Aoifinn Devitt: This podcast was made possible by the kind support of Alvine Capital Management, a London-based specialist investment advisor and placement boutique.
James: An entrepreneur isn’t an entrepreneur until they’ve had the bailiffs round. And I think it’s hard to find an entrepreneur who hasn’t basically risked everything, you know, maxed out the credit cards, etc., etc. And as with many, where we are now is a combination of a fair amount of really hard work and a lot of thought, but also a fair amount of luck. And I think one of the things that I’ve learned is you that, know, as Gary Player used to say, the more I practice, the luckier I get. I think one of the things that has stuck with me since the very early days is when you’ve seen people working in real adversity, in very challenging circumstances, walking out of a shantytown in a crisply pressed shirt and a smart suit simply in order to go for a job interview, whereas most of their family are sitting around wondering where the next meal is coming from, you start to realize that there are different perspectives on how you want to live your life.
Aoifinn Devitt: I’m Aoifinn Devitt, and welcome to the 50 Faces Podcast, a podcast committed to revealing the richness and diversity of the world of investment by focusing on its people and their stories. I’m joined today by James Penny, who is chairman at Darwin Alternative Investment Management Limited, a firm that offers innovative, alpha-driven investment solutions for long-term investors. Welcome, James. Thanks for joining me today.
James: Thank you, Aoifinn.
Aoifinn Devitt: Well, let’s start with your background because I’m particularly interested in your early interests, which included languages, Latin American politics, and a host of other things. Can you start with that?
James: I was fortunate enough to spend some time between school and university working for Johnnie Walker as a graduate trainee in Venezuela. So at the tender age of 18 and a bit, I I flew to Maiketia, the airport in Caracas, armed with a return flight in 4 months’ time and an address and a job. And I spent 4 incredible months traveling all over Venezuela, working as a whiskey salesman’s assistant, which gave me a love of Latin America and also quite a love of whiskey in later life. But I was then off to study French and Spanish at university. And went back again to Venezuela at the end of my first year with the intention of working for a law firm. And I spent a month and a half working for a firm of lawyers in Caracas, but then went on and as a result of the experience of my friends living in shantytowns, this was back in ’84 when Latin America was rife with military dictatorships and political issues. I decided that I wanted to change. Instead of doing law for the second and third year at uni, I switched to theology. And then at the end of my second year, I went and worked for 2 months in the slums in Lima, working with a Benedictine community in one of the poorest areas of Lima. And that’s really what fired my interest in Latin America and the role that religion was playing in the struggle for the powerless to oust the military dictatorships. And so for a period between 1985, ’86 to 1992, I spent 2 to 3 months every year working in, first in Lima and then subsequently in the shantytowns around Rio and São Paulo as I stayed on to do a PhD in the role of the church in politics in Latin America. And of course, this was at the height of Shining Path in Peru. When I finally left Lima in August 1992, It was just before they were capturing Abimael Guzmán, the leader of Sendero, which basically brought Peru back to a more even keel subsequently. So that’s really how I became not exactly infatuated, but very much focused on Latin America, its politics. I was lucky enough then to teach theology for about 7 years, teaching mostly a mixture of ethics and Latin American studies.
Aoifinn Devitt: Well, that is an absolutely fascinating backstory there. I’d love to ask a little bit about it. One doesn’t go through experiences like that without them being formative. I had something very similar, but not in any way as deep, I would imagine, in my teens. And I think I became perhaps less materialistic, certainly more street smart. Can you describe maybe how that formed your personality? And I’d also love to know, did you encounter any danger, physical danger? There must have been many episodes.
James: There was plenty of danger involved. When I was first in Lima in ’86, we were in an area of Lima where there was a large prison housing mostly terrorists. And a week before I arrived, there had been an incursion into the prison and the military had basically bombed the area where Sendero had been held and the whole wall of the prison had been blown out. And because it was part of the parish and because it was on the visiting duties of the Benedictine community I was working with, we were ushered into that part of the prison when we were doing our prison visits, which was quite a formative experience for someone— I I don’t was, know, 20, 21 at the time. It was a very haunting experience. And in other parts of the prison, they were keeping people who were we would call them vulnerable adults, and they were just kind of running around crazed, dressed in rags. I mean, it was quite a shocking experience. And then about 2 weeks later, there was an explosion just down the road, and a person carrying a bomb which they were taking into the center of Lima dropped the bag and the bomb exploded, killing them. And it was very much a part of Lima where if you are white, you were either a drug baron or a priest. Unfortunately, I was never mistaken for a drug baron, so I’ve also been shot at. It was quite a formative experience, those years.
Aoifinn Devitt: And in terms of the work you did in the slums and working with religious organizations, with missions there, I would imagine there’s also a great deal of translation that goes on between theory and doctrine, perhaps, and practice and the kind of grittiness of on the street. Which maybe helps inform your impression of impact now.
