In the 1990s, Yen Liow, a hedge fund manager in New York, worked as a consultant for Bain & Co in Silicon Valley, helping the next batch of superstar companies capitalise on the emerging internet economy.
As the dotcom boom intensified, Liow worked closely with Dell Computers, then a scrappy start-up that became a household brand by selling PCs directly to consumers, circumventing the distributors relied upon by its rivals.
Dell’s success as the tech boom reached its zenith spurred its share price to jump more than 800 times through the 1990s, outperforming all other US stocks that were listed for the full decade.
“The company was growing absurdly fast,” recalls Liow, who now runs Aravt Global, a $US550 million ($730 million) hedge fund in Midtown Manhattan.
“That was a boot camp in understanding growth businesses, understanding industries that were in rapid transition and building real, operating businesses at a rapid rate.”
Now, Liow is hunting precisely the types of companies hoping to repeat the growth Dell enjoyed at the peak of the boom, during another period of dizzying share price highs for the technology sector.
The hedge fund he runs is named after the army of Mongolian leader Genghis Khan – which is partly a nod to his family’s roots in northern China, and outlines the type of winner-takes-all business models the portfolio targets.
Dominant positions
Despite the echoes of the dotcom bubble, today’s tech companies are underpinned by real profits in addition to the promise of scalability, says Liow, who grew up in Melbourne and will present at December’s Sohn Hearts & Minds event.
“We hunt monopoly and oligopoly growth stocks and these are the largest monopolies with the largest addressable markets with the best unit economics in the history of mankind,” he says.
The firm has large stakes in PayPal, its biggest US equity holding, and credit card giant Visa, in a bet that the incumbents in the vast global payments infrastructure will ward off disrupters and maintain dominant positions.
“We are very focused on payments,” Liow says. “There has been very little innovation in the financial world in the past decade, and I think we’re seeing the start of a golden age.”
PayPal shares have doubled through the pandemic but have fallen by a fifth from a high in July. Visa shares have underperformed the market over the past two years, and sit broadly in line with their level before COVID-19.
Regulatory woes
The hedge fund is also bullish on discount retailers and has a big holding in Five Below, a Philadelphia-based chain that sells cheap socks and slippers and has branched out into electronics and pet food, tripling the number of its outlets in the past eight years.
“Discount retail is something we love,” Liow says, describing the business model as “scale economics shared with your customer”, offering a winning blueprint that has found success from Frankfurt to Beijing.
“These exist all over the world,” he says, citing Japan, Germany, Turkey and China. “They all come in different shapes and forms but the formula is almost identical in all of them.”
The fund held a sizeable stake in Alibaba, the Chinese e-commerce giant, but dispatched its holding as concerns began to mount last year around the risk of swift government intervention.
The threat of greater regulation on large Chinese technology businesses makes the sector “very challenging right now”, Liow says.
Data privacy
Last year, when Chinese authorities pressured Ant Financial, an arm of Alibaba, to scrap its US listing, Liow grew worried about the spectre of sudden crackdowns across the tech sector.
“We saw that in Ant Financial. That was the trigger and that is why we exited,” he says. “Once you hit regulatory situations, predictability goes down dramatically.”
Alibaba shares have fallen 45 per cent over the past year in a tumble that accelerated after Chinese authorities clamped down on data privacy and pressured app platforms to remove Didi, a ride-hail company, shortly after its own US listing in June.
Didi shares have nearly halved since its initial public offering.
The risk of tighter rules also hangs perilously over large US technology companies like Google and Facebook. The social media giant has faced a wave of accusations over the years that it has avoided concerns about the impact and safety of its content to maximise its profits.
“The mega-caps are now starting to face far more scrutiny than they have over the past decade,” he says.
In response, Aravt has begun to shift away from large tech groups into the small and mid-sized companies that can stake out similar market dominance in niche corners of tech and other sectors.
“We have over the past 18-plus months been refocusing our portfolio back into small and medium-sized companies.”
Small companies “face far less regulatory scrutiny”, says Liow. “If a regulator is really going to go hard at a consumer-facing company it is much better to go for the large ones.”
One fast-growing tech group the company has targeted is Evolution, a Stockholm-based online gaming business that acts as a back end for many of the world’s online casino websites.
Shares in Evolution have surged more than 27-fold in the past five years and Liow is confident the company can expand into the US, where internet gambling regulations are easing, and Asia, where it has yet to operate.
Best-known investors
Liow hails from Kew, in the inner eastern suburbs of Melbourne, but has spent most of his career in New York where he launched Aravt seven years ago following more than a decade running equity portfolios for Ziff Brothers Investments, one of the world’s largest family offices.
At Ziff, he helped invest the fortune of the family behind the Ziff Davis media empire and worked alongside some of the best-known investors in the world.
The family office was one of the biggest backers of Jim Chanos, the famed short seller who successfully bet against Enron before its collapse after an accounting scandal.
“I’ve been a short seller for 21 years now and Jim Chanos was one of the guys who trained me,” he says.
Other industry icons who have helped shaped Liow’s style include Warren Buffett, Christopher Hohn, the British hedge fund manager who founded TCI, and Steven Mandel, a so-called “tiger cub” who launched Lone Pine Capital after a stint with Tiger Management, Julian Robertson’s famed hedge fund.
Liow will join the ranks of some of the world’s most famous investors in December when it takes the stage, virtually, to present a stock tip at the annual Sohn Hearts & Minds conference in Australia.
The event will be headlined by Charlie Munger, the nonagenarian superstar and right-hand man to Buffett at Berkshire Hathaway. Previous speakers have included Ray Dalio, the founder of Bridgewater Associates, Bill Ackman of Pershing Square and Howard Marks of Oaktree Capital Management.
Liow promises a “whopper” of a stock pick when he presents and hopes to appear at the conference in the future when the event returns to its typical live format.
“I wish I was there, back home, to be able to do this in person,” he says. “I hope to be able to do that next year, so I’ll have to make sure my pitch is in the top three.”
The Sohn Hearts & Minds conference will take place on December 3 with tickets available from sohnheartsandminds.com.au.
This article was originally posted by The AFR here.
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