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An Interview with Ken Shubin Stein of Spencer Capital Holdings


Ken Shubin Stein is the chairman of Spencer Capital Holdings and the founder and portfolio manager of Spencer Capital Management. As the force behind recent acquisitions within the industry, many have been curious about what they have in store going forward. Shubin Stein discusses the company’s philosophy and process that led them to where they are today, as well as what they see for the future.

  1. Tell me a little bit about your company, Spencer Capital Holdings.

Spencer Capital Holdings (Spencer) is a holding company, not a private equity firm. It was formed by myself and some other investors to pursue the model of Berkshire Hathaway, Leucadia, Fairfax, Marmon Group, and other great holding companies. We aimed to join the ranks of companies that have created a lot of shareholder value over time through their ability to invest in a variety of different businesses as well as buy publicly traded securities.

  1. Why did you decide to purchase Spencer Re and move into the finance and insurance (F&I) industry?

The original goal when we founded Spencer was to find great businesses run by great people and build a holding company with a diverse portfolio of businesses. Spencer has, for 15 years, outperformed the S&P by a pretty large margin, about 10% per year. That puts us well into the top 5% of money managers of all styles in the United States. However, during the recent credit crisis we experienced the impact of unstable capital and liquidity. After that period, I started to think more seriously about taking a page out of Warren Buffett’s book and develop a permanent capital vehicle which would provide the stability to generate better returns over time. Although outperforming the market by 10% each year for the past 15 years is something we are proud of, that number would be significantly higher had we had permanent capital going through the credit crisis. From here we decided that finding companies to put into a holding company structure was a more suitable model for us. The first area that we looked into was insurance because it is something I have been investing in for several decades. Within insurance, we looked at several companies and we ended up identifying a distressed reinsurance company. The company was in the vehicle service contract reinsurance space, which we believed to be a great line of business. Although the company had a lot of problems, it was operating in a great niche. We felt that intrinsically it was a good business and we could fix the problems the company was having, and that’s what led us to Spencer Re.

  1. Now that you have acquired SouthWest Dealer Services, what do you see for the future of your organization?

We are really excited about our partnership with SouthWest Dealer Services. It is a first class business run by first class people. They have one of the best reputations in the industry. Right now, they largely operate on the western half of the United States. We see a great opportunity to grow the business both organically and through acquisition across the rest of the United States. Our goal is to provide the management team at SouthWest with the support needed to do so and create a coast-to-coast footprint for our company. We can then bring these agencies into the SouthWest system.

  1. As a player in the F&I industry, how are you looking to expand and grow your business in this industry? Through further acquisitions? By expanding the reach of your current holdings?

Both. We plan on investing a significant amount of capital in growing the companies we currently own or are partnered with. Our plan is to help SouthWest grow organically in its existing markets. But we think there’s also a very significant opportunity to grow the company by buying up other independent agencies and adding them to the SouthWest platform. SouthWest is the largest and the most robust independent agency platform in the US. Many independent and other small or mediums sized agents would be more profitable and be able to service their clients better if they were part of SouthWest. We think there is a terrific opportunity to grow and create a coast-to-coast company with this strategy.

  1. What are the synergies between Spencer Re, USA Risk and SouthWest Dealer Services? How are you going to take advantage of these synergies?

All three companies, by themselves are growing quickly. One of the exciting things about our current platform is that we have three companies who are, all well known in the space, run by top executives, and growing independently. In addition, all three feed each other. They can all help each other grow and service their clients in new ways that they couldn’t before.

Beyond this, being a part of the Spencer platform is advantageous because we can contribute a significant amount of capital along with growth opportunities. We believe that this will help our companies execute on their plans and follow leads they couldn’t otherwise. Additionally, we have a very long investment horizon; our ideal holding period is forever. Most private equity firms buy a company, lever it up, and have to sell it in 4 or 5 years. That puts a certain type of stress on a company. As part of Spencer, we provide a permanent home for great businesses, and over time these businesses can help each other and work together knowing they are going to have a very long-term relationship.

Independent of us the executives at all three companies have expressed how excited they are to work with the other companies because they can help each other and they are intrinsically related. SouthWest uses a lot of financial products, such as captives and reinsurance. Spencer Re provides terrific reinsurance solutions and is the only company in the US that has dual domicile citizenship in Puerto Rico and Switzerland. Puerto Rico is an NAIC compliant domicile. No other islands are NAIC compliant, which makes Spencer Re’s placement in Puerto Rico very high quality reinsurance. We also have commercial status in Switzerland, which helps us do things you couldn’t do unless you were part of the Swiss-US tax treaty. We have spent a lot of time and money setting up these systems to make them effective and we think they are the best in the business in terms of quality and compliance with NAIC.

