REQ Capital Investing with Insight

Investing With Insight

2 Investing with insight ​

3 REQ Capital ​

4 Generational perspective

6 Responsible investments ​

8 Shaped by our investment journey ​

10 Mistakes are part of the game ​​

13 No distraction from index ​

14 How we generate investment ideas

​ 15

Management & culture

18 Capital allocation

19 Not all growth is good ​

20 Perspectives on pricing ​

21 Force of gravity ​

22 Risk management

24 Thank you for your support

3.

Investing with insight

REQ Capital is a long term active asset manager. We are independent-minded and differ from the crowd both in terms of how we search for investment ideas and how we create extraordinary results. This Investor Manual will provide our investors a deep insight into

our investment

experience and how we intend to take care of and compound capital. Our funds deviate both from market indices and competitors. It is therefore of importance that our investors know how we manage their capital. ​ We believe in open and sincere communication. We will not compromise on what we explain and represent in this Manual. ​ We have devoted a whole chapter to the mistakes we have made over the years. Fortunately, we have learnt a lot from these mistakes. Extraordinary long-term investment results boil down to investing with the right people, the right ownership structures and in unique corporate cultures. We explain how we assess these aspects. ​ These investment principles stand the test of time and do not depend on a specific market climate in order to succeed. These principles form the basis for our investment philosophy.

Our investors trust us to make good long term decisions on behalf of them. The investments we make depend on the management teams and cultures in the companies in which we invest.

There is a chain of trust from our investors, through our capital allocation decisions to the companies we choose to invest in. ​ Thank you for your support.

4.

REQ Capital

We are an independent partner-owned fund management company with a generational perspective. We have, and aim to keep, a unique culture in our company based on respect, strong values, true partnership and collaboration. ​ We are partners with different skillsets and experiences. We are different personalities. We have chosen to bet big on a set of complimentary skills. We believe that equal ownership is a key to success in building a new business. We have an eternal perspective which we believe is a competitive advantage in a short-term oriented industry. ​ Our values are professional, and fun. REQ Capital is not a job, it is a lifestyle. Our investors will experience a corporate culture of enthusiasm and energy. Having fun is not normally a mission statement in the asset management industry but it is of utmost importance. ​ 5 percent of our net profit will be donated to associations, foundations and non-profit organizations which contribute to the UN Sustainability goals. It feels good to know that the better results we create for clients, the more we are able to contribute. ​ We believe people with passion and dedication can accomplish anything. Unique corporate cultures with an ownership mentality, happy customers, employees with an inner motivation and strong management are elements on which we base our investments and use as a guide in building our own company.

5.

Generational perspective

We aim to create wealth over decades and manage our clients’ capital just like our own. We will only invest in our own funds and seek clients that share our values and long-term perspective. Common interests with clients is crucial for long term success.

W

hen your goal is to compound capital

When you invest with a generational

for a generation you focus on other

perspective you have to get management,

areas than most market participants. We

culture and ownership right. Our advantage

do not have a qualified view on the market

is that most fund managers are incentivized

returns over the next year and do not know

on very short time horizons. Most market

how the macroeconomic picture will look like

participants try to win in the short term.

over the next three to five years. What we

There is far less competition when you truly

know is that we have invested in companies

invest with a generational perspective.

that will grow and prosper over the long haul,

​

irrespective of market conditions. Ultimately

Over the short run the stock market is a

the value creation of these companies will be

voting machine. Over the long term the

reflected in the stock prices.

market is a weighing machine. As you expand

​

your time horizon and invest with

Stocks rarely perform in the time frames

6.

a generational perspective you need to

we predict, and that is why the market only

get the fundamental return contributors,

works for investors who have patience.

represented by profitable earnings growth

​

and dividends, right.

Responsible investments

The world is changing and we want the companies we own to be proactive and change accordingly.

