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Sir Christopher Hohn - Investment Conference 2025 - Norges Bank Investment Management ​

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Chris Hohn - TCI Fund Management Holdings

Host:

Welcome everyone. We are privileged to be joined by two truly great investors today.

I'll start the conversation with Sir Chris Hohn and we will later then be joined by Christian Sindig, CEO of EQT.

Chris, it's a privilege and honor to have you. Welcome. I have to say I completely agree with Nicolaj. Probably the best investor Europe has ever seen. To back it up with numbers, 9% returns above the market every single year over a period of 21 years.

Sir Chris Hohn:

Wow. On average. Not every single year, but on average.

Host:

On average. So, share your secret with us.

Sir Chris Hohn:

Well, strategy has been to invest in great companies. But over time I've come to refine and understand better what that means.

That's just point one. Find the great companies.

Point two is being concentrated.

George Soros said once, it doesn't matter if you're right or wrong, all that matters is how big you are, your position size when you're right and your position size when you're wrong. If I'm right on a 1% position, it kind of doesn't make any difference. So, we'll take positions of 10% to 15% in the past, even 25% of the fund. And that's a double-edged sword. If you're right, it's fantastic. If you're wrong, it's very painful.

So, concentration is an important facet because there aren't hundreds of great ideas and companies.

You might say, "That sounds risky."

Then it is. And I'll ask you, "Well, how do you define risk?"

And the best definition of that was, for me, given by Warren Buffett, who we all love, and he defined risk as not knowing what you're doing.

And then the third component, I would say, is long-termism.

You can find a great company, but if your time horizon is very short, you're at the vagaries of what Keynes called the voting machine.

He said, "In the short term, the market is a voting machine, and only in the long term is it a weighing machine."

Going back to Warren Buffett, he was asked, "Was Coca-Cola a risky investment when you first made it?" And he said, "Depending on the time horizon, over one year, one month, very risky. You couldn't sell where the price would trade it. It doesn't necessarily reflect fundamentals in a short or even medium term."

And so I do think time horizon is a critical thing, and even intelligent investors are unable or unwilling to have a long-term horizon.

And so I would put engagement as another component of that for us, of adding value.

And so we find the great companies focused or concentrated portfolio, long-termism, and engagement, act as an owner in simple terms.

But a lot of investors get confused that the thing that you want is growth.

Yeah. And if you look at industries like airlines, they've been growing for 100 years, maybe 5% a year. Fantastic growth, but collectively and cumulatively, the industry never made any money because competition was too strong.

And so, per se, growth by itself is not a guarantee of making money. So you need, critically, barriers to entry to competition and sustainable value add and high value add. So it's actually a combination of barriers to entry and high value added that you can charge for.

And of course, then, growth has a value. So everybody would agree with those statements, but the interesting thing is...

Going back again, third time to Warren Buffett, he said most moats aren't worth a damn. Because you think you've got a moat, but then it erodes. And so the real thing is sustainability of moats.

Host:

How do you find out whether a great company remains a great company all the time?

Sir Chris Hohn:

Yeah. Well, one of the things is to understand the forces of competition and substitution and disruption are very powerful.

And we've learned, just in the same way people underestimate complexity structurally,

Most investors underestimate the forces of competition and disruption. Why? Because they're short term. It keeps going back to the same root causes. So we learn through examples and through sometimes experience and suffering.

One of my investments 30 years ago, before I started TCI, was with a European media company that Bain Capital had bought control of. It was a monopoly and they bought control. It was like a billion euro valuation. And the stock went to 50 billion valuation. One billion to 50 billion. And then it went to zero.

And it was a yellow pages company in Italy. Because the internet hadn't been founded. People thought it was a resilient monopoly. But, you know, something, Google destroyed the company. So we sometimes don't know. We can't know what hasn't been invented.

So then how can you know anything, you might say?

It was "unknown, unknown. You don't know what you don't know".

But certain industries are more prone to disruption than others. Your risk is much higher. And so we try to avoid those sectors because you're asking for trouble or limit our exposure.

And one of those sectors is technology.

Host:

So what are the ones you like?

Sir Chris Hohn:

I've always liked as one example, infrastructure. Which is a bit unusual.

You know, it's not that sexy. It's a bit boring owning toll roads and airports and transmission lines, cell phone towers.

But I was born into a poor family. So I always wanted to get my capital back. I thought that was a good starting point. Don't lose your capital.

And so I sort of believed in physical asset backing, which most investors don't look at tangible book value. It's something forgotten in economic textbooks as a metric or a placement value.

But an example is maybe ten years ago, nine years ago, the Spanish government approached us about taking an anchor position in an IPO of their airport, Aena. And the airport was basically brand new, huge under capacity. And 75% of the value was in unregulated shops and car parks and complete monopoly unregulated and huge growth potential. And they sold it at a 15% free cash flow yield.

And what we could see is that you could never replace these assets, Madrid Airport and Barcelona Airport and irreplaceable. And they sold at the right price. Valuation matters. They sold at a 15% free cash flow yield.

Host:

So I learned at school that a great company is not necessarily a great investment. But you look at something like cash flow yield to tell you now it's a good time to buy.

