Pavel Begun - 3G Capital Management

8/17/23, 10:44 AM How investing global, Pavel Begun of 3G Capital Management?
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How investing global, Pavel Begun of 3G Capital Management?
How investing global, Pavel Begun of 3G

Capital Management?
 26. April 2022  Tilman Versch
Pavel Begun of 3G Capital Management is a Global Value Investor. In our conversation we have
covered his investing process and some investment examples.
The interview was done in 2020. We made it public now to give you more materials about our high-
quality interviews at hand.
How to invest globally in the best stocks you can find? A talk with Pavel…
Pavel…
Table of contents
1 Check out Interactive Brokers

https://www.good-investing.net/2022/04/26/pavel-begun-3g-capital-management/ 1/22
2 Introduction
3 Getting to know 3G Capital and how it started
4 Advantages and disadvantages of shifting to a more global concentration
5 International investment framework

6 Acquiring the best equities despite limited resources
7 3G Capital on price discipline
8 Idea stock criteria
9 Disruption in investment companies

10 Framework for valuation
11 Global investments
12 Factoring risks into an investment approach

13 Managing diversification
14 Privatizations in Eastern European countries
15 Crisis investment
16 Deep dive on what 3G Capital Management stands for
17 Answering questions from the audience
18 Advice to young investors
19 Disclaimer
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Introduction
[00:00:00] Tilman Versch: Hello everyone. Welcome back to our live stream series. This time
I’m happy to have Pavel Begun on. He is in Toronto. Hi Pavel! How are you?
[00:00:13] Pavel Begun: How are you doing?
[00:00:15] Tilman: I’m good.

[00:00:16] Pavel: Thank you for having me.
[00:00:18] Tilman: It’s too hot today here in Stuttgart. I hope in Toronto the weather is
better. You already told me that it’s not that hot as in Stuttgart.
[00:00:26] Pavel: It is not snowing yet, but I’m sure that’s coming soon.
[00:00:30] Tilman: Toronto, I should visit one day. I’m happy to see the city then and meet
you.
[00:00:37] Pavel: Great.
Getting to know 3G Capital and how it started

[00:00:40] Tilman: I want to start with a question, and then I want to show the disclaimer and
give you some time to think about the question. It’s a very classical question for you because
your company is named 3G Capital, and there are some guys from Brazil who also have a very
similar name. Could you explain the difference in what you are doing and who had the name
first and who copied it? That’s my question this time.
Before that, I want to show the disclaimer that everybody can get a view on it. Here we go.
The disclaimer is also linked below the video so people can find it and look at it.
The short message coming with the disclaimer is, if we are talking about securities, it’s just an
opinion. You have to do your work and do your research before you invest. We are doing no
advice here. Please do your work.
What is this about 3G Capital, and how are you related or not related to the guys in Brazil?
[00:01:53] Pavel: Well, not related at all. In our case, 3G stands for the investment approach
that we practice. In other words, it stands for good business, good management, and good
price. I think nobody’s ever going to tell you now that they’re looking for bad business, bad
management, and bad price. Later on, I’ll tell the viewers more about our definitions of each of
the 3Gs. As far as the other 3Gs, it’s hard to tell why they named it 3G. I don’t think it’s a case of
somebody copying somebody else. It’s just more of a coincidence.
Advantages and disadvantages of shifting to a more

