Joshua Collinsworth recently started Nomadic Value Partners. Our fund starter interview discusses Joshua’s way into the investing field. Furthermore, we look at his investing approach at Nomadic and discuss investing in healthcare services.
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We have discussed the following topics:
- Welcome
- Disclaimer
- Introducing Joshua Collinsworth:
- Learnings from farming
- Joshua Collinsworth on learnings from solar
- Choosing public over private equity
- Acceptable IRRs
- Check out Stratosphere
- Joshua Collinsworth on thesis-driven research
- Why Nomad Value Partners
- Choosing the right clients
- Joshua Collinsworth’s competencies as an investor
- Investing in Healthcare Services
- Thank you
- Disclaimer
Welcome
[00:00:00] Tilman Versch: A warm welcome to the Good Investing Talks podcast. I’m your host Tilman Versch and I’m very happy that you’re discovering underfollowed investors and underfollowed companies together with me.
Disclaimer
[00:00:26] Tilman Versch: And now one last step. Here is the disclaimer for you.
All we are doing here is no advice and no recommendation. Please always do your own work and now enjoy the video.
Introducing Joshua Collinsworth:
[00:00:40] Tilman Versch: Dear audience of Good Investing Talks. It’s great to have you back on the show. And today we are portraying another emerging manager. We just started this format in the last podcast with Michael Cushman of Alpha Star. And today, I’m having Joshua Collinsworth on. It’s great to have here, Joshua. Where are you based in the world?
[00:00:59] Joshua Collinsworth: Well, thanks for having me on here, Tilman. We’ve known each other down for three years or so and just really respect what you’re building at Good Investing and I’ve gotten lots of introductions with people from it and some ideas and it’s a great platform. Thanks for having me. I’m based in Denver, Colorado.
[00:01:21] Tilman Versch: It’s a pleasure to have you, and it was a pleasure to already have met you in Omaha and now in the podcast and you’re an interesting guy. Today it’s two bearded men and two microphones. So it’s time for an investing podcast. And at the beginning of this podcast, I also want to talk a bit about your background and you’re an interesting guy. You have these different backgrounds that are not typical investing. So, one is farming. One is a solar power construction company and one is the allocator. So maybe let’s go with all three of these and all combined with the question of what you learned from the different tests there that are relevant for you as an investor.
Learnings from farming
[00:02:08] Tilman Versch: So maybe let’s start with farming. What have you learned from it?
[00:02:10] Joshua Collinsworth: Yeah. I grew up in a family farming business. My father was bootstrapped from having a job and saving money. He bootstrapped buying one location and to multiple locations by the time I was in college. I was a part of that business growth and part of the team of people working on the farm all the time. It taught me a lot about small businesses and what’s not, what businesses like lots of industries are not good industries.
Farming is really tough and it taught me some things about cash flow management, you know, how a business like depreciation is like a real expense.
Farming is really tough and it taught me some things about cash flow management, you know, how a business like depreciation is like a real expense.
You have to, in like the whole concept of amortisation when you have hard assets you want to extend the life of that asset well beyond what the depreciation schedule says it is. And if you can do that well over a long period of time, you can actually generate some cash flow out of a very low-returning business. That was instilled in me at a really young age and I kind of always knew I wanted to be a business person.
Back in high school I even had an interest in stocks. I’ve been buying stocks since like 15 years old, but didn’t know that it would be, it would go into being a stock picker as a profession. So I left the farming world and went to college in a town that was like an hour and a half away, and I got into the solar development business at the time because a lot of funding had come from the government to finance solar, and I joined a group that had done it before back in the ‘70s, back when Jimmy Carter was president and had initially done some funding there and then that kind of went away when Reagan got elected and oil got cheap again, but it’s it came back and it’s back for good now.
I joined this team that had done this for a really long time and they were really good engineers and we were building solar throughout the Southeast, which was kind of contrarian. The economics of solar rays in the southeast back when I was building them was not very good, but we were still getting projects done and big projects. I mean we did some small stuff on a commercial scale, but we went all the way into megawatts scale projects that I was a project manager on which kind of touched all the functions of engineering and product procurement.
