The concept of alignment has been a central tenet of Pembroke’s business and investment philosophy since the inception of the firm in 1968. We believe that investing in companies whose management own a significant economic stake is a key criterion that should increase the odds of success for our investments. In the same spirit, Pembroke employees are significant shareholders in the funds we manage; it aligns us with our clients.
It is our view that aligned management teams bring an owner’s mentality to the management of their companies. This owner’s mentality is reflected in both company-wide frugality and the way capital is allocated to fund business imperatives. The greatest investment results are produced by the successful interplay of sound strategy, operational skill and capital allocation. Long-term growth achieved without significant equity dilution can to lead to spectacular returns in the stock market.
The aligned manager thinks of equity and capital as a scarce resource and not just as currency to create a larger company. This perspective leads to a focus on earnings and cash flow per share as important metrics. Aligned managers almost always have target rates of return for any project or acquisition. This is not to say that the management of aligned companies get every decision right. On the contrary, entrepreneurs are often risk takers who make mistakes along the way. Their alignment with other shareholders, however, is insurance that the management team has likely reflected on the impact of any decisions on all stakeholders.
Successful investing is a long-distance race; investing in companies with an owner’s mentality should enhance the chances of long-term success. For these reasons, alignment is a key part of our investment philosophy.
Chairman, Pembroke Management and Pembroke Private Wealth Management