What We Do Capital Allocation

We are always on the lookout for wonderful businesses that fit our criteria, which can be summarised as follows:

• A demonstrable track record of high and enduring returns on capital employed. Our definition of “high” is an unlevered average of 15% after tax over a full economic cycle.
• An “economic moat” surrounding the business to protect those returns on capital and ensure they stay high.
• We are able to buy into the business at an attractive price that offers us a large margin of safety.
• Our ideal businesses come with a management and a culture who think and act in the same way we do about capital allocation. However, we have experience of providing the right people if needed.

This brief list is only a guide to what we look for. It summarises an in-depth research process developed over 23 years by the investment manager. If you think your business fits the criteria, please give us a call.

Whilst we think deeply about decisions and are meticulous with our research, we pride ourselves on our nimbleness. We have a single point of decision making and can transact very quickly for the right opportunities.

All enquiries will receive a reply.

Our ideal situation with our businesses is delegation just short of abdication.

We want the best managers in their field to run our businesses. We also want them to share our passion for long-term thinking and rational capital allocation frameworks.

If this is the case it is likely that a potential business can move into our ownership and there would be no changes at all with very little ongoing oversight.

Unfortunately, these “home-runs” are rare. As a result, we have developed a framework for helping our businesses protect their competitive positions and maximise shareholder value creation.

Most of the time, Castelnau Group helps the holdings by clearing away short-term pressures and allowing the business to focus on the long-term.

This can take many forms. For example, we have provided capital with a long-term (but large) payback to improve the customer proposition when lenders and other shareholders were not prepared to do so. We have also shared technical resource from other portfolio companies to modernise the infrastructure of acquired businesses.

Ultimately, Castelnau Group strives to be a decentralised holding company and help investments realise their full potential. We do that by investing resources, both human and financial.

We treat our shareholders as partners.

Shareholders should expect transparency and alignment.

We write a detailed account to shareholders in the annual report and include a section on the progress of each holding. We strive to treat both our mistakes and successes with humility and shareholders should expect to read about both.

The investment manager is paid a performance fee in shares. There is no ongoing “management fee” for sitting still. Unless the per share performance of Castelnau Group exceeds the FTSE All Share Total Return, then no performance fee is paid.

Shareholders don’t incur fees if we don’t outperform. We think that is fair.

This is not a traditional Private Equity fund. This is not a traditional institutional fund. Shareholders should be prepared for an unconventional approach.

We like to think as objectively and rationally as our human condition permits. We have found this can often lead us into contrarian actions and unconventional structures.

We are collectors of businesses and investment opportunities that we believe are likely to help us compound shareholders' capital at high rates of return. Our strategy is not to sell or “realise” investments or shuffle around weightings of listed investments based on short-term expectations.

We think that Castelnau Group will optimise shareholder value over the long term by building a decentralised conglomerate of permanent holdings. Shareholders should expect holdings to come from a variety of sectors with no particular bias to size.

We strive to be professional opportunists and so do not restrict ourselves to one of public or private markets. We will also consider every part of the capital structure of an opportunity when making an investment.

Ultimately, we will aim to allocate capital in a rational long-term manner and shareholders should expect a transparent and aligned partnership.