A little bit of inside sales even and then construction management and then commissioning the projects like all that touching a lot of things, a lot of busy work, but also a lot of like risk management of you have a budget and you’re trying to bring a project and to completion within time and budget. But yeah, I did that for several years and then got the opportunity to join what I call a concentrated family office.
Joshua Collinsworth on learnings from solar
[00:05:34] Tilman Versch: Let me quickly follow up. What did you learn from investing in the solar power construction company?
[00:05:42] Joshua Collinsworth: I’ve thought about this and I would say that I had a really good boss and he gave me a long lead and I had control of budget at like 22 years old and made some big mistakes and the boss that I had let me make those mistakes. He would slap my wrist when I lost his money but I would learn from that.
I would say that I had a really good boss and he gave me a long lead and I had control of the budget at like 22 years old and made some big mistakes and the boss that I had let me make those mistakes. He would slap my wrist when I lost his money but I would learn from that.
And so there was just general mentorship and like how you interact with mentorship. I learned through that period. But also I’d say today from an investing programme, I would say that I know the renewable energy space pretty well because I had networked a lot during that time and a lot of folks that I met at conferences or just out doing business are now kind of who’s who in the renewable energy space, specifically solar. They’re out with big businesses or have sold businesses and started new ones. So I have a pretty good pulse of the development landscape because of that experience. Yeah, I don’t know about any stock-picking takeaways from it but it was a good experience.
[00:07:07] Tilman Versch: Continue with the allocator point. You just start with the…?
[00:07:09] Joshua Collinsworth: Yeah, I got a chance to join what I call a concentrated family office. So it’s a multi-family office, but not just your run-of-the-mill wealth planner. It was a team that worked on single-family that had multiple siblings. So has multiple pools of capital, but we managed it like a single-family office. We were allocating to concentrated stock pickers long only long short. Some of your traditional long-short hedge funds that aren’t just constant, that aren’t just concentrated but more maybe quantitatively driven but with a fundamental bias. Some real estate distressed credit. I joined that team when we were coming out of the financial crisis and we had some investments in distressed credit. So I learned that space pretty well and I was there for almost five years and then left to join the University Endowment, where specifically I was working on private equity.
[00:08:19] Tilman Versch: What is your takeaway from these two positions for investing? Are they more close to what you do today?
[00:08:26] Joshua Collinsworth: Yeah. You know a lot of folks have like a very coherent thought about their life at a certain time or whatever, and I would just say that with mine it was just been it has been a slurry of getting to know myself and learning about investing and where I want to be within the world of investing in business. As an allocator, they’re good jobs. I mean, you get to travel the world and meet the best investors in the world and support a mission that has a real impact on the world and then turn it off at 5:00 P.M.
As an allocator, they’re good jobs. I mean, you get to travel the world and meet the best investors in the world and support a mission that has a real impact on the world and then turn it off at 5:00 P.M.
That’s a sought-after job. It’s a good role. But really over my experience there and learning more about investing and spending time with what I consider some of the best investors in the world and seeing how they manage and how they think and how they invest. But I was really developing my own investment style and really learning more about myself that I really like to be the person that has the pulse on the wrist being taken and not having a very large broad portfolio and pushing the risk being taken to the managers.
I found myself wanting to be the manager and I had proven to myself in my personal account that I could manage a concentrated long-only strategy, and that strategy was information over a period of years and I’d really say that. It really clicked with me when I was at the University Endowment and spending a lot of time in private equity which kind of rounded out my equity investing allocation background that I could really apply this to public markets. And I think that I could raise some money to experiment and see if I could actually grow a business doing this in my own strategy.
That whole process was a little bit like pulling a hen’s teeth, we say in the South, just like being in my mid, late 20s and going through your first career crisis that everyone goes through at that time and just needing mentorship and guidance and if you’re listening to this stock picking managers that have given the advice and guidance, thank you. I really got directed right and was able to launch Nomadic Value Partners and so far have been able to grow it to a sustainable place.
