Value Investing with a Private Equity Mindset

We had the pleasure of sitting down for an exclusive interview with Christopher P. Mittleman, chief investment officer of Mittleman Brothers, in 2016. Shai Dardashti, former managing director of MOI Global, conducted the interview.

Chris Mittleman directs investment policy, research and portfolio management for the Mittleman Brothers. He has provided investment strategy and portfolio management for more than twenty years to clients including high net worth individuals, corporate pension plans, foundations, endowments, and other institutional investors. Chris managed private client portfolios for Spencer Clarke, LLC as Senior Vice President of Investments from 2002 until 2005, when he co-founded Mittleman Investment Management, LLC with his brother, Phil. Prior to that, Chris was an Investment Executive at UBS (PaineWebber) for twelve years. He began his career in 1990 at Shearson Lehman Hutton, after attending Phillips Exeter Academy, and The Pennsylvania State University.

The following transcripts have been edited for space and clarity.

MOI Global: Your investment approach was recently referred to by Barron’s as applying a private equity mindset to investing in public markets. Please elaborate.

Chris Mittleman: The kind of businesses we’re targeting are the same kind of companies that private equity firms are attracted to. These are businesses that generate free cash flow on a sustained basis; free cash flows that are, if not predictable, at least somewhat repeatable, so that if I pay 10x FCF for this business today, hopefully in five years’ time, the cash flows are going to still be at some semblance of that level in a worst-case scenario.

We’re looking at a business based on, if we were to buy the whole company, what would be the cash-on-cash return we will get in year one, two, three, four? That’s what private equity does when they scout investments, but the key distinction is that we are not seeking to take control. We’re not looking at it from a real private equity point of view, but there is this aspect of it that’s like private equity investing. Many of the companies that we’ve invested in ended up getting bought out by private equity, so you see that they’re looking for the same qualities in a business, a key difference being that they have to pay a control premium.

As an asset class, private equity has very good long-term returns, but we’ve been able to outperform that asset class, on average, over an extended period because we’re not paying that control premium.

We’re looking for these kinds of businesses—where you have a fairly strong sense that the free cash flows are going to be reproducible and will hopefully grow over time, and you’re able to pay a low price relative to those cash flows. You’re not getting control, but you’re paying a much lower price than a private equity firm. Rather than pay 10x EBITDA or 15x free cash flow, we’re trying to pay substantially less. Obviously, the valuation depends on the nature of the business, but that’s how we end up outperforming the private equity asset class.

MOI: You have the benefit of liquidity, you’re not locked in…

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