We continue this series with an interview with Erling Sorensen, founder and portfolio manager of Aligned Capital Partnership, a boutique investment management company based in Melbourne, Australia.
Aligned Capital Partnership is the trustee and investment manager of the Aligned Capital Partnership Investment Trust, which is open exclusively to “Wholesale Investors” who are approved as being suitable and deemed to be like-minded investors.
Erling ended his executive career in 2017 to set up Aligned Capital Partnership, with the objective of institutionalizing managing his family’s money and, ultimately, opening up to a few like-minded co-investors.
We cover the following topics, among others:
Erling’s path in investing and the genesis of Aligned Capital
Founding principles and co-investor alignment
Investor communications
Definition of investable universe, and idea generation
Stock selection criteria
Assessing competitive advantage
Contrarianism — being “prepared to be contrarian”
Assessing the quality and incentives of management
The art of valuing a business
Concentration versus diversification
Right level of cash in the portfolio
This conversation was recorded on February 5, 2025.
The following transcript has been edited for space and clarity.
John Mihaljevic: Erling, it is so great to have you here with us. I would love to hear about your path in investing, the genesis of your firm, and some of the principles that have guided you since starting it.
Erling: Let me take you back. I left home when I was about 15 and joined the merchant navy in Denmark as a deck officer cadet with a company called Maersk. That’s one of the largest companies in Denmark. That experience taught me very early what it means to work hard, sacrifice, and work thoughtfully with others. I also learned the importance of perseverance.
In terms of capital markets, I’ve been involved in them since 2010 – as an investor, as a business founder, and also as a business operator. I come back to the Buffett saying, “I think I’m a better investor because I’m a business owner, and I’m a better business owner because I’m an investor.” Before that, I spent some 20-plus years in global commodity markets, operating out of Copenhagen, Singapore, Oslo, Melbourne, and London. Effectively, my entire career post-maritime has revolved around optimizing allocation of capital and resources. I’ve cobbled that with rigorously thinking about risk.
Very core to the way I sought to structure the partnership trust and management was the importance of complete and uncompromising alignment with the investors in the partnership trust and also treating our co-investors as true partners. For me, that means complete transparency of what we own and why. It also means not charging our co-investors any fees at all other than performance above a 7% per annum compound hurdle. Allow me to explain these two points in more detail because they do go to the heart of our existence and belief.
When I established Aligned Capital Partnership, I was very clear with myself that I wanted to ensure all of my energy and all of my endeavors would always remain fully fused with the partnership trust and continue to compound capital for its co-investors. I truly wanted to ensure there would be only one investment fund, one strategy. I didn’t want to have separate classes of units in the partnership trust, and I didn’t want to go out and raise new funds or new strategies depending on the time and the environment. Everyone in the partnership trust is invested on the exact same basis, in the same class of shares, in the same strategy. I wanted to ensure there was never going to be any splintering of my time or focus on interests not aligned with the management of the capital that co-investors entrusted me with.
It’s important to note that my wife and I have all of our money invested in the partnership trust, on the exact same terms and in the exact same class of units as all the other investors. There’s no difference here. This goes to the absolute heart of what we do and how we do it. We look for complete alignment with our co-investors. We believe it can only be achieved if we’re not distracted by having any of our money invested elsewhere.
Furthermore, we are and always will be the largest individual investor in the partnership trust. This way, none of our co-investors should feel that we’re at risk of being influenced by a larger co-investor, and we can confidently tell them that when things don’t go well, we will feel it.
Over the years, I’ve observed that for many investment managers, the skill of attracting money seems to be more important than the skill of managing money. That’s not something we subscribe to. We would be doing what we’re doing anyway with our own money, so I don’t see how it’s right that we seek to charge co-investors a fee to manage money that they want to invest alongside us. There’s virtually no incremental cost for us in running additional money. Why would I pretend there is and charge for that?
Therefore, the only fee we’ve chosen to charge is what we call a performance fee – that is, if the partnership trust returns more than 7% per annum compound. In case we do earn such a performance fee, then that’s 20% of the returns generated in excess of the 7% per annum compound. Very importantly, any and all performance fees earned by us are reinvested straight back in the partnership trust.
We sought to set this up in a way allowing us to demonstrate that we had the best form of alignment we could figure out. That’s what we sought to achieve here. We take this alignment extremely seriously. Frankly, we wouldn’t look to manage money for any other people any other way.
