VALUE: After Hours (S08 E34): Korea’s Hidden Value: Activism, AI & Golfzon | Ryan Albert

During their recent episode, Taylor, Carlisle, and Ryan Albert discussed:

• Why South Korean Stocks Trade at a Discount — And Why That Could Change
• How Shareholder Activism Could Unlock Hidden Value
• Quasars, Dutch Disease and The Enormous Concentration of Investment in AI Infrastructure
• South Korea vs. Japan: Where Are the Best Value Investing Opportunities?
• Can South Korea’s Corporate Governance Reforms Unlock Lasting Value?

TRANSCRIPT

[Tobias] We’re live. This is Value After Hours. I’m Tobias Carlisle, joined as always by my co-host Jake Taylor.

Our special guest today is Ryan Albert of Turton Capital. He has a global focus on governance, and we’re going to talk career particularly. Welcome, Ryan.

How are you?

[Ryan] I’m doing well. Thanks for having me.

[Tobias] Our pleasure. Tell us a little bit about you and your background.

[Ryan] So a little bit about me and my background. Well, I’m based here right now in Newport Beach, Irvine, California. That’s also where I grew up.

I did my undergraduate at Princeton University. I was a varsity baseball player there as well, so competitive athlete my entire life, and worked in New York for a few years after graduating from Princeton, started doing investment banking, and later worked at a kind of hybrid VCP fund that was almost like a family office-backed fund, and had an itch to go work abroad. I actually ended up then working in Mexico City for a Mexico-based venture capital fund doing early-stage investing.

I realised that the long-term process-orientated nature of early-stage tech investing was maybe not as suited for my more quick-paced action, and then felt that public equity investing was something that could be for me. I read all the value investing books as a lover of moneyball with my baseball background. Moneyball made a lot of sense for what value investing is, and decided that’s the path I wanted for me, so decided to go to business school.

I went to Columbia Business School, did the value investing programme there, and then the past, call it six plus years, been public equities. I started working with a family office-backed fund called Brezo Capital, based out of New York City, looking at global equities, looked at everything from Latin American stocks to Asian stocks to African stocks, American stocks, purely long-term-orientated fundamental equity investing. Learned a great deal there.

Then I had an opportunity to go work at Berkshire Hathaway, worked under Todd Combs and learned a lot from Todd. Complete change of pace, mainly looking at larger mega-cap compounding-type businesses. Then wanted to go and live in Asia and look at more of the companies that got me excited when I was first working at the family office-backed fund at Brezo, and went back and worked for Brezo.

Then that’s when I had the idea eventually to start my own fund, which I launched in May of Terton. It’s focused globally with a global mandate, but really zooming in on the markets that I think where they’re going through corporate governance reform cycles. It’s bottoms-up equity investing paired with a top-down focus on these markets where I think when you really isolate why stocks are cheap, and it’s governance angle, and that governance is improving, you have a big pond to fish in.

I’ll pause there, but that’s a little bit about my background and what I’ve done over the past decade and a half.

[Tobias] There’s a few little nuggets that you dropped there. What was it like working for Todd? What did you learn under him?

[Ryan] I learned a lot. I can talk about a lot, but I would say the main focus was purely a ruthless focus on doing the qualitative research work. I learned to appraise businesses, looking at multiples a few years out, and creating a range of outcomes, and really focussing on quality at that point because then it becomes almost like a multiple debate.

If you can underwrite something that’s a fair-to-cheat multiple a few years out, then the question becomes what’s a fair multiple in three, four years. That then is a question of your market size, how fast you can grow it to a management quality, and aspects like that. That becomes almost like qualitative research-driven rather than just pure numbers.

Very much focused on unit economics of businesses and how that might change and the total addressable market. It was very research-heavy. It was go and just do your own research, come back with all the facts, know a lot, be able to know everything about a company, but you only truly know when you distil it into something compact and be able to explain it in something that you can read in three to five minutes.

That sticks with me to today. Almost everything I do, I try to write in a very concise manner and try to get something that could be explained simply. That’s what I learned under Todd, but can take it in many different ways.

I learned many other things, but that was, I’d say, the core principle focus of the things that he owned and what I focused on.

[Tobias] You’ve got a current focus on Korea and governance in Korea. I think Korea has been in the headlines over the last 12 months or so because there’s a lot of speculation around the AI adjacent industries, semis, and things like that. You’re not looking necessarily at that part, but are you impacted at all by the cross?

Jake just shared with me before we came on, there’s a chart showing the cost piece of 35% or something since the peak, which is not that long ago.

[Ryan] Yeah, definitely when investors sell stakes in companies that have not gone up for a long period of time to chase companies that are going up quickly, that puts selling pressure, particularly in more illiquid names. I’d say over the past few months, three to five months since I launched in May, I feel like there’s less and less selling pressure on some of these names that are not related to AI whatsoever. Of course, you’ll get some overlap, particularly when there’s more foreign investors involved or when something touches the semiconductor supply chain.

In general, from June to July, when you saw just crazy movements in all stocks together, I think just in this past week, there’s been a decoupling to some degree. For sure, FMCG companies, other companies that have nothing to do with AI are not nearly feeling the impact as AI-related stocks. At least that’s my anecdote.

I don’t have any data to back that up, but that’s just thinking through the experience so far over the past four or five months.

[Tobias] So talk us through Korea. What’s the opportunity in Korea and why do you think that, well, I know there’s a discount because of the governance, but why now?

Why South Korean Stocks Trade at a Discount — And Why That Could Change

[Ryan] Yeah. Well, first talk about the Korea discounts. I think it’s important to really zoom in on the Korea discount because it’s easy to say there’s a discount and it exists.

But I think that the discount, simply put, is just the price of being a minority partner to family-controlled companies and they dictate how the rules are set. So if you’re a family-controlled business, this is generalising for all families, but controlling shareholder groups think in many different ways. But you want control, right?