Choosing public over private equity
[00:11:14] Tilman Versch: Why didn’t you go into private equity when you had this experience? And why did you decide on public equity?
[00:11:20] Joshua Collinsworth: Yeah, that’s a good question because I do think about my investments in the portfolio like a private equity investor. A lot of folks say that and lots of folks mean it and it is very different than thinking that you’re that you have a stock that you’re trading. So like we do own stakes of businesses. Private equity is very much a networking, almost political hustle trying, in a very competitive market, to get deals.
Private equity is very much a networking, almost political hustle trying, in a very competitive market, to get deals.
This is where I deviate from private equity and my strategy approach is the same as that we are looking for long-term growth opportunities typically in market share-gaining companies that are on the right side of change and that will create value for a corporate strategy that might take out the company or the company is so unique and special, it’s creating real terminal value for itself.
And really identifying how a company would choose to compete and take market share as a preferred strategy to do so. You identify that through a lot of research and hustle of networking and working through talking to experts and other investors and folks that work in the industry that you’re researching and companies that you’re looking at. Once you kind of identify what you want to own like the preferred asset to own, that’s where I deviate because we’re in public markets and I wait for the right price to where I can generate a forward IRR that is acceptable, which is not only high, but you know inclusive of all the risks that accounts for the risk.
A private equity investor then has to go find an asset to buy and then they have to convince that asset to sell. They have to convince the founding team or whatever, or another GP that owns a stake in the business to sell them a stake. That is a very different thing than pure investing. At the same time, I would be lying if I said I didn’t find the drama of public markets interesting, and volatility interesting. So it very much suits my personality to research private equity and to execute my investments like public equity.
[00:14:00] Tilman Versch: So you like soap operas in the market?
[00:14:03] Joshua Collinsworth: I wouldn’t say I like soap operas, but if the stock’s down big in the day, it definitely motivates me a little to get to researching. It’s not what drives my research process is stocks being down, but it adds a little bit of drive to my research efforts when there’s blood in the streets, let’s say.
Acceptable IRRs
[00:14:29] Tilman Versch: What is the acceptable IRR you’re looking for in an investment? You can also say it’s like acceptable IRRs because you have different buckets of investments you’re looking for.
[00:14:43] Joshua Collinsworth: That’s something that has evolved with me and this kind of gets to portfolio construction too. It’s going to be hard to wrap it all together into something in a bow, that’s it. I’m looking for opportunities that are ideally balanced across revenue growth, margin enhancements, capital returns, and changes in valuation right of the drivers of an equity return.
I’m looking for opportunities that are ideally balanced across revenue growth, margin enhancements, capital returns, and changes in valuation right of the drivers of an equity return.
I don’t want to build a portfolio full of revenue growth and that’s it because you generally find yourself with a bunch of multiple fates.
If you build a strategy like that and then you have a great decade coming out of like the 2010s and then you find yourself owning a bunch of momentum and you didn’t realise that until too late, which I think happened to a lot of folks in ‘22. So I try to balance that. I own some companies that have high revenue growth, and some companies that are margin turnaround stories, almost. Some stories have some capital return and are involved with revenue growth and then some stories where stocks aren’t just stories.
I don’t know why I’m saying stories right now, but some stocks that we own were the multiple leading up to 22, it was always a 1 or 2% kind of forward IRR on the portfolio of multiple headwinds. And coming out of 22 that doesn’t exist anymore and we’ve got multiple tailwinds and that’s a positive. So with all that said, I try to build an IRR that at least beats the portfolio. The weighted average IRR of the portfolio and I say that I’ve evolved because when I started, I was like 20%, and the reality is you can find high 10s with relatively low risk.
You can find high 20s with much more risk and much more levered to and leverage not the right word, but much more correlated to or overly exposed to one of those value levers that I described a second ago and it kind of gets the portfolio out of balance. So I’ve learned to keep a really close pulse as quarterly as companies release their financials and it’s tracking along with a thesis that I have and I’m updating some intrinsic value or some trajectory of revenue growth or margins or something. I’m updating that quarterly and the weighted average forward IRR of the portfolio is kind of the reference IRR for new ideas. With that said, I will let stuff drift as they as it trades up. I’ll let stuff drift down to 10% or so of a forward IRR that I’m expecting.
