquisitions (37:22)
Differentiating between structural and fixable costs (39:41)
What’s behind the long-term underperformance of European stock markets (42:35)
How teaching has expanded Scott’s perspective (44:54)
Scott’s recommendations for investors to improve the odds that they will be successful over time (46:26)
What keeps Scott up at night and excited about the future (47:23)