And control means that cash stays inside the company and that’s used for cross-shareholdings instead of being divided out, buying treasury shares and not retiring them, buying real estate, doing things so the cash does not leave the business. And then that also means succession to keep control. And succession means the next generation needs to acquire the controlling stake cheaply.

So a low share price is wanted because inheritance tax is paid off of the share price. So it’s a formula that’s generally set around two months before and two months after the gifting. And that’s up to 60%.

It’s one of the highest in the world. It’s 50% plus a 20% control premium. So basically up to 60% when you gift.

So now you can see why companies want to depress their share price. There’s really no incentive to get it up. So why now?

The issue became political and there’s many different stats of how many brokerage accounts there are and how many retail stock investors. But I think the last time I checked, there’s around 15 million retail stock investors in Korea now. I think that’s up from like 5 million pre-pandemic.

Don’t quote me on that, but I think those are the numbers that I’ve heard or seen recently. So this retail base is a huge investing block. It’s a huge political block now.

[Tobias] And that’s sort of like a population of 50 million.

[Ryan] Yeah. And then even adults, it’s a huge block.

[Jake] Isn’t it like two accounts for every one adult or something?

[Ryan] Yeah. Maybe even more. So it’s some crazy number.

So that became a huge powerful block. So that’s one issue. And then the second is just, I think the Japanese example showed what is possible.

So from 2013, the Tokyo Stock Exchange and Abe government enacted a whole set of governance reforms. And the topics I think had doubled while the Korean index had been flat for that period of time. So basically showed what’s possible if change is enacted.

So yeah, so the first iteration under this started under the previous Yun government and that was with the corporate value up programme, but it was totally optional and there was not that much compliance. And then the new president came in and he’s on the democratic party and they already had kind of a controlling or they had a majority in the national assembly. So it was easier to start passing rules through.

And basically it’s the purpose of getting all this done is to create like an actual vehicle for retail investors and the population to know that they’re not going to be junior partners to controlling shareholders when they invest. Because historically, I think it’s something like two thirds or three quarters of savings for most families go into real estate. And that’s exact opposite of the U.S. I think the U.S. is like a quarter or one third or something like that. So most families have their wealth tied in the real estate and real estate is at sky high prices like Seoul is some of the most like unaffordable real estate prices. So the whole goal is have families invest wealth into the stock market and have them have confidence investing into the stock market. So these reforms have started to be enacted, which have basically been trying to solve for these governance or these Korea discount issues.

So I’ll pause there. And why now is a whole set of reforms have been rolled out over the past year and a half since the new president has come in. Some of them have are in the process of being promulgated.

Some of them have already been enacted. Some of them are just talk speculation. But in general, a lot has changed in a year and a half time frame versus what happened in Japan over a 10 year span.

So compressed. Time frame for these changes happening in a market that got ahead of itself a little bit, I think, because of just the importance of Samsung and SK Hynix. So I’ll pause there, but that’s a little bit of the history of the discount and why now and all these reforms.

[Tobias] Can you take us through a name that you’re looking at to give us an idea how it’s sort of being impacted?

How Shareholder Activism Could Unlock Hidden Value

[Ryan] Sure. I can talk about an engagement that I was recently doing just because I think live and stress tests some of the different aspects of governance reform. So there’s a company called Gulf Zone Holdings, and it’s all public.

You can actually find it on a website that I set up dedicated to it called gulfzonefairvalue.com. I have three open letters there. But basically, Gulf Zone Holdings is a conglomerate that has various stakes in gulf-related assets.

And its most valuable stake is a minority stake in a company called Gulf Zone County. Gulf Zone County is the largest golf course operator in Korea, and its 68% partner is the largest private equity fund in Korea. And that asset is in the process of being sold.

It was reported in the media that it was being sold. And that, if you took any relevant metric or relevant valuation of what that 32% stake was for Gulf Zone Holdings, which is the publicly traded holding company, was worth significantly more than the market cap of that company. And that does not even include the golf courses and real estate that that business owns and the stakes and some other assets.

So it was, on my appraisal, trading 0.15 to 0.2 times book value. Pretty obscene prices. At the end of June, the controlling shareholders of that entity, which owned about 60% of the shares, excluding treasury shares, set up a separate vehicle.

And they made a tender offer at a 50-something percent premium to the ongoing share price. That share price had been depressed for a variety of reasons. One, because it was semi-illiquid, because of the holdsco and opco structure.

Its operating company is the largest golf simulator business in Korea. So that was also listed. So it had a holdsco-opco structure.

And then, as you can imagine, with the share price that went sideways or even down over the past few years, investors got fed up and sold to buy more of Samsung and SK Hynix and other AI-related stocks. So share price tanked. And the controlling shareholder vehicle on a share price that was depressed offered a 50-something percent premium.

And that was at a their offer was at 0.35 times book value. So that, to me, at least was not a fair offer for a variety of reasons. One, simply being that as a buyer of a business that’s worth 0.35 times book value, the minute you own it, it’s closer to one times book value. Maybe it’s a little less. Maybe it’s even more. I thought it was more, actually, because a lot of their stakes, the stake in just because it was its fair value on the balance sheet was not consolidated.

So, long story short, we wrote an open letter to the board because we felt there were a variety of disclosure-related issues and process-related issues. Or, sorry, we wrote an open letter to the board and shared it with the public and was covered in the media and basically highlighting how the Ministry of Justice’s guidelines, which came out in February of this year, which were, again, this is going into some governance points here, and happy to elaborate on them. And that’s why I’m bringing up this case.

The Ministry of Justice guidelines covered mergers, spinoffs, comprehensive share exchanges, and subsidiary listings. And it’s basically where Korean minorities have lost the most. And it’s, in general, meant to address when controllers’ interests and the general shareholders’ interests conflict.