W

e have witnessed companies without

Governance

strong guidelines and action plans in

We focus on companies that put governance

terms of sustainable development, quickly

high on the agenda. Many of the companies

lose reputation, customers and owners.

in which we invest will be led by the initial

​

founders. It increases the speed of execution

We believe that companies which engage

and facilitates long-term decision making.

proactively in sustainable development gain

​

a competitive advantage. People graduating

Our experience is that founder-led companies

today who will become potential employees,

often tend to take social and environmental

customers and suppliers, care a lot about

aspects more seriously than companies that

sustainability. These employees will be the

are purely institutionally owned. Companies

future decision makers of the companies

where sustainability is deeply rooted in the

that we own. The quest for the best future

culture are in a better position to create

brainpower will be won by the companies

lasting shareholder value. We address these

that do care about sustainability.

issues in our dialog with companies and we

​

will make sure we are heard.

We have excluded the same companies as Norges Bank Investment Management,

Social

NBIM. We do not invest in companies that

In order for a strong culture to last you

extract oil and coal. We exclude producers of

need diversity both in terms of sex, age

pornography, alcohol, gambling, tobacco and

and ethnicity. We will clearly represent this

weapons. If you ask us why, the answer is

stance simply because we think it is rational.

straight forward: It just feels right.

​

​

Engaged colleagues are the foundation in

We will own companies with management

any company. These employees need strong

that understands the issues of sustainable

labour contracts and sensible incentive

development and takes responsibility in a

schemes. We will work to highlight these

proactive way. We will do our very best

important issues.

as active owners to put sustainability on the agenda.

Social is also about creating corporate

​

cultures of trust and well-being among

The buzzword in the asset management

employees.

industry is ESG. Our priority is GSE. ​

8.

Environmental Climate change is one of the biggest challenges we face. Different sectors, industries and geographies face different opportunities and challenges. Our approach will be to challenge the companies we own on how they can contribute to make the world a better place.

Companies do not need to balance sustainability and growth. Sustainability is growth. We applaud companies which can invest in environmental-friendly products and services that increase growth, increase return on capital or reduce the cost of capital. These companies create shareholder value and make the right investments in environmental-friendly solutions at the same time. ​ We will create value for our clients, and it makes a lot of sense for us to manage our client’s money in a way that contributes positively to a better world. ​

9.

Shaped by our investment journey During your investment career you get shaped by your experience. Over the years we have experienced both outstanding investments as well as big losses. Both are needed in order to mature as an investor and find your way of investing.

O

ur investment journey has led us to

We care about accounting figures, valuation

spend most of our time on qualitative

and pricing multiples, but the most important

criterias like evaluation of management and

judgements we make are found behind the

soft factors like corporate cultures. Our best

figures – judgements of management and

investments historically are the result of

the culture of the businesses. Of course,

investing with the “right” people, the best

historical accounting figures are reflections of

ownership structures and unique corporate

both management decisions and culture, but

cultures.

in order to understand if historical figures

​

can be replicated in the years to come we

Our weakest investments have been

need to make sure to invest in the right

characterized by the opposite. These have

management teams. We explain more about

been situations where we have spent too

the importance of the right management and

little time on management and culture. These

company culture in one of the chapters and

experiences have shaped the way we look at

in our book “Investing in Value Creators”.

investments. When we buy a stock we hire

​

someone to take care of our capital. You want the right ethics and skills. ​

10.

On a medium-term view of three to five

An important insight from years of managing

years there is still a lot of noise reflected

capital is that managing risk is more

in share prices. A three to five year view is

important than managing returns. We have

still too short to observe the footprint from

devoted an own chapter to risk management.

management in the accounting numbers. In

​

the long run you will clearly see the effects

To sum up, we believe our investment

of management and culture reflected in

journey has provided us with some valuable

the figures and share prices. We have a

insights. Under the setup of REQ Capital we

generational view on investments in order to

have all the foundations in place to create

capture these effects.

value for our clients. We look forward to the

​

journey over the next decades. Hopefully you will choose to join us.

Over the years we have experienced both some outstanding investments but also some big losses

11.

Mistakes are part of the game

We all make

mistakes. Investors who learn from past mistakes and see patterns

in the failures will succeed. These are some of the mistakes we have made over the years and which we strive not to replicate in the future.

