Due Diligence on Litman Gregory Masters International Fund Sub-Advisor Evermore Global Advisors

Firm Background

David Marcus and Eric LeGoff founded Evermore Global Advisors in 2009. Marcus heads the investment side of the business and LeGoff leads operations and business management. The firm is based in Summit, New Jersey.

Our research on Marcus and his firm goes back to 2010, shortly after he co-founded Evermore. This has allowed us to follow, meet, and assess the team over a long period of time.

David Marcus Background

Marcus leads the investment team that also includes two senior research analysts.

Marcus’s investment career started in the late 1980s at Mutual Series, where he worked with renowned value investor Michael Price, whose investment process and stock-picking ability we held in very high regard. Our initial interest in Marcus (going back to the summer of 2010) came about because of his background at Mutual Series and experience working with Price. By the time Price left Mutual Series, Marcus was the portfolio manager on the Mutual European Fund, as well as co-portfolio manager on two other funds.

Marcus left Mutual Series in the early 2000s to start Marcstone Capital Management in partnership with Swedish financier Jan Stenbeck. Marcstone was a long/short Europe-focused hedge fund. Stenbeck passed away unexpectedly in 2002, leading Marcus to liquidate the Marcstone hedge fund so that he could help Stenbeck’s eldest child manage the family’s various businesses. For about a year and a half, Marcus became heavily involved operating and restructuring many of the private and public businesses under the control of the Stenbeck family. This gave Marcus extensive business operating experience, which he leverages to this day when assessing different investment opportunities, especially those that involve restructurings.

In 2004, Marcus founded MarCap Investors with the backing of private-equity firm Reservoir Capital. The MarCap strategy was long-biased, investing in small and mid-cap European special situations. In 2008, Reservoir Capital decided to exit its investments in equity managers, including Marcus’s MarCap strategy. This served as a catalyst for Marcus to start thinking about building a mutual fund company. A year later, in 2009, Marcus co-founded Evermore Global Advisors.

The various capacities in which Marcus managed money prior to Evermore have been too short in duration and/or too different to derive meaningful conclusions about his performance.That said, our positive opinion on Marcus and Evermore is primarily driven by the extensive qualitative due diligence we have done on Marcus since 2010. However, his track record of the Evermore Global Value Fund, after a rough start, is sufficiently long and solid. His fund is beating its Morningstar World Stock Category benchmark over trailing three and five years among 831 and 658 funds, respectively, stacking up in the top 10% of its peers over these time periods as of 12/31/2016 based on risk-adjusted return (although his shorter-term relative performance has been and will likely remain volatile).

Investment Philosophy

Marcus and his team employ a deep-value, opportunistic investment approach. They look for special situations around the globe and will opportunistically invest in companies that trade at steep discounts to their intrinsic values and where catalysts (e.g., management changes, asset sales, spin-offs, mergers, acquisitions, liquidations, shareholder activism, etc.) exist to unlock value for shareholders. This special-situations approach often leads Marcus to complex, under-researched and misunderstood areas of the market. On an exceptional basis, Marcus will also invest in post-distressed situations and merger arbitrage.

Investment Process

Ideas are generated through a number of different avenues. Over the years Marcus has built a strong network of relationships with many management teams, regional bankers and brokers, and other institutional investors. He leverages this network for new ideas and to cross-check data points. Marcus also screens for companies that may be undergoing strategic change by performing key word searches for phrases like “spin-offs,” “restructurings,” “management changes,” “mergers and acquisitions” etc.Typically, Marcus wants at least a 40% discount to his estimate of intrinsic value, though he may accept a lower discount for stable and growing businesses he calls “compounders” or merger-arb situations. In addition, he also wants to see a catalyst that he thinks will help unlock value. He will not buy something just because it’s cheap, no matter how deep a discount to his estimated intrinsic value the stock trades. How these catalysts play out often depends on the execution of underlying company management teams, so he spends a lot of time getting to know them. Given these factors, the key moving parts of his investment approach are valuing a business (this includes assessing the quality of the business and its assets), assessing catalysts, and assessing management.

Intrinsic Value Assessment

Valuation assessment depends upon the type of business or special situation. It involves evaluating private transactions and/or how peers trade on relevant valuation metrics such as cash flow or earnings. He also considers the liquidation value of underlying assets. Typically, he does not rely on future cash-flow growth when determining his estimate of intrinsic value, instead wanting to see whether a company is cheap based on current or next year cash flows (he will discount these cash flows, however, if in his opinion they are above normal). He evaluates what the company has done in the past, where it is now, and where it might be headed. As he says, “If we know the business is growing, is it compelling based on what they are doing now? If we have to go out three to five years to make it cheap, it’s not cheap.” While he does not factor future business growth explicitly into his valuation framework, it does influence the discount at which he is willing to make a purchase. For example, if he is highly confident the business is stable and growing, in part because of the quality of its assets or competitive advantages, then he will be willing to accept a lower discount to his intrinsic value estimate than he would for a less stable business.

Catalyst & Management Assessment

Prior to investing in any company, Marcus wants to be able to identify a catalyst or a series of catalysts that he believes will unlock the value or narrow the discount between the share price and his estimate of intrinsic value. Typically, he enters these situations when these catalysts or actions have already been announced, or if some changes have taken place to suggest a high likelihood that value-enhancing steps will occur, such as mergers and spin-offs, operational restructurings that include layoffs and other cost reductions, and financial restructurings that may involve renegotiation of debt covenants and payments.

Marcus is well aware that in many special situations he is taking on execution risk. Therefore, management can have a material impact on the outcome of an investment. He does many of the usual things to evaluate management, such as analyzing the paper trail of past actions and understanding incentive structures. Over the years he has built a good network of contacts, and he taps into this network to perform reference checks, to help facilitate meetings with management, or to vet ideas.

Litman Gregory Opinion

We believe Marcus has the attributes of a great investor. He has a well-defined investment process. He is exceptionally disciplined in that he buys only deep-value situations that have a catalyst associated with them. Marcus and his team are also willing to do the work to analyze complex, less covered companies, and they are not afraid to look at businesses that are stressed and ignored by many investors.

We find Marcus brings a mindset that values learning from mistakes. He also brings a private-equity mentality to his investments. We believe his operational experience in the early 2000s has likely equipped him with the ability to gauge the quality of catalysts and management teams better than the average investor. His involvement in the running and restructuring of private and public businesses gives him superior insights into different business models and what it may take to restructure them.

There is also likely a small advantage stemming from his extensive network. He has spent years maintaining and growing this network of contacts. In some cases, this superior awareness of value creators may give Marcus an edge over his peers.

Marcus has also committed to capping his asset base at a level that should enable him to continue to access smaller-cap stocks and other relatively inefficient pockets of the investment universe.

In summary, we believe Marcus is a disciplined, intellectually honest, and independent-minded investor. His passion for investing comes through every time we meet with him. Marcus’ unique approach to investing we believe can be executed well within the Litman Gregory Masters International Fund’s concentrated mandate of pursuing only his highest conviction ideas and lends diversification to the fund. He already runs a highly concentrated mutual fund, Evermore Global (EVGIX), of 40 or less stocks, and runs a separate account that can hold no more than 20 names.