And the guidelines recommended a special committee of independent directors, external fairness opinion, documenting consideration of alternatives, fuller disclosure, and shareholder engagement. And a lot of these practises, I felt, were not being fulfilled to their degree. So, we wrote an open letter highlighting all this.

And the tender offer, which is kind of in its own grey zone, because it’s a private transaction between the vehicle and minorities, and it doesn’t fall under the same rules, that needed around 90 percent to delist. So, for me, I felt that enough shareholders could potentially see the open letter and see the value and understand that they would not want to delist and keep value intact. I felt that value was at least 30,000 won per share.

The tender offer price was at 6,700. So, a big divergence between what the offer was and what I felt fair value was of all the assets. So, then throughout all this, I felt that the board was not executing their fiduciary duty, which, again, goes to the first Commercial Act Amendment, which is the first thing that was passed under the president.

So, in the past, the board of director members only had a fiduciary duty to the company and not to the shareholders. And then the rules changed or that now they are legally answerable to shareholders, not just the company. So, they must protect the interests of all shareholders as a whole and treat all shareholders equitably.

So, I leaned on that a lot throughout my processes. Just to give you an example, up until just a couple or a few days before the tender offer window was going to expire, the board did not disclose any of their opinion. They waited multiple, multiple weeks, and I felt that was not a fair part of the process.

And the board also abstained from issuing or saying whether or not it felt that the actual price or the value being offered was fair, but they still recommended that investors go through with the tender offer price. So, I was leaning on that angle, but there’s been no precedent test yet of all of this. But anyway, just to walk through this, during the first tender offer, the controlling shareholder group got up to 85%, short of the 90%.

A few days later, they launched a second tender offer at the same exact price, and investors saw right through that. And started bidding the price higher, above the tender offer price, and then it went higher and higher. And I wrote a couple other open letters, and then a big change was on the amended Capital Markets Act was passed, I think, if I recall, on August 20th, during the second tender offer window.

And the second Capital Markets Act was previously, Korea had a formula that let the controlling shareholders virtually inflate. I don’t want to say pick the price of a merger, but the price was based on the share price. So, the merger ratio between listed affiliates was set by a market price formula, using the weighted average of recent trading prices.

So now, on August 20th, going forward, all listed company transactions, the value must now be a fair value that comprehensively weighs share price, asset value, and earnings value. And that same standard applies to appraisal rights. So, that was enacted during the second tender offer window.

And that meaningfully changed the scope of what I was looking at or what I was doing, because the way for the controlling shareholder group to maybe push this through and delist it would be a comprehensive share exchange. And that would fall under this new rule, potentially. So, results came out after the second tender offer in early September, and zero shares were tendered, like literally zero shares were tendered.

So, immediately after that, the controlling shareholder group made a press release saying they were seizing the delisting process, and they’re going to pursue enhancing corporate value instead. So, now the share price is meaningfully above the tender offer price, and no new updates on that. But that’s an example of something that I was recently involved in, with a few different factors, with the First Commercial Act Amendment, the Capital Markets Act Amendment, the MOJ guidelines.

So, a few of the meaningful governance reforms were all in play in this recent engagement that I had. I’ll pause there.

[Jake] Yeah. So, it sounds like you’re on the front lines of a kind of changing environment in real time, as everyone is kind of figuring out how to do this together as a society in Korea. Is that, Phil, accurate?

[Ryan] Yeah. I really applaud a lot of the local funds that are pushing for change, and the regulators and the government officials that are pushing for change. They’ve been enacting things very quickly.

And even since August 20th, there’s now been word of some other bills being formed and passed. So, things are moving very quickly. I have a screener and tracker where I basically, every single morning, get updates on new governance-related items.

And once a week or once every couple weeks, there’s a new bill that’s brought up or some speculation. It’s truly moving very fast. But yes, I hope to be on the front lines and hope to do my part to ensure that corporate value is maximised because the Korea discount should be eliminated.

It’s better for society.

[Jake] How about a lot of the Japan opportunity playing out over whatever it’s been now, 20, 30 years or something. And there’s been, at least what I’ve heard, is that outsiders have been kind of shunned often, especially if they come in aggressively and aren’t. They’re just kind of seen as these attacking outside influences that are maybe even short-term in nature when they’re painted in their worst.

How’s your experience been as an outsider trying to crack into Korea?

[Ryan] The experience has been more positive so far. I would say from meeting company angles, that’s always difficult. There’s always, there still needs to be a, again, there’s a wide, there’s a dispersion between companies’ receptivity to you.

But I think if you own more shares, the companies are more receptive to you just because you have more influence. And we could talk about the 3% rule and how that’s important in Korea. But in general, to answer your question, the media, I think, has become increasingly more receptive versus a decade ago when call it activist funds were labelled almost as vultures and were labelled in a very negative light in the media.

I’d be hard, like, you can go through any of the engagements or activism that’s been happening over the past year. And I would say for the most part, foreign funds are viewed in a more positive light. I think simply just because this is now rule, it’s like law.

It’s not just asking nicely and putting pressure. It’s like actually being codified now by a government. And I also do think now with unaffordable homes and investors now with the, I don’t want to say the AI meltdown, but now they are realising that governance reform is probably the pillar that sustainable market growth needs to be based on.

So you are seeing media and I think regulators warm up a lot more to foreign investors because I do think foreign capital flows and foreign investors need to have a role in all this. They played a major role in Japan. So I do think we’re being welcomed with way more open arms by society than before, but it is still tough versus Western standards to engage with companies.

And there’s always a little bit of just like cultural dynamics to work through in terms of information sharing and understanding what’s happening at companies. But in general, if you go on Dart, which is their version of Edgar, disclosures are great. Disclosures are timely, confidence in numbers.

From that regard, foreign investors are welcome and have confidence in the to analyse and invest.