Selling too early

Over analysis

One common mistake we have made several

Some of our worst investments have been in

times is selling stocks way too early just

companies that we have spent way too much

because of a strong share price run in

time analyzing. The key takeway from these

the short term. These exits have been in

mistakes has been to try to find companies

companies that have been strong long-

that are easy to understand and where you

term compounders.

do not need lots of spreadsheets in order to

​

make up your mind. If we do not understand

In 1966 Warren Buffett bought 5% of Walt

the business case in the first place, just move

Disney for 4 million USD. That position is

on to a new research project.

worth 12 billion today! Unfortunately, Buffett

​

sold that position for 6 million USD in 1967.

This experience has made us much less

Even the greatest investor of all time make

interested in complicated business models.

big mistakes.

We like simplicity. Too much information

​

about a company often leads to decision

The key lesson for our part has been to be

fatigue. If we are not able to make up our

very hesitant to sell stocks in companies that

mind about the direction of the company

work perfectly. Sometimes these stocks run

because there are too many contradictory

ahead of the underlying performance of the

signals regarding the path forward, we

companies. Do not let a temporary high price

should pass.

of the stock scare you out of an outstanding

​

company. It is very hard to enter the stock

Over- and underconfidence

again at a higher price point.

One of the big challenges in investing is to balance confidence and humility. We need

Why we sell

confidence in order to make an investment.

We have arrived at three reasons to sell a

At the same time we need to be aware that

stock. The first reason is that you made a

we might be wrong. If we have too much

mistake by buying a company in the first

confidence we will never be able to admit

instance. The company is not as strong

a mistake and will not be able to learn

as you initially thought. You have done

and grow.

a fundamental mistake and should take

​

the consequence. The second reason to

If we constantly think we will be wrong we

sell is that you do not trust management.

will not be able to make any investments.

Management starts to convey a message that

The stock market is a fantastic instrument

you do not understand. You do not like the

to make you humble. That is the reason

language they use and they do not seem to

very experienced investors often are of

be good stewards of our capital. The third

the humble kind. They have made lots of

reason to sell is a pricing of the share which

mistakes and learnt from these mistakes.

is far beyond what you think is rational.

​

​

Charmed by management

We think the last reason to sell is the most

Some investors avoid all management

difficult and therefore we are very reluctant

interaction. Others find discussions with

to sell based on pricing of the share alone.

management very helpful. It is easy to get

​

12.

charmed by charismatic management. We

development is always accompanied by a

dig deeper if we meet overly charismatic

lower share price and what seems to be a

management. It is often a red flag.

more attractive pricing of the share. It is

​

better to admit that you were wrong and

It takes quite a few management meetings

sell the share rather than trying to find a

to understand that we should not necessarily

new cause to continue owning the share

invest with the most charismatic and

at a lower price point. We would rather

outgoing CEO in town. We have devoted

average up and buy more shares at a higher

a separate chapter to evaluation of

share price level in companies where the

management. In the long run investing

underlying fundamental development is

with the right management is of utmost

better than expected.

importance.

​ Failing is part of being an investor. We are

Too much focus on numbers

not ashamed of our mistakes. We will make

Our investment experience has changed a

new mistakes but we will never hide them or

lot over the years. Early on we focused a

look for excuses.

lot on the quantitative aspects of potential investments. We still care a lot about the financial history of companies. But at the same time we have come to the conclusion that our biggest investment mistakes have been a result of investing with the wrong type of management and wrong ownership

It is the investors

structures. Our best investments have been characterized by the opposite. ​ Therefore, we have become more and more interested in how management communicate and how they interact with investors. This is the non-financial aspect of investing.

that learn from their mistakes that will succeed

Qualitative criterias are more difficult to evaluate than financial figures, but we do believe getting these evaluations right increase the odds of good shareholder returns.

Not willing to sell losers A costly mistake we have made is not being willing to sell companies that are not performing according to our expectations.

When the investment thesis changes you should evaluate the investment again.

Weaker than expected fundamental

13.

14.

No distraction from index

We do not compare our investment strategy to an index. Our ambition is to deliver the best returns irrespective of benchmarks and competitors. Avoiding benchmarks makes us look only for the finest companies, irrespective of index weights.