James: Yes, I think it absolutely does shape you. I had quite a critical view of power and authority at the time and received wisdom. And if there was one thing that became very clear in the time working in the shantytowns is that there’s a huge difference between political rhetoric and what actually happens to real people in real circumstances. And I think those early years in various parts of Latin America have given me a very strong commitment to working for change for some of the poorest members of our communities and to try and improve people’s outcomes, partly through some of the school governing work that I do now, but also in the way that you think about investment and the way that you think about the responsibility you have particularly investing local authority pension fund money, which is a large part of where our funds derive their investment, and the responsibility you have to those future pensioners in the way that you allocate and invest their money. Also, I guess the other part is the willingness to back yourself and to have confidence, sometimes perhaps misplaced, in your ability to create an opportunity and then exploit it. I’ve seen plenty of examples of people who are super talented, who either because of their own fear of failure or because they think that it’s not the done thing, don’t have a go. And I think that’s a real shame.
Aoifinn Devitt: And let’s now move to another way that you had a go in terms of setting up your own consulting firm and moving into investment management, as you have at Darwin Alternatives. Can you talk us through that journey?
James: At uni, I was fortunate enough to be at Cambridge, stayed on to do a PhD, as I mentioned. Then when I was teaching, I was at Westminster College in Oxford, and we got a new principal. I was about 32 at the time, had spent the previous 3 or 4 years setting up a whole range of distance learning courses. This was pre-internet, so all booklets that we sent out to people, and we’d written a 7-year distance learning to degree program. And had encouraged people from all over the world to apply. And at that point, we had across various programs about 1,000 students in 50 countries. The new principal said that wasn’t Oxford and we really should start winding that down. So I thought, okay, I’m in my early 30s. Admittedly, I’ve got tenure, but this is not the kind of thing I’m prepared to watch happen. So I decided to leave. Got a place at London Business School doing the Sloan Master’s program, and out of that started the strategy business with a couple of classmates on the basis that if you’re a reasonable academic, you should be good at research, and if you’re a half-decent lecturer, you should be good at presenting. And I felt that would make a much better use of my languages. And so with naive optimism of youth, as we were all in our early 30s, we decided to create a sort of mini McKinsey, which did strategy consulting, principally for financial services clients originally, but then more broadly into some not-for-profit, so work for the World Wildlife Fund, some private equity work, and some work for some family offices, particularly in the area of clean tech. So a very wide generalist approach, but gave me a real insight into how boards think, how senior management think, how businesses are run by different groups of people in different interests. But also, particularly in the work we did for some of the family offices and private equity, really thinking about how value is created and in particular how you can create value for different stakeholder groups. And I think that’s what really got me interested in the intersection between corporate strategy, corporate finance, and the world of financial investment. The theory was that if you gave a McKinsey consultant and a CFA analyst a company to value, you would get two very different perspectives on what the company is worth. But of course, the company is the composite of those values. The difference is that the CFA analyst mostly works for investors and the McKinsey consultant works mostly for the company. Very rarely do you get that sort of strategic insight applied on behalf of investors. That’s really the first journey into the world of investment, where together with Anthony, with whom I set up Darwin Alternatives, we started doing some work for some of the large investment managers. For example, for M&G, helping their equity research team think about companies and their value and the way that they’re creating value from the perspective of a strategy consultant rather than from the perspective of of a, a CFA.
Aoifinn Devitt: And one common thread throughout the work I see Darwin doing is the potential perhaps that often gets overlooked in certain businesses, and also the potential for fragmented industries to be consolidated and value extracted in that way. Can you talk about how you approach that through your fund?
James: Yes. So we started back in 2007 with the first fund, the Darwin Leisure Property Fund, which came about as a consequence of a, what is now famous lunch at the Peacemaker Express in Haymarket, where Anthony and I had sat down. This is back in 2006, and Anthony came to me and said, James, I’ve been thinking quite a lot about the holiday park sector. There are something like 4,500 holiday/caravan parks in the UK, and the top 3 players own less than 7%. What do you think? And I said immediately, well, here’s an opportunity for consolidation. And so on the back of a napkin in the Pizza Express, we sketched out the business plan for the first fund, which was essentially to create a consolidation of what were predominantly mom-and-pop businesses, somewhere between Carry On Camping and Fawlty Towers in their approach to their customers, often lacking capital, almost always lacking a sense of providing great customer service. And we felt that by deploying some capital, we could create a business which was very much focused on the guest experience, which would deliver stable, consistent returns in what was effectively an uncorrelated sector of the economy. Therefore produce predictable income, which should be very much appreciated by pension funds, and in particular local authority pension funds. And that’s really, really how we got started. And then we set up back in 2017 a second fund exploiting a similar sort of strategy. And we’ve also more recently set up a bereavement services fund, which again focuses in an uncorrelated asset-backed income-generating sector where there is real opportunity to create value both for the investors, but also for members of the general public. My original theory was you’ve got local councils that own crematoria, and for many local councils, that’s one of their principal sources of revenue because otherwise they’re completely scarce of cash. And yet on the other side of the public sector balance sheet, you’ve got local authority pension funds, which are awash with cash and desperate for a high-yielding asset. And in the midst of this, you’ve got the general public who experience poor customer service, poor quality of buildings, because the asset owner, the local council, has no money to spend on it. You don’t win votes by giving another lick of paint to the crematoria, rather than providing textbooks for local schools or social services or children’s services and so on. So the idea was, why not set up a fund for local authority pension fund investment to acquire and then operate the bereavement services assets from the local councils? The hope being that you get effectively a win-win-win. The pension fund gets the yield, the local authority gets stable rental income, plus one-off capital, and the member of the general public gets an asset owner who’s prepared to invest in and improve the quality of the experience for the bereaved family. And over time that’s grown. We acquired initially a group of private cemeteries, and more recently we’ve acquired the third largest group of privately owned crematoria. And again, from the investment point of view, it’s a very fragmented sector. Very stable and predictable. Short of privatizing HMRC, it’s probably the most sustainable yield in terms of demand, and it’s completely uncorrelated. So we do like looking out for opportunities in often unloved and generally fragmented sectors, particularly where it’s sort of capital intensive, which puts it out of the reach of individuals and therefore opens up opportunity.
