Interview #114 : Erling Sorensen (Aligned Capital Partnership)
Thinking in generations.
For this issue we have the pleasure of interviewing Erling Sorensen from Aligned Capital Partnership.
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Hi Erling, thanks so much for taking the time out to do this interview.
Can you please tell readers about your background, and how you got involved in investing?
Thank you for the invitation to participate in the Capital Employed newsletter, Jon. Seeing what you have built is impressive, so this is a real treat for us.
Leaving home at the age of 15 to join the merchant navy as a deck officer cadet with Maersk, one of the largest companies in Denmark, I learned at an early age what it means to sacrifice, to work hard, and to work thoughtfully with others, as well as the importance of perseverance.
I have been engaged in the capital markets since 2010, as an investor, investment manager, as a business founder and as a business operator.
Before that, I spent ~20 years in global commodities markets, working out of Copenhagen, Singapore, Oslo, Melbourne & London.
My entire post-maritime career has been centred around optimising the allocation of capital and resources, coupled with rigorously thinking about risk.
Core to the way I have sought to structure the Aligned Capital Partnership Investment Trust (the Partnership Trust) and the management thereof are:
The importance of complete and uncompromised alignment with investors (we refer to them as co-investors) in the Partnership Trust.
Treating our co-investors as true partners. This means complete transparency of what we own (all holdings) and why. And it also means not charging our co-investors any fees, other than a performance fee above a 7% p.a. compound hurdle.
Let me explain a bit more about each of these two points, because they really go to the heart of our existence and beliefs.
When establishing Aligned Capital Partnership, I was very clear with myself that I wanted to ensure all my energy and endeavors would always remain fused together with the Partnership Trust and continue to compound capital for its co-investors.
I wanted to ensure that there would always and ever be only one investment fund, one strategy. No separate classes of units in the Partnership Trust. Everyone is invested on the exact same basis.
And I wanted to ensure there would never be a splintering of my time and focus on interests that weren't aligned with the management of the capital that co-investors have entrusted us with.
For my wife and me, all of our money is invested in the Partnership Trust on the same terms and in the same class of units as all other co-investors in the Partnership Trust.
This goes to the absolute heart of what we do and how we do it. We are seeking complete alignment with our co-investors and believe that can only be achieved if we are not distracted by having any money invested elsewhere.
Additionally, we are and will always be the largest individual investor in the Partnership Trust. This way, none of our co-investors should feel that we are at risk of being influenced by a larger co-investor, and we can say to our co-investors genuinely that when things don’t go well, then we will feel it.
Over the years I had observed that for many investment managers the skill of attracting money appeared more important than the skill of managing money.
For us, job 1, 2 and 3 is investment performance. Not gathering of assets. We believe that if we are reasonable at jobs 1, 2 and 3, then the interest in what we are doing will increase, and, if appropriate, over time the Partnership Trust will grow.
As we would be managing our own money this way anyway, I didn’t think it would be right that we charge our co-investors a fee. There are virtually no incremental costs associated for us, so why pretend there is in charging for them.
The only fee co-investors in the Partnership Trust will incur is if the Partnership Trust has returned more than 7% p.a. compound. In such a case a performance fee of 20% of the returns generated in excess of a 7% p.a. compound return is payable.
Importantly, any/all performance fees that are earned by Aligned Capital Partnership, as the manager of the Partnership Trust, are reinvested in the Partnership Trust.
Finally, the manager of the Partnership Trust is structured such that it cannot be sold to another money manager. That way our co-investors can rest assured they will not wake up one day to someone else managing their investment, while I am catching a plane to the nearest beach. Our co-investors can sack us, but we won't sell them.
I hope that what comes across is that the concept of complete and uncompromised alignment with our investors is one we do take seriously. We would not manage money for other people any other way.
Why did you decide to launch your own fund? And whom do you manage funds on behalf of?
After l decided to end my executive career towards the back-end of 2017, I set up Aligned Capital Partnership, with the plan of institutionalising managing my family’s money.