W

e know very well by experience that

We will never discuss tracking error which

professional fund managers with

measures how closely a portfolio tracks

traditional benchmarks spend too much time

the index.

looking at the benchmark, how it performs

​

and the constitution of it. We truly think that

We want to diverge from the index and

we will be in a better position to generate

believe we need to differ in order to create

solid returns for our clients by avoiding

extraordinary performance.

traditional benchmarks and keep our eyes on the ball.

We do not care about the contents of benchmarks and spend no time looking at how we differ from benchmarks

15.

How we generate investment ideas

We like to look for ideas where most professional fund managers do not look. The traditional way of generating investment ideas is by doing financial screens. The challenge is that you get the same kind of lists of stocks as everyone else, you end up studying the same kind of companies and, in the end, invest in the same companies as everyone else.

Businesses are not spreadsheets, but people.

Talk to people and you will gain an advantage that most professional managers do not have

W

e look for ideas through more

the last aspect we look at. The pricing needs

qualitative lenses. We search in

to offer us the prospects of at least double

magazines, through conversations with

digit annual returns over the coming decade

management, through social media, talk

in order for us to consider the stock as a

to people and read investment blogs etc.

potential investment. More about pricing

You need to search for ideas where most

of stocks in the chapter “Perspectives on

professional fund managers do not look.

pricing”

​

​

Idea generation is just the first part of the

Due diligence does not end with the purchase

investing process. We do not spend time on

of a stock. It is just the beginning. Our initial

most ideas since they do not pass through

due diligence might get us invested but it is

our rigorous return on capital criteria. We are

our maintenance due diligence that will keep

obsessed with value creation and only invest

us invested. We do not buy and hold, we buy

in companies that are able to deploy new

and verify.

capital at very high return on capital.

​

​

We conduct a systematic, qualitative due

If the company in question has a history of

dilligence in order to reveal the true mental

strong value creation and is also run by a

health of the company. The answers we get

management team of the highest integrity,

are of utmost importance to our investment

we listen closely. The pricing of the stock is

decisions.

We like to talk to customers, ex-employees and other external stakeholders in order to understand if and why they are happy

16.

Management & culture

We seek management teams that are willing and able to turn away from the shortterm pressure by investors and analysts and act in the interests of long-term investors of the company.

A

person who wants to lead the orchestra

“The C in “CEO” stands for Culture. The CEO

must turn his or her back to the crowd

is the Cultural Executive Officer” says Satya

and do something different. In order to turn

Nadella, CEO of Microsoft. We could not

away from the short-term pressure it helps

agree more.

to be an owner operator. We like to invest

​

with founders that have skin in the game. It

We believe the responsibility of building

doesn’t mean the company will

corporate culture belongs to the top ranks

be successful, but it helps us trust

of the company. Management behavior,

management when we know they have to

communication and interaction with

live with the consequences of their decisions.

employees, suppliers, customers and

Incentives matter.

shareholders is important for the creation of

​

a good corporate culture.

We use own research, external consultants

​

and third-party insights in order to gain

Our CEOs give priority to customers first,

strong understanding of culture and

then employees and finally shareholders.

management. To form an opinion on culture

Over the very long term, if the customers are

you need to get insights below the ranks

happy, employees will be more satisfied and

of top management, especially from ex-

shareholders will ultimately enjoy the ride.

employees who are naturally more open and

​

frank about the state of the culture.

Our CEOs treat shareholders as partners

​

and own a significant amount of shares

We are always impressed by the CEOs that

themselves. A leader who rises to the top

are humble and appreciate their competitors.

of a big corporation and owns none is much

These are leaders who are honest about

more interested in control than he or she is in

challenges and do not blame external factors.

economics. Politics and bureaucracy become

They take responsibility.

the name of the game. It is just the nature of

​

humanity. Someone who owns his business is

Leaders often do not fully recognize the

used to control. He or she never has to fight

extent to which “who they are” affects

for control. The only thing a CEO, who is also

virtually every aspect of their organization.

an owner, has to fight for is value creation.

