Markel builds the next Berkshire Hathaway in the Richmond area

Thomas S. Gayner in many ways is the Warren Buffett of the Richmond area.

The president and chief investment officer of specialty insurer Markel Corp. spends months — sometimes years — getting to know a company and its management before buying it.

When Markel Ventures, the Henrico County-based company's investment subsidiary, makes a purchase, it does so forever. "There is no exit strategy," Gayner said.

Gayner is not necessarily looking for stocks that are undervalued, as Buffett does. Nor do Markel shares trade in the stratospheric levels as Buffett's Berkshire Hathaway.

But Markel stock is the highest priced on the Richmond index, trading for about $380 a share. And Gayner, like Buffett, seeks to make permanent investments in quality companies that earn good returns on capital. "We have had no duds so far," he said.

Gayner follows four investment principles. "They either line up or they don't," he said.

Some equity investments — ranging from a company that slices pickles and stuffs them into jars to one that builds dredges — seem as quirky as the niche markets that Markel insures.

The corporation sells property and casualty insurance for dude ranches and dance schools, for example, and insurance for yachts, motorcycles, oil rigs and weddings — the latter for event cancellations due to inclement weather, not runaway brides.

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Markel Ventures' most recent equity purchase was in WI Holdings Inc., a Bethlehem, Pa.-based company, also known as Weldship Corp. It makes and sells high-pressure trailer tubes for trucks that transport gas and liquids for industrial, chemical and distribution companies.

That acquisition in October marked Markel Ventures' fourth since December, bringing to 10 the number of companies in its investment portfolio.

In July, it acquired PartnerMD, a local provider of concierge medical services founded in the Richmond area in 2003. In January, it bought a majority stake in Richmond-based Diamond Healthcare Corp., a privately held company that manages behavioral-health programs.

In December, Markel bought a majority interest in RD Holdings LLC, the holding company for RetailData, a retail intelligence service based in Henrico.

"It's very unusual for a company that says, 'I am going to buy your company because I believe in your company, … and I want and expect you to run the business,' " said Christy Cottrell, CEO and founder of RetailData.

"It's been perfect; business as usual," she said of the the partnership with Markel.

She and the executive team meet quarterly with Markel to discuss their vision, budget and talk in general about the business, she said.

Other local companies in Markel's portfolio include AMF Bakery Systems, Markel-Eagle Partners LLC and ParkLand Ventures Inc.

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The reason Markel relies on present management to continue running the business is based on one of the four investment principles.

The management team must have an equal measure of talent and integrity, Gayner said. "One without the other is worthless."

An investment by Markel is like a marriage, he said. "You want to know whether that person has values similar to yours to spend the rest of your life with them."

Gayner gets to know the management of a prospective company by spending time with them and seeking business and character references.

He also pores through paper trails — proxy statements, letters to shareholders and annual reports.

He wants to know what people say and what they pay themselves, and if either is egregious, he's not interested.

He says he can tell if letters to shareholders are written by public relations people or chairmen, and he compares what was said 20 years ago with how things panned out over the years.

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First, though, a business must be profitable. "If not, it will go away. And if it is profitable, it is serving customers in ways that they value."

He also looks at businesses that aren't subject to technological changes that could undermine the core business.

Take, for example, ParkLand Ventures, a Henrico-based company that operates and acquires mobile home parks. Markel bought the company in 2008.

The company owns the underlying land — and land always appreciates over time, Gayner said.

It sells manufactured houses at cost with no markup, offering the best product at the lowest price, and provides financing with a 10 percent interest rate, he said. "We still make a good return … and (housing) is not subject (to) massive technological changes."

The third principle is to look at the reinvestment dynamics of a business.

"The best businesses in the world earn very good returns on capital and can reinvest that capital at similar rates of return going forward," Gayner said.

"The second best have good returns on capital and can't reinvest it, but management knows that and is good at acquisitions or paying out dividends or repurchasing its stock.

