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Many investors view emerging companies as high-risk, with returns that don’t justify the exposure. Yet many of today’s leading listed companies were once small or micro-cap emerging businesses.
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These companies have a distinct advantage — access to multiple growth levers that can drive earnings per share higher and faster than larger peers. Such levers include expansion into new geographies, development of complementary products and services, gaining a greater share of existing customers’ spending, and value-adding acquisitions.
For Sebastian Evans (pictured), NAOS Asset Management Managing Director and Chief Investment Officer, smaller companies offer a longer runway for sustainable growth.
“Their runway for growth is, in our opinion, much longer, given the size of the business, the industries they generally operate in, their percentage of market share or whatever it may be,” he says. “They’ve got a lot more levers to grow earnings such as market share growth, new products and services, mergers and acquisitions, and geographic expansion.”
Emerging companies also provide investors with two unique benefits: exposure to individual industries that allow direct participation in long-term structural tailwinds, and access to founder-led, highly aligned businesses.
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One example of the former is a truck parts business.
“If you look at the fundamentals of that industry, they’re very strong,” says Evans. “Australia has a growing population, but we’re still awfully reliant on trucks to move goods around the country. The fleet of trucks in Australia is aging every single year, so therefore the reliance on truck parts is ever-increasing.”
The advantage of the latter is that founder alignment supports long-term decision-making and ensures management interests remain closely aligned with those of shareholders.
Boutique fund manager NAOS has invested in emerging companies for more than 18 years on behalf of thousands of investors. High-quality opportunities are rare, so when identified, NAOS takes concentrated positions — typically around 12 investments per portfolio, often with five to 30 per cent ownership stakes.
“We’re not activists” says Evans. “We want to partner with businesses and people, and support them through their journey, as opposed to trading in and out. We also demand the same shareholder alignment from ourselves — directors and staff are the largest investor cohort across our three listed investment companies”.
To be exposed to a select group of quality emerging companies, visit naos.com.au or look up NAC, NCC and NSC on the ASX. Investment is as simple as buying any other listed shares.
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