global concentration
[00:02:41] Tilman: Thank you for the clarification. You started your business as a fund with a
focus on the US and then moved globally. Why did you do that?
[00:02:51] Pavel: Right. When we started the business back in 2004, initially, we were 100%
focused on the US. We assumed that the governance standards are not solid enough outside
the US, and maybe the social behaviors in different countries are just not up to the standard.
What we discovered over time is that just the ideas in the US started drying up. If you wanted
to buy decent businesses and have decent prices, you would not be able to do that. That forced
us to start looking outside the US, and that’s where we discovered this really large investment
pool teaming with a crack of investment opportunities.
Right around 2008-2009 is when we went global. It worked out well for us. As a matter of fact,
if you look at our track record, our returns have improved quite a bit once we availed ourselves
of the global investment opportunities. Since strategy inception, I think we’ve compounded at
15% net versus the global index produced a return of less than 7%.
[00:04:12] Tilman: It’s interesting to learn more about how you did that, but before that, I
want to say a warm welcome to every guest here. As always, you’re welcome to post your
questions through the chat so that I can see them and weave them into our talk with Pavel.
Now, let’s go back to you. How did you do this process of moving from the US to a global
approach? What were your learnings, and what also were your mistakes doing that?
[00:04:45] Pavel: Sure. When it comes to learnings, if you look at the whole evolutionary
thinking process, we started off thinking, you cannot invest in those frontiers and emerging
markets because, as I said, maybe the standards for corporate governance or the social
behaviors in those markets would not allow an investor to consistently generate a good return
using a repeatable process.
Over time, as we started looking into those markets, we’ve discovered that actually, it’s not the
case at all. You can generate consistent returns using a repeatable process. One way for other
people who still think that you cannot consistently make money in those markets would be to
sort of say, “Okay, let’s try to separate emotions from reality here. Let’s use the case of the
United States of America.” Very instructive to look at the US market over the years.
If you go back a hundred years, when Benjamin Graham was getting started, the US used to be
a frontier market. Then over time, it had progressed to becoming an emerging market like in
the ’50s and ’60s when Warren Buffet was getting started. Of course, now it’s a developed
market. A highly developed market. Then you’d say. “Okay. As an active manager who knows
what he’s doing, what has happened to the margin of outperformance that you generate by
applying your knowledge and rational thinking?”
What you’re going to see is that the margin of outperformance they should be able to generate
as an active manager in the ’20s, which is when Ben Graham was getting started, was the
highest. Then it shrank somewhat over time as the US became more of an emerging market
rather than a frontier market in the ’50s and the ’60s. Then, as the US became a highly
developed emerging market, so today, the margin of outperformance that an active manager
can produce has shrunk even further.
I think the lesson here is that instead of saying, “You can’t generate returns in those markets.”
what you see is the operative. It’s easier for an active manager who is knowledgeable and
rational to generate a good margin of outperformance in the emerging and frontier markets
versus developed markets. It is very interesting that when Warren Buffet was asked how he
would rank his partnership if he would start all over again today, he said, “Look, I’d be 100%
international.”
International investment framework

[00:07:46] Tilman: How did you build your framework to invest internationally, and how did
this framework progress through time?
[00:07:56] Pavel: Well, it was quite a bit of work. You cannot just wake up one day and say,
“Well, I’m going to be invested in those faraway places.” There is a lot of effort through a lot of
work that goes into it. You have to develop the infrastructure to invest globally. A lot of those
markets are so-called ID markets. Just to set up, to be able to invest in those markets takes a lot
of work. A lot of times, you have to get a separate idea for each separate market. You need to
get to know the service providers in those markets. Even more importantly, you need to
develop a network in those markets to back up your research.
In any market that you go to, there will be a lot of detail that is very specific to that locale.
When I’m here in the US, well, it’s just easier for me to deal with that because you grow up with
that, so you already know those little things. In those other markets, well, you have to learn
about them. That takes a lot of time, a lot of reading, a lot of talking to people.
You also have to develop the on-the-ground intelligence gathering network because if you’re
investing in a market that’s tens of thousands of miles away, you can’t do it via purely desktop
research effort. It’s just not going to work. It’s going to lead to mistakes. You need to familiarize
yourself with that place. Again, that just takes a lot of meetings, a lot of getting to know people.
It takes some trips to those places where you just have to meet with people, et cetera, et
cetera. That’s what we had to do. Of course, you do it over the years, and it does take quite a
few years to get up to speed. That’s exactly why I don’t think there’re a lot of people who’d do it
because the upfront effort that you need to undertake is so massive that people say, “Look, why
would I do it? I don’t even know if there’s anything investable in there.” They give up and stick
with what they know, which is to stay around the developed markets.
[00:10:12] Tilman: Have you built a certain edge in the international investing space like
focus on certain markets, or is it really that you say you’re investing globally?
[00:10:23] Pavel: Well, I think you’re investing globally, and what happens is that that’s what
gives you the advantage because it’s just much easier to source investment opportunities if
you’re dealing with an investment universe that includes 50,000 names and that’s what we
have. Now, if you look at people who operate within a single market, it’s just much more
difficult for them because a lot of times, they’re going to face that shortage of ideas. As a result,
they might be forced to accept suboptimal investment opportunities. For us, it’s not going to be
the case at all.
I would just say that in addition to that, our ads would include the fact that we use a process
that’s consistent, repeatable, and in-depth. That process is grounded upon facts and rational
analysis, and that process has been battle-tested over decades. It yielded very good results.
Furthermore, it does help that we have a small team. It’s only two people; it’s my partner Cory
Bailey and myself. This way, there is no politics and no bureaucracy, so we’re very nimble and
can be decisive when we need to. I think with larger teams, you run into this issue of “Well, you
know what? If you got 10 people on the team, there’s always going to be somebody who freezes
at times of stress,” and that just makes the entire decision-making machine ground to halt, and
it just doesn’t happen in our case.
Acquiring the best equities despite limited