Aoifinn Devitt: And certainly now that I know more about your background, your lifelong focus on human dignity has carried through into this. It certainly seems the bereavement services, as you said, because investing in these services can actually contribute to a more dignified end of life and experience for the family. It certainly is a very holistic approach.
James: No, that’s absolutely right. And one of the things that we’re trying to do in particular in the work we’re doing with Mémoria and their affordable funerals brand is to try and address funeral poverty, which is increasingly a serious problem, partly because of horrendous inflation in funeral prices, even before general inflation picked up over the last couple of quarters, but really to provide bereaved families with, with the service and the whole experience of the event as best as it can be under very sad circumstances. So for example, our slots at the crematoria are all 1 hour long, which means that you don’t feel that you’re part of a conveyor belt. You’re not there to be part of somebody else’s funeral. You’re there for your family, your friend’s funeral, and you don’t really want to be reminded of other people’s. So the attention to detail is very much around making sure the bereaved family are at the center of everything that we do. And that’s really the philosophy that underpins that.
Aoifinn Devitt: Do you find that from an investor standpoint, there’s ever any aversion maybe to the whole idea of investing in bereavement services and making a profit perhaps out of that? Or has, because of, as you mentioned, it does come as a package which ultimately enhances the experience and also is perhaps subsidizing other experiences, is justifiable?
James: I think it’s a really, it’s a really interesting question. I mean, in general, death is not a subject that the British public are talking about very readily. I think the experience over the last couple of years with the pandemic has caused a seismic change in that approach, partly because so many more of us have been exposed to untimely early death. We’ve also been exposed to and suffered and seen in often harrowing scenes how people have had to mourn alone or have had to be buried alone, which is really tragic. And you’re right, there’s always a sensitivity around making profit out of death, if I can put it that way. But from the perspective of a local authority pension fund, the local authorities are providing bereavement services. I think there is a reasonable case to say that working to provide a dignified, honorable, appropriate celebration of the end of life is an important part of what society should be able to offer. And in our case, we try very hard to be upper quartile, if not the top quartile, in terms of the service to the bereaved family, whilst being in the lower quartile in respect of price, because we do take very seriously the whole affordability of end-of-life services.
Aoifinn Devitt: And now moving to the investment role more generally, what’s at the forefront of your mind at the helm of a firm today? And in particular, I’m thinking of the increased awareness around ESG factors, around impact perhaps. What do you think you’ll be focusing on over the next 5 years?
James: Well, ESG and impact are really important themes at the moment, and I get quite frustrated by people who use these terms rather loosely. As you can imagine from the stories I’ve told of my early 20s, impact is an important part of what we look for. We’re trying to effect change in society, to deliver excellence in areas which haven’t always been very well served. So one of the reasons why we started in the caravan park arena was that a lot of the services that were provided to customers were just of a really poor quality. As I mentioned, it’s sort of Fawlty Towers-esque. And certainly that was one of the motivating factors for becoming involved in bereavement, was there are many ways in which we can improve the experience for bereaved families at that very difficult time. And I think one of the things that we’re very interested in is how we can effect change to improve the world in which we live and of which we are stewards for future generations. So for example, one, we are at the forefront in the bereavement services industry of trying to show, really shine a light on poor practices in the sector. Just as an example, if you were to switch from gas as the heat source for a cremator to electricity, and in particular renewable electricity, you reduce the amount of carbon produced from a cremation by about 90%. Another example, if you were using the same amount of formaldehyde that exists in embalming a cadaver as sheep dip as a farmer, then the undertaker would be in prison because there’s relatively little regulation of the amount of embalming fluid that is buried with every burial. So there’s some really poor practices within the sector. The amount of carbon that is in a black granite imported from China memorial stone is 5, 6, 7, 8 times more than the carbon in a headstone made of UK quarried granite. So we’re trying really hard to expose some of these poor environmental practices in a sector which people don’t really think very hard about. Although I can’t at this stage yet prove it, we do think that for a lot of local councils, quite a serious amount of their carbon footprint is actually generated by their bereavement services. Operations, although they don’t realize that.
Aoifinn Devitt: So it really seems there’s massive opportunity for impact all around, but this investment is a long way to go. Clearly, you’ve brought a lot of cognitive diversity to the industry through your own experience and perhaps as the hinterland we talked about before. Carrying on the ESG topic a little bit further, what are your thoughts on the current levels of diversity in the investment industry from your perspective?