[Tobias] What are the consequences for not following the, I don’t know what the legislation or the guidelines or what they sort of add up to, but if they, I appreciate that the Gulf zone happened sort of while some of this legislation was coming in and you said there might’ve been a complicating factor because the bidder was not the company or there might’ve been some, what’s your prospects for like enforcing, if you just have a bad actor who just ignores all of the rules and just continues on with what they were going to do anyway, what kind of standing do you have to go and enforce your rights?

[Ryan] Depends on, I think the bad acting, but some of these commercial act amendments that I brought up, well, I brought up just one of them, but there’s two other ones. One of them is mandatory treasury share cancellation and mandatory cumulative voting for bigger companies. Those have to be changed.

If you’re not obeying mandatory treasury share cancellation and mandatory cumulative voting, it’s very easy to see that you’re not abiding by that. But for the examples that I gave, there have yet to be any precedent cases. So I think if there’s going to be one bare thought on all of this, it’s none of this has been proven yet, or none of this has really been tested in a meaningful way.

I think we will start seeing some being tested. But so far, I have yet to see what happens if a board is found that they’re not doing their fiduciary duty. What are the consequences?

What are the penalties? How do you assess damages? I have not seen a test case for that yet.

It’s all happening very quickly.

[Tobias] But you’ve still got some standing, you can at least sue them, take them to court, or do you report it to the regulator?

[Ryan] Yeah, you can still go to court and court processes take a decently long time. But you still have rights, right? You can still go to the court.

I have no opinion and I really do not know how this will unfold yet when someone brings this to court. I think it’s case by case so far, but very much it’s a case law, from what I understand, it’s a case law country where they base a lot of decisions off the existing case law and the rule at hand and how it’s interpreted.

[Tobias] Are there any other local names that you can talk about that you’ve sort of either for undervaluation or that meet the criteria for an activist approach?

[Ryan] I’m trying to think. Maybe for compliance reasons, I don’t want to share too many others. But I’ll generally say there’s a lot of FMCG companies that I think trade at valuations that are quite cheap versus what they are in Western markets and with K-wave growing all over the world.

And they’re putting up great numbers and lots of them have a lot of hard non-operating assets. They at least seem to me attractive.

[Jake] I’ve got a couple numbers. Thanks to Verdad came out with a piece on Korea this morning, which was really helpful. Yeah, thanks, Dan.

Shout out. So Korea’s the median, or sorry, cheapest quintile valuation basically, what we’re looking at for South Korea is price to book of 0.65 versus Japan right now at 0.88, price to earnings of eight times versus 12 for Japan, free cash flow yield of 11.3% versus 6.6 in Japan. So it’s cheap, I think, is what kind of the general takeaway.

[Ryan] Cheap and growing. There’s still a lot of assets that are growing. Gulfstone is unique because I think it’s just so much hard asset value there, but there are other companies that trade at maybe not 0.15 times appraised book value, but 0.4, 0.3 times book value with businesses that are actually growing and growing.

[Jake] What kind of ROEs do you kind of see there?

[Ryan] Because I know that was always the knock on Japan was like- I mean, it depends how you calculate ROE. I usually calculate ROE on the operational business and then also as the whole firm, right? Because part of what we’re playing for here is better behaviour unlocks that ROE.

So I would say for some of these FMCG businesses, low, mid-teens, even high-teens ROEs, that’s like excluding non-core assets. When you include non-core assets or when you include these non-core assets, lots of cash, stakes in other businesses, real estate, you get ROEs that are from 5% to 10% usually. But when you really look at the underlying operating businesses, you could find some hidden gems.

[Tobias] Let me do a quick shout out and then JT, you want to do some veggies for us? Sure. Hey, Paris, that might be the first.

Gothenburg, Sweden, what’s up? Boise, Bendigo, Victoria, early start for you. Toronto, Valparaiso, Tomball, Texas, Lausanne, Switzerland, Cappavoga, Iceland, that’s a hard one, sorry.

Toronto, Servaton, London, suburbs, Snohomish, Norway, Petitikva, Israel. Is that Barbados? It’s just a flag.

Tampa, Florida, what’s up? Tallahassee, Gurney, Illinois, Oklahoma. Thanks guys.

We appreciate it. Take it away, JT.

Quasars, Dutch Disease and The Enormous Concentration of Investment in AI Infrastructure

[Jake] I’m just impressed that you knew the Barbados flag. I don’t think I would have gotten anywhere near that.

[Tobias] I hope I got that right.

[Jake] We’re going to find out it wasn’t. All right. It’s 1963 and we’re atop the Palomar Mountain in California.

The biggest telescope in the world at 200 inches swings slowly on an arc in an inky night sky. A Dutch astronomer named Martin Schmidt is looking at a faint star called 3C273. We don’t have good names for in the sky, but it looks like a star.

It’s also one of the loudest radio sources in the sky. Stars don’t really do that. He takes its spectrum and he heads back to Caltech to crunch the numbers on it.

The lines are making no sense to him. For weeks, he can’t read them, but then he sees the pattern. They’re ordinary hydrogen lines.

They’re just shifted 16% towards red, which means that light source is roughly 2 billion light years away. To look that bright from that far away, it has to outshine our entire galaxy, 100 billion stars, 100 times over. This is an incredible light source.

What Schmidt has discovered is a quasi-stellar radio source, which is quite a mouthful. Thankfully, we’ve shortened that term to just a quasar. Within a year, two physicists, one American, one Russian, had worked out that nothing that we knew of could power that much light.

No star, no explosion, only extreme gravity, only a black hole. Here are three things that you need to know for the rest of this segment. One, a black hole on its own is dark.

We know that by definition, but nothing gets out of it, including light, because the gravity is so strong. Two, paradoxically, the brightest objects in the universe are black holes, which are being fed. That’s all that a quasar really is, is a black hole that’s eating something.