When you start to get below 10% and that’s happened to me a few times since I started pneumatic. When you start to get below 10%, I don’t think it accounts for the risks involved with you being wrong. So if you were to be wrong on something, you could cut your IRR in half down to five and that’s not that doesn’t be cash today. So like I start to exit positions even though they’re they could be great companies and the thesis has proven true and they’re still executing towards I start to sell it then.
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[00:19:01] Tilman Versch: We already deepened the wits with portfolio construction but maybe…?
[00:19:15] Joshua Collinsworth: I know, but it’s important. I mean when you think about what your required rate of return it’s a reference to the portfolio’s weighted average return and you have to get into it. So yeah, I know.
Joshua Collinsworth on thesis-driven research
[00:19:29] Tilman Versch: No, it’s great that we’re into this and I think you said stories because it’s also a bit of a strategical thing you can do. You’re not private equity. We have to be the same when you just bought it in the stock market. We can be strategical and also say, Oh, this story has played out and I go to the next one. It’s the flexibility we have.
[00:19:51] Joshua Collinsworth: Yeah, exactly. And it has to show up in like a thesis. I call myself a thesis-driven. Like I have a thesis-driven research process. That’s a commonly used phrase in the venture community. I would even say this you could sit back and say, well, we’re all thesis-driven. But what I mean by that is really developing a view of how to best compete in the industry to capture market share. And there’s unit economics attached to that. You should be able to take those unit economics and build it up into your thesis to support it and it should be expressed like a thesis ultimately has to be expressed through those value levers of a company, revenue growth, margins, capital returns, and change of valuation. Capital structure too is a part of that. So like a company that has the ability to leverage the balance sheet over time and return cash to shareholders and you could tell too, it gets circular. But a thesis has to be distilled into those economic variables to build up before the IRR of stock.
Why Nomad Value Partners
[00:21:08] Tilman Versch: Let’s jump over a bit to the structure of your business and one of the classic questions I often ask is about the name of the company. So your company is named Nomadic Value. So why nomadic and why value in the name of the company?
[00:21:26] Joshua Collinsworth: Yeah. So, firm names are interesting because, like, we were talking before this call a lot of lots of people just end up with the name of the street. And which is great at the geographic location. It might mean something significant to the person who lived on the street or had a family home on the street or something. Mine is I really like to backpack. And I’ve been increasing the distances farther and farther the intensity. That has really evolved over a decade-plus period for me, where my relationship with long-distance walking in nature has just evolved.
In like a really good way I kind of see parallels to investing where we evolve as investors. We’re homo sapiens. We were nomadic people. There’s something to walking and the evolution of learning and so I think nomadic value distils that experience that I’ve had through long walks. And value is what we’re investing for buying missed-priced securities and things below their intrinsic value. So you put them together, nomadic value partners, and you know partners, the structure of my business is I don’t have a hedge fund vehicle. They’re separately managed accounts.
So partners does not imply a limited partnership or anything but it does imply how I view my clients when we are along this journey together. And so I’ve spent a lot of time actually. It’s in my firm slide deck. There are a couple of slides in there. Actually, Graham Rhodes helped me with this a little bit. Graham Roads with Longriver. I followed him on the Internet for some time but actually met him at Berkshire this year in person. He helped me with, helping distil stuff that was already trying to communicate in my slide deck and the way I thought about starting a business and this certain book called The Model by Richard Lawrence, he started Overlook, which is a really successful stock cooking firm focused on Asia.
Richard Lawrence to still what made Overlook great, so well. And I was like, yes, I mean this is like I’ve been trying to figure out how to communicate this off like being fully aligned with the client. The word partners is a really key word in Nomadic Value Partners.
