This article was originally published on Canadian Family Offices by Marjo Johne on July 30,2024.

The way Greg Dean sees it, leaving a big firm to start his own business was much like being a musician who decides to break away from the band.

“When you’ve had tons of success as a group and suddenly you’re taking a subset of that group to do something a little different, that first album is pretty much make-or-break,” says Dean, who left Cambridge Global Asset Management – a division of CI Investments – after 10 years as principal and portfolio manager to launch Langdon Equity Partners, a Toronto-based investment firm focused on high-performing smaller companies.

“You better score with that first album or you might not get the chance to make a second one,” he adds.

Almost two years after Langdon launched its first two funds in Canada – one loaded with global companies and another with Canadian enterprises – Dean and his team have scored well enough to keep on going. As of June 30, the Langdon Global Smaller Companies fund posted an annualized net return of almost 17 per cent and a cumulative net return of just over 33 per cent, while the Langdon Canadian Smaller Companies portfolio returned 12.4 per cent net on an annualized basis and 24 per cent cumulatively.

“We’re not in it for hall-of-fame size, but I think if we’re good at delivering hall-of-fame returns, we will build a very viable business,” says Dean, who notes that Langdon aims to hold between 25 to 40 companies in its global fund and between 15 to 20 in the Canadian fund. A maximum of 10 per cent of each fund will be made up of private companies.

Dean and his team have skin in the game, having invested $12.4 million of their own money in Langdon funds. The firm is also backed by Australia-based Pinnacle Investment Management Group, which owns one-third of the business.

“We have a 10-year funding agreement that will ensure that we never need to take the wrong money in order to deliver on our value proposition,” says Dean, who has built a solid reputation for picking global growth stocks.

While Langdon’s focus is on smaller companies, its approach to picking investments is based in large part on a set of criteria that might typically be applied to big companies. That’s hardly surprising, given Dean’s longstanding reputation as a fund manager who, according to one news article, picks small caps that act like large caps.

We talked with Dean about his latest venture and Langdon’s funds.

Where does Langdon see itself in the investment landscape? How are you positioning yourself in the market?

Langdon’s approach is based on a very narrow focus, on smaller companies exclusively. We’ve been deliberate from the early days that we’re not going to raise a lot of money, we’re going to try to deliver exceptional returns, and we’re going to focus on offering a world-class infrastructure – not just world-class investment management but also world-class compliance, legal risk, you name it.

If you’re interested in generating what I’ll call compelling returns without taking undue risk, then that’s where you should think of where Langdon plays, as an alpha sleeve or an alpha source. You can put our risk-adjusted returns against anything – private debt, private credit, private equity, public equity – and we’re going to stack up.

What I think is missed is the diversification potential. Large cap is 90 per cent of the world’s market cap but it’s actually only 10 per cent of the companies. So for the average investor, they’ll have three or four or six managers hunting for them in the 10 per cent of companies considered large and they’ll own a lot of the same stuff, maybe 70 or 80 different companies. But then they’re completely neglecting the 90 per cent of the companies that we hunt. Small cap is almost 5,000 companies in the developed world – it’s enormous. So we just focus on four sectors – consumer, industrials, financials and software – in developed countries only and a million dollars a day of free-float liquidity, as we do offer our clients daily liquidity.

What is your process for finding and ultimately choosing the companies that you decide to put in your funds?

The vast majority of our competitors are going to screen on valuation, growth or returns, or some combination of the three. But what I learned in the early years of my career was that the best opportunities were the ones that didn’t screen very well. The spreadsheet would have said “pass” but the investor intuition says “let’s dig in.”

So we said, why don’t we just go meet all the companies we’re interested in? Why don’t we add that secondary lens of what we call factor tilt? If you want to screen on [price-to-earnings ratio] below 14 or [return on equity] above 9, you can do that, but you’re kind of outsourcing. And the reason most people do that is because their teams are not set up to go do 400 different company meetings a year in 40 different cities in a dozen countries. Part of why we wanted a partner at the beginning was we want to be able to invest the time and the capital to be able to do the right work. We felt like the best way to do that was to meet as many companies as we possibly could. We probably do somewhere between three and 10 meetings before we invest. So these are not like a speed date at a conference. This is a lot of field research.

