Daniel Bakalarz and Alex Furmanski of Unison Asset Management
The interview below is part of a series from The McGuireWoods Emerging Manager Program featuring impressive emerging managers. The McGuireWoods Emerging Manager Program supports emerging managers throughout the most critical stages of a fund’s evolution. It offers a differentiated and proprietary approach to connecting emerging managers with limited partners, providing intelligence on market terms and preferences, and advising emerging managers on all components of building a durable brand as an investor. To recommend an emerging manager for a future interview, please email the team at MWEMC@mcguirewoods.com.
Q: How did you think about assembling your team?
Daniel Bakalarz (DB): One question prospective investors commonly ask us is whether having two chief investment officers (CIOs) running one portfolio strategy obfuscates our ability to make decisions. For us, it’s the exact opposite. We think the best way to produce any sort of clarity is through the open conflict of ideas between people who view each other with respect and high regard. There’s no limit to this degree of clarity when neither person minds who gets the credit. In essence, this characterizes our organizational culture, and to a large degree, it forms the basis for evaluating potential team members.
We believe teams thrive when founded on trust, shared values and a deep sense of familiarity. These things take time to cultivate. Alex (Furmanski) and I are fortunate in that these qualities were already firmly established when we decided to work together. This is because our connection dates back to our very early childhood: We attended preschool together in Colombia, where we were both born and raised, and we have remained close friends ever since. In shaping the vision for our team, we’ve drawn inspiration from the nature of our relationship.
At the core, we want individuals who can act as each other’s guardrails in our pursuit of absolute knowledge and best practices. People are surprisingly good at fooling themselves. Mark Twain neatly underscored this with his famous quote: “It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.” The gist is that knowledge can be an illusory target that can lead you astray. It’s like the geocentric earth model. For centuries, people thought the earth was at the center of the universe. If false information can entrench itself at such a large scale, even amongst the most knowledgeable people, imagine the harm it could cause to a portfolio manager whose ideas aren’t challenged.
We also look for diverse skill sets. This is how we create strength and well-roundedness. For example, we joke that in a past life, Alex was probably a credit trader because he’s incredibly talented at thinking about what can go wrong in an investment, whereas I was an angel investor because I really enjoy thinking about what can go right. This naturally filters into the stocks we follow: Alex gravitates toward established, mature companies, and I tend to focus on younger, more disruptive businesses. This allows us to cover a broader area for new ideas.
Q: What were the most important considerations for you when choosing LPs to pursue for partnership?
Alex Furmanski (AF) I’d argue nothing else is as important to the success of our firm as selecting clients with a long-term orientation. We’ve observed throughout our careers that the market is usually good at discounting earnings six to 12 months into the future. That’s because a surprisingly large number of investment firms with ample resources focus on short-term strategies. For this reason, we’ve never liked our odds of outperforming the market by predicting a company’s near-term earnings.
However, we’ve noticed that ability begins to break down progressively three years out, and it essentially disappears beyond year five. We’re convinced this dynamic is intrinsically linked to investors who are incentivized by clients that are wired to think short term.
Therefore, our inherent investment advantage stems from underwriting investments we intend to hold for long periods. Here, the playing field is less competitive. Having limited partners (LPs) with a long-term orientation is crucial to enabling this strategy.
Q: What did you consider and prioritize when developing an investment strategy for your initial fund?
AF: Our strategy is the culmination of 40-plus years of collective investment experience. While we persistently look for ways to improve our process, the premise of our investment philosophy remains constant: to buy exceptional businesses at reasonable prices and hold these businesses for as long as their prospects remain promising. It is simple yet remarkably profound. Our track record has proven that if we can identify these great businesses and buy them at a meaningful discount to their intrinsic value, we will inevitably generate attractive returns over a full business cycle.
DB: Along these lines, when a company first makes it onto our radar as a prospect for the portfolio, we focus on addressing two fundamental questions. First, how good is this business, which is evaluated on the returns it can generate on incremental invested capital; and second, how much is this business worth, which is determined by building a discounted cash-flow model.
As we’re systematically working to answer those two questions, our analysis centers around several key aspects. We quantify the unit economics of the product or service the business sells. We evaluate the values, integrity and track record of the people leading the business. We scrutinize the financial health of the company’s balance sheet. Finally, we gauge the durability of its competitive advantage.
Ultimately, maintaining price discipline is imperative. The world does not have many great businesses, and we’ve culled down our investable universe to about 100 that we consider highly desirable to own. Unsurprisingly, most of these businesses trade at premium prices. Therefore, it is incumbent upon us to exercise patience in pursuit of opportune moments, recognizing that investment returns are primarily a function of the price paid for an asset.
Q: What is the best piece of advice you were given when raising your first fund?
DB: We all know the clichés “live each day as if it were your last” and “seize the day.” The best piece of advice I’ve ever received was to flip that concept entirely on its head: Live each day as if I’d live forever. This speaks to the power of incrementalism. Most people overestimate what they can do in one year and underestimate what they can do in five years. If you manage to properly balance that equation, some degree of accomplishment becomes inevitable.
This transcends investing. It applies to so many things in life, including friendships, diet, exercise, marriage and parenting.
There’s a cool story about a reporter once asking New England Patriots Coach Bill Belichick, “With all you have accomplished in your coaching career, what’s there left to do?” His response was, “I’d like to go out and have a good practice. That would be at the top of the list right now.” That about sums it up.
About Daniel Bakalarz
Daniel Bakalarz is a partner and investor at Unison Asset Management. He has over 20 years of investing experience. He spent a decade as a managing director at Rote Capital, a family office. Prior to this position, he was at JPMorgan Chase’s chief investment office where his team was responsible for investing and managing the bank’s on-balance-sheet private equity portfolio. From 2003-2007, Bakalarz was an equities trader at First New York, a New York-based hedge fund. Bakalarz was born and raised in Bogotá, Colombia. He holds an MBA from Columbia Business School and a BA cum laude in economics and international relations from Tufts University.
About Alex Furmanski
Alex Furmanski is a partner and investor at Unison Asset Management. He has more than 20 years of professional investing experience. From 2011-2017, Furmanski was managing partner and founder at Safe Harbor Investment Partners, a private investment partnership focused on investments in public equities employing the same approach used at Unison Asset Management. From 2005–2011, he was senior associate at Khronos, a private investment partnership based in New York. From 2003-2005, Furmanski was an investment banking analyst in the global healthcare group at Merrill Lynch. Furmanski was born and raised in Bogotá, Colombia. He earned a BS in economics cum laude with a concentration in finance from the University of Pennsylvania’s Wharton School.