Interview #113 : Matt and Dan (Eagle Point Capital)
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For this issue we have the pleasure of interviewing Matt Franz and Dan Shuart from Eagle Point Capital.
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Hi Matt and Dan, thanks so much for taking the time out to do this interview.
Can you please tell readers about your backgrounds, and how you got involved in investing?
Hi, and thanks for the invite!
Matt: I got interested in markets in high school while taking classes about macroeconomics and comparative politics. I learned that currencies fluctuated based on things like interest rates, trade balances, and political stability. I thought that if I could understand these factors I could make money. That appealed to me because I liked reading.
As an engineering student at the University of Michigan my interest in currencies gave way to options and futures. After I graduated, it was obvious that my passion was investing, not engineering, so I moved back to Chicago and got a job trading S&P 500 and VIX options.
I worked for a series of small firms. One was an RIA, another a mutual fund, and the last a hedge fund. I primarily used quantitative methods to trade S&P 500 and VIX options to hedge volatility in stock portfolios. Since these were small shops, I got exposed to every piece of the business, and also learned about the pros and cons of how investment companies are structured.
Shortly after graduating I discovered Shane Parrish’s Farnam Street blog and read Rodger Lowenstein’s Making Of An American Capitalist. It was my first introduction to Warren Buffett and Charlie Munger and it sent me down the value investing rabbit hole.
Their concepts of intrinsic value and margin of safety made intuitive sense to me. I liked how they embraced marked-to-market volatility and used the price they paid to mitigate the risk of permanent loss. That was refreshing since my job at the time was focused on minimizing marked-to-market volatility, which came at substantial cost.
My job started early but was pretty much done by 3:15 PM, when futures markets closed in Chicago. I started going to the library after work for a few hours each day to study value investing. I read practically every book on it at the Harold Washington Library.
Just as I was launching EPC, I reconnected with Dan. I’d met Dan in college but hadn’t kept in touch. We realized that we had the same approach to investing and the same vision for building a company around it.
Dan: As a fellow engineering student, I also have a non-traditional background when it comes to investing. I graduated with an Industrial Engineering degree from the University of Michigan, and had already accepted a job in engineering when I got bitten by the investing “bug”.
My senior year of college my Uncle gave me Howard Marks’ book, The Most Important Thing, as well as The Essays of Warren Buffett and I immediately took to the ideas laid out in those books.
The concept of buying something for less than it’s worth and the intellectual challenge of trying to understand the businesses behind stocks hooked me almost immediately. Before graduating college I knew I would become a full-time investor at some point, I just didn’t know how or when.
I spent a few years working as an engineer and an operational leader at a consumer goods company and spent almost all my free time building an investment approach that I thought worked for me. Taking the concepts Buffett, Munger, Marks, Greenblatt, and so many others have communicated and applying them in a way that works for me was a fun challenge in those years, and a process that is still ongoing.
When I felt I was ready to make a career transition I ended up getting a job working for a lower middle market private equity company as a way to transition from the operations world to the investment world.
Working in private equity was a lot of fun and working closely with portfolio companies made me a much better investor as I got to see what really drove profitability and competitive positions, and lack thereof, in real operating businesses. I also learned a ton about the credit markets which is extremely helpful as an equity investor.
Before accepting the job in PE Matt and I knew we were going to work together when the time was right, and in 2019 I joined Matt at Eagle Point and we haven’t looked back since.
Why did you decide to launch Eagle Point Capital? And who is the typical person who invests with you?
I started Eagle Point Capital in 2017 to focus on old school, bottom’s-up value investing. I wanted to build a firm that spent 90%+ of its time doing the actual research for investing. I’d seen how easy it is to get wrapped up in marketing, client hand-holding, and compliance. It seemed like there were relatively few investors left building concentrated, bottoms-up portfolios with an eye towards cash flow.
Options and futures trading was beginning to feel like an arms race that the Citadels of the world were bound to win. Value investing felt like an area where an individual or small company could still compete. The more you read, the more your knowledge compounds, so I wanted to start compounding as soon as possible.
I started EPC with money from friends and family and it has organically grown from there. We offer separately managed accounts to individuals and high net worth individuals. Our client base ranges from middle-of-career savers to high-net-worth retirees to custodial accounts for young children of our clients.
We love the diversity of our investor base, and we focus on aligning ourselves with clients that have the right mindset and attitude towards investing instead of a specific demographic.
We write them a letter every six months to explain what they own and why they own it. We used to write investment memos to ourselves to test our understanding of what we’re reading. We decided to start sharing them so our clients understood what we did all day. Its become a great way to meet like minded investors too.
What type of businesses, or situations, do you like to invest in?
We prefer to invest in simple, predictable, and profitable businesses. We emphasize predictability, yield, and valuation more than most value investors.