Sir Chris Hohn:

And sometimes people say things are cheap for a reason.

Now people were concerned about government ownership in this case, regulation. And the government did impact it. They limited the compensation of the CEO to 200,000 euros. And ultimately the CEO left. He was a very good CEO, the original. But it didn't matter because the monopoly was there, the assets were there. So I like asset backing of infrastructure.

Host:

Can I just ask you one question on this? If you like an asset, the physical asset, does management quality matter? Is it important?

Sir Chris Hohn:

Less so. It matters for reinvestment risk.

And, but one of the things I mentioned that we do is we're actors owners. People have different terms for that, constructivists and activists. But I really think fundamentally it's acting as an owner.

We were worried we didn't have any control. But we had influence. I was asked to be on the board. I was on the board for three years of the Aena, the airport company. And we went to the government and to the board and said, look, you're throwing out for all this cash flow,billions of euros of cash. You don't need it. We want to propose an 80% dividend payout ratio. And for you, that's dividends you can spend and they agreed to it.

And so my reinvestment risk of management was limited then, very limited. And so there are things you can do to mitigate risk. And, but it does matter.

You know, another infrastructure asset we've been invested in is in the toll road sector and for OVL.

It's where there's a family that have about a quarter of a stake and they're fantastic capital allocators. They just reinvest. They sold Heathrow Airport recently and, you know, at a low return and they're reinvesting in monopoly toll roads at high returns. And they just really know their business and have high alignment of interest.

So, again, Buffett said you've got to ideally you should invest in an industry where it's a monkey could run it because one day they will.

And so, you know, I want to find an asset where because, you know, there's no guarantee the CEOs comes back.

And so I think you have to invest in an in a business where it's a great business and it doesn't depend on the manager because the assets are ultimately more reliable than the manager.

So in this sort of where are the moats, you talked about infrastructure and physical non-replicable assets.

Another space we like as an example is aerospace, things like aircraft engines and manufacturers like the aerospace and Safran.

And we like that space because the barriers to entry are extremely high in terms of intellectual property.

It's so complicated to make this product that there'd be no new entrants for 50 years. Yeah. So new entrance is a sign of the barriers to entry. That's one of the criteria you can look at.

And why is that? not only very complicated.

You make the money in the spare parts. So once you've got this installed base, you know, the new engines are only a small percentage and the airframe is only want one or two engines. It's too complicated. Otherwise, there isn't the room for multiple competitors.

And so and then the various reasons that it's very difficult for competitors to enter the replacement parts. So that's another space where very intellectual property is can be a barrier.

....

Host:

You mentioned long-term themes. Chris, this approach that Christian takes on investing in long-term structural themes, something that resonates with you?

Sir Chris Hohn:

The average life of holding of our current portfolio is 8 years. The average holding of a US stock is less than one year. So investors are absolutely en masse short-term trading-oriented.

But we should ask, well, why is long-termism... Is it a good strategy? Or why?

I'd like to think it is. Well, we should ask the question why. I always say justify.

If you look empirically, it turns out that the very best companies, high ROEs, they stay good. They don't disappear overnight generally. And bad companies stay bad. Low ROEs stay low ROEs.

Christian Sinding:

I totally agree. We have an expression: Good companies are better than they seem. Bad companies are worse than they seem.

There's persistency. You've got to get rid of the bad ones and just double down on the good ones.

Sir Chris Hohn:

Yeah, there's persistency.

And the value of that company is only seen over the long-term. They say there's no free lunch in finance, but actually, I do think long-termism in a great company is a free lunch because If you look at any sell-side model, they'll go out three years Or two years.

Why?

Because that's the time horizon of the typical buy-side investor, one or two years.

But what if it can keep being good for 30 years? Then you're completely undervaluing that company.

And people don't look at it because most companies, 95% are mediocre or bad companies. And they meet their cost of capital, but they're not super companies.

One of the companies, I mentioned Aerospace. We invested in Safran. We've owned it for 13 years now. And we're actually one of the largest investors in the company. And we made more than a 20% IRR for 13 years.

So long period. That duration.

Safran. They were a joint venture with GE Aerospace in aircraft engines.

And so we have investors who come in and say, "Well, we want new things."

Host:

Why is it so hard for investors to be long term? I understand that commercial pressures.

Sir Chris Hohn:

They think new is better.

...

Host:

What can you do in the public market as an activist? Your approach has evolved a little bit over time.

Sir Chris Hohn:

Yeah, it's an interesting debate, private versus public. Because I do think the very best companies in the world are public companies. Not everyone, but generally.

One of the reasons is in many industries, scale and scope matter. Small is not beautiful.

An example of this is video conferencing, where Zoom, new innovator, bought out video conferencing and Microsoft launched teams and just distributed free integrated in their bundled office product.

Now people say Zoom was a better product, but Microsoft won because they had this bundling strategy and they had scope, they had advantages of scope. The ability, customer relationships.

I think people underestimate sometimes these powers of big companies of incumbency to crush a competitor.

So the public market investor doesn't have no influence. If they're willing, they can influence. Sometimes, stopping stupid things.

