Investors should treat buying a single share in a company in the same way that they would approach buying the whole company. This is one of the key pillars of the way many leading investors, from Benjamin Graham to Warren Buffett, approach equity investment. It is therefore interesting to look at some of the tools private equity funds and industrial buyers use when they consider the acquisition of an entire company.
One of the tools they often use is expert interviews. This can be an extremely efficient way to gain unique insights into an industry or a company.
Andreas von Buchwald is the CEO and founder of Nordic Knowledge Partners. The company connects its clients, often private equity funds, with the most relevant experts to empower more well-informed investment decisions.
I talked to von Buchwald about the use of expert interviews in the investment process and about how they can create the most value. Below are the highlights from our conversation.
The text has been translated and edited for clarity and length
When do private equity funds typically use expert interviews?
“Private equity funds use expert interviews throughout the investment process. They are often used in the pre-deal screening before the fund goes into the actual due diligence. In this phase, they do everything from one to perhaps five expert interviews to understand the industry and the attractiveness of the case. They try to understand the key conviction points and figure out what they need to believe in before they go into the due diligence process.”
“In the actual due diligence process, a lot of expert interviews are conducted. Typically it is a commercial advisor who does it together with or on behalf of the private equity fund.“
What kind of experts are usually used?
“The type of experts varies depending on the case and where the investors are in the process. Early in the process it is often senior experts. It’s typically former C-suite executives from the target company or from their biggest clients. It can also be former heads of strategy or business development who have an overview of the market and have done a lot of analysis on the competitors and the competitive landscape. As the project evolves, you go down into the areas most important to the case. It can be a specific geographic area you want to examine. Or it can be the logistical setup or the supply chain.”
“The expert should have both front-line experience and be able to give an investor-centric perspective. That means they can see what is important for a potential investor in the specific case. It is relatively important to check that ability before the interview.”
“It is important to highlight that we use former employees and not current employees as experts. And only former employees without a conflict of interest or issues with contractual obligations. We find experts with an up-to-date understanding of the case. They’ve typically left the company within the last 18 months.”
How do expert interviews create value?
“In a very short amount of time you get an extremely good overview of the case, the company, and the market it operates in. You get an overview of potential risk factors and test if it is something you should worry about or not. It is a very efficient way of gaining a relatively large amount of information about an investment opportunity.”
“It is also a way to get views on a case that very few people have access to. With market reports, you find online or sell-side research, a lot of your competitors and other investors have read the same thing. With expert interviews, you have an opportunity to get some insights that potentially no one else has, without any compliance issues.”
What kind of information can be obtained?
“It can be anything from how does the competitive landscape look? And how are the different players positioned? To the customer’s purchasing process, purchasing criteria, or their view on different vendors’ offerings. It can be a lot of different things, and it’s often with a strategic perspective. How is the market developing? Who will be the winners going forward, and why? And so on. I believe it can give some very interesting nuances and a potential edge.”
“It is important for equity investors to be aware of the limitations of the expert interviews. The expert will not have an opinion on the share price. They can help you with the underlying fundamentals, the developments in the industry and in the company, but not with the valuation.”
Can you give some advice on how to prepare for and conduct an expert interview?
“It’s important to make it very clear to yourself what the two or three questions are that you really want to get answered. What part of the investment decision do you need to get comfortable with? It’s important to know where you want to go and what kind of uncertainties you have and wish to reduce or eliminate. Then it is obviously good to have some kind of agenda. Investors with a clear picture of what they want to achieve get the best outcome.”
“In general, strive to ask open-ended, probing questions. Let the dialogue develop, it is okay to go slightly off-topic or change the order. But don’t be afraid to interrupt if you feel the expert is not answering your questions. Sometimes, as an alternative to asking open-ended questions, it can work to make a specific statement and ask for his or her view on it.”
How does it work if an institutional investor contacts Nordic Knowledge Partners to learn more about a specific case?
”We are not a traditional consulting business. We are specialists in finding those persons who know the most about what our clients are looking for. Then we facilitate direct contact and knowledge-sharing between our customer and the experts.”
“When we get a request, it takes from an hour or two to a few days before the first phone interviews with the experts can start. Ninety percent of our expert calls take place within three days from the client brief.”
“We make a longlist of potential experts and pre-interview the most relevant ones. We make sure there are no compliance issues. Based on our findings, you decide which, if any, experts to engage with. Then we set up typically a one-hour phone consultation at a time that fits both the client and the expert.”
How does Nordic Knowledge Partners’ pricing model look?
“Unlike most of our competitors, we are flexible towards how our customers wish to purchase expert interviews and use our services. You can either sign up for a subscription with a certain number of credits upfront or you can choose our pay-per-use model. In the pay-per-use model, you have no commitment, no financial risk, and no upfront payment. If you buy credits upfront you will get a better price.“
“We present the shortlist of experts we have identified specifically for your request. Based on the experts’ CVs, Nordic Knowledge Partners’ presentation of them, and their relevance, you can decide how to proceed. You can actually go all this way without paying anything if you decide not to do an interview. That is rather unique.”
Institutional equity investors’ use of expert networks
In January 2018, the second version of the Markets in Financial Instruments Directive, or MiFID II, took effect across member states of the European Union. MiFID II will require that investment banks charge separately for research and brokerage services. Before this law went into effect, the cost of research was included in the fees that banks would charge to execute trades. The change is likely to lead asset managers in Europe to shift some research spending to other sources.