James: Poor, to be honest. I think that as with many other industries, the level of diversity is nowhere near where it could be. And I think this is one of the factors that hopefully is at the forefront of investment managers in terms of recruitment, in terms of training, developing talent, and so forth. But also, as you’ll have heard up till now, the social bit of ESG is very much at the forefront of our thinking. The environmental bit of ESG is equally important. I think it’s incumbent upon everybody in construction, for example, to think really carefully about the materials they use, where they source the materials from, the energy sources they’re putting into new developments. And certainly that’s something we think about very hard when we’re developing new sites for the Lodge Parks. But also I think the G, the governance, element is equally significant about holding oneself to account and being prepared to be held account by the key stakeholders, um, is a significant part of the responsibility of professional investors these days. And so we try as hard as we can to promote each of the components of the ESG agenda in what we do, both ourselves as an investment business, but also in effectively the portfolio businesses owned by the 3 funds.
Aoifinn Devitt: Let’s just move back to discussing some of the takeaways from your early years, because I think they really relate to, I’m sure, your approach today. In terms of setbacks and challenges, whether it’s for the very early years in your academic life or as you moved to set up your own strategic consulting firm and now an investment firm, were there any particular challenges that you learned lessons from that made you see the world a little differently?
James: I often tell the story that an entrepreneur isn’t an entrepreneur until they’ve had the bailiffs round. And I think it’s hard to find an entrepreneur who hasn’t basically risked everything, maxed out the credit cards, et cetera, et cetera. And as with many, where we are now is a combination of a fair amount of really hard work and a lot of thought, but also a fair amount of luck. And I think one of the things that I’ve learned is that, as Gary Player used to say, the more I practice, the luckier I get. I think one of the things that has stuck with me since the very early days is when you’ve seen people working in real adversity in very challenging circumstances, walking out of a shantytown in a crisply pressed shirt and a smart suit simply in order to go for a job interview, whereas most of their family are sitting around wondering where the next meal is coming from, you start to realize that there are different perspectives on how you want to live your life. And I think you develop a sense of integrity of the value of others around you because you can’t make real change on your own. You have to enlist others and effectively impress them with your vision of what you’re trying to achieve. One of my favorite phrases, which my mother always used to use a lot, was, ‘Where there is no vision, the people perish.’ And I think quite often it’s lack of vision from leaders that causes people to question and to challenge, but it’s also that element of vision which conversely encourages people to challenge leadership.
Aoifinn Devitt: And also, I suppose, you have to be able to convince people and bring them round to your vision. There’s an element of people skills involved there with the vision too.
James: Absolutely, absolutely.
Aoifinn Devitt: And speaking of people and relationships, you mentioned already your partner and that famous meal at Pizza Express. Have there been any other key people who’ve influenced you in career or life?
James: Certainly, my head of department when I first started lecturing at Westminster in Oxford. Gave me a real sense of how to manage other people, how to encourage people to share your vision for what you’re trying to achieve. The point that you were just making earlier, you’ve got to be able to persuade people, but also that you needn’t fear anybody. I remember probably in my first year, we had an audit visit from the Higher Education Funding Council, a bit like an FCA inspection really, and he was very good at putting me to ease. I was 24 years old, running the undergraduate part of the department and never had come across these faceless people who come and have the power of closing you down or putting you to the top of the rankings. And he always said, you know, James, they’re ordinary people like everybody else. You know, they get into the car, they go home. You have to imagine that when they pitch up, you know, they’ve had a row the night before, either with one of their children or their partner. You know, they’re thinking about 1,001 other things. So, when you go to present to them, don’t think about the power they have over you, think of their personal situation and what they might be worrying about. And it’s amazing how that disarms you and stops you getting too nervous.
Aoifinn Devitt: It’s a reminder, I suppose, of where we rank in the scheme of things, perhaps, for that person’s priorities, which is very interesting. You’ve given us lots of words of wisdom here already, and I’m going to take away that without vision, everything perishes. For sure. If there was any one piece of knowledge or advice or wisdom that you could tell that young student spending summers in Latin America, is there anything you know now you wish you had known then?
James: There are 3 things that I think are really helpful. The first, I also learned from that same professor back in Oxford. It’s easier to be forgiven than to get permission, which I think is a really good concept to live by. The second is never be afraid to get it in writing.. And I think that’s also a very good lifelong message. And the final one, which is really important for both entrepreneurs and those trying to raise money: never confuse enthusiasm for a check.
Aoifinn Devitt: I love that sobering— a little sobering message at the end there, just in case we were getting too carried away. Well, this has been a very inspirational conversation, James. I have always known you to be a champion of the vulnerable. I didn’t know until now just how far back that went. And thank you for your fearlessness in breaking new frontiers in the world of investment and for sharing your insights here with us.
James: Thank you very much, Aoifinn.
Aoifinn Devitt: I’m Aoifinn Devitt. Thank you for listening to the 50 Faces Podcast. If you liked what you heard and would like to tune in to hear more inspiring investors and their personal journeys, please subscribe on Apple Podcasts or wherever you get your podcasts. This podcast is for informational purposes only and should not be construed as investment advice. Advice, and all views are personal and should not be attributed to the organizations and affiliations of the host or any guest.