An example of Safran, we have this great company, reported eight times earnings, it was compounding at 20%. One day they came out and tried to make an incredibly stupid acquisition of a company called Zodiac, a wild of evaluation using shares which were half their intrinsic value. So it was doubly bad.

And we fought the deal and in the end they cut the price in half and then paid only in cash and the share price doubled.

We got sued by the seller. I was sued personally for 100 million euros and my CFO came to me very stressed one night saying it's all right for you, you can afford it, but they're going to bankrupt me. Because the seller lost a billion euros , but few investors will act like that, most just accept it.

But in the end they cut the price and blamed us, which was fine and all's well that ends well. They never did silly things again.

Christian Sinding:

But then you have to have a big enough ownership stake to actually have that influence, don't you, in some form ,Or at least a real voice that they will listen to. The challenge in the public markets, if I may challenge that, is that often the companies become run by the management, right? Because they're ultimately ones then with no active shareholders they effectively point the board and you have a bit of a governance system.

Sir Chris Hohn:

It's a big risk and in general, well I would maybe the general is there are many companies with bad governance that become badly run. And I'm not a believer in being an activist in a bad industry or a bad company. That doesn't make any sense.

And so, but there is a, I don't actually think the shareholding necessarily is everything.

Can matter. We went recently on the board of a company called CellNex, Cellphone Towers, and we had 10%. So it mattered because there were four shareholders with 10% each and so it was very concentrated.

But I think the power of the argument can win. shareholders are not stupid. Norges Bank is not going to be an activist themselves, but if an activist makes a good case, they'll support them.Whatever stake the activist has, 1%, 2%, it doesn't matter.

Christian Sinding:

Can we go back to the statement that you had that the best companies are public. I don't really appreciate that one. So maybe I give some examples.

But I do agree with you that having companies that are strong, large, winning, beating the competition, whatever, one is very interesting that we own, which is the world's largest private education company.

It's a $15 billion company, but it's only got 5% market share around the world, growing organically through acquisitions, super purpose driven, doing very good for society.

And the competitors are moms and pops all around the world that don't have the resources to invest in AI and the next generation of education and stuff like that. That is a brilliant company.

We've actually had it public twice, but the public market didn't appreciate it. So we've taken it private twice and now we're just going to keep it private, hopefully for as long as we can and just build and build and build.

So I think the world is also changing because private equity has gotten so large now and we can move companies into longer term ownership structures.

So we can actually, I think we're going to see more and more of the best companies in the world either stay private or go private and grow.

And that's a big difference. And that's one of the things we're seeing in the market while you heard a number of public companies is shrinking a lot over time.

Sir Chris Hohn:

And you alluded to the importance of control. You tried an approach, a private equity approach in the listed market with the EQT listed.

Some reflections on lessons learned.

Christian Sinding:

Yeah, we did.

We tried to start a mini version of what you do and we failed miserably actually. After we shut the fund down last year, we delivered back like 90% of the capital that was invested or something a little bit worse than that.

And luckily it was very small. And when we realized we weren't good at it, we actually did shut it down and focus on what we're good at, which is private markets.

I think we tried to apply the models that you've heard me think about here and talk about here in a public setting where we didn't have the toolbox, we didn't have the understanding of how to drive influence. We thought we would have more impact being who we are and it didn't work.

So it's really about, it's a lot of learnings in there. Back to really sticking to your guns and doing what you do well and more of that.

Sir Chris Hohn:

Like everything, there's pros and cons, arguments for and against.

But in private equity, you pay a price for control. You pay a premium, can be big.

So, don't get me wrong, control has a high value, has a value, let's say. But is it worth 40% or whatever premium you have to pay in a competitive auction?

In public markets, there's an offer every day. You can take it or leave it.

So I just think that that point is relevant to entry price matters.

Christian Sinding:

Do you think liquidity is overvalued in the markets? Why do people need liquidity as much as they think they do all the time?

Sir Chris Hohn:

You can be wrong.

That's something I learned, the Yellow Pages example was...

And if you're wrong in private, there's no way out here in a short term. And if you're wrong in a public, you have a chance to get out. You have a chance.

Christian Sinding:

But you don't really have a chance to repair and improve what you do in private. We can huddle down, change the management, change the board, divest underperforming operations. It's just a completely different mindset.

Sir Chris Hohn:

To a point, yeah, there's...

We were investors in cable, in the US, Charter and communications and before that, Time Warner cabled. And it was a great investment for eight years. We made five billion a P&L and five times our money. But then the industry started to deteriorate. It became saturated and more competitive and people started overbuilding private equity.

Christian Sinding:

Yep, we bought lots of those companies.

Sir Chris Hohn:

Yeah, so it's overbuilding.

Christian Sinding:

One of our best sectors actually.

Sir Chris Hohn:

And I sold, yeah, because it changed.

Christian Sinding:

We were buying.

Yeah.

Host:

Unfortunately, we are in the end of the session already. I would love to continue for much longer.

Chris, you shared many of your secrets. You shared more in a podcast that you recorded with Nicolae, which will be released on the 14th of May. So I encourage everyone to listen to that one.