resources
[00:12:15] Tilman: It’s two and 50,000 a lot of this. How do you manage to get the best
equities out of this universe? There’s also one question from the chat I want to pick up on
this. Do you use screening like PE price book to get to the ideas, or how do you select ideas in
this space with the limited resources?
[00:12:41] Pavel: Right. Let me first address the question of the limited resources. We do get
this question a lot because people say, “Look, it’s just a team of two people. How do you cover
the entire global universe with 50,000 ideas?” Well, I would say that our objective is not to do
in-depth research on 50,000 names that are out there. It would be impossible to do it with two
people, and actually, even if we had 20 people, it would be impossible.
All we need to do, we need to source one or two ideas a year out of the global universe of
50,000 ideas. That’s a much easier task and can be easily done with two people. We only need
one or two ideas because we run a highly concentrated portfolio and use a long-term approach
whereby we typically stick with a name for three to five years. As long as we find one in two
years, we’re just very happy.
Then on to the screening part. When it comes to screening, we don’t use screens based on
quantitative criteria. We just find that if you just strictly focus on the quantitative aspects, you
will just not pick up a lot of names that are just good businesses, and you are just going to end
up with a whole bunch of stuff that may be low PE, but business is just not going to be that
solid.
You just don’t want to be in a position where you use a screen that disregards the business’s
qualitative aspect, which is really the most important part of valuation assessment. What we
do instead, we focus on basically getting a list of equities for a given country or a region. Then
we start going from A down to Z. We just look at those businesses that may be spending a
minute or two in each business, reading the brief business description and maybe quickly
glancing at the financial performance just to see if that is of interest.
Given that we use very stringent criteria as to what we look for, we end up with a much shorter
list of names. Once we end up with a shortlist of names, well, then we go in-depth. At that point,
we start looking into valuation as well, and to the extent that we’ve researched something in-
depth and the valuation looks attractive, well, that may end up in our portfolio. There will
always be names where the business is good, but it’s just not cheap enough for us. Well, that
name is going to go on to a list of potential ideas.
At some point, we might be buying that name if the price becomes the right price. I think that
list numbers a few hundred names, and we actively follow and track those names. From time to
time, we do get a chance to buy them. For example, you can go back to March 2020, when the
markets were in major turmoil. We purchased four ideas from that list. Well, the interesting
thing is, all those four ideas were on our list of potential ideas for 10 to 15 years. We waited for
quite some time, but eventually, it paid off.
3G Capital on price discipline

[00:16:21] Tilman: That’s interesting to wait and to have the patience to wait so long. How do
you stick to this? How do you make it that you still be patient if you’ve already looked at an
idea and found it interesting? What’s your framework to not act?
[00:16:39] Pavel: Well, this is genetic. On a serious note, look, we’ve seen how other people do
it. When we looked at the approach that works, we try to look at the best investors in the world
and reverse engineer what they do. Of course, we’ve discovered that they buy those good
businesses, but they also have the price discipline. I think with that, we just say, “Look, that’s
just the approach.” And yes, sometimes it can be painful to wait, but you have to. That’s pretty
much the frame of reference for us, which has become ingrained in our philosophy. You just do
what you have to do. I think it’s the combination of patience and decisiveness.
Idea stock criteria