In the UK and in the US, it is already rather common to use expert networks; in other regions such as the Nordic countries, they are rarely used. The Norwegian asset manager Odin started to use expert networks this year as a supplement to sell-side research. They also increased the number of internal analysts and started to use an advisory board. According to the world’s largest expert network company, GLG, 27 of the 50 leading mutual funds use their services as of October 2018.
We sent two cases to Nordic Knowledge Partners to see how they could help institutional equity investors.
Case 1: An institutional investor is considering an investment in the Finnish elevator producer Kone (KNEBV:FH). They like the business model, the industry and the valuation. However, the competitive situation and developments in the important Chinese market are a concern, and they would like to get a deeper understanding of this specific issue. How would you be able to help the client?
“We have identified a couple of expert profiles that we think would be relevant in this situation. We would typically present three to four experts on the vendor side and two to three on the customer side. We would pre-interview the experts and write a small recommendation on each expert. Since this is a mock request, we only identified two experts.”
Candidate 1: Former Vice President for Greater China Area at Kone. This expert was responsible for New Equipment and China Front Line Product Strategy. He worked at Kone for six years until 2017, has a consultant background, and currently works as an advisor for corporates. He has a good understanding of developments in the Chinese market, Kone’s position in China, competition from low-cost providers, and property developers’ purchasing criteria. This is a classic example of an expert that can talk about your current concern and help you make a more informed investment decision.
Candidate 2: Former Vice President in the leading Chinese property developer Vanke. This expert was Head of Design and Project Management in Vanke in 2014–16. He has an architect background and has a lot of experience from the property development industry. It’s relevant to get a customer perspective. Sometimes we see that the customers’ perception of the company, the market, or the competitive situation is a bit ahead of the vendor’s perspective. With this expert, we would recommend that you discuss the key purchasing criteria. How is the purchasing process? How has it evolved over the last couple of years? What will drive demand going forward? And what type of technical solutions will be in demand? How does he see the competitive landscape? How is Kone positioned compared to the competitors? How does he see the price pressure? It is these kinds of questions we would recommend that you cover with the customer side.
Case 2: An institutional investor is looking at Norwegian Scanship (SSHIP:NO), the global leader in waste and water cleaning systems for cruise ships. The investor would like an introduction to the industry and especially an understanding of how the customers see Scanship’s offering compared to its competitors’. How would you be able to help the client?
“In this case, the number of relevant experts is getting smaller as they operate in a niche industry. Our team has done some research and found some interesting experts.”
Candidate 1: Former CFO of Scanship who now works as a consultant. This expert worked in Scanship for a number of years, and as recently as 2017. Experts with a financial background sometimes see the world a bit differently than people with a commercial or sales background. But when you are at the CxO level, they usually have a very good understanding of the industry and the business model.
Candidate 2: Former regional manager in Scanship. This expert was responsible for the Italian market until 2017, and before that he worked with sales and marketing in the US. These are two large markets he could cover in more depth than a top-level executive. We would also recommend that this expert covers areas such as customer landscape, the demand drivers, and the industry outlook.
Candidate 3: Former Vice President of Fleet Regulatory Compliance and Corporate Environmental at Norwegian Cruise Line, one of the large customers. It is interesting to understand the changing regulatory requirements, what suppliers are most attractive today, and who will be most attractive tomorrow. These kinds of topics are interesting from a customer perspective.
Based in Copenhagen, Denmark, Nordic Knowledge Partners is a specialized knowledge services firm that connects professional clients with leading industry experts.
They serve customers in 15 countries but with a focus on clients in the Nordic region, where they have close relationships and a deep understanding of the client’s business. They deliver access to experts across all geographic markets and have worked with experts from 92 different countries so far.
The three largest customer segments are private equity funds and other principal investors, management consulting firms, and corporates, which includes business development and M&A teams in large corporations.
Nordic Knowledge Partners work with the top 3 global management consulting firms and the leading regional consulting companies. They work with around 25% of the large and mid-market private equity funds active in the Nordic countries on a repeat basis.
Legendary investors’ use of expert interviews
Philip Fisher on expert interviews
Philip Fisher was a big advocate of talking to experts to get a unique understanding of a company or an industry. In his 1958 classic Common Stocks and Uncommon Profits he writes:
“Most people, particularly if they feel sure there is no danger of their being quoted, like to talk about the field of work in which they are engaged and will talk rather freely about their competitors. Go to five companies in an industry, ask each of them intelligent questions about the points of strength and weakness of the four other, and nine times out of ten a surprisingly detailed and accurate picture of all five will emerge.”
“However, competitors are only one and not necessarily the best source of informed opinion. It is equally astonishing how much can be learned from both vendors and customers about the real nature of the people with whom they deal. Research scientists in universities, in government, and in competitive companies are another fertile source of worthwhile data. So are executives of trade associations.”
Warren Buffett’s life-changing expert interview with Lorimer Davidson
On a Saturday in 1951, Warren Buffett took a train to Washington to learn more about the insurance company Geico. Unlike Omaha in the 1950s, Saturday wasn’t a workday in Washington. According to Buffett, a janitor directed him to Lorimer Davidson – the only other person working in the office that day. Lorimer Davidson was Assistant to the President and later became the CEO.
“Davy had no reason to talk to me, but when I told him I was a student of Graham’s, he then spent four or so hours answering unending questions about insurance in general and Geico specifically,” Buffett says. “No one has ever received a better half-day course in how the insurance industry functions nor in the factors that enable one company to excel over others… That afternoon changed my life.”
In a Berkshire Hathaway shareholder meeting Buffett said: “Berkshire would not be where it is today if Davy had not been so generous with his time on a cold Saturday in 1951.”
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