"The worst businesses in the world don't make very good returns on capital, and they seem to need gobs of it all the time."

Gayner would consider the best or second best as a possible investment or acquisition.

The final consideration is price. "A company may have the first three lovely attributes, but can you afford it and pay a fair price? If you hold something for five, 10 or 45 years, as an investor, you want to make the same kind of returns as the business."

Markel Ventures purchases a company in its entirety or a majority interest of at least 80 percent. It has invested a total of $284 million to date.

Growth in shareholder equity at Markel has grown from $55 million from the time the company went public in December 1986 to $3.5 billion as of June 30.

"Collectively, they (the investment companies) are producing good operating profits," said Mark Dwelle, director of insurance equity research for RBC Capital Markets in the Richmond office. "But it may be too soon to judge how they will do over the long term, since Markel has only owned most for a few years."

Still, the comparison to Berkshire Hathaway is apt, despite being far apart in size and scale, Dwelle said.

Markel provides its business partners with capital, expertise and access to resources, he said.

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Despite its recent flurry of deal making, the investment subsidiary made zero deals from 2006 to 2007. The market was over-valued and over-leveraged, leading to the financial crisis in 2008 and 2009 and liquidity crunch.

Markel is a cash-buyer and doesn't need financing. "We will close a deal and that started to matter a great deal," Gayner said about prospective sellers.

He defined three categories of buyers:

• A private-equity firm will buy a company, using debt to make the deal, and, within a few years, it will need to sell to give money back to investors. Those deals are distracting and tumultuous for the company that is acquired, Gayner said.

• A strategic buyer will purchase a company because it is in the same or complementary business. "What they like about it is the revenue. What they hate is the expense," Gayner said. One operation will be folded into another, and redundant positions will be eliminated.

• The third buyer — the model followed by Markel — puts permanent capital into a business. "Their only interest is the business continues to do well and earns a good return on capital."

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Markel's investment business took on a different tone when Gayner, who worked as a research analyst at Davenport & Co., an investment firm in Richmond, joined Markel in 1990.

He recalled how he and Vice Chairman Steven A. Markel chatted about Berkshire Hathaway and how Buffett had taken underwriting profits and invested for the long term.

They came away with the same conclusion, Gayner said. "We can build the next Berkshire Hathaway right here in Virginia."

Gayner's first equity purchase recommendation was for AMF Bakery Systems, a manufacturer of high-speed bakery equipment, which Markel Ventures bought in 2005.

Ken Newsome, president of AMF Bakery Systems, said the partnership has been transformational.

"Because of a permanent capital base, we don't have a lot of debt hanging over our heads and we don't have a pending sale of the company five years in the future," he said. "Our charge is to always do what is best for our customers and for our people. We have been producing exceptional results ever since we have been in the relationship."

The companies - Here are the businesses Markel Corp. has either bought or is a major investor in:

• AMF Bakery Systems: A manufacturer of high-speed bakery equipment based in Richmond.

• Ellicott Dredges: Designer and manufacturer of portable dredges, based in Baltimore.

• Panel Specialist Inc: Manufacturer of college residential furniture, based in Temple, Texas.

• Solbern: Designer and manufacturer of food-processing equipment, based in Fairfield, N.J.

• Diamond Healthcare Corp.: A contract manager, facilities developer and clinical service provider in behavioral health, based in Richmond.

• PartnerMD: Concierge medical and executive health services provider, based in Henrico County.

• RetailData: Retail intelligence service provider, based in Henrico.

• ParkLand Ventures Inc.: Owner and operator of manufactured housing communities in the U.S., based in Henrico.

• Markel/Eagle Partners LLC: A private-equity fund manager, which provides capital in distressed real estate projects, based in Henrico.

• Weldship Corp.: Makes and sells high-pressure trailer tubes for trucks that transport gas and liquids for industrial, chemical and distribution companies, based in Bethlehem, Pa.