[00:17:36] Tilman: What are the criteria to dive deeper into an idea in stock and do more
research?
[00:17:44] Pavel: Well, basically, our sweet spot is finding those businesses that are industry
leaders in an industry that has a long-term track record of leadership sustainability. Once you
have that and you’re able to identify the factors behind that leadership sustainability, that’s
where you can make a judgment as to whether that sustainability is going to persist over the
next 10 or 20 years. Once you can make the judgment, you can predict what this business
should be worth. That’s the criteria that we use to build our framework.
If we find a business, it’s number one, number two. In an industry where number one and
number two stay in the lead for decades, well, it passes the first stage, and then obviously you
have to look and say, “Well, how is the return on capital? Is it good?” Then how is the financial
condition? Does it have any debt? Does it have cash? Does it have too much debt? That’s the
second criteria. Then you’re going to look at the management team, and you’re going to say,
“Look, is the management team solid? Have they done more or less rational things over time?”
If you get a positive answer to each one of those questions, then you’re going to proceed into
the price, and then you’re going to say, “Well, what’s the price like?” For us, that price has to be
anywhere from 4 to 10 times normalized sustainable earnings. If the company earns a pass
when it comes to that last stage, it ends up in the portfolio. Otherwise, as I said, we put it on the
list of potential ideas, and we just wait. If it takes 10 years, well, we’re going to wait for 10
years.
[00:19:41] Tilman: What are two examples for these leaders?
[00:19:44] Pavel: I think you’re familiar with them by now. It’s a company called Ülker. It’s the
largest confectionery company in Turkey. Their brands occupy leading positions across Turkey
and the Middle East. If you study the confectionary business history, you see that the number
one players in the confectionery industry, regardless of their geographic domicile, actually stay
in their leading positions for decades, if not centuries. You can look at Mars, Snickers, Hershey,
Cadbury. I mean, pick any one of those.
[00:20:33] Tilman: It’s a sweet position.
[00:20:35] Pavel: It’s a sweet position. For Ülker, they’ve been number one in Turkey since the
’70s. Well, they’re probably going to be the market leader in Turkey in 2017. Their profitability
should stay roughly the same. When it comes to margin, obviously, the volumes are going to
grow over time. That’s one example.
Another example would be a company like Foxtons, which is an estate agency out of the UK. It’s
a similar dynamic. If you look at Foxtons, they’re number one in London by a wide margin. If you
look at a business like that and study the history of estate agencies worldwide, you can look at
Royal LePage in Canada; you can look at RE/MAX in the US. You can look at certain businesses
like that in the UK. What you’ll see is that those market industry leaders stay in the lead for 50
or 60 years, in some cases 100 years.
Again you can make a judgment that if you’re number one in London by a wide margin, chances
are you’re going to stay in that position for the next 10 or 20 years. I don’t want to say that we
always assume that the past and the future will be exactly the same. The future might turn out
differently. That’s why we need to go in-depth and identify the factors behind that leadership.
If you can easily identify the factors behind that leadership, you can judge how those factors
will persist in the future. Well, then you’re going to have your answer whether this is something
that you want to invest in or not.
Disruption in investment companies

[00:22:23] Tilman: How do you ensure that we have a lot of disruption in the current
environment and that the companies you’re investing in aren’t disrupted?
[00:22:34] Pavel: Well, that goes back to studying the factors behind leadership sustainability
of the past. I think you just have to say, “Okay, I’m going to look at Ülker. They make chewing
gum. Is the internet going to change the way we chew gum?” Depending on the answer you give
me, I’m going to be able to tell you what happens to the business.
Again, when I started that question, I came up with the answer that the internet is not really
going to change the way somebody chews an Ülker gum. When it comes to things such as
newspapers, well, they had good leadership sustainability in the past, but I think those paper
newspapers will probably cease to exist because things have changed quite a bit with the
internet. That’s the contrast between how things can turn out depending on the specific factors
behind leadership sustainability.
Framework for valuation