​

​

We seek leaders who are independent and

Leaders must be able to facilitate high

got an unusual combination of conservatism

performance in large groups of people who

and boldness. We want to invest in CEOs who

are looking for equality and responsible

are down-to-earth and value-based in their

freedom. Employees want to be held

leadership style. We know that the behavior

accountable - not micro-managed and

of CEOs are easily transmitted throughout

supervised every moment of every day.

the organization. There is a strong link

​

between financial performance and the

We like management teams that do not try

alignment of an organization’s cultural values

to guide investors on short term results.

with employees’ personal values.

Quarterly guidance increases the attention

​

17.

to short term results which is not good for

The CEOs we try to find spend more

the company or its shareholders. CEOs should

time focusing on cash flow than reported

avoid guidance and rather provide long term

earnings. We want to invest in CEOs who

ambitions which are rooted in the strategy of

care about profitable growth over time.

the company. These are ambitions that both

These CEOs do not pay attention to short-

employees and shareholders can align to.

term movements in the stock price. They are

​

fully aware that the stock market will put the

Companies get the type of shareholders

right price on the company over time.

they deserve. Long term communication

​

attracts long term investors. Companies with

We will invest in many decentralized

long term investors do have a competitive

organizations where employees get a lot

advantage in the marketplace since these

of responsibility and where there is a

investors encourage long-term thinking.

strong chain of trust from top management

​

to group leaders. There is a fundamental

We seek CEOs that act without external

humility to decentralization, an admission

advisors in capital allocation decisions. They

that the headquarter does not have all the

do not need external consultants to tell them

answers. Autonomy will work perfectly as

what to do with their own business. ​

The words and actions by management is of utmost importance for employees

18.

long as incentives are aligned with long term

No matter how much work we as investors

value creation. We like incentive systems

put into an idea, the future remains uncertain.

that are easy to grasp both for employees

Capitalism brings creative distruction. The

and shareholders. These incentive systems

best insurance against creative distruction is

stimulate profitable growth and are easy to

to partner with a management team that is

stick to year after year.

smart, energetic, honest and who is acting in

​

accordance with a vision and who has their

How the CEO organizes the business to

own financial future at stake.

foster entrepreneurial energy is important.

​

Managing human capital is critical.

Over time, great people generate the best

​

results in pretty much every undertaking. We will do our very best in order to find the best athletes in the field of business.

A CEO needs to manage two aspects of the company well in order to be successful people and capital

19.

Capital allocation

We want to invest in management teams that are outstanding investors and know how the capital market works.

T

he CEO has to run the operations

The main task in capital allocation is to tap

efficiently and deploy the cash generated

the right source and deploy capital at high

by those operations at high returns. They

returns, risk taken into account. Over and

need to be good investors and capital

over again.

allocators.

​

​

The pressure on CEOs to do the same type of

When we find CEOs who are very competent

capital allocation decisions as everyone else

at both the human/cultural aspects and also

is huge. But doing like everyone else is the

at allocating capital we pay close attention.

recipe to mediocre results. We like companies

Most CEOs rise up through the sales or

that spend lots of free cash flow to do small

operations ranks but as a CEO you will be

bolt-on acquisitions. We like CEOs that pay

in charge of allocating the capital of the

extraordinary dividends to shareholders

entire business. Capital allocation is a skill-

when there are no other good reinvestment

set. Capital allocation has a large impact on

opportunities. We like CEOs that minimize

value creation of the business and therefore

the spending on outside consultants in capital

stock returns. Two companies with the same

allocation decisions.

operating results and cash flow with very

​

different approaches to allocating capital will

It is those who have mastered the art of

get two very different outcomes for long-

evaluating management that the stock

term shareholders.

market rewards with gold. That is the reason

​

we focus on people. Investing with top

Every CEO has three sources of capital;

entrepreneurs and owner-operators gives

equity, debt and free cash flow. Good capital

you a big edge.

allocators know which source of capital to tap into at the right time. Every CEO can deploy capital in five different ways; invest in the business, acquire competitors, pay dividends, buy back shares or pay down debt. ​

20.

Not all growth is good

In light of the fundamental differences between the calculation of accounting earnings and economic value, it should come as no surprise that all earnings growth does not necessarily lead to the creation of economic value for shareholders.

W

e care about profitable growth.