Aoifinn Devitt: This podcast was made possible by the kind support of Alvine Capital Management, a London-based specialist investment advisor and placement boutique.
James: An entrepreneur isn’t an entrepreneur until they’ve had the bailiffs round. And I think it’s hard to find an entrepreneur who hasn’t basically risked everything, you know, maxed out the credit cards, etc., etc. And as with many, where we are now is a combination of a fair amount of really hard work and a lot of thought, but also a fair amount of luck. And I think one of the things that I’ve learned is you that, know, as Gary Player used to say, the more I practice, the luckier I get. I think one of the things that has stuck with me since the very early days is when you’ve seen people working in real adversity, in very challenging circumstances, walking out of a shantytown in a crisply pressed shirt and a smart suit simply in order to go for a job interview, whereas most of their family are sitting around wondering where the next meal is coming from, you start to realize that there are different perspectives on how you want to live your life.
Aoifinn Devitt: I’m Aoifinn Devitt, and welcome to the 50 Faces Podcast, a podcast committed to revealing the richness and diversity of the world of investment by focusing on its people and their stories. I’m joined today by James Penny, who is chairman at Darwin Alternative Investment Management Limited, a firm that offers innovative, alpha-driven investment solutions for long-term investors. Welcome, James. Thanks for joining me today.
James: Thank you, Aoifinn.
Aoifinn Devitt: Well, let’s start with your background because I’m particularly interested in your early interests, which included languages, Latin American politics, and a host of other things. Can you start with that?
James: I was fortunate enough to spend some time between school and university working for Johnnie Walker as a graduate trainee in Venezuela. So at the tender age of 18 and a bit, I I flew to Maiketia, the airport in Caracas, armed with a return flight in 4 months’ time and an address and a job. And I spent 4 incredible months traveling all over Venezuela, working as a whiskey salesman’s assistant, which gave me a love of Latin America and also quite a love of whiskey in later life. But I was then off to study French and Spanish at university. And went back again to Venezuela at the end of my first year with the intention of working for a law firm. And I spent a month and a half working for a firm of lawyers in Caracas, but then went on and as a result of the experience of my friends living in shantytowns, this was back in ’84 when Latin America was rife with military dictatorships and political issues. I decided that I wanted to change. Instead of doing law for the second and third year at uni, I switched to theology. And then at the end of my second year, I went and worked for 2 months in the slums in Lima, working with a Benedictine community in one of the poorest areas of Lima. And that’s really what fired my interest in Latin America and the role that religion was playing in the struggle for the powerless to oust the military dictatorships. And so for a period between 1985, ’86 to 1992, I spent 2 to 3 months every year working in, first in Lima and then subsequently in the shantytowns around Rio and São Paulo as I stayed on to do a PhD in the role of the church in politics in Latin America. And of course, this was at the height of Shining Path in Peru. When I finally left Lima in August 1992, It was just before they were capturing Abimael Guzmán, the leader of Sendero, which basically brought Peru back to a more even keel subsequently. So that’s really how I became not exactly infatuated, but very much focused on Latin America, its politics. I was lucky enough then to teach theology for about 7 years, teaching mostly a mixture of ethics and Latin American studies.
Aoifinn Devitt: Well, that is an absolutely fascinating backstory there. I’d love to ask a little bit about it. One doesn’t go through experiences like that without them being formative. I had something very similar, but not in any way as deep, I would imagine, in my teens. And I think I became perhaps less materialistic, certainly more street smart. Can you describe maybe how that formed your personality? And I’d also love to know, did you encounter any danger, physical danger? There must have been many episodes.
James: There was plenty of danger involved. When I was first in Lima in ’86, we were in an area of Lima where there was a large prison housing mostly terrorists. And a week before I arrived, there had been an incursion into the prison and the military had basically bombed the area where Sendero had been held and the whole wall of the prison had been blown out. And because it was part of the parish and because it was on the visiting duties of the Benedictine community I was working with, we were ushered into that part of the prison when we were doing our prison visits, which was quite a formative experience for someone— I I don’t was, know, 20, 21 at the time. It was a very haunting experience. And in other parts of the prison, they were keeping people who were we would call them vulnerable adults, and they were just kind of running around crazed, dressed in rags. I mean, it was quite a shocking experience. And then about 2 weeks later, there was an explosion just down the road, and a person carrying a bomb which they were taking into the center of Lima dropped the bag and the bomb exploded, killing them. And it was very much a part of Lima where if you are white, you were either a drug baron or a priest. Unfortunately, I was never mistaken for a drug baron, so I’ve also been shot at. It was quite a formative experience, those years.
Aoifinn Devitt: And in terms of the work you did in the slums and working with religious organizations, with missions there, I would imagine there’s also a great deal of translation that goes on between theory and doctrine, perhaps, and practice and the kind of grittiness of on the street. Which maybe helps inform your impression of impact now.
