Mar 18, 2024 · 53m · capital-allocators
Jonathan Tepper - Buying Monopolies at Prevatt Capital (EP.375)
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Jonathan Tepper, founder and CIO of Prevatt Capital, joins Ted Seides to discuss his transition from studying industrial concentration in 'The Myth of Capitalism' to managing a concentrated, long-only portfolio of global natural monopolies. Tepper details his unique background, investment philosophy, rigorous valuation and sell discipline, and the operational architecture required to compound capital alongside aligned partners.
How this conversation actually went
Every chapter scored 0–10 on four independent dynamics. Hover any point for the reasoning behind the score. Ted holds 21.2% of the talking time here. How this is scored →
Ted as informed peer 4.4 Guest teaching 6.0 Guest disagreement 1.2 Ted pushing back 0.8
speaking balance: gold is Ted, purple is the guest (3 minute bins)
Sharpest disagreement ▶ 40:00 Defending sibling partnerships in asset management
Tepper firmly rejects the common industry premise that working with family is a red flag, citing empirical evidence of owner-operator outperformance and historical precedent.
Hardest push from Ted ▶ 39:50 Ted presses on sibling risk in fund managementTed directly confronts Tepper with allocator concerns regarding hiring family members and potential operational hazards.
Biggest teaching moment ▶ 25:01 Reframing natural monopolies beyond textbook definitionsTepper educates the audience by dissecting textbook economic theory versus commercial reality, demonstrating why regulatory-created monopolies create fragile, rent-seeking investments.
Ted holds their own ▶ 26:25 Ted queries regulatory overhang on big techTed demonstrates deep knowledge of antitrust debates, prompting Tepper to address undiversifiable regulatory break-up risks across mega-cap platforms.
the scores for every segment, with the reasoning behind each
| Chapter | Topic | Ted as informed peer | Guest teaching | Guest disagreement | Ted pushing back | Why |
|---|---|---|---|---|---|---|
| Guest Spotlight: Sarah Samuels on Braving Our Savings | 4 | 5 | 1 | 1 | Ted guides Sarah Samuels through a spotlight conversation promoting her children's book on financial literacy. Samuels shares her personal background and career lessons in an educational, collaborative tone. | |
| Tepper's Upbringing Among Madrid's Heroin Epidemic | 3 | 6 | 1 | 0 | Tepper recounts his unique childhood in Madrid assisting his missionary parents with heroin addicts and navigating the emerging AIDS crisis. Ted listens attentively and prompts the narrative. | |
| Intellectual Development, Family Grief, and Studies at Oxford | 4 | 6 | 1 | 1 | Tepper explains how early family tragedy and intense independent reading shaped his worldview, leading up to Oxford. Ted asks probing questions about processing grief and academic acceleration. | |
| From Industrial Concentration Research to Investment Philosophy | 4 | 7 | 1 | 0 | Tepper outlines how researching industrial concentration for The Myth of Capitalism naturally led to identifying non-parasitic monopolies as prime investment candidates. Ted provides an open prompt. | |
| Long-Only Monopoly Investing and the Global Opportunity Set | 4 | 6 | 1 | 0 | Tepper details why a concentrated long-only quality-plus-value approach beats shorting or wide diversification, noting global opportunity sets. Ted facilitates the breakdown of the investment universe. | |
| Natural Versus Unnatural Monopolies and Regulatory Hazards | 5 | 7 | 2 | 2 | Tepper broadens the definition of natural monopolies versus unnatural regulatory protections, explaining why Prevatt avoids legally protected rent-seekers like rating agencies or TransDigm. Ted asks targeted follow-ups about regulatory risk. | |
| Deep Value Chain Diligence and Capital Allocation Assessment | 5 | 6 | 1 | 1 | Tepper explains his team's deep diligence process and highlights why assessing executive capital allocation matters more than financial modeling. Ted probes into buying triggers and valuation approaches. | |
| Thesis Drift, Executive Missteps, and Media M&A Pitfalls | 5 | 6 | 1 | 1 | Tepper describes exiting positions when management loses capital discipline, citing CBOE and media acquisitions, and outlines Prevatt's position sizing discipline. Ted engages on portfolio construction. | |
| Overlooked Moats: Knorr-Bremse Rail Brakes and Food Distributors | 5 | 7 | 1 | 1 | Tepper details less obvious monopolies like Knorr-Bremse rail brakes and food distribution middlemen providing economies of scope rather than pure scale. Ted inquires into business economics and cyclicality. | |
| Brotherly Partnership, Analyst Freedom, and LP Selection | 5 | 6 | 2 | 2 | Ted brings up common LP skepticism regarding sibling partnerships. Tepper counters by citing research on family business outperformance and outlines how he structures research freedom and LP alignment. | |
| Mistakes, Portfolio Construction, Meta Governance, and Semiconductors | 5 | 6 | 2 | 1 | Tepper reflects on mistakes including dual-class governance risks in Meta and passing on semiconductor compounders after deep research due to cycle discipline. Ted asks pointed questions about opportunity costs. | |
| Scaling Prevatt, Operational Excellence, and Core Values | 4 | 5 | 1 | 0 | Tepper outlines lessons from scaling Prevatt to nearly half a billion in AUM, prioritizing operational leadership, capacity discipline, and LP alignment. Ted draws out his long-term philosophy. | |
| Personal Influences, Key Mentors, and You Do You | 4 | 5 | 1 | 0 | Tepper answers closing questions on unusual personal facts, key mentors like Adil Khobani and Paul Marshall, and the value of intellectual independence ('you do you'). |
Statements from this episode (22)
Tepper: Academic economics is overly theoretical and detached from reality
“I felt economics was in a way too mathematical and theoretical and not really tied to the real world in many ways.”