Choosing the right clients
[00:24:38] Tilman Versch: What kind of partners or slash customers are you targeting with your partner? It’s not your partnership with your firm.
[00:24:47] Joshua Collinsworth: Yeah. Well, they’re certainly not customers. I mean, they’re clients that are requesting a service of money management but an outperformance of an index or their alternatives. But I started like most stock picking firms, single manager, but in this case single analyst PM, stock picking firms where you start with friends and family. I don’t have a track record from a previous firm. I need to build one and that was really the idea when I started. I’m going to get friends and family initially and I’m going to kind of keep my head down and build a track for about three years, which is what the industry kind of wants.
Then from three years to the five-year record which is what a lot of institutions want at the sea, for staying power and confirmation of track record and skill then I’ll just I’ll start reaching out and hopefully can grow into new clients. What I’ve been able to attract and start as friends and family and then some other private equity investors that I’ve known from back when I was an allocator which has been great because they’re actually collaborative with research with me and one small charitable foundation which was information that I’ve been able to help grow, which I’m proud of.
Now I’m reaching out to larger family offices and institutions. I will say I have a couple of wealth manager clients who have their clients invested in my strategy. They’ve been great clients because they’re relatively sophisticated investors and from an allocator point of view and it keeps my overall communication, time spent on communication down because I have just a select set of of clients that doesn’t require a lot of time to still spend impactful time communicating to them.
Joshua Collinsworth’s competencies as an investor
[00:27:10] Tilman Versch: How would you describe your circle of competence as an investor?
[00:27:13] Joshua Collinsworth: Yeah. I think it’s really difficult these days to be a generalist and not be resourced to your eyeballs with alternative data and the ability to get almost any bit of information in the world within seconds. So if you’re playing a different game than that in like long-term focus, it’s still really hard because there are lots of long-only shops that have been around for decades and have institutional knowledge of industries and companies. And opportunities don’t last very long.
As an investor, you have to spend time really understanding an industry and all the players and where the industry is going to be able to feel confident in any kind of terminal value or any kind of intrinsic value whether it’s not a high-terminal value, some special situation in a company or something where a company is in structural decline, but you can find value there with a catalyst. That’s not what I do, but folks do that frequently in public markets, but that’s getting harder if you’re a generalist coming trying to get up to speed on a name in a few days. I’m not sure you’re set up to help perform in that scenario, for me, and there are lots of ways to make money.
You learn that as an allocator too. There are lots of strategies out there, and if you’re consistent with it, you can find a way to outperform. But for me, I slowed myself down from reaching out to companies, and I’m a generalist, I would say I’m a generalist, but I’m just not going to buy something that requires me to get up to speed in a few days or a few weeks even. It is a long-term effort to understand an industry and all the private players in the industry. All the public companies, I call them the large public incumbents and then under like market mapping and truly understanding all the private players who have financed them from a private equity point of view, what’s their track record.
In this industry, where do they see value, where do they target that and what they’re doing again? Or like lots of these private equity firms will do the same playbook three, four times and you have to understand all of that and it’s a continual work in progress and I think that you have to build years and years of building institutional knowledge of an industry and all the players in it. Then you can move quickly and with conviction and be accurate on your– You know investing, investing is predicting the future and that’s really hard to do.
Investing is predicting the future and that’s really hard to do
So I think you’ve got to focus on areas where you really know so that increases your odds of getting the future correct. And for me, that’s just been, specifically, that’s been a small handful of industries and I’m working to grow new industries all the time, but you’re not going to see me take positions in companies and something that I’ve been working on for a few months. It’s going to take longer than that. For me, it’s been industries that are mission-critical to society, so as healthcare services which is a big one for me. Energy and specifically renewable energy. We kind of touched on earlier.
Some niche financials like asset managers. Like I’m in that business. I know that business pretty well. I used to be an allocator. I know a lot of the firms that are out there trying to raise capital and what their track records are like and what their team members have turned over and things like that. So you have to get really in the weeds on this stuff, but for me, it’s these big, slower-moving industries that are generally highly regulated which kind of slows down the change but are still undergoing like evolution as an industry into some positive direction.