James: Yes, I think it absolutely does shape you. I had quite a critical view of power and authority at the time and received wisdom. And if there was one thing that became very clear in the time working in the shantytowns is that there’s a huge difference between political rhetoric and what actually happens to real people in real circumstances. And I think those early years in various parts of Latin America have given me a very strong commitment to working for change for some of the poorest members of our communities and to try and improve people’s outcomes, partly through some of the school governing work that I do now, but also in the way that you think about investment and the way that you think about the responsibility you have particularly investing local authority pension fund money, which is a large part of where our funds derive their investment, and the responsibility you have to those future pensioners in the way that you allocate and invest their money. Also, I guess the other part is the willingness to back yourself and to have confidence, sometimes perhaps misplaced, in your ability to create an opportunity and then exploit it. I’ve seen plenty of examples of people who are super talented, who either because of their own fear of failure or because they think that it’s not the done thing, don’t have a go. And I think that’s a real shame.
Aoifinn Devitt: And let’s now move to another way that you had a go in terms of setting up your own consulting firm and moving into investment management, as you have at Darwin Alternatives. Can you talk us through that journey?
James: At uni, I was fortunate enough to be at Cambridge, stayed on to do a PhD, as I mentioned. Then when I was teaching, I was at Westminster College in Oxford, and we got a new principal. I was about 32 at the time, had spent the previous 3 or 4 years setting up a whole range of distance learning courses. This was pre-internet, so all booklets that we sent out to people, and we’d written a 7-year distance learning to degree program. And had encouraged people from all over the world to apply. And at that point, we had across various programs about 1,000 students in 50 countries. The new principal said that wasn’t Oxford and we really should start winding that down. So I thought, okay, I’m in my early 30s. Admittedly, I’ve got tenure, but this is not the kind of thing I’m prepared to watch happen. So I decided to leave. Got a place at London Business School doing the Sloan Master’s program, and out of that started the strategy business with a couple of classmates on the basis that if you’re a reasonable academic, you should be good at research, and if you’re a half-decent lecturer, you should be good at presenting. And I felt that would make a much better use of my languages. And so with naive optimism of youth, as we were all in our early 30s, we decided to create a sort of mini McKinsey, which did strategy consulting, principally for financial services clients originally, but then more broadly into some not-for-profit, so work for the World Wildlife Fund, some private equity work, and some work for some family offices, particularly in the area of clean tech. So a very wide generalist approach, but gave me a real insight into how boards think, how senior management think, how businesses are run by different groups of people in different interests. But also, particularly in the work we did for some of the family offices and private equity, really thinking about how value is created and in particular how you can create value for different stakeholder groups. And I think that’s what really got me interested in the intersection between corporate strategy, corporate finance, and the world of financial investment. The theory was that if you gave a McKinsey consultant and a CFA analyst a company to value, you would get two very different perspectives on what the company is worth. But of course, the company is the composite of those values. The difference is that the CFA analyst mostly works for investors and the McKinsey consultant works mostly for the company. Very rarely do you get that sort of strategic insight applied on behalf of investors. That’s really the first journey into the world of investment, where together with Anthony, with whom I set up Darwin Alternatives, we started doing some work for some of the large investment managers. For example, for M&G, helping their equity research team think about companies and their value and the way that they’re creating value from the perspective of a strategy consultant rather than from the perspective of of a, a CFA.
Aoifinn Devitt: And one common thread throughout the work I see Darwin doing is the potential perhaps that often gets overlooked in certain businesses, and also the potential for fragmented industries to be consolidated and value extracted in that way. Can you talk about how you approach that through your fund?
James: Yes. So we started back in 2007 with the first fund, the Darwin Leisure Property Fund, which came about as a consequence of a, what is now famous lunch at the Peacemaker Express in Haymarket, where Anthony and I had sat down. This is back in 2006, and Anthony came to me and said, James, I’ve been thinking quite a lot about the holiday park sector. There are something like 4,500 holiday/caravan parks in the UK, and the top 3 players own less than 7%. What do you think? And I said immediately, well, here’s an opportunity for consolidation. And so on the back of a napkin in the Pizza Express, we sketched out the business plan for the first fund, which was essentially to create a consolidation of what were predominantly mom-and-pop businesses, somewhere between Carry On Camping and Fawlty Towers in their approach to their customers, often lacking capital, almost always lacking a sense of providing great customer service. And we felt that by deploying some capital, we could create a business which was very much focused on the guest experience, which would deliver stable, consistent returns in what was effectively an uncorrelated sector of the economy. Therefore produce predictable income, which should be very much appreciated by pension funds, and in particular local authority pension funds. And that’s really, really how we got started. And then we set up back in 2017 a second fund exploiting a similar sort of strategy. And we’ve also more recently set up a bereavement services fund, which again focuses in an uncorrelated asset-backed income-generating sector where there is real opportunity to create value both for the investors, but also for members of the general public. My original theory was you’ve got local councils that own crematoria, and for many local councils, that’s one of their principal sources of revenue because otherwise they’re completely scarce of cash. And yet on the other side of the public sector balance sheet, you’ve got local authority pension funds, which are awash with cash and desperate for a high-yielding asset. And in the midst of this, you’ve got the general public who experience poor customer service, poor quality of buildings, because the asset owner, the local council, has no money to spend on it. You don’t win votes by giving another lick of paint to the crematoria, rather than providing textbooks for local schools or social services or children’s services and so on. So the idea was, why not set up a fund for local authority pension fund investment to acquire and then operate the bereavement services assets from the local councils? The hope being that you get effectively a win-win-win. The pension fund gets the yield, the local authority gets stable rental income, plus one-off capital, and the member of the general public gets an asset owner who’s prepared to invest in and improve the quality of the experience for the bereaved family. And over time that’s grown. We acquired initially a group of private cemeteries, and more recently we’ve acquired the third largest group of privately owned crematoria. And again, from the investment point of view, it’s a very fragmented sector. Very stable and predictable. Short of privatizing HMRC, it’s probably the most sustainable yield in terms of demand, and it’s completely uncorrelated. So we do like looking out for opportunities in often unloved and generally fragmented sectors, particularly where it’s sort of capital intensive, which puts it out of the reach of individuals and therefore opens up opportunity.