The core values of Aligned Capital Partnership are deeply ingrained principles that guide pretty much everything we do – whether it’s with our co-investors, with portfolio investment companies, with our service providers, or with all other stakeholders and people we interact with. There are just two of them: We always act in good faith, and we always seek out the truth. These core values serve as our cultural cornerstones. We will never compromise on them, neither for convenience nor for economic gains.
When it comes to investment principles, we aim to build a strong multi-generational investment track record. Frankly, in doing so, we have found ourselves coming back to being guided by Charlie Munger when he said, “Avoiding stupidity is a lot easier than seeking brilliance.” Our aim in making investments is to be approximately right on average over time. Our clear focus is just on long-term outcomes. In achieving that, we expect to be misunderstood in the short term quite frequently.
I’d say our investing principles largely come down to common sense, which we seek to apply vigorously. When asked about investing principles, I prefer to start with highlighting the things we don’t do rather than what we do. Some of the things we don’t do include shorting and employing leverage, i.e., at the fund level. We don’t hedge. We don’t trade frequently. We don’t rely on being able to sell to a greater fool than us.
There are certain sectors we simply don’t know anything about, that we can’t understand, or where we think the odds are stacked against us succeeding, so we don’t invest there. For instance, if we look at historical success rates, where we see the odds stacked against us would include biomed or exploration, so we don’t go there. Conversely, some of the things we do include only making investments when we believe there’s a reasonable margin of safety in place. We always believe that this time is never different. We’re always seeking to be patient. We’re prepared to be contrarian and very mindful of balance sheets we invest in.
That’s a brief summary of where we come from and what we seek to do.
John: Thank you so much for sharing that. Given how aligned you are with your investors – I hesitate to even call them investors at this point given what you described – how do you go about choosing who invests alongside you? How do you communicate with them? What are some of the most important considerations in that regard?
Erling: It’s a hugely important question for us. We don’t actively solicit or market to prospective investors for the partnership trust. In addition to not undertaking any marketing, probably the biggest reason for us being so obscure stems from our fanaticism about only allowing the right investors to join.
We have turned down a great number of investors – not because we don’t like them; they’re great people – and we’ll most likely continue to turn down a great number of investors, but it’s more because they may not be right for us. In saying no to some people, we accept that we’re the obscure people.
It’s important for us to understand the significance and the value of selecting the right co-investors. In doing so, what we set out to do in selecting and attracting the right quality of investors is to be one. We think the best way to attract someone is to be someone of that ilk ourselves. We’ve concluded that – in the absence of some past precedence – we need to have enough reason to believe that potential new co-investors possess the same long-term business owner orientation as the rest of us currently in the partnership trust do.
Without this clarity, frankly, we face the risk of initiating disagreeable relationships that may be based on shaky foundations. That’s not a risk we’re willing to take. We want to continue to enjoy the intellectual challenge of finding interesting investment opportunities through the rigorous research we undertake, all while knowing that we’re in the company of people we trust and admire, who know and understands and, importantly, are comfortable with how we think and invest.
Irrespective of the co-investor and the partnership trust, there’s this tribal-like affinity for long-termism and pragmatism that runs through our investor base at the moment. Most of us think of that investment as one for the grandchildren of our grandchildren’s grandchildren. This would probably place us in a category of investing misfits. If that’s the case, happy for it to be so. We consider these non-financial ties to be of irreplaceable value. If we take in new co-investors in the future, they will come either from within this ecosystem or they’ll understand, agree, and embrace the philosophy we’ve set out.
One of our key advantages is the aggregate patience of our co-investor base. We’re genuinely investing for the long term; from our observation, only a few are. If we are to have a competitive advantage over our peers in the investment industry, it will come from our capital allocation skills as the manager, if any, and it will come from the patience of our investor base. Only by looking further up than the short-term crowd do we believe that we can do better than them. Frankly, it’s for this reason we named the partnership trust an investment partnership and not a fund. The relationship we seek is very different.
As for how we communicate, we write some pieces every time we believe we have something intelligent that should be shared with our co-investors, and we provide them with a semi-annual update on their performance in the investment trust.
John: Switching gears to your investment process, how do you define your investable universe? How do you generate ideas?
Erling: Yes, the question of the investable universe. We have to remember that I started Aligned Capital as a vehicle through which to invest the money my wife and I had. As such, I saw no reason to place any restrictions on where we would invest – keeping in mind, of course, the investment principles I talked about earlier.
With this in mind, the partnership trust can invest across the capital structure of businesses and assets both in public and private markets in Australia as well as overseas. That said, we’re quite concentrated in what we do and where we invest, mainly because there’s just not so much we can get our heads around. Currently, our portfolio has 15 holdings, 13 of which are equity-based, and 10 of these represent about 80% of our total assets.