Restructuring announcements disclosing

Shareholder value will increase only if

management’s intention to cut its losses

the company earns a rate of return on new

and exit value-decreasing lines of business

investments greater than the rate investors

are almost invariably accompanied by

can expect to earn by investing in alternative,

significant write-downs in current earnings

equally risky, securities. Earnings growth,

and increases in share prices. We have

however, can be achieved not only when

seen that in these situations, the market is

management is investing at or above the

responding not to the unexpected decrease in

cost of capital, but also when the company

earnings but to the long-term consequences

is investing below the cost of capital and

of redeploying corporate resources to higher

thereby decreasing shareholder value.

valued uses.

​

​

In spite of these facts we witness a lot of

We are obsessed by profitable growth. We

CEOs who believe that stock prices are driven

only invest in companies that are able to

by short-term accounting numbers and EPS-

reinvest at high returns on capital. Value

growth despite impressive evidence pointing

creation is key in investing.

to the contrary. One important reason is that market responses to earnings announcements are often misinterpreted. When investors believe quarterly earnings reports provide new information about a company’s longterm cash flow prospects, reported earnings per share will affect market value. But the market is not reacting to reported earnings per share. Instead, when appropriate, the market uses unexpected changes in earnings as a useful proxy for reassessing a company’s future cash flows. ​ A disappointing quarterly earnings announcement that is seen as a change to the future cash flow prospects will drive the share price down. ​ Research studies have shown that announced changes in accounting methods that affect reported earnings, but not expected cash flows, do not affect stock prices. ​

21.

Perspectives on pricing

When you are a long-term investor in great businesses, and enjoys the full benefits of compounding, you are going to get used to holding stocks that are not always “cheap” on short term multiples. You only see the effect of compounding earnings after many years. If you take any of the stocks in our current portfolios and go back 15 to 20 years and ask what we could have paid for our stocks and still got the market return, the answer will surprise you. The P/E-multiple we could have paid many years ago is a lot higher than one would imagine.

T

he multiples we pay will of course affect

We do our own valuation of companies.

our long-term investment results. The key

Multiples are not valuation. Multiples obscure

for us is to evaluate if the business still has

the value drivers of a business. The value

a strong competitive advantage many years

drivers are growth, return on capital and the

from now. If we have high confidence in

discount rate.

the competitive position in a decade we are

​

much more willing to pay a seemingly high

In our search for excellent companies we are

earnings multiple today. We are fully aware

aware of the fact that when you overpay

that paying a too high multiple can destroy a

for a “safe” company, you can turn a “safe”

decade of strong fundamental performance.

company into a risky stock investment. It all

When we face seemingly high multiples we

boils down to your conviction on the long

need to be confident on the competitive

term profitable reinvestment opportunities.

position years into the future and the

A high degree of certainty is needed when

stickiness of the corporate culture.

paying up for quality businesses and

​

outstanding management.

With our investment perspective it is far better to make a mistake on the price of a business, than the quality of a business.

The vast majority of losses in the stock market come from investing in the wrong businesses, not picking the wrong valuation on the right businesses. ​

22.

Force of gravity

The force of gravity works against you as an asset manager. Too much assets under management will eventually lead to poor returns. One of our major competitive advantages as we launch our funds will be the initial size of the mandates. Small funds offer a lot of flexibility and freedom for fund managers, but very few clients dig into this advantage.

T

he incentive for almost all fund managers

and conviction at high levels which means to

is to grow the funds as large as possible.

only invest in the very best companies we

Unfortunately, clients suffer as the funds

find and build large positions where we feel

grow in size. We plan to close our funds well

risk is low and return opportunities great.

before we feel we have to sacrifice returns

​

for clients.

On the global investment arena liquidity is

​

generally better which makes it easier to

The optimal size of a fund naturally depends

run a fund with more capital. But if you run

on the mandate and type of companies in

a concentrated strategy globally with a

which the fund invests. Global mandates

bias towards companies where management

with a large-cap bias can manage billions

or founders own a large part of the

of dollars without running into liquidity or

company, you will sooner or later experience

ownership issues. Narrow, concentrated

capacity constraints.

mandates with a small-cap bias will quite

​

rapidly face constraints as the funds grow.