The light isn’t actually coming from the hole, it’s coming from matter that’s falling into the hole, and it glows on its way down. Here’s why. The gas doesn’t just fall in a straight line in, it spirals, and it flattens into a disc, kind of like water going down a drain.

The inner lanes of the disc are moving faster than the outer lanes of the disc. Those lanes then rub together, and the friction heats the gas up to millions of degrees. Falling into a black hole releases about 10 times more energy per kilogramme than fusion inside of our sun does.

That’s how one black hole can somehow outshine 100 billion stars. Number three that you need to remember, a galaxy only has so much gas in it, and gas is what stars are made of. If we’re feeding a black hole, it doesn’t just eat the gas.

Also, the energy that’s pouring off of this giant disc heats the rest of the gas, and hot gases can’t collapse together to form stars. A galaxy that’s with a feeding black hole at the centre, it stops making new stars, basically. Schmidt grew up in a town called Groningen, I believe it’s pronounced, in the north of the Netherlands.

In 1963, the same year that he’s sitting looking at this quasar, there was a natural gas discovery in fields near the farmlands outside of where he grew up. The Dutch got very rich from this. It was a huge find.

The gilder went up, money and workers poured toward the gas. Everything else that the Dutch made got more expensive abroad, and the Dutch manufacturing just kept shrinking at that point. In 1977, the economists gave this whole thing a name, called it the Dutch disease.

Of course, it’s named by the British. Dutch disease describes a booming sector that makes the headline numbers all look better, while it starves everything else around it. That should sound a lot like our fact three that we just had about quasars, which is feeding a black hole in the centre means that cold gases aren’t forming into planets at the edge.

Let’s see if we can torture this analogy now that we’ve set it up. It feels like to me, and probably everyone else, that AI is this gravitational body in the American economy right now. Four companies, Amazon, Microsoft, Alphabet, Meta, are going to spend $750 billion to $1 trillion this year, maybe mostly on data centres.

Michael Symbolist at JPMorgan says tech capital spending was 40% to 45% of US GDP growth through the first three quarters of last year and even more into this year. Forty-two AI-related companies produced 66% of the S&P 500’s earnings growth since ChatGPT launched, and 78% of the price return. All this fresh spending, all the earnings are all around the gravity of AI.

It’s a tonne of light that’s being emitted from a relatively small place. There’s a chart that’s making the rounds on Twitter right now, which shows that real construction spending in the US through August, year-on-year, data centres naturally up 64% year over year. Every other category has shrunk.

Construction spending on housing is down 10%, hospitals down 10%, schools down 13%, offices that exclude data centres down 14%, factories down 24%. We’re not forming new stars in the economic galaxy right now. It seems like the data centres might be crowding out all of this other capex spending.

I’ll skip a little bit of this, but wrapping this all up, we have this brilliant centre that doesn’t really tell you what the rest of the galaxy is doing. There’s a spectacular spending boom. If we go back to that construction chart and think about capital cycle theory, where is the new supply slowing down or non-existent?

What might customers still need later when we aren’t making investments in capacity today for it? Who already owns the assets that are getting harder to replace and aren’t being spent on? Those are three different questions.

My hunch is that the opportunities of tomorrow may exist where those answers line up. While everybody’s asking about building this next big thing, I might ask, who already owns something that we still need and we aren’t building more of? Where is there not a black hole that’s sucking all the energy out of it?

That’s a little bit of science and economic history and maybe AI today.

[Tobias] Tobias Carlisle Good one, JT. Dutch disease.

[Jake] JT Robinson Dutch disease, quasars, and AI.

[Tobias] Tobias Carlisle What do you think, Ryan? Does that turn up in microcosm in the Korean stock market? Hey, Ryan, you still there?

[Jake] JT Robinson I fell into the quasar.

[Tobias] Tobias Carlisle We’ve lost him. Hey, Ryan, can you hear us?

[Jake] That’s okay.

[Tobias] Tobias Carlisle Yeah, I enjoyed that, JT. I saw that tweet doing the rounds about the Dutch disease last week. That seems like an accurate description of what’s happening in the US at the moment.

Huge investment in AI, data centres, and anything that’s adjacent to that and very little into, or at least some shrinkage outside of that.

[Jake] Are you seeing themes in places that you invest in that are being starved of capital and that are showing up?

[Tobias] Tobias Carlisle Yeah, being starved of capital. That’s interesting because I would have said oil and gas through to 2020, certainly starved of capital, but came back to life probably post-2020 and has been earning a little bit more, but consumer discretionary continues to be the weakest, I think. Tobias Carlisle Housing’s kind of interesting.

There’s two charts doing the rounds. There’s one that says that we’re silent. There’s no new house built, so we’re below where we should have been on an annual basis going back to 2016, so we’re still short housing.

But then equally, there’s a multitude of sellers over buyers, so the spread between the two is gigantic. Housing transactions are back to the GFC low. Nothing’s going through with long-run mortgage rates back to basically close to the long run.

[Jake] So prices are high, but volumes are low, and then therefore, there’s not a lot of transactions, and so you kind of have to take it all with a grain of salt.

[Ryan] I don’t know what I’m saying. My bandwidth was—sorry, if you were calling me, my bandwidth for some reason on the internet here is off, so I’m on my phone, which is better. Sorry about that.

[Jake] No worries.

[Ryan] No problem.

[Jake] We were just asking if any of the kind of black hole phenomena of absorbing all the energy, you see that in Korea, if there’s any corollaries there.

[Ryan] If I’m going to be honest, the past two minutes, I was hearing nothing, and I was hoping it was coming back, so I apologise. Now I’m on my phone. I don’t know why the internet’s off.

[Tobias] No worries. Yeah, you sort of touched on it a little bit, but you were saying that there was a lot of speculative investment, anyway, on the stock market directed towards the AI related names, and you had seen some retraction in anything that wasn’t sort of AI facing. Has that reversed course with the Korean stock market off sort of over the last few months?