[00:23:38] Tilman: What is your framework for valuation, and at which valuations do you get
comfortable buying companies?
[00:23:47] Pavel: When it comes to valuations, as I said, we look to buy those businesses
assuming they pass the test concerning the business quality, financial condition, and
management. We look to pay anywhere from 4 to 10 times normalize sustainable earnings. The
distinction that I’d like to make here is that we’re not looking at current earnings and saying,
“Well, would like to buy a business based on current multiple earnings because current
earnings could be either overstated and understated depend on a specific circumstance for the
business.”
In certain businesses, especially the cyclical ones, you have to be careful to normalize those
earnings and say, “Well, look, in a strong economy, you probably want to make adjustments
downward. In an economy that’s very weak, you have to estimate what’s going to be the
upward adjustment.” Then obviously, you have to make sure you scrub those earnings to
exclude any items that are not sustainable over the long term.
Then the next step is to say, “Well, what kind of multiple am I going to pay?” I can tell you that
right now, our portfolio multiple is about six times earnings or so. As to what multiple we
specifically pay will depend on a few factors. Of course, it’s going to depend on the business
and the market. For the business that has the ability to grow at above-average rates, obviously,
we would be comfortable paying a higher multiple to the extent that you buy a business in a
market that’s a developed market, and investor protections are somewhat stronger. Well, you’d
be willing to pay a higher multiple for that as well. Also, it will depend on what else is available.
You’re going to look and see. Sometimes, if you have a portfolio full of really attractively priced
names, then just for a business to make its way into our portfolio, that multiple has to be a lot
lower.
[00:25:53] Tilman: You said you have to range from for to 10 times PE?
[00:25:57] Pavel: Ten times, roughly.
[00:25:58] Tilman: Yes, when is four acceptable, and when it isn’t? What should be the case
for a 10?
[00:26:06] Pavel: Well, it’s hard to give you a precise answer because a lot of the stuff is case-
specific. If you have a business that’s just a wonderful business, that is capable of growing at a
high rate of return and is based in jurisdictions such as the US, it’s like, “Okay, well, 10 times is
good.” But then you have another business that’s based in some other jurisdiction. Maybe it’s in
Argentina and maybe just not a fast-growing business. Maybe for a business like that, you
would like to pay four times. But then there are just a lot of in-betweens. And like I said, it also
depends on what else you have available within your portfolio today. If your portfolio today is
an average size of six times and you find something at 10, well, you know what? You might not
be buying it. If the names in your portfolio are on average for 10 times and you find something
at eight, well, maybe you just buy it.
Global investments
[00:27:13] Tilman: If you’re looking at the world today as a global investor, where do you
currently see value?
[00:27:21] Pavel: Well, I’d like to make a small disclaimer before answering the question. I’d like
to emphasize that we’re not emerging or frontier market specialists or developed market
specialists. First and foremost, we specialize in buying attractively-priced investments
wherever they are. We’re not really top-down investors either. We don’t pick a specific country
and say, “Well, as an attractive country. Let’s buy names in that specific country only.” If
anything, we bottom-up people, and we are just going to look at ideas regardless of their
geographic domicile, and then from there on out, if they happen to be in a specific country, well,
so be it.
With that, I can tell you that if we look around the world, most of the names that we’re picking
up happen to be in the so-called emerging markets. Now there are a few names that we see.
There are a few slivers of opportunity that we see in developed markets outside the US. Again,
I don’t think it’s surprising that we see the most opportunity today in those emerging markets
because if you look at what happened in the markets over the past 10 plus years, the emerging
markets have been in a bear market. Then obviously, the developed markets, mainly the US,
have been in a bull market for the past 10 plus years. So one would expect most opportunities
to be in the emerging markets today.
[00:28:52] Tilman: Is there a special region or sector that’s interesting to you, or is this
question too macro?
[00:28:58] Pavel: Yes, that goes back to macro. No. I wouldn’t say there is a special region that’s
of interest. I would just say that most of the names that we’re seeing are cropping up in places
such as Turkey, China, Brazil, and the UK.
Factoring risks into an investment approach

[00:29:21] Tilman: On this market, if you’re looking, investing in them, you have a dozen of
risks like political risk, Brexit in this case, or the government risk related to Turkey or China
that there might be an ownership risk. You also have the risk that people try to betray you.
How do you deal with these risks and mitigate them? How do you factor them into your
investment approach?
[00:29:50] Pavel: Well, I would say that that risk is not necessarily unique to those markets.
There is quite a bit of risk in places such as the US and Canada. If you look at the political
dimension, if you look at banks in the US, there was just such a backlash against the banks back
in 2008, 2009 that it became very tough doing business just politically for those banks. I don’t
want to downplay the fact that you face quite a few risks, pretty much anywhere you go, be it
the US, the UK, or Turkey, Russia, or China.
Obviously, there are a few ways you do it. I think you do try to spread your assets across those
different markets. You’re never going to be fully invested or 50% invested in any given place, be
it Turkey, Brazil, Russia, or China. You will have to diversify. You want to make sure you stick
with those businesses where politics will play to your advantage rather than a disadvantage.
I think you do have to have to spend quite a bit of time getting the lay of the land from the on
the ground intelligence gathering network that we have, just to make sure you’re not stepping
into any landmines with respect to either a political risk or maybe dealing with people who are
just dishonest.
Managing diversification
[00:31:24] Tilman: How do you manage diversification? How many positions do you have? Do
you have a certain limit for a certain region that you say, “I only have 4% in this company
because there’s a risk of X, Y, Z?”
[00:31:40] Pavel: Well, we typically around 10 to 12 names.
[00:31:45] Tilman: High conviction. It’s a high conviction.
[00:31:50] Pavel: Yes, high conviction. We do have country limits, and the specific percentage
would depend on the country when it comes to a country like the US, which is the preeminent
military power that no one can touch. In general, the US’s corporate governance and social
behaviors are going to be up to par. With a country like that, we’d be comfortable having 100%
of our assets in.
When it comes to, let’s say, I don’t know, Argentina, or the Democratic Republic of Congo,
maybe, it’s going to be a different level of confidence, so maybe you say, “Well, we’re going to
limit our investments in those countries to maybe 5%.” If you have a country that has a history
of capital controls and a history of expropriations well, you just cannot have a lot of money
invested in that country.
I can tell you that in places like Germany, I just don’t think we’d be opposed to having all of our
assets and in German stocks. Then, of course, there are just many in-betweens like Brazil and
Turkey and Russia and China. Probably, not something you’re going to have 100% or 50% in,
but more than 5% would be comfortable having in those.
Privatizations in Eastern European countries