So like healthcare services is this big alternative payment model around pushing risk closer to the delivery of care. That is a very slow-moving trend, but it is the future of healthcare. And you understand how the incumbencies work and how entrenched they are and that they’re not going anywhere. And to be healthcare, like there’s one key insight, healthcare services that if you get right, you can find opportunities that are perpetually mispriced that generalists move through the market, short sellers, pot shops that are trying to catch the next quarter or short sellers that don’t understand the business but move in quickly and aggressively.
All these things keep the valuation of these companies and places that are undervalued in my view, on some companies. It allows me to hold with conviction and I think generate outperformance. Yeah, that’s been, for me, it’s been those slower moving, relatively regulated, but moving into a positive new shape and form and you can get into the right side of that and apply that private equity lens and public equity discipline of owning the company at the right price and not owning it at the wrong price. It allows me to stay concentrated and focused.
Investing in Healthcare Services
[00:33:49] Tilman Versch: You already mentioned healthcare as a sector. You’ve done deep work on this and did all the puzzling and hustling and to get an idea about this sector, what is important to not lose money as an investor in healthcare? What are your lessons here?
[00:34:05] Joshua Collinsworth: Yeah. I’m not saying healthcare services, so like healthcare is nearly 20% of GDP and that includes a lot of like pharmacy and biotech things, but like healthcare services is where I would say that is no fair amount about. I’d say the one key insight with Healthcare services is if you don’t own one of the large payers, the large incumbents like United Healthcare or Elevance Health which used to be Anthem. If you don’t own one of them, then it is just really difficult to compete.
You’re like razor-thin margins. You’ve got concentrated market shares in these large payers that have lots of market power. Healthcare is really local, so you’ve got these large companies that are all over the country, but they compete zip code by zip code. So like understanding how local healthcare is and that one company, if you say like a healthcare provider, say primary care provider for instance and you’re doing well in Florida or like a specific county in Florida, that does not mean you will do well in Arizona.
So like understanding the locality of healthcare is important. And then I’d say like the key insight outside of that is if you are a business that’s trying to be on the positive side of change within this value-based care shift, for me, it was like my light bulb and that was the only way you’re going to be successful taking market share and scaling a business that has any shot at being A) really large, and B) profitable is you have to solve problems for every single stakeholder in that healthcare services value chain.
The only way you’re going to be successful in taking market share and scaling a business that has any shot at being A) really large, and B) profitable is you have to solve problems for every single stakeholder in that healthcare services value chain.
So that’s the centres for Medicaid and Medicare services, the CMS, which is the regulatory body. You have to be on the right side of what they want. The future of healthcare to be and they tell you what that is. You can read all kinds of white papers. They have all kinds of webcasts. There’s a little bit of politics in that, but actually, it’s been pretty insulated from politics. They’ve been pretty consistent with the direction.
So you have to understand that. You have to understand what the payer wants. So the payer obviously wants some profits. They want more members, they want to be in alignment with what CMS wants them to do. So you have to scratch the edge of the payer. You have to solve problems for the provider. So you’re a primary care provider, for example, and I’ve got a company in the past. So that and then I can talk about that highlights this. But you have to solve the problems for the provider which is the doctor.
So you may be a corporate-owned primary care clinic across the country, but like an asset management business, your assets walk in and out of the door every day, which is your doctors. So doctors are overworked. Doctors spend too much time on admin tests. Doctors don’t get to see the follow-through and the impact on their patients enough. If you can solve these problems for a doctor, then you don’t have nearly the issue as a corporation with recruiting doctors, which has been a big limiter on growth. You have consistency in a doctor-to-patient relationship which creates outcomes.
The most important, last here in this example, but the absolute most important is to have outcomes with the patient. The patient has to be healthier and live longer and be like mentally satisfied, emotionally satisfied with it and that shows up in PS scores outcomes from like lower hospital readmits and better outcomes post surgeries and shows up in for– This also where a group like a primary care provider that generates the best outcomes. They will also generate savings to the system, which they can get paid as a bonus, but they also lower the churn of health plan members.
