Magellan's latest bite of a Mexican fast-food chain builds on earlier listed investments. But it will be some time before investors can judge the success of Hamish Douglass' direct investment strategy.
Never let it be said that Hamish Douglass doesn’t know his fast-food joints.
Over the years his Magellan Financial Group has invested in a swag of quick-service restaurants including Yum Brands (owner of KFC, Pizza Hut and Taco Bell in the United States), Starbucks and McDonald's, which he memorably chose as the venue for a Lunch with the AFR article last year.
But Douglass’ latest fast-food foray is something a bit different.
Magellan announced on Tuesday it has invested $86.8 million to buy a 10 per cent stake in Mexican food chain Guzman y Gomez, the private Australian food business led by founder Steven Marks and former Kmart and McDonald's Australia boss Guy Russo, who is non-executive chairman.
The deal is the latest under what Magellan calls its principal investment strategy, which is about taking direct stakes in unlisted businesses.
It put $155 million into new investment bank Barrenjoey in September and a month later put $20 million into a financial technology provider called FinClear.
While Magellan argues it has had a principal investments strategy for some time, it has mainly been investing in its own managed funds – eating its own cooking, as Douglass likes to say. What we’ve seen in recent months is quite different to that.
At Magellan’s AGM last month, Douglass nominated five key tests for any such investment – an estimated pre-tax return above 10 per cent, the ability for the investment to operate without day-to-day involvement from Magellan, the opportunity for the investment to help Magellan learn about a sector or business model; a high-quality business; and the opportunity to add value for Magellan shareholders.
Magellan would prefer fewer, larger investments, Douglass said, while stressing that no investment would be allowed to complicate the group’s simple funds management model.
There’s logic to the approach, particularly in a world where private capital markets are becoming increasingly important and outperformance harder to find in public markets.
But the simplicity of Magellan’s approach – finding the best 30 or so long-term stocks and sticking with them – has always been one of its great attractions. Does the principal investment strategy dilute that at all? Or will it deliver the promised benefits by improving Magellan’s stockpicking while earning decent returns?
It will be many years before we can answer that – it will be hard to definitively answer the returns question until Magellan exits some of these investments.
On first blush, it looks like it has paid a full price for its stake in Guzman, given its investment values the business at $870 million, well above the $500 million valuation that was being thrown around when the business started talking to bankers and lawyers in October ahead of a potential ASX float.
That said, the business is growing fast. And Magellan’s quick-service restaurant knowledge should be helpful in shifting a few more tacos and burritos.
Magellan shares rose 1.6 per cent on Tuesday morning but are still off 23 per cent since their February peak. Investors might take a bit more convincing that this principal investment strategy is the whole enchilada.