ACQ’s approach to investment

What is ACQ’s investment approach?

ACQ supports growing Australian companies.  Research papers from the Commonwealth Department of Industry and Science (Office of the Chief Economist) conclude that young Australian companies contribute disproportionately to net job creation; although such companies employ only 15% of the workforce, they generate 40% of job creation (the largest share) in Australia.  To put this in context, over the period 2006 – 2011, it is estimated that 1.04 million full time equivalent jobs were added to the Australian economy and while start-ups added 1.44 million jobs over this period, older firms in fact shed around 400,000 jobs over this period.

In choosing investments through its research intensive investment process Acorn Capital attempts to identify the most attractive opportunities that have the potential to generate value within a given industry over the medium to long term.

”Our focus is to identify companies that are the most attractively valued investment opportunities in a given industry.  We typically find that the most attractive companies have a well-defined business model and a deep understanding of the process by which they create shareholder value.  The defensibility of a company’s business model is analogous with its sustainable competitive advantage.  A company may not be sustainable if in the long term it doesn’t recognise, manage and measure the by-products of its value creation process.  In our experience sustainability doesn’t manifest itself in terms of a binary financial outcome, rather companies with sustainable business models should be eventually rewarded with a relatively lower cost of capital.”

Robert Routley CEO Acorn Capital

Sustainability concepts are inherent in the investment process.  The interdependence of the global economy means that interaction between companies and their environments impacts directly on their competitive position.  Companies are increasingly confronted with environmental issues, such as climate change, water scarcity and pollution, as well as social factors including product safety, human rights, labour issues and relationships with regulators and the communities in which they operate.  Those companies that properly manage environmental and social issues can obtain a competitive advantage in today’s economy.

Environmental, Social and Governance (ESG) factors are considered in the investments that are made by ACQ.  ESG is a way of pricing economic externalities into the value of an investment opportunity.  Externalities are not readily reflected through traditional financial metrics (as costs created by the company that are passed to third parties, e.g. pollution, worker exploitation, unsafe work practices). However, the risk to an investor is that at some point these external costs become internalised to the company’s income statement (e.g. oil spill, faulty products) and will damage shareholder value.

ACQ and Investment Themes

Investing in ACQ is a positive decision by an investor and by doing so, you will:

  • Gain access to a portfolio of companies that is compositionally different to those in the ASX 250.  Underlying portfolio investments are generally at an earlier stage of development with greater long term growth opportunities.
  • Access a large universe (by number and aggregate market capitalisation) of companies through an established investment manager with experience in deploying capital in Emerging Companies.
  • Assist in the supply of risk equity capital to support Australian based entrepreneurs in listed and unlisted investments across all industries.
  • Indirectly provide capital to unlisted companies through an experienced investment manager.
  • Access a sector of the Australian economy that quickly adopts new ideas and identifies new markets.

When applying Acorn Capital’s investment process to ACQ, particular themes are sought.  These are:  Innovation, Efficiency, Growth and Diversity. At least one of these themes is present in each of ACQ’s investments.

 

     Innovation

A company’s level of innovation is key to both its competitiveness and growth.  Innovation takes many forms. For example:

Product innovation – significant improvements in technical capability through better components or materials, or other functional characteristics.

Process innovation – including a new and improved production or delivery method, such as changes in techniques, equipment and software.

Marketing innovation – implementation of a new marketing method such as new product design, placement, promotion and pricing.

Organisational innovation – in the workplace or in external relations

Innovation is not restricted to the Information Technology and Telecommunications, and Healthcare and Biotech sectors.  Australia has a history of new invention and is home to many new manufacturing and service companies.

“The relatively high share of start-ups among Australian firms can be seen in the manufacturing and services sectors. The share of manufacturing firms aged less than 3 years was around 24 per cent, which is relatively high compared to most other countries over the 10–year period. Similarly, the services sector also exhibits a relatively high share of young firms, where some 33 per cent of firms could be classified as start-ups “

The Employment Dynamics of Australian entrepreneurship 2015 Office of the Chief Economist

 

     Efficiency

An efficient company is one that uses all of its resources, both material and human, in an optimal manner that minimizes waste and inefficiency and employs sustainable and ethical practices.

 

     Growth

Companies with an equity value less than that of the 250th largest company listed on ASX are generally at an earlier stage of development and often grow at a faster rate than larger companies and can also contribute more to the growth of the economy. As companies age they tend to contribute less to job creation and more to job destruction.  Recent large scale retrenchments have occurred in many mature industries.  In contrast, research shows that young firms in Australia contribute disproportionally to job creation.  Investors in ACQ can support both job creation and growth in the Australian economy.

“Over the period 2006–2011 we estimate that 1.04 million full time equivalent (FTE) jobs were added to the economy. Start-ups (firms aged 0–2 years) added 1.44 million FTE jobs to the economy whereas older firms (3+ years) shed around 400,000 FTE jobs over the same period.”

The Employment Dynamics of Australian entrepreneurship 2015 Office of the Chief Economist

 

 

     Diversity

ACQ’s portfolio consists of Emerging or Microcap Companies.  As a group, such companies are compositionally different to those within the ASX 250 as they are generally at an earlier stage of development.  ACQ invests in both listed and unlisted Emerging Companies.  This provides shareholders in ACQ with access to companies that are at a different stage, are in different sectors and have a different growth profile to larger capitalised comparable companies.

“Australia’s future output and employment performance will be determined by our ability to find new sources of growth. Without another resources boom, growth is likely to rely on a greater use of knowledge, innovation and entrepreneurship.”

Australia Innovation System Report 2016 Office of the Chief Economist, Department of Industry and Science