So if you’re a health plan and you have a member that’s seeing this certain primary care provider if that primary care provider is in-network and that patient loves that primary care provider and has gotten better outcomes from it and has better satisfaction. They’re not going to churn from their health plan nearly as much. So the health plan actually gets this patient acquisition funnel from the primary care provider. So you see that there’s like this ecosystem of stakeholders that are all related and you need to solve problems for all of them.
Say that if you’re not one of the big giants with lots of market power in the local market, that’s the only way you’re going to scale. So like all these telehealth providers, all these clinic providers that have poor outcomes, they’re just dead and they’re already dead. Either they can get growth by underpricing and having large losses, okay, or they could try to take a profit and not have the outcomes and they can’t grow. So they’re going to get a really low valuation.
You’ve got to figure out how to solve those problems. Once I realised that it changed my life with healthcare services but it is the key insight. Lee Liu talks about having a key insight. Once you have a key insight that separates you from the consensus. You have got to trust in your work and you have got to load up. There’s a famous lecture he gave at the Graham Dodd Centre for investing or whatever, the Columbia Business School class back in the middle 2000s or something. If it’s a key insight from this interview, it’s the take the key insight lesson from Lee Liu and learn about the key insight that I learned about it. But no, it is.
If you can get those things right at healthcare services, first of all, it will filter out 90% of the companies that are in your universe and then will allow you to really understand the strategic value of these companies. So the example is like, I own shares of this company called Oak Street Health. Oak Street Health is a Medicare Advantage. Seeing your focused primary care provider and what I mean by that is they’re a doctor’s office that has a brand. They built a brand around it and they’ve got a clinical programme that generates results and not only way better outcomes and longer life for seniors. And better satisfaction for the experience for seniors. But has scratched the itch of the payers because they’re out there acquiring patients for this new health plan.
It generates savings and the health plan likes it because they can share some of those savings with Oak Street and the plan can use the savings to craft better benefits for their health plan accrue more members and get higher revenue from higher star ratings. So like I’m not going to get into all those details of what that is, but it’s complicated. But Oak Street was solving problems for everybody. CMS liked it because they were generating health outcomes and directing health insurers in the right direction.
I actually knew about that company before it went public because I did a big long project on understanding primary care providers and where that was going within this alternative payment and risk model, business model. Several companies came out of that weren’t public yet, but then went public. A company called Lora Health which was actually the dog of the bunch. I didn’t like them. Cano Health, which went public via SPAC. CareMax that I knew Deerfield, which was they also went public via SPAC sponsored by Deerfield, which is a healthcare investor, I knew actually back when I was an allocator.
I knew that they were kind of wanting to do something in that space, you know the other SPAC, so I didn’t know about Care Max, but I knew about CareMax after they announced it and studied it. But I knew about Oak Street from their late-stage VC rounds. Like Oak Street, you talked to folks in the industry. You talked to other experts that have done business with them or in and around them. Talked to doctors who work there and talked to one of their really early hires who has been promoted consistently on the battlefield in that company.
Oak Street was just separate from the pack. They had built this amazing culture and they had built I should back up and say that the company was founded by a couple of guys who were healthcare consultants and it was founded after the Affordable Care Act in 2010, which allowed for these risk-based models to really take hold. The company was founded in what I call the Petri dish of incubating these business models, and it was a huge success. They standardised the model and built an organic growth engine for patient acquisition.
So a lot of these primary care providers were just acquiring practises to acquire patients and then coming in with some kind of set of technology like a suite of technology to better deliver value-based care, but they were acquiring practises and I had identified that is not the preferred way to do it because it’s adverse selection. You’re basically buying a practise from an old doctor who doesn’t have much intention of bettering their practice. Now, there may be young doctors in the group who want to, but basically, you’re buying a mature practice for full value versus Oak Street which was creating new practices from scratch and going out with community outreach organisers. They call them to get patients.