[00:33:10] Tilman: Interesting. The other question is coming from the chat on privatizations.
Was it a topic for you that you try to invest in privatizations in Eastern European countries or
other countries?
[00:33:26] Pavel: I think we’ve been late to the game when it comes to privatizations. I think
they were all the rage in the early to mid-’90s. That’s when there was a lot of opportunity in
Eastern Europe. We started our fund in ’04. We went global around ’08, ’09, so, unfortunately,
we didn’t really get a chance to participate in that.
Crisis investment
[00:33:52] Tilman: Would you describe yourself as a crisis investor? Do you like to take
advantage of the crisis in certain markets? For instance, Turkey, with the currency crisis
maybe.
[00:34:04] Pavel: Well, I wouldn’t describe it as crisis investors. That would probably not be
entirely accurate. We’re not really seeking out the crisis. I think what we do is we seek out
attractive investment opportunities and an attractive investment opportunity, regardless of
geography. You talk to the US, UK, Turkey, Russia, Brazil. It’s just impossible to have an
attractive investment opportunity unless there is some kind of uncertainty going on. The more
dramatic the uncertainty, the better investment opportunities that you get.
It doesn’t have to be a specific country. Sometimes it’s a specific sector of the economy.
Sometimes it’s just a specific region within a country. If there is a crisis, yes, we might be in that
spot, just because attractive opportunities will abound in that specific place, but we don’t
specifically seek out crisis and say, “Well, you know what? There is a crisis. We’ll invest.” That’s
just not the way it works.
[00:35:14] Tilman: Could you maybe name examples where the crisis was helpful for you?
[00:35:19] Pavel: Yes, I can name a few. Actually, if you go back and look at 2008-2009, which
was sort of the first crisis we went through. That crisis was very helpful to our fund investors,
first and foremost, because it was a ton of extreme stress, and we basically did the right thing.
We allocated capital to the most attractive risk-return opportunities at that time, and that
crisis was pretty much the starting point to very strong returns for our investors.
Then we also went through an economic crisis in Russia in 2014, and it was the same story
again. It was just something where things were tough. There was a lot of turmoil. It was
extreme stress, but we stuck to our guns. Again, we headed two positions when facts and
analysis indicated that we should. We took advantage of attractive investment opportunities,
and again it was a starting point to a pathway to strong returns. The same thing happened in
Brazil, 2015. The same thing happened in Turkey in ’18 and recently in March of 2020 in the
US.
If you study history, what you’ll see is that, historically, the best time to invest with us has been
the crisis because we always proceeded rationally, in an alternate decisive way to take
advantage of opportunities, which doesn’t always happen with people. After all, a lot of times, I
see in times of stress, people just freeze.
[00:37:14] Tilman: Send this guy your money if there’s a crisis. That’s the takeaway from that
one.
[00:37:20] Pavel: Right. When things are good, please don’t send us any money. Of course,
that’s the opposite of how people typically do it.
Deep dive on what 3G Capital Management stands