USA Risk is the largest independent captive insurance manager in the world. They have an A+ reputation globally as being one of the most knowledgeable captive managers. They already do a lot of things that work with Spencer Re and SouthWest because captive insurance companies are already part of the auto industry. Spencer Re provides reinsurance for several different types of structures and will also be working with SouthWest because their clients will need reinsurance in the future.

As you can see, these companies already work with each other and they are now further related through our capital management fund. Our efforts are dedicated towards helping them build a future. The leaders of all three companies have expressed their excitement about the fact that they can grow more quickly by being part of our platform. In fact, one of the reasons USA Risk group sold to Spencer is because they believed they would be able to grow much faster as part of the Spencer platform than on their own, while still maintaining complete independence.

The crux of our platform is that we don’t make any management changes when we buy companies. We want to buy first class companies run by first class people. We don’t want to put our own management in or make changes. Therefore we have to buy good businesses, like Spencer Re, USA Risk, and SouthWest Dealer Services.

  1. Are you looking to expand into other parts of the automotive industry, or is the F&I market your current target?

We are open to looking at companies or opportunities in any industry. We don’t have intent to expand into other parts of the auto industry, or into other potential industries, but we are open to looking at anything. Over time I expect us to have a diversified group of businesses in many industries. But yes we would welcome the prospect of another deal in the auto space.

  1. I noticed that you are a medical doctor and CFA, what led you to capital management?

My background is in molecular genetics and medicine. After I got my license to be a doctor, I realized that although I love medicine, taking care of people, and science, I am also very interested in investing and entrepreneurship. By starting Spencer Capital I was able to satisfy my interest and my desire to grow an investment company and build businesses while still having a foot in the health care world through public health. Public health is the intersection of business, medicine, and policy. Those are all areas I am interested in and to which my background is well suited. The idea was that I could do entrepreneurial things, run an investment company and also help in the area of public health to hopefully have an impact on a large number of people. As a doctor you see patients one by one, in a serial fashion. It is a very special thing, but with public health if we do something right, we can impact thousands, tens of thousands, hundreds of thousands, or millions of people. I see public health as a way to have a much more leveraged impact in helping society. For me, that is very exciting.

  1. I understand that you are also an adjunct professor, teaching an advanced investment research course at Columbia Business School. How long have you been doing that and what drew you to the world of academia?

I have been involved with Columbia University in one way or another since the 1980’s when I was a student there. Since 2009 I’ve been fortunate enough to teach the Advanced Investment Research course, which is one of the capstone courses in their Value Investing program. Columbia Business School is the number one business school in the world for investment management. By teaching this course I have not only enjoyed teaching and interacting with the students, but I have also had the opportunity to learn more as an investor myself. I have learned a lot by having to take what we do here at Spencer, making it explicit, and subjecting it to my students questions. On top of that, our class has also been fortunate to have several world-class investors come and speak with us in private. In total, it has been tremendously helpful to me. I have learned a lot from both the speakers and the students.

  1. Can you tell me about your not-for-profit initiative, Crutches 4 Kids? How did you get involved in this great program?

I thought of the idea for Crutches 4 Kids in 2009. There are approximately 50 million children in the world who need and do not have access to mobility devices and Crutches 4 Kids addresses this problem. These children are often physically and mentally abused and because of this abuse and lack of access to society’s resources, they often have shortened life spans. They are essentially the most disadvantaged human beings on the planet. In the United States we buy approximately 10 million new pairs of crutches a year. When people are done with their crutches they largely go into garages, closets, attics or dumps.

Crutches 4 Kids, simply put, helps collect crutches from people who have and don’t need them, and delivers them to children who need and don’t have them. The minute you give a child a pair of crutches, without any training, they learn how to use them, and pretty soon they are doing backflips and playing soccer. It is pretty amazing how quickly children adapt and learn how to use crutches.

It is really exciting to be a part of a group that is addressing one of the large global public health problems. To give you a sense of scale, 50 million children is about the same as the number of school aged children in America. This is as if tomorrow morning every child in America woke up and couldn’t go to school. We are also very lucky to be partnered with world-class medical institutions like the Hospital for Special Surgery (HSS), as well as several others. Today we’ve helped children in 25 countries and we’ve helped recycle and distribute over 15 tons of crutches.

  1. Is there anything else you would like to add?

There are two things I would want anyone who reads this interview to come away with. Number 1, if you run a great business and want to sell it along with the current management, give us a call. Number 2, if anyone wants to think about how they can immediately have a high impact on the most disadvantaged people in the world, go to crutches4kids.org and make a donation. For $10 you can buy a pair of crutches and change a child’s life.

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