Aoifinn Devitt: And certainly now that I know more about your background, your lifelong focus on human dignity has carried through into this. It certainly seems the bereavement services, as you said, because investing in these services can actually contribute to a more dignified end of life and experience for the family. It certainly is a very holistic approach.
James: No, that’s absolutely right. And one of the things that we’re trying to do in particular in the work we’re doing with Mémoria and their affordable funerals brand is to try and address funeral poverty, which is increasingly a serious problem, partly because of horrendous inflation in funeral prices, even before general inflation picked up over the last couple of quarters, but really to provide bereaved families with, with the service and the whole experience of the event as best as it can be under very sad circumstances. So for example, our slots at the crematoria are all 1 hour long, which means that you don’t feel that you’re part of a conveyor belt. You’re not there to be part of somebody else’s funeral. You’re there for your family, your friend’s funeral, and you don’t really want to be reminded of other people’s. So the attention to detail is very much around making sure the bereaved family are at the center of everything that we do. And that’s really the philosophy that underpins that.
Aoifinn Devitt: Do you find that from an investor standpoint, there’s ever any aversion maybe to the whole idea of investing in bereavement services and making a profit perhaps out of that? Or has, because of, as you mentioned, it does come as a package which ultimately enhances the experience and also is perhaps subsidizing other experiences, is justifiable?
James: I think it’s a really, it’s a really interesting question. I mean, in general, death is not a subject that the British public are talking about very readily. I think the experience over the last couple of years with the pandemic has caused a seismic change in that approach, partly because so many more of us have been exposed to untimely early death. We’ve also been exposed to and suffered and seen in often harrowing scenes how people have had to mourn alone or have had to be buried alone, which is really tragic. And you’re right, there’s always a sensitivity around making profit out of death, if I can put it that way. But from the perspective of a local authority pension fund, the local authorities are providing bereavement services. I think there is a reasonable case to say that working to provide a dignified, honorable, appropriate celebration of the end of life is an important part of what society should be able to offer. And in our case, we try very hard to be upper quartile, if not the top quartile, in terms of the service to the bereaved family, whilst being in the lower quartile in respect of price, because we do take very seriously the whole affordability of end-of-life services.
Aoifinn Devitt: And now moving to the investment role more generally, what’s at the forefront of your mind at the helm of a firm today? And in particular, I’m thinking of the increased awareness around ESG factors, around impact perhaps. What do you think you’ll be focusing on over the next 5 years?
James: Well, ESG and impact are really important themes at the moment, and I get quite frustrated by people who use these terms rather loosely. As you can imagine from the stories I’ve told of my early 20s, impact is an important part of what we look for. We’re trying to effect change in society, to deliver excellence in areas which haven’t always been very well served. So one of the reasons why we started in the caravan park arena was that a lot of the services that were provided to customers were just of a really poor quality. As I mentioned, it’s sort of Fawlty Towers-esque. And certainly that was one of the motivating factors for becoming involved in bereavement, was there are many ways in which we can improve the experience for bereaved families at that very difficult time. And I think one of the things that we’re very interested in is how we can effect change to improve the world in which we live and of which we are stewards for future generations. So for example, one, we are at the forefront in the bereavement services industry of trying to show, really shine a light on poor practices in the sector. Just as an example, if you were to switch from gas as the heat source for a cremator to electricity, and in particular renewable electricity, you reduce the amount of carbon produced from a cremation by about 90%. Another example, if you were using the same amount of formaldehyde that exists in embalming a cadaver as sheep dip as a farmer, then the undertaker would be in prison because there’s relatively little regulation of the amount of embalming fluid that is buried with every burial. So there’s some really poor practices within the sector. The amount of carbon that is in a black granite imported from China memorial stone is 5, 6, 7, 8 times more than the carbon in a headstone made of UK quarried granite. So we’re trying really hard to expose some of these poor environmental practices in a sector which people don’t really think very hard about. Although I can’t at this stage yet prove it, we do think that for a lot of local councils, quite a serious amount of their carbon footprint is actually generated by their bereavement services. Operations, although they don’t realize that.
Aoifinn Devitt: So it really seems there’s massive opportunity for impact all around, but this investment is a long way to go. Clearly, you’ve brought a lot of cognitive diversity to the industry through your own experience and perhaps as the hinterland we talked about before. Carrying on the ESG topic a little bit further, what are your thoughts on the current levels of diversity in the investment industry from your perspective?
