Chuck Akre Comments on Colfax Corporation

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Jul 23, 2014

Colfax Corporation (“Colfax”) (NASDAQ: CFX)

Market Cap: $9.2 billion (as of 6/30/14)

Company overview:

Colfax (CFX) is a multi-platform industrial engineering and manufacturing company with a focus on two product areas: (1) gas & fluid handling, and (2) welding. The company was founded in 1995 by Steven and Mitchell Rales, best known as the founders of Danaher Corporation, and it has grown to its current size through a combination of acquisitions and organic growth. In 2012, Colfax completed the transformative acquisition of Charter International PLC, a UK-based industrial conglomerate many times its size, increasing revenues overnight from $700 million to $4 billion.

Akre Focus Fund Investment:

The Fund purchased its first shares of Colfax in July 2012 and continues to add opportunistically. Colfax is a core portfolio company for the Fund and as of June 2014 represents 10.4% of the portfolio.

Investment thesis:

We believe the heart and soul of Colfax is a set of operational and management tools known as the Colfax Business System (CBS) which stresses continuous improvement in all aspects of the business. Danaher fine-tuned the use of these tools, compounding shareholder capital at a 20%+ Compound Annual Growth Rate, (CAGR) since 1984 by acquiring underperforming businesses, improving revenue, margins and cash flow, and employing that cash flow to fund the next acquisition. Colfax has borrowed the Danaher playbook.

Colfax specializes in non-commoditized, niche industrