The last month marked the anniversary of the rapid global spread of COVID-19. It was a time of massive panic, underscored by unknown health risks, school and office closures, the shuttering of borders, and the steepest drawdown in the history of global equity markets. It was perhaps the most uncertain time, not in terms of Wall Street but Main Street, since the Cuban missile crisis that brought the USA and USSR to the brink of nuclear war in 1962. 

And, yet, March 2020 proved the best buying opportunity in more than a decade. Not only had major global indices already gotten massively cheaper on the back of a 32% drawdown, but there were plenty of reasons for optimism: social distancing had taken off and was proving effective, private enterprise had thrown its considerable weight behind finding and creating treatments and vaccines, and governments and central banks had unleashed unprecedented fiscal and monetary stimulus. 

The crash and recovery provided many reminders for old hands and hard-won lessons for investors experiencing their first rodeo. Key among them:

1. Acting with a long-term mindset is incredibly important, especially during tough times. 
2. Having a clearly articulated philosophy and process gives something for investors to latch onto when fundamentals become unmoored from reality. 
3. Companies that are already gaining market share thanks to a superior value proposition tend to see those share gains accelerate during recessions. 
4. Always keep a running watch list of companies you’d love to own at a better price. You’ll oftentimes get your wish and, during a steep downturn, you can put money to work quickly. 
5. Emphasising holding companies with strong balance sheets provides surprising resilience during recessions as such companies can play offence while most others play defence. 
6. Running a concentrated portfolio allows for a greater depth of understanding of portfolio companies, as does low turnover, and the combination of the two allows investors to conceptualise new risks and opportunities relatively quickly. 
7. Markets look forwards, not backwards.

Some of these lessons were applied in the below investment cases, as we assessed current holdings and identified new ones.

Seizing the opportunity

Twilio has been a significant win for the Lakehouse Global Growth Fund, increasing from US$78 when we built the position in the depths of the crash to US$378 on the day we exited. 

Twilio is a business we’ve been following for a couple of years. The founder-led communications platform-as-a-service (CPaaS) allows developers to embed programmable communications within applications. Simply put, it transforms communications, which is largely hardware and physical networks, into software. If you’ve ever called your Uber driver through the app or have received a confirmation for an Airbnb booking, you’ve probably experienced some of Twilio’s earlier use cases.

Our investment in Twilio is a case study in the Fund’s process in action. 

First, it was a business that we had long admired and kept on our watch list but had not found the right time to initiate a position. 

Second, thanks to read-through from following a similar business, we correctly identified that Covid might actually increase engagement of Twilio’s flexible communications tools and services plus propel new customer acquisition. We realise this may seem obvious in hindsight but, with intense panic rattling markets and the shares 48% below their then-recent highs, we think it is fair to say this was a strongly non-consensus view. 

Finally, while we’re loath to sell great businesses on valuation as they are so few and far between, our sell decision reflects that our team does hold on regardless of price. We bought Twilio well at an enterprise value equal to about 6 times forward sales and, having exited at about 25 times, or more than double the 5-year average of 12, we’d like to think we’ve exited at a reasonable time as well with a price that largely captures many of the positive attributes we see in the business. Twilio has been a significant win for the Lakehouse Global Growth Fund, increasing from US$78 when we built the position in the depths of the crash to US$378 on the day we exited. To that end, we will continue to follow the business closely and would gladly re-open a stake should a more attractive entry point present itself. 

Superior value proposition: CoStar Group (NASDAQ: CSGP)

Founded in 1987, CoStar has grown to become the leading provider of data, analytics, and online marketplaces to the commercial real estate industry in the US. The company's core business is its original real estate data service, the CoStar Suite, which is a massive database of commercial real estate information which the company has painstakingly built over the last three decades. The database is supported by the largest research department in the industry with 1,800-plus researchers that make about 50,000 calls per day. Over time, CoStar has become deeply embedded into the daily workflow of a fragmented landscape of industry professionals, including real estate brokers, owners, banks and governments. 

The CoStar Suite is largely unmatched in terms of the breadth and depth of information it provides – we’ve heard it referred to as the Bloomberg of real estate – and has essentially become a ‘cost of doing business’ for those operating in the commercial real estate market. 

To that end, the CoStar Suite has consistently attained renewal rates of 90%-plus, with the figure typically exceeding 95% for clients who have been customers for 5 years or longer. Furthermore, CoStar only saw renewal rates drop to about 85% during the global financial crisis, which is impressive given the downturn was particularly severe and affected real estate much more acutely than previous recessions. 

In more recent times, CoStar has moved beyond its core data service with a handful of acquisitions that facilitated its entry into the online marketplace domain. Most notably, the company acquired LoopNet in 2012 and Apartments.com in 2014, which have now grown to become the leading commercial and multifamily marketplaces in the US, respectively. For a sense of scale, LoopNet is roughly 20 times larger than its nearest competitor, Crexi, whilst Apartments.com is roughly 4 times larger than its nearest competitor, RentPath. We remain excited about the opportunity ahead as CoStar’s scale and market leadership afford tremendous pricing power and platform optionality, particularly in the hands of such an adroit capital allocator as founder and CEO Andrew Florance.