for
[00:37:31] Tilman: You mentioned you want to disclose the 3Gs like good business, good
management, good price. We already talked about good business and good prices. Maybe
let’s focus first on good management. What is good management for you?
[00:37:48] Pavel: Well, there are a couple of things. First, you want to be sure that the people
who run the business are good operators. Basically, you just study the history of the business,
and you see what they’ve done. Have they been able to increase the operational value of the
business? That’s the first factor.
Then you’re going to look and see how they’ve done on the capital allocation front. When they
get the cashback from the business, what do they do with it? Do they put it to good use, or do
they just waste it? That’s the second factor.
Thirdly, you’re going to study the incentives, and you’re going to say, “Well, are the incentives
aligned with those of the shareholders?” Often, that would mean either the compensation is
tied to the underlying performance of the business, or maybe management has a large equity
stake in the business, things of that nature.
[00:38:50] Tilman: Do you want to add something on good business and good price?
[00:38:53] Pavel: Sorry, I didn’t hear you.
[00:38:55] Tilman: Do you want to add something on good business and good price we
haven’t covered yet?
[00:38:59] Pavel: Right. Yes. I think I should because every person has a different definition of
good business. I mean, you’re going to be talking to a roomful of people, and you’re going to say,
“Well, how many of you want to buy a good business?” All the hands are going to go up, and
you’re going to say, “Well, how many of you are looking to buy a bad business?” Not a single
person is going to raise his hand.
Then you look at what they’re buying, and you look at the performance. Only a few of those are
going to have good performance. That’s why you really need to dig a little deeper as to what
your definition of a good business is. Like I said, with us, it starts with the competitive position.
We’re going to look for the number one and number two businesses in those industries where
those number one and number twos tend to stay in the lead for decades.
First and foremost, that’s the factor that we’ll look for. Of course, we want to be sure that the
return on capital that the business earns is attractive, which normally for the number ones and
number twos, it is. You also want to be sure that the financial condition of the business is solid.
You don’t want anything over-leveraged.
Thirdly on the good price, as I said, we make sure that we normalize the earnings. This way,
we’re not paying a little multiple of earnings that are inflated.
Answering questions from the audience

[00:40:30] Tilman: Interesting. Some questions are coming from the chat that is related to
certain stocks and investment ideas. I want to ask you. You have to decide for yourself how
you answer them, and what you want to say on this. There’s one question about the space of
European REIT in retail.
[00:40:54] Tilman: REITs.
[00:40:56] Pavel: REITs, okay.
[00:41:00] Tilman: There are huge discounts to liquidation value. Dan mentions Deutsche
EuroShop. Do you have an opinion on that, on the whole space?
[00:41:13] Pavel: Well, it’s hard for me to comment on specific names. Obviously, I never
looked at the name that’s been mentioned. In general, I’d say that could be an attractive
business. Actually, we do our own REIT. I think it just gets down to the price that you pay and
the value that you get.
[00:41:36] Tilman: Then, there’s a question on Ülker and whether Yildiz will ever IPO Godiva.
Do you have a take on that?
[00:41:56] Pavel: It’s really hard for me to comment on what they are going to do. I don’t think
they ever tip me off as to what their plans are. It could happen at some point. In the meantime,
that business has certain values. Whether it’s public or not public, the value is there anyways.
[00:42:22] Tilman: Okay. The last question mentions, Agrokor, the food monopoly which just
emerged from bankruptcy. Do you have a take on the Croatian stock market? It would be
interesting to hear something on this as well.
[00:42:40] Pavel: Look, I am sure you can probably find some attractive business in Croatia. I
never looked at Croatia. Now, I will. It may be going to be the topic for the next conversation.
[00:42:49] Tilman: It’s interesting. It’s also a nice country to travel to.
[00:42:58] Pavel: Right. I hear they got some good beaches.
[00:43:01] Tilman: How do you do it with building your network on the ground if you’re in a
country? How do you go ahead? Do you mail investors you find on the internet or know
already, or how do you do that?
[00:43:19] Pavel: It’s a combination of all those things. Sometimes, it’s basically just trying to
network with like-minded investors who are based in those places. Sometimes, it’s just getting
connected to industry insiders through maybe sell-side people in those places. A lot of times,
it’s just developing contacts through conferences. We go to quite a few conferences in those
places. That’s their fertile ground for just developing contacts from the ground, meeting those
people who are in the know. Then they can help you get the lay of the land.
Last year we went to Moscow, to an investment conference. We actually met a ton of people.
We met with the minister of finance, minister of the economy. We were in a meeting with the
president of the Russian Federation. We met a lot of investors from all over the place who do
business in Russia. With conferences like that, you tend to develop a lot of contacts. Anytime
you need to get a REIT on a specific business or an industry, chances are you’ll be able to find
that.
[00:44:31] Tilman: That’s interesting. How do you manage the knowledge you get from these
meetings? How do you make sure that someone doesn’t want to sell you something?
[00:44:41] Pavel: When you talk to those people, you’re not really paying them for research.
That’s typically one quality of data that could be a suspect. These are people who are doing the
same thing that you do. They really have no incentive to sell you anything. This is more or
where people share knowledge. Of course, I’d never make any decisions based on just one thing
I hear from someone. I typically want to talk about multiple sources that are not related to each
other. If the story checks across, I don’t know, five or seven sources that are independent of
each other, I think you can conclude with a good degree of confidence that the story is probably
useful.
Advice to young investors