[Ryan] The volatility in the past couple of months has not been nearly—or I would say since the massive sell-off has not been nearly the same, but the concentration still exists in those names, and they are the most exciting names, maybe from a growth perspective on the Korean market. So I still do expect most investors to want to invest to higher growth names. Growth kind of cures everything.

But yeah, I do think the speculative nature has died down versus what it was in the earlier part of the year. I think now there’s tests and there’s income thresholds for accessing leveraged products, if I’m not mistaken. So you’re not seeing the same degree of speculative behaviour that caused the KOSPI to whip from $5,000 to $6,000 and quickly up to $9,000, back down to $5,000-something, and I think now it’s closer to $6,000 again.

So not nearly the same degree as before, but when there’s so much concentration in industry and a couple companies, it’s going to—I mean, it’s definitely going to move the whole market.

[Tobias] But you’re not necessarily just focused on Korea. You can look anywhere?

[Ryan] I can look anywhere, not just Korea. I’m focused on Korea because I personally think that there’s no other market in the world with the depth of almost 3,000 listed companies and so many of them trading at basically valuations where—that they’re low, mid-single digits, PE, or sometimes discounts to NAV of three quarters with—basically, you’re pushing on an open door because the government is doing a lot of this door-pushing for you. Hard to find other markets in the world where that’s actively happening and where valuations are what they are.

So yes, to answer your question, I can look on other parts of the world, but given the valuation and given what I’m focused on and my focus on engaging with companies to improve corporate value, hard to find other markets that are as exciting as Korea. But yes, if other markets, I feel like, are going through these governance reform cycles or there’s something exciting, I’m always willing to take a look.

[Tobias] How does Korea compare to, say, Japan?

South Korea vs. Japan: Where Are the Best Value Investing Opportunities?

[Ryan] The big—I mean, many ways to take that, but I would say the big difference is just Japanese companies do not have the same controlling shareholder family dynamics as Korean companies. There’s more or less a professional management class. So when there’s a professional management class, it’s—let’s just say it’s easier to buy up shares and easier to influence and win proxy battles.

So in Japan in particular, you’ve seen a lot more activity and a lot more funds get involved simply because I think there’s just more companies and more shares out there to buy. It’s hard to buy up a lot of shares when families own a majority—that’s 20, 40, 60 percent of companies. So I’d say everything goes back down in terms of the difference into just the setup, like the actual composition of the companies.

Japan has less controlled entities and Korea has a majority controlled.

[Tobias] When you were investing around the world, you looked at Africa. What was that like?

[Ryan] I didn’t dive into Africa nearly to the same degree as my PM was, but we were looking at a couple of things primarily in South Africa, one in Botswana and some Pan-African companies. I mean, the growth is absolutely insane. At the same time, some of the currency depreciation aided into those returns.

But the thing that stood out to me from being someone who had never looked at Africa much before was just every part of Africa is very different. So to generalise the whole continent as one is not fair. So if you wanted to look at West African countries, they operate very differently from East Africa, obviously, which is very different than South Africa and Botswana and that part of South Africa.

So I actually felt it to be a lot like we got great access to the companies. The companies spoke English. They wanted to talk with us.

But change is slow and companies that operated in many different countries often found themselves maybe not growing as fast as they would like sometimes or bumping up to some red tape for regulatory reasons. But I do think Africa is an exciting place to focus on. I don’t look at any African stocks today, but it’s definitely a part of the world that gets, I think there’s also a distortion between potential versus how many investors are focused on it.

I see the same dynamic in Korea.

[Jake] Do you say that the long arrow of progress in governance is pointing in the right direction around the globe? Like, is it increasingly, do you think it’s getting better or do you think it’s like stalled out or is it? Because actually, as a counterpoint to that, like, you know, Buffett has said now that he thinks that financial reporting is worse.

[Ryan] Yeah.

[Jake] Financial statements are worse than they were 30 years ago.

[Ryan] Yeah. I mean, it does seem like in many countries, or at least in Western markets, governance is stalling or even going backwards. But I do think in markets that are still, I mean, frankly speaking, they’re competing for investment dollars from the U.S. and other markets that have way better, more global businesses, right? Hard to, if your best options in any given market, whether it’s a Brazil or a Mexico or a Korea or Japan, you have to, I mean, you’re competing against buying Apple. You want your investor base to feel secure in that they’re going to get a good return on their capital and they’re going to be treated fairly. So when you frame it that way and you frame the ease of now creating accounts in all these countries, kind of just piggybacking off what Robinhood’s created, like you can basically find almost like a Robinhood-esque product in any market you go to on a bunch of copycats.

Yeah. I mean, retail investing blocks are important now. So I do think you will see governance improvement.

But again, I think it will depend also on the development of the country, how far it is in its development curve, political will, how many companies are listed. For some Latin American markets, governance is actually, I think, decent, but reform can always be needed. But then how effective is reform going to be if those markets have maybe anywhere from 25 to 50, 75 investable companies for most serious institutional investors access?

It’s just maybe not worth, like the juice is not worth the squeeze. So I do think more and more of these like deep markets that are starting from a low governance base will see improvements, whereas I’ve seen more in Western markets governance going a little bit backwards.

[Jake] Yeah. So it’s a reversion of the mean.

[Ryan] Hence cyclical. You know, it goes like this and you could be at the bottom of the cycle and that’s where Korea is. And maybe, who knows, US might be top of the cycle going the other way or on the other part of the cycle.

I’m not suggesting that, but it definitely seems that way.

[Tobias] What’s Buffett’s objection to the current reporting?

[Jake] I think he would say that when you just blizzard people with a 300 page proxy statement, you’re kind of telling them everything, but you’re also sort of telling them nothing.

[Tobias] Yeah.