As for how we generate ideas, firstly, we tend to read an awful lot – newspapers, annual reports, company filings, lots of books. Then, we’re old school. Our office is probably more like an abandoned library with a couple of bums loitering about. We sit around reading, thinking, talking among ourselves. Then we wait for the right opportunity to come by. Of course, we run the occasional screens and the rest, but we have found that our best ideas come from reading, discussing, and thinking.
I’d like to bring this back to your earlier question about investors and the partnership trust because when we meet and discuss with prospective new investors, we rarely miss the opportunity to stress the importance of having the right co-investors and strongly emphasize that the right co-investors are what enable us to unleash what we believe to be one of our biggest weapons – inertia.
What else can I say? We put as much premium on figuring out what to buy. We probably put even more of a premium on what to avoid buying. Typically, we like to prioritize what’s simple and easy. We’re very quick to say no and discard what’s complicated. We continue to follow what we believe is a common-sense approach to solving the problem of investing. We see intellectual honesty and rigorous analysis as the keystones to success in doing so.
John: Erling, tell us a bit about the stock selection criteria you use in choosing where to commit capital and the types of businesses you have favored historically.
Erling: In his book The Theory of Investment Value – first published nearly 90 years ago – John Burr Williams wrote that the value of any stock, bond, or business today is determined by the cash inflows and outflows discounted at the appropriate interest rate that can be expected to occur during its remaining life. In the same book, he also said a long-range forecast is too uncertain.
The type of businesses we love and favor investing in are probably very similar to those most other investors favor. That’s the proverbial business that can generate a good return on the capital it employs. It’s one where the profits are not too dissimilar to its cash flows. Ideally, it can reinvest a very high percentage of the cash it generates back into the business at similarly high returns. That’s the formula most sound investors would probably seek to apply. It’s probably how they would describe the ideal investment. The problem we are faced with is that there are certainly such businesses around at the moment, but we can’t invest in them while upholding our investment principle of making sure that a reasonable margin of safety exists – not in our opinion, anyway.
What we’ve noticed is that when this very discussion is taking place with a whole number of investors, and they’ve found a high-quality business that they’re buying or have bought or are considering buying, if the question of price comes up, we’ve noticed some people fall back on this quote by Charlie Munger, “If a business earns 6% on capital over 40 years, and you hold it for those 40 years, you’re not going to make much different than a 6% return, even if you originally buy it at a huge discount.” He then said, “Conversely, if a business earns 18% on capital over 20 or 30 years, even if you pay an expensive-looking price, you will end up with a fine result.” The trick is getting into better businesses.
It’s very compelling. This quote is frequently referred to when someone is looking to justify a price they have paid or are looking to pay for an investment. Mathematically, what Charlie taught is correct, but we believe some very important inputs were left out from that quote.
One, as investors, we don’t earn the same return on capital as the business we buy into because we’re often required to pay a multiple of the capital that is employed in the business. Because of that, in our opinion, the critical components of what Charlie said are that (1) the business must remain in business, and (2) it must continue to generate those very returns for many years in the future for us investors to eventually be able to generate the same returns as the business.
We sit around in our office, talk a lot, and study a lot. In studying a great number of businesses in a great number of sectors in a great number of jurisdictions over a long-time horizon, we observed that there aren’t that many businesses which (1) remain in business for that many years, and (2) that continue to generate high returns. For us, the important thing for an investor is to be able to – with a high degree of confidence – foresee that (1) a company will be around for decades ahead, and (2) what the competitive landscape that it is operating within will look like. Hence, how will it be able to grow over those decades?
The issue is that the higher the price we have to pay for a business, typically, the longer we’ll have to be able to justify being able to look out, and the more certain we have to be about this competitive landscape in those years out for that business. This becomes tremendously difficult because our job is to be intellectually honest. Based on the prices of high-returning and/or high-growing businesses that I referred to earlier, there’s just not that many around today where we can build a high enough confidence on these matters.
We like a lot the framework by Michael Mauboussin and Alfred Rappaport in their book Expectations Investing. We find it a tremendously useful framework. Therefore, based on that book and the framework they lay out, one of the most important questions we ask ourselves in the role of allocating the partnership trust capital is, “What do we have to believe about the future to generate respectable investment return from here?”
Frankly, the less ambitious assumptions we have to apply about the future, the better we feel about that investment. At the moment, the partnership trust has part ownership in a few retailers of different varieties – a finance company, a cement company, a bank, a food and beverage company, a property company, a gaming company, a technology manufacturing business, an industrial equipment business, and a few mining companies. Some of those companies can reinvest the cash they generate at good returns. Importantly, they do it. Some of them have fewer reinvestment opportunities, and they return capital to us, typically in the form of dividends although we tend to favor buybacks if they’re trading cheaply. In fact, we engage quite actively with the companies to make this view known.