[00:45:30] Tilman: Interesting. If there are any more questions from the audience, please
type them in chat. I want to make the last call for questions. I also want to ask you a question.
What would recommend young investors, how they should go about starting their career
and going into investment business?
[00:45:54] Pavel: Well, I think the one thing I would recommend is to start building a track
record that is audited and verifiable because once you have that, it’s going to be a lot easier for
an investor to go to market and say, “Hey, you know what? I’m good. Therefore, I deserve to get
your capital.” That’s one of the technical fronts when it comes to just learning the knowledge
front.
I would just try to get familiar with as many businesses as possible, just reading about them.
That’s going to form the knowledge base of which you will identify proactive investment
opportunities.
[00:46:42] Tilman: Do you have something to add to our talk we haven’t mentioned that’s
important to describe your approach at 3G Capital?
[00:46:51] Pavel: I think the one thing that we haven’t discussed, but I think that has to play a
part when it comes to manager assessment, is the fact that both my partner, Cory Bailey and
myself, have the majority of our net worth invested in the funds that we run. We’re also the
single largest investors in the funds that we run. Our investors know enough that their
interests are close to the line with ours.
[00:47:26] Tilman: That’s a good thing, and it helps too. It’s one puzzle piece to get a good
performance besides the good process you already mentioned. Very interesting. Do you
want to add something else?
[00:47:39] Pavel: No, I think that’s about it.
[00:47:42] Tilman: Then, thank you very much for your time. Thank you very much for the
time of our viewers. If you like the content, please always leave a “like” If you have more
questions, please comment in the comments below. Thank you very much. Have a great day.
Pavel, please stay on for a second. Bye to the audience.
[00:48:03] Pavel: Thanks for having me.
[00:48:04] Tilman: Thanks for coming.
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8/17/23, 10:44 AM How investing global, Pavel Begun of 3G Capital Management?

You are Here Home  2022  April  26 

How investing global, Pavel Begun of 3G

1 Check out Interactive Brokers

5 International investment framework

9 Disruption in investment companies

12 Factoring risks into an investment approach

Check out Interactive Brokers

Try Interactive Brokers

[00:00:13] Pavel Begun: How are you doing?

[00:00:15] Tilman: I’m good.

[00:00:16] Pavel: Thank you for having me.

[00:00:37] Pavel: Great.

Getting to know 3G Capital and how it started

Advantages and disadvantages of shifting to a more

International investment framework

Acquiring the best equities despite limited

3G Capital on price discipline

Idea stock criteria

[00:19:41] Tilman: What are two examples for these leaders?

[00:20:33] Tilman: It’s a sweet position.

Disruption in investment companies

Framework for valuation

[00:25:57] Pavel: Ten times, roughly.

Factoring risks into an investment approach

[00:31:40] Pavel: Well, we typically around 10 to 12 names.

[00:31:45] Tilman: High conviction. It’s a high conviction.

Privatizations in Eastern European countries

Deep dive on what 3G Capital Management stands

[00:38:53] Pavel: Sorry, I didn’t hear you.

Answering questions from the audience

[00:40:54] Tilman: REITs.

[00:40:56] Pavel: REITs, okay.

[00:42:58] Pavel: Right. I hear they got some good beaches.

Advice to young investors

[00:47:39] Pavel: No, I think that’s about it.

[00:48:03] Pavel: Thanks for having me.

[00:48:04] Tilman: Thanks for coming.

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Tilman Versch  131 Posts

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Join a great community of thoughtful investors:

1. Financial data: 👉🏻 TIKR* and 👉🏻 Stratosphere*

Tom Gayner, how are you building Markel? A CEO interview

Is Vossloh on track to outgrow expectations, Mr. Trischka?

Guy Spier, how would you invest 1 Mio $ in China?

 Axel Krohne, why are you looking for crisis?

African Investing Allocators American Investing Annual Meetings Asian Investing

Growth Investing Impact Investors Investing Books Investing Conferences

Investing Events Investing ressources Investing Styles Investing tools

Investment philosophy Oceanian Investing Regions Value Investing

About You Aquamarine Capital Berkshire Hathaway Brasil Canada Carvana

Emerging Markets Facebook Fashion Fintech Firebird Management Fred Liu

Georgia Georgia Capital Germany Green Revolution Greggory Warren Grenke

Hayden Capital Impact Investing Insurance Mexico MITIMCo Music market

Naked Wines Nintendo Nordics Project Punch Card Conference Renewables

RV Capital Sea Limited ShawSpring Partners South East Asia Spotify

Subcription businesses Sweden Switzerland VEF VNV Global

Wermuth Asset Management