If you’ve done the math that had gone back, there were some assumptions that had to be made but that were triaged with other’s collaboration of work with folks that I knew in the private equity world as well as experts talked to. Oak Street was creating from a cost per patient acquisition, Oak Street was creating patients at 1/3 the cost of their competitors. They knew they had a good thing, so they went out and raised a tonne of money from General Atlantic and a couple other firms in a light stage round before they IPO and raise some more money, they were blitz scaling across the country.
So they were generating enormous losses because when you put scale across the country, there’s a lot of startup costs in each market as well as when you acquire a new patient, that patient in the way the risk-based primary care and Medicare Advantage or any of these CMS models and traditional medicare where it’s risk-based the way it works is you lose money on that patient first couple of years. There’s like a J curve on basically riding the ship on the patient’s health and getting them into the practice several times a year and staying on top and following through with procedures that the patient needs to get healthy.
After a couple of years, the patient starts to inflect into profitability for the company and in those later years they’re very profitable. And so there’s some math to be done per facility type unit economics and they have proven it in Chicago and, I guess where the company was based, and there was contention in the street, there was contention on Wall Street that these unity economics were going to scale elsewhere.
Also COVID, right in the middle like the IPO and then COVID and then their medical loss ratio which is not quite the same as an insurance company because they’re further down the value chain. But people like to compare them like that. Like ballooned because of COVID and because of their growth rate and it was hard to disentangle what was driving that and then the valuation was pretty rich. And so you know markets were selling down in ‘22 as interest rates rose. That had some effect. And then there was this DOJ, civil investigative demand that came out on the company for their marketing practises, which I dug, spent a lot of time into realise that a civil investigative demand is not an investigation and they can right their wrong and they did.
It didn’t really cost the company anything, but all these factors came out in the company like I think it was like from peak to through was like down like 80% or something. My mistake was we sized it up too soon, but after doing lots of work, I went to their Investor Day and met the management team and talked to lots of short sellers that there were– I think Jim Chanos was on TV talking about these businesses all being bankrupt and the business models are broken and there was some hope. Some high-profile folks were just against these businesses and they’re just wrong.
The reason why I bring up the story is it highlights that you know we we were able to get our cost basis down to really low and we ended up driving significant money-weighted returns, outperformance of the index on the name despite from when we first bought shares to when we finally sold shares when they got acquired by CVS. It was a negative time, a time when it returned. We still made lots of money on the name but I bring all that up to say, CVS ultimately bought them out and it was because there’s a little bit of, like CVS wanted a primary care platform because other large companies were buying them and they wanted one too. But at the same time, Oak Street was the premier asset and there are synergies, there are lots of high-impact synergies within CVS and Oak Street being combined.
That is where you know having this view of if you can solve problems for everyone in the system, there is enormous strategic value to this company as a large player in the value chain. So like a United Healthcare or CVS or an Elevances or something. And I don’t think any of the short sellers out there or any of the naysaying long only that are watching but don’t own it. I don’t think any of them sell that coming. And it’s just those opportunities are out there and so within healthcare that is my working model. You know that I’m not sure how much that I mean the whole like shared was that the whole Costco thing everyone says which is–
[00:51:32] Tilman Versch: Scale economy is shared.
[00:51:34] Joshua Collinsworth: Yeah. So there are models like that in other industries but they rhyme, but they’re not the same. So you just have to dig in there and find what is it and then look for it. And in the Oak Street example for Nomadic, I think it highlights kind of that private equity approach, the understanding of where this value both sides the public like the what the public equity incumbents want and what the private equity guys want and are investing for and kind of arbitraging the two views and finding where the intrinsic value of this company is.
Thank you
[00:52:16] Tilman Versch: Thank you for already answering a lot of my questions on the healthcare space in your long explanation. For the ones that want to hear more about a fresh idea from Joshua, they are invited to apply to the Good Investing Plus community because, in this interview format, we also do an idea pitch that will be exclusively released in the community, so feel free to apply via the link and to Joshua, thank you very much for this part of our interview and all the listeners, thank you very much for listening till now. I hope you enjoyed it. Thank you and bye-bye.
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