Having repeatedly being asked to do so by a number of people and institutions I had gotten to know and/or who I had managed money for during my executive career, I started considering potentially, eventually, opening up to like-minded investors to invest with me. We took in the first outside co-investors on the 1st of November 2021.
Before ending my executive career I noticed that for a large part of the money management industry the principal/agent problem was real and frequently somewhat pungent. I think it still is.
In many instances the principal (the investors) and the agents (the managers) had different priorities. I think they often still do. I believe there are really only two ways to approach this problem:
Maximise the conflict for the sake of maximising short-term revenues to the agent (which I think appears to be close enough to standard industry practice); or
Seek to minimise the problem through behaving and thinking like principals.
I didn’t particularly like the first approach at all. And as I wanted for the Partnership Trust to be an investment that our co-investors would think of as one for the grandchildren of their grandchildren’s grandchildren, plus the entire net worth of the family was invested (still is) and hence I was already a principal - I decided to follow the second approach.
My sole objective for launching the Partnership Trust is to make money for my co-investors and with my co-investors. Not off my co-investors. It was with this in mind, and taking inspiration from the partnership Warren Buffett ran in the 1950’s, prior to taking over Berkshire Hathaway, that I created the fee model which I believe is right and fair.
In doing so, I concentrated on the correct philosophical approach to incentives, and so the job was easy:
the management fee should not be a profit centre as we do not create value through managing Aligned Capital Partnership per se; and
a performance fee should respect the notion of the opportunity cost of capital for our co-investors and me.
Hence, as I mentioned above, we do not charge any management fees. I want us to be the best investors we can be, and I want our co-investors in the Partnership Trust to benefit from what results.
Our goal is excellence in investing, which means achieving the returns our co-investors are seeking from their engagement with the Partnership Trust.
To achieve that, our aim, since day one, remains to spend high-quality time, studying high-quality people that are building high quality businesses, and in doing so finding high-quality investment opportunities for a group of high-quality investors.
We don’t actively solicit or market to prospective investors for the Partnership Trust.
External investors in the Partnership Trust come in the form of family offices, business owners and ex-business owners, and individuals. Some invest in their personal names, some through their superfund (Australian for pension fund), some through family trusts and some through a company structure.
The Partnership Trust is open exclusively to 'Wholesale Investors' as defined under the Corporations Act 2001 (Cth) in Australia.
In addition to us undertaking no marketing of the Partnership Trust, probably the biggest reason for our obscurity stems from our fanaticism about only allowing the "right" investors to join. We understand the importance and value of selecting the right co-investors, and we know that the way to attract quality investors is to be one.
We remain open to external capital, albeit selectively.
We have concluded that in the absence of past precedent, we need to have enough reason to believe that potential new co-investors possess the same long-term, business-owner orientation as the rest of us. Without this clarity, we risk initiating disagreeable relationships founded on shaky foundations.
That is not a risk we are willing to take. We want to continue enjoying the intellectual challenge of finding interesting investment opportunities through rigorous research while knowing we are in the company of people we trust and admire, and who knows, understands, and are comfortable with how we think and invest.
What type of businesses or situations do you like to invest in?
We are old school. We mostly just sit around reading, thinking, discussing among ourselves, putting the occasional numbers into spreadsheets, and waiting. Frankly, our office probably feels more like an abandoned library with a few people loitering around.
Of course, we like a little action like anyone else. We just don't find ideas worthy of action on a regular basis.
As such, when we meet and discuss with prospective new investors, we rarely miss the opportunity to emphasise the importance of having the right co-investors. They, our co-investors, are what enables us to unleash one of our biggest weapons: inertia.
Our investment mentality puts a premium on figuring out what to avoid, rather than what to buy. We look to prioritise the simple and easy, and we seek quickly to discard the complicated.
We follow what we believe is a commonsense approach to solving the problem of investing - holding intellectual honesty and rigorous analysis as the keystones to success.