[Jake] There’s just like, it’s not as… Yeah, exactly. It’s about CYA and legal and less about like, I want to actually convey to you as the owner of this business, like what’s happening here.

[Ryan] At least in the US though, a cure for governance is always, if you don’t like what’s happening in private equity, you can come in and make a, you know, there’s probably too much money out there to bid for companies. So in other markets like Korea, there is a lot of private equity money, but it’s simply control. So I do think that’s why some of the other, like the mandatory cumulative voting is a necessary pushback against…

[Tobias] What is that? How does that work?

[Ryan] Yeah. So mandatory cumulative voting is basically, you can put all of the votes for all of your shares on one single candidate. So it’s not really needed in a place like the US where the ownership is so dispersed that it’s not concentrated in one hand.

So you could technically run a proxy battle and be able to solicit a lot of votes because they’re so dispersed. The effectiveness of proxy battles is quite hard in markets where owners own so much of a company. So cumulative voting is basically for like, let’s say you have 10 shares and there’s five board seats up for re-election in one year, you have 50 votes.

You can put all those 50 votes on one single candidate. So it allows a lower threshold of ownership to have more say in appointing board members. And there’s another rule called the 3% rule, which is very unique in Korea, which is for electing audit committee members, the controlling shareholder group plus affiliates, their voting power is capped at 3%.

Or any single block is capped. So if I own more than 3%, it’s also capped at 3%. So that’s another way to make it that minorities do have influence more than what their actual voting power states.

So the Korean government is putting in these rules to, I wouldn’t say take power back, but make it more of a level playing field to ensure there’s actual real independent governance and minority representation for these businesses.

[Jake] How did it get to be that way to begin with? Why are these companies even public if they’re 60% owned by a family?

[Ryan] Access capital. The most problematic aspect of it was the hold co-op co-structure. That I think is more problematic than actually going public.

I mean, a lot of companies might go public to give their private equity investors an out. Also, some of them might go public simply because of the reasons I stated earlier. A low share price creates control.

So if you’re publicly traded, you can have a low share price. When you’re privately held, you’re valued at a combination of asset value and earnings value, which is closer to book value or more.

[Jake] So you go public to then lower the tax bill. You tank the stock and then do the transfer.

[Ryan] I don’t want to suggest that’s what every company does because there’s a lot of- What if it happened by accident? Yeah, no, but there are a lot of companies, and if you think about the economic history too, it- Interest rates were not always this low in Korea. So it made sense to access capital and be publicly traded.

But now with the hold co-op co-structures, those I think are the most problematic, and that’s where you’ll see a lot of cleanup happening where you can have very little ownership at a holding company, and then that you can effectively control something where you look through ownership. If you have a son, like an op co, and then even a grandchild public company, you can control the grandchild through very little ownership in the hold co. That is quite problematic.

That makes it very hard to actually make any change. And you are seeing some rules around that, and I think investors are starting to target those types of businesses as well to make changes because holding companies should not be able to influence that much power on grandchildren companies when those grandchildren companies are such important businesses for the country and they drive economic growth. And they’re solely- I Yeah, that’s where I find maybe the most interesting setups in the market, when there’s fixable issues with firm structure, governance, overcapitalised balance sheets, board dynamics.

There’s a lot of potential to say the least from where we’re starting.

[Tobias] Ryan, you gave us a few potential topics here. Just stop me if you’ve already gone through these, but did you discuss the mandatory tender offer bill that was introduced and blew up?

[Ryan] Yeah, so we did not discuss that. We didn’t discuss a lot of them, but actually we have discussed most of them. We haven’t discussed two of the ones that are in the process of being enacted or not enacted.

So the mandatory tender offer bill, it was meant to give minorities control premium. So basically, if you acquire 25% or more and become the largest shareholder, the rule was stating that you must launch a tender offer for at least 50% plus one share of the outstanding stock, less what you hold at the same price that you paid the controller with the excess tenders cut back pro rata. The reason why this was even brought on was because of this, and this did not exist, the mandatory tender offer, you could theoretically buy shares from the controlling shareholder at a really high price, and then drive the price down and be able to squeeze out the rest of minority shareholders.

That’s not great. So this was introduced as a way to put minorities on the same level as controlling shareholders. But the problem that a lot of the local funds found with this was the sequencing of it all.

So the original bill let the acquirer buy the controller’s block off market first, and then tender only for the shortfall of that 50%. So let’s just say a family holds 45% of a company and sells all of it, the acquirer tenders for the remaining, you know, like 5% from everyone else. So instead, they wanted to be pro rata.

So the bill scrapped to the best of my knowledge now because of this pushback, just of the sequencing of it. I think the direction of it’s good. But I think the sequencing of it should be pro rata from the get go.

So instead of the controlling shareholder exiting first, it’d be all investors pro rata, participating in that 50% plus one. So that was kind of what blew up and why it blew up. But the intent was there to fix the core issue of controlling shareholders putting their interests ahead of minority shareholders.

[Tobias] So you have this situation where you can have a change of control without a control premium being paid to anybody other than the shareholder who has the minority controlling interest.

[Ryan] That historically existed. It’s becoming increasingly hard to do that or borderline impossible to do that now with all the rule changes. And they are trying to codify that officially.

It was more of the sequencing that I think investors felt was not the right sequencing of letting the controller exit first. But the intent is there. And I think with some of the recent tender offers, Goldstone included in the MOGA guidelines, it’s becoming harder and harder to be able to basically squeeze out minorities, as you put it.

[Tobias] Tell us about the bear hug bill. What’s a bear hug? Why do you need a bill?

[Ryan] So this is the opposite of the change of control bill. So instead of protecting minorities from change of control, it uses the threat of one now to discipline management. It still hasn’t passed, but it’s probably likely by year end.