James: Poor, to be honest. I think that as with many other industries, the level of diversity is nowhere near where it could be. And I think this is one of the factors that hopefully is at the forefront of investment managers in terms of recruitment, in terms of training, developing talent, and so forth. But also, as you’ll have heard up till now, the social bit of ESG is very much at the forefront of our thinking. The environmental bit of ESG is equally important. I think it’s incumbent upon everybody in construction, for example, to think really carefully about the materials they use, where they source the materials from, the energy sources they’re putting into new developments. And certainly that’s something we think about very hard when we’re developing new sites for the Lodge Parks. But also I think the G, the governance, element is equally significant about holding oneself to account and being prepared to be held account by the key stakeholders, um, is a significant part of the responsibility of professional investors these days. And so we try as hard as we can to promote each of the components of the ESG agenda in what we do, both ourselves as an investment business, but also in effectively the portfolio businesses owned by the 3 funds.
Aoifinn Devitt: Let’s just move back to discussing some of the takeaways from your early years, because I think they really relate to, I’m sure, your approach today. In terms of setbacks and challenges, whether it’s for the very early years in your academic life or as you moved to set up your own strategic consulting firm and now an investment firm, were there any particular challenges that you learned lessons from that made you see the world a little differently?
James: I often tell the story that an entrepreneur isn’t an entrepreneur until they’ve had the bailiffs round. And I think it’s hard to find an entrepreneur who hasn’t basically risked everything, maxed out the credit cards, et cetera, et cetera. And as with many, where we are now is a combination of a fair amount of really hard work and a lot of thought, but also a fair amount of luck. And I think one of the things that I’ve learned is that, as Gary Player used to say, the more I practice, the luckier I get. I think one of the things that has stuck with me since the very early days is when you’ve seen people working in real adversity in very challenging circumstances, walking out of a shantytown in a crisply pressed shirt and a smart suit simply in order to go for a job interview, whereas most of their family are sitting around wondering where the next meal is coming from, you start to realize that there are different perspectives on how you want to live your life. And I think you develop a sense of integrity of the value of others around you because you can’t make real change on your own. You have to enlist others and effectively impress them with your vision of what you’re trying to achieve. One of my favorite phrases, which my mother always used to use a lot, was, ‘Where there is no vision, the people perish.’ And I think quite often it’s lack of vision from leaders that causes people to question and to challenge, but it’s also that element of vision which conversely encourages people to challenge leadership.
Aoifinn Devitt: And also, I suppose, you have to be able to convince people and bring them round to your vision. There’s an element of people skills involved there with the vision too.
James: Absolutely, absolutely.
Aoifinn Devitt: And speaking of people and relationships, you mentioned already your partner and that famous meal at Pizza Express. Have there been any other key people who’ve influenced you in career or life?
James: Certainly, my head of department when I first started lecturing at Westminster in Oxford. Gave me a real sense of how to manage other people, how to encourage people to share your vision for what you’re trying to achieve. The point that you were just making earlier, you’ve got to be able to persuade people, but also that you needn’t fear anybody. I remember probably in my first year, we had an audit visit from the Higher Education Funding Council, a bit like an FCA inspection really, and he was very good at putting me to ease. I was 24 years old, running the undergraduate part of the department and never had come across these faceless people who come and have the power of closing you down or putting you to the top of the rankings. And he always said, you know, James, they’re ordinary people like everybody else. You know, they get into the car, they go home. You have to imagine that when they pitch up, you know, they’ve had a row the night before, either with one of their children or their partner. You know, they’re thinking about 1,001 other things. So, when you go to present to them, don’t think about the power they have over you, think of their personal situation and what they might be worrying about. And it’s amazing how that disarms you and stops you getting too nervous.
Aoifinn Devitt: It’s a reminder, I suppose, of where we rank in the scheme of things, perhaps, for that person’s priorities, which is very interesting. You’ve given us lots of words of wisdom here already, and I’m going to take away that without vision, everything perishes. For sure. If there was any one piece of knowledge or advice or wisdom that you could tell that young student spending summers in Latin America, is there anything you know now you wish you had known then?
James: There are 3 things that I think are really helpful. The first, I also learned from that same professor back in Oxford. It’s easier to be forgiven than to get permission, which I think is a really good concept to live by. The second is never be afraid to get it in writing.. And I think that’s also a very good lifelong message. And the final one, which is really important for both entrepreneurs and those trying to raise money: never confuse enthusiasm for a check.
Aoifinn Devitt: I love that sobering— a little sobering message at the end there, just in case we were getting too carried away. Well, this has been a very inspirational conversation, James. I have always known you to be a champion of the vulnerable. I didn’t know until now just how far back that went. And thank you for your fearlessness in breaking new frontiers in the world of investment and for sharing your insights here with us.
James: Thank you very much, Aoifinn.
Aoifinn Devitt: I’m Aoifinn Devitt. Thank you for listening to the 50 Faces Podcast. If you liked what you heard and would like to tune in to hear more inspiring investors and their personal journeys, please subscribe on Apple Podcasts or wherever you get your podcasts. This podcast is for informational purposes only and should not be construed as investment advice. Advice, and all views are personal and should not be attributed to the organizations and affiliations of the host or any guest.