Some of these companies are generating operating cash at what we believe – based on history – are low points of a cycle with what we deem to be very solid balance sheets. Virtually all of our companies or the companies we own part of are trading at low valuations relative to what we estimate their conservative value to be. We don’t have to believe very much about the future for these investments to work out just fine. Ultimately, we look to assign realistic probabilities to likely outcomes. That should be the job of most investors.
At the moment, we are more focused on our slugging percentage than our batting average. For us, the magnitude of correctness matters more than the frequency. Of course, if we could fill our entire portfolios with high-quality, high-returning companies at prices where we didn’t have to be heroic about the future, then we would change our focus to be more on the correctness of frequency, but in our opinion, the markets are not offering up that sort of opportunity at the moment. It has in the past at times, and we believe that it will again at some point in the future.
John: I love how you link the price you have to pay to the ability to gauge how long a business will maintain its competitive advantage and be able to reinvest at high rates. It seems to me that’s sometimes lost in the dialog in the investment community – when people focus only on the quality of the business without reference to the price. As investors, we do need to take both into account.
Erling: It’s a fascinating point. In your own local markets or the best-known companies in the world that we can all ramble off the seven names of, the calculation is reasonably simple to do as to how long they have to reinvest at those rates for us as investors to generate the same returns as the business itself based on the price we’re currently paying.
That’s a fascinating calculation to do because that brings us back to Charlie Munger’s quote. It should give us some guidance as to how long a period we need to know the future of. If we run the numbers on what we deem to be pretty highly priced companies, we have to be able to see very clearly for a very long period of time. That’s just not something we’re able to do.
John: Absolutely. When it comes to durability of competitive advantage, have you found some sources to be particularly predictive in terms of how long a company can sustain it, or perhaps even some types of businesses where you’ve seen it sustained over time more so than in other businesses?
Erling: It’s a fascinating one. It’s tremendously important, of course. I’ll mention a couple that we have found to be quite durable.
One would be scale and location of a natural resource; hence, a cost curve advantage. That would be one source of competitive advantage that would be extremely hard to compete away. Another might be a company operating in the proverbial town that’s too small for a second competitor. That was largely the thinking behind how Walmart started out. Then it would be products that are etched in the minds of consumers and occupy a high share of their mind. Of course, these are subjective measures. They’re not quantitative. Hence, there’s a large element of emotion involved, but because of that element, it’s also extremely difficult to compete away.
Generally, products or services that can be quantified, meaning they are objectively better or worse – for example, the iPhone might have better features than a Nokia – can more easily and quickly be disrupted. Another example might be what we saw last week with DeepSeek and ChatGPT. Advantages that are very objective can probably be more easily competed away than those that are subjectively better in the minds of individual consumers. For example, some soft drinks might be healthier or have more organic ingredients than others. Taste is personal, and it’s less likely to be intruded on by innovation or technological change once the person has determined that they like it or it’s their favorite. While the world might change rapidly, the human palate changes slowly, if at all.
Those are ways we like to think about competitive advantage.
John: Those are really thought-provoking points. When you say that Aligned Capital Partnership is always prepared to be contrarian, what does that mean to you? How do you prepare for those moments when it does pay the most to be contrarian?
Erling: Let me be clear about what it does not mean for us to be contrarian. It does not mean that if consensus growth for something is 15% per annum, we instead believe it’s going to be 20%. That’s not what we mean when we say contrarian. In our minds, being contrarian largely refers to being countercyclical. It can also refer to us being willing to invest in a place when few others are. It’s not long ago that we heard China had become uninvestable – that sort of stuff makes our ears prick up. That’s when we were prepared to be contrarian.
John: That’s a great example. I agree that such absolute statements can offer opportunity because investing is often about the odds one gets rather than saying yes or no in absolute.
Erling: I completely agree.
John: Another factor that does play a role — both in those kinds of quality compounders that a lot of investors seem focused on, but also in companies in the mining sector, let’s say — and may be even more important is the management that operates those businesses. How do you assess the quality and incentives of management? Are there some CEOs you particularly admire that we should also be aware of?
Erling: This is an extremely interesting question because an important factor for us as investors is to make sure we don’t fall prey to our own hubris. This dawned on me recently when I had dinner with someone who’s an organizational psychologist. Afterwards, I reflected on this very point you raised.