So now the board of directors must disclose an acquisition proposal and must publicly disclose its terms and the board’s review plan of it. Historically, Tobias, imagine if you made an offer to buy a whole company and it was controlled, the board might not even respond. The board didn’t have an obligation to respond to you or even disclose it.

So now the board has to disclose the acquisition proposal and must publicly disclose its terms and must state the reason for rejecting it. And that’s simply, I mean, it’s meant to be a way where if there’s a company trading at a significant discount to its asset value, and it’s just middling there, this is meant to be an incentive for bidders to come in and see this and to offer a price and to basically put pressure on the board to say, hey, if you’re going to state that you don’t think this acquisition offer is fair, that you need to get your share price up or you’re potentially not obeying your fiduciary duty to all shareholders and maximising value. So that’s kind of what a bear hug is and what the bear hug rule is in this sense of Korea.

It’s another way of getting valuations up and combating price suppression.

[Jake] I was just going to say, do they have this poison pill, a pretty regular thing that happens there?

[Tobias] No, they don’t have a poison pill.

[Jake] No.

[Tobias] You had a good point here. What does Japan have that Korea still doesn’t?

[Ryan] In terms of rules. So I would say Japan has a working market for control. Japan has dispersed ownership, and I think more of an arm’s length pension fund to facilitate some of this change in the market.

I also think the TSC, the Tokyo Stock Exchange, is a lot more reform minded and restructured its market in different tiers and forcing companies to disclose their cost of capital. So it was a lot more forceful in that regard. I think also taxation, again, I’m not an expert in this, but from my understanding, taxation is a little bit more straightforward.

I think it’s like dividends and capital gains are closer to 20 percent, whereas Korea for a while, dividend was taxed at 49 or 50 percent. And actually, recent dividend tax rules now make it easier or have now been promoting better practises to pay out at least 40 percent dividends or 25 percent in Korea plus 10 percent growth to lower your dividend burden. Again, trying to improve shareholder value.

So getting back to your Japan versus Korea, I’d say the main thing just points back to a working market for control and then the real active effort by all stakeholders, the Tokyo Stock Exchange, MEDI and their takeover guidelines. They do have case law on defence or they do have case law on corporate takeovers. Still early days in Korea.

So I’d just say it’s been established a lot longer in Japan. It’s still early, early days.

[Tobias] And what’s the bear case for all of this?

Can South Korea’s Corporate Governance Reforms Unlock Lasting Value?

[Ryan] I think the bear case is simply one of the things that I mentioned earlier, which is there’s no precedence. So it will take a while for precedence to happen and maybe foreign investors give up or get tired of all this before the precedence actually come into effect. You have 50 percent of the market plus in two companies and they’re pretty phenomenal businesses, but they are inherently cyclical.

Don’t tell the market that. And I also think a lot of these changes will happen in 2027. So in an increasingly short-term minded market, investors might just not be patient to wait for this and then stuff gets delayed.

It might be 2028 and then investors are just don’t have increasingly less patience. On the flip side, that’s great for investors that have patience. And I do think this change is credible.

So I think the bear case is simply what I mentioned. I do think it’s almost like going from horse carriage to cars. You don’t really go backwards very quickly on these governance reforms, although maybe our discussion of Western markets going backwards on governance, maybe you need decades to reach that point.

But I do think when you’re just starting out this early and you put so much political power into passing this and making it a pillar of kind of the Democratic Party in Korea, it’s hard to see how this goes backwards anytime soon. It’s just more when it’s enacted and if the biggest businesses in Korea will maybe not bring down the rest of the market with it. I would say those are the primary bear cases right now.

[Jake] So the bull case is Japan and the bear case is Japan.

[Ryan] It just depends on the timing. And we’ll see if it’s bull or bear as well. I’ve yet to crunch the numbers, but Korea is still technically an emerging market based on MSCI standards, and it’s actively trying to change that.

So it’s most likely going to be up for reelection or up for developed market status, if I’m not mistaken, middle of next year. So then it would come in effect 2028 or 2029. So if that happens, that could potentially be huge.

But then also if it’s trying to slot in with a bigger market, it actually might be negative short term. But I think longer term, it’s probably better. So those are some other factors that could provide a medium to longer term boost for the general market.

[Jake] Yeah, you might almost want to stay EM classification if there’s a rotation, and if developed markets sell off and then you get stuck in that bucket.

[Ryan] Exactly. And then there’s also such a huge concentration of EM flows alongside Taiwan and China that they might become a smaller portion of developed market flows. So I’d say that’s the bear case.

The bear case is simply this gets delayed and there is no real precedence. Let’s just say the precedence that are established are not maybe as strong as investors would like. Maybe because there’s just like political influences.

But at the end of the day, it’s still a society that was built by many great families and created these big businesses. So it’s always a tension to kind of want them to change and force them to change. But hard to beat being a fundamental value investor in these markets when you can find amazing businesses at just ludicrously cheap prices and where their core operational business is good.

And they are making changes, right? They are making changes to make minorities more and more on level footing. So that’s why I’m still optimistic about it all and trying to play a role myself.

[Tobias] On that note, Ryan, if folks want to follow along with what you’re doing or get in contact with you, what’s the best way of doing that?

[Ryan] Yeah, you can subscribe on my website or you’ll get access to letters if you’re an accredited investor at www.TerotonCapital.com. You can look at my X, which is Teroton underscore Capital. And those are the two primary ways.

My email is also ralbert.TerotonCapital.com. If you want to send me an email, I answer. Email is also on the website.

So those are the three primary ways. And if you’re ever here in California, come pay me a visit. And I’m in Asia a lot too.

So also, if you’re in Asia, ping me because we’ll most likely overlap or be an hour or two flight away.

[Tobias] Good stuff. JT, any final words?

[Jake] No, just plug Toby’s book again. Go buy Crash Test Dummy.

[Tobias] Thanks, Dave.