Tepper: US corporate profit margins driven by rising industrial concentration
“It's not the only reason, but it's certainly a very important reason was the rise in industrial concentration in the U S. So the rise of monopolies, duopolies and oligopolies.”
Tepper: Short selling is a negative carry game where time works against you
“And often now with high borrow costs and all hedge funds shorting the same names, you end up paying a lot more than you would have previously. So you're running a negative carry game where time's against you.”
Tepper: There are only 500 to 600 natural monopolies globally
“Broadly, globally, I think there's between 500 to 600 companies, and some markets are obviously a little harder to invest in than others internationally.”
Tepper: Cement and aggregate quarries operate as local monopolies
“Aggregates and cement tend to be local monopolies. You just don't ship these things hundreds of miles. And so if you have the quarry, you'll have that local monopoly.”
Tepper: Two insurers control 90% market share in some US states
“The U S spends more on healthcare and medicine than almost any other country with worse outcomes because you have some states with two insurers having about 90% market share.”
Tepper calls TransDigm's price-tripling aerospace model 'slightly parasitic'
“You have some like Transdime, for example, which relies on FAA certification and are pretty open about they triple the pricing when they purchase a little part, and they raise prices over six percent per year, regardless of what the underlying cost of producin…”
Tepper: Prevatt manages nearly $450M with five people and won't add staff
“We have four analysts plus myself. So five at the firm, arguably we might be overstaffed relative to our assets, which are approaching four hundred fifty million, but we don't have to hire more as we get bigger.”
Tepper: Financial models matter less than executive capital allocation discipline
“And so you can write the best write up you want, make the most amazing model that's accurate down to the penny. But if management goes out and blows all their cash on a terrible acquisition, they just destroyed a tremendous amount of value. So getting to know …”
Tepper: Prevatt bought Booking Holdings at launch at ~10% normalized FCF yield
“When the fund launched in May, 2020, the bottom in the market was in March, but people were still very fearful of COVID and no one was traveling. And so we felt that we were able to buy booking Close to a 10% normalized free cash flow yield with a terrific CEO…”
Tepper: Financial exchange spent $500M on crypto platform, writing it down instantly
“Sometimes we've misjudged management, so we did own a financial exchange, and then they went out and spent half a billion dollars on a crypto exchange, and they surprisingly wrote down the acquisition the same quarter that they made it. To me, that was spectac…”
Tepper: Media Industry Destroys Capital Through Uneconomic Acquisitions
“Media itself tends to lead towards Uneconomic decision making, which is to say that whether it's the arts or music can't be judged on financial metrics. And so therefore a lot of capital gets destroyed in pursuit of acquisitions and growth.”
Tepper: Prevatt Capital averages 16 stocks across its portfolio
“So 10 to 20 stocks, but we've really averaged sort of 16 over the life of the fund.”
Tepper: Prevatt Capital will only double down on a position once
“We will only double down once. If you start doing more than that, you're essentially following the Martingale strategy, which is also known as gambler's ruin, and it's always the house that wins, not the gambler.”
Tepper: Immediately trimming winning stocks leads mathematically to worse returns
“Returns tend to have a Pareto distribution, and I think as a manager, if you immediately start trimming a winner, you're going to have worse returns, just mathematically.”
Tepper: Replicate expensive quality funds for 15bps using XLP, XLK, and XLV
“You can basically buy XLP, XLK, and XLV at 15 bibs and replicate with about 95% correlation a lot of these quality funds.”
Tepper: Prevatt owns Knorr-Bremse, part of global rail brake duopoly
“We own Norbremse, which is a German rail brakes company. And globally, it's basically, for the last century, been a duopoly between Wabtec in the US and Norbremse in Germany producing rail brakes.”
Tepper: Academic research shows family-run businesses tend to outperform
“If you look at academic research, family run owner operator businesses tend to outperform.”
Tepper: Investing with CEOs holding outsized voting control is generally ill-advised
“Being in a relationship with a CEO who has outsized control relative to their shares is generally not a good idea.”
Tepper: Semiconductor valuations are unattractive relative to fundamentals
“And the valuations today are certainly not at all attractive relative to the fundamentals in many cases.”