The 13 best small and mid-cap management teams on the ASX

Ben, I'm going to start with you today. What does it take to make an awesome management team? What factors are you typically looking for?

How to spot a great management team 

The alternative to that is you get a CEO who comes into a company who doesn't have a stake, and they might make an acquisition because they're using other people's funds, they might drive short-term incentives for the business, and that can sometimes be at the detriment to long-term returns. So, alignment is probably the key thing we look at.

Nathan Hughes: I agree with Ben wholeheartedly on that. Alignment is something we look for, but there are a couple of other things we look for as well at Perpetual. We're looking for people who are all over the details, and that comes through when you meet management teams; the passion they have for running their business and the level of knowledge they have over the intricate parts of their operations. 

We're looking for conviction in sticking to a really well clearly articulated strategy and not deviating from that on short-term things. We're also looking for a little bit of humility in management teams as well. So we need a degree of confidence and conviction that they're doing the right things, but they're also quite humble in the way they go about things.

Are founder-led companies better investments?

Ally Selby: I feel like we hear time and time again that fund managers love founders. Why is that particularly important when it comes to small and mid-cap stocks?

Nathan Hughes: In my perspective, founder-led businesses, to Ben's earlier comments, take a long-term view of things. So they're thinking about their own wealth, their own capital, and something they've built with their bare hands typically, but they also take a longer-term mindset. 

They're not pressured by the market or the next results or the next earnings call; they're thinking about what's the best thing to do for this business on a long-term view. They often keep pretty strong balance sheets as well, which is something we look out for at Perpetual and we're very fond of.

Red flags to look out for

Ben Rundle: A key red flag for us is actually when you see the words "transformational acquisition", and you usually see that from a management team that doesn't have a significant stake, because a management team that does is not going to risk their business for a business that they don't know. 

Usually, when you're buying a business, the seller is going to know more than you are. So the words "transformational acquisition" are a huge red flag for us. The balance sheet is also a problem as well. But as Nathan pointed out, when these founders have their own money at stake, often you see them less likely to put that stake at risk by taking on too much debt. Not always - some founders don't like to dilute and they do take on debt, but in most cases, they're pretty cautious about where they spend their capital.

Nathan Hughes: I think sometimes poorly designed remuneration schemes. So it really emphasises the short-term incentives for the management team. Sometimes that leads them to make decisions that feel good - they might make a short-term acquisition because it's EPS accretive, but it puts the balance sheet at risk and may leave the business in a worse spot in two to three years' time. So really, just thinking about how they're incentivized and whether there are any risks in the way that their remuneration package is set up. The other one, which is a little bit quirky - a red flag for us is when the management team is in the press a lot or in glossy magazine photo shoots.

The top small and mid-cap management teams on the ASX

Ben Rundle: In the tech sector, I think it is probably Tony Walls from Objective Corp. It's probably a name that not a lot of people are familiar with because he's not the sort of manager who's very promotional. But since he listed the business, he's taken the shares on issue down by about 15%. That's something we really look at closely, equity dilution from the issuance of extra shares, and he's actually gone the other way and he's bought shares back. He's never sold a share in over 20 years of having the company listed. He spends money on behalf of the company thinking about a 10-year timeframe rather than thinking about next year. So he portrays a lot of the things we look for in a really quality management team.

Nathan Hughes: Creme de la creme? Well, it's a bit of a sleeper. We have a really high opinion of Jens Monsees at Infomedia. He's not just a tech CEO, but we think he's doing a really good job there. He's got form in turnarounds before, but he's a really passionate guy. He gets out, he pounds the pavements, he knows the customer well and he's super highly motivated, and we think that's exactly what the business needed. We think he's doing a fantastic job.

Ally Selby: How about in financials?

Nathan Hughes: I'd nominate Ian Macoun of Pinnacle. Looking at the business he's built over a number of years, I think what sets Ian apart is his ability to attract key talent and retain them. With funds management businesses, you've got a lot of competing interests. So there are different styles, but there are firms competing under one roof at Pinnacle. He's done a terrific job keeping them all happy, and performing well, but also has attracted new talent, and that's enabled him to grow the business for a very long time.

Ben Rundle: I think it's probably the Heine family at Netwealth. I think that Michael's done a fantastic job of bringing Matt into that business and showing him early on what he believes are the key traits of a really good management team. And I think sometimes when businesses can go down a generation, there's risk to that. But I think in this case, Matt's been in the business so long and he's been taught so well. I think the family just really knows how to do business well and do the right thing by shareholders, so we're lucky to have them as a management team.

Ben Rundle: I think it's hard to go past Solomon Lew from Premier Investments. I think he's done a fantastic job, and his track record speaks for itself. Brett Blundy is probably also someone to call out in that space who's done really well. And then I think the Nick Scali guys also do a fantastic job and have shown that, in a business that is fairly consumer-facing, is probably more resilient than people give them credit for.

Nathan Hughes: Can I copy Ben's answer? I would agree with all of those. But look, not dissimilar to the Heine family, actually, I'd talk about the Robinsons, Glen and Ian, from Beacon Lighting. Another family business, and much like the Heines, they actually haven't sold a share since they floated the company; I think it was 2012 or 2013. A lot of the traits that I talked about earlier - like passion and attention to detail - but they just run the company with a very long-term mindset. They've done a terrific job, much like Scali, in a business that is cyclical and consumer-facing. They've done a great job over a number of years.

Ben Rundle: Probably a lesser-known guy by the name of David Collins, who's just taken the reins at Paragon Care. I've only had four or five meetings with him so far, but in every meeting I've had, he's certainly said the right things. He focused on return on capital. He didn't sell any shares into the deal that he did with the merger of Paragon. Very cost-focused. Seems to me to be, early on, a really high-quality manager.

Ben Rundle: It's hard to go past Chris Ellison from Mineral Resources. He has a fantastic track record of capital allocation. But someone similar to Chris who I've come across recently is Bill Beament from Develop Global. I think he portrays a very similar mindset to what Chris does. He's put a lot of his money into the business himself, and I think we'll be sitting here in 10 years thinking he's one of the true stars of the resources industry.

Nathan Hughes: So I nominate Mark Clark of Capricorn, formerly Regis, and we knew him quite well through his Regis days. In the gold space, it's quite tricky. Capital allocation is difficult, and sadly, a lot of gold companies haven't shown a great track record of generating shareholder value and free cash flow. We like Mark because he's a pretty conservative guy. He has a bit of an under-promise, over-deliver culture. He's conservative in how he talks about reserves and resources. And traditionally, he hasn't overspent on CapEx or gold-plated, pardon the pun, some of the assets. So we just think he's been a really sensible allocator of capital, which actually is quite rare in the gold resource sector.