Investing in listed real estate in the Nordics

​

is a niche investment style with some very

We will invest across large and small

good opportunities for long term, quality-

companies in our funds. We have very

oriented asset managers. Many of these

flexible mandates but often prefer some

companies are also founder-led and less

of the smaller companies due to growth

liquid. Therefore you will face liquidity issues

opportunities in the small-to-mid cap space.

earlier than a Nordic mandate.

Naturally, we make sure to balance our

​

exposure with larger companies. With our

As a consequence, we plan to close our

investment style, where we tend to invest

funds before we face any difficulties in

in founder-led companies and other types

deploying capital. We want to generate the

of family owned companies, liquidity is

best returns possible. That is the right choice

less than in large institutionally-owned

for our clients.

companies. We like to keep concentration

23.

Risk management When managing risk we separate what we can control from what is out of our control. Our experience tells us that managing risk is more important than trying to manage returns. We control our investment process and risk taking. The end result of good risk management practices is solid returns. There are two types of risks we assess in all our investments: operational risk and financial risk.

Operational risk

We are careful with companies which are

Operational risk impacts the bottom line of

solely dependent on one factor outside of

our companies directly.

management control. Gold producers depend on the gold price, banks are generally

A risk management principle to reduce

dependent on the interest rate environment

operational risk is to avoid companies which

and airlines depend on the price of jet fuel.

sell a single product to a single customer

All these factors are outside of control.

in a single market. These business models are vulnerable. If the product, customer or

Operational risk also includes the assessment

market fails the results of the company will

of regulatory risk. We are careful with

be hit hard. Our risk management process

companies which base their existence solely

tends to carry us into business models which

on licenses from governments which make

are diversified and where single events have

the companies prone for regulatory pressure.

less negative impact.

24.

Financial risk

Portfolio risk management

We study financial risk through the

We manage overall portfolio risk in different

assessment of financial liabilities. The

ways. We avoid too much exposure in one

dramatic meltdowns in investments happen

single country in order to reduce political,-

when operational risk is high while the

and currency risk. We balance the liquidity

balance sheet is vulnerable. An example

risk on a portfolio level. We primarily invest

could be capital intensive industries where

in very liquid stocks but are able and willing

the end market collapses and where the

to invest in less liquid stocks when the right

company has significant financial liabilities

opportunity presents itself.

and investment needs. These situations lead to permanent capital losses. We put a lot of

Taking on market risk is part of being

effort into avoiding these situations.

invested in the stock market. We are not trying to reduce market risk through hedging.

Beyond operational and financial risk we

Our funds are subject to fund regulations

reduce risk through several measures. All

which make sure diversification across

potential investments are discussed in

number of holdings is taken care of.

the portfolio management team before investment. The pricing of the stocks is

We put a lot of effort into keeping the risk

measured against the predictability of

in the portfolios at a decent level. But the

growth in cash flow. We challenge each

future will always be unknown. An important

other with different insights. We run

part of our philosophy is therefore to invest

concentrated portfolios which make us think

with management teams who themselves

risk management in every single investment

are significant owners of the business. These

we make. We also manage risk through the

managers will put risk management on top of

sizing of positions. The largest positions

their agenda since they have to live with the

are characterized by the lowest levels of

consequences of their decisions.

operational and financial risk.

25.

Thank you for your support

We have set up our company with the aim of managing capital with a generational perspective.

We are both owners, clients and capital providers to the funds that we manage. Clients in our funds understand how we invest which is our biggest competitive advantage. We will work hard to build some of the best portfolios we can using our investment principles. ​ We do not look at relative performance on a quarterly or yearly basis. As a client you should not applaud us on a yearly basis if our relative performance to any benchmark is positive. On the contrary we will have years where our fund performance is behind any benchmarks on short term horizons. Measuring performance on a yearly basis makes no sense. A year is the time it takes the earth to go around the sun and a year is of more use in studying astronomy than investment results. ​ As a client – be sure that we will work hard and dedicate ourselves to generate strong results.

On behalf of all of us at REQ Capital, thank you very much for your trust.

Nina Hammerstad CEO, REQ Capital

26.

Øvre Vollgate 9 • N-0158 Oslo www.reqcapital.com