When you’re meeting companies, what are you looking for?

Potentially, it would have to be a pretty interesting company for us to want to activate that level of rigour early on. Our first investigation into a business is actually a pretty comprehensive data collection exercise where we’re not outsourcing the decision of pass/fail to a quant screen. We’re collecting information on who runs this business, who are the customers of this business, what does this business do, how does it generate cash, how aggressive or conservative they’ve been with their accounting over a three-, five- and 10-year period.

It always surprises people to hear that the average age of one of the companies in our portfolio is close to 40 years old because when they think small cap, they think of something that was launched in 2021 and has had a good couple of years. We tend to gravitate to companies with proven business models, proven economics, proven leadership, and in the absence of being able to validate those things, we’re very happy to pass and move on.

It’s obviously a lot of work for you, but it’s also a certain amount of work for the companies you’re meeting with.

Do you ever have situations where a company thinks it’s way too much effort for them and maybe they don’t want to work with you anyway because you guys might be difficult?

So the companies that say, after 45 minutes, ‘How many shares are you going to buy?’ Or ‘I’ve never been asked that question, that’s uncomfortable and we’re not interested in responding to that’ – those are usually good signs that it’s not a business that’s going to fit our criteria. More often than not, when we’re requesting a meeting and the management team says they’ve never heard of Langdon, we tell them about the six or seven other companies in their country that they can call to get a reference on us. I can say, unequivocally, we’ve gotten any meeting that we need, which is a privilege and something we have to continue to earn.

What’s the profile of the investor that would be most attracted to your firm and your funds?

We deliberately launched with very accessible price points. We’re available on every single major bank in Canada, on their advised platform, as well as on their online brokerage platforms. It takes a lot of time and costs a lot of money to be available in a dropdown menu for the average Canadian, but that was important to us. We didn’t think that investment excellence should be relegated to a subset of the world based on your means or wealth.

But that being said, we’re not for everyone, and I think [among] the community of investors that understand us, most have run a business. The reason I say that is because if you’ve been a builder of a business, you’ve probably had 85 per cent of your wealth in one company for decades, and it probably would have been a small company. We invest in half-billion to US$5-billion companies. So if you were the CEO of a $30-million company for 20 years, small cap doesn’t equal risk, and the idea that you would sell your company that you’ve worked decades to grow and then invest in 1,000 line items in a traditional fund makes zero sense.

Beyond what’s on your website and any reports you might send out to investors, how else do you provide deeper information on the companies in your funds?

We do a lot of education with our clients on what we own, what those companies do and why we think they’re interesting. We bring the leaders of those companies to a lot of the client outreach that we do. We’re doing our first investor day this fall and we’ll invite one or two of the companies that we own to come that day so our clients can speak to them. It’s been interesting because a lot of our entrepreneurial clients are actually executives at companies we invest or have invested in, and they’re saying, ‘You know, I’m in software in Canada but I’d love if you could find us the equivalent of our firm in Norway, or the equivalent of a business that thinks like us in beverage manufacturing.’ So the DNA, ethos and leadership of the businesses that we invest in have a lot of commonality with our clients.

How long do you typically hang on to companies?

The longest hold, Waterloo Brewing, was 15 years, and that was only sold because Carlsberg Canada Inc. acquired it last year. We would have happily held on for a number of additional years.

Our desired hold is closer to five years and that only can happen when you buy it small enough and it can grow through your size range. Over the last couple of years, our turnover probably has put it at more like a three- to five-year hold.

Can you talk about how Langdon funds have performed since they were introduced to Canadian investors?

Our returns since inception have been really strong. We launched the Langdon Global Smaller Companies Portfolio in Canada about two years ago, and as of June 30, we’ve compounded at about 17 per cent net of fees. Last year we were up about 30 per cent. There are no guarantees in life, but we target 15% net returns and nothing structurally has changed to suggest that we don’t think we can continue to earn those sorts of returns over a reasonable time.

What kind of fees do you charge?

Our base fee is 1.4 per cent, and we do charge a performance fee, it’s 15 per cent of alpha – the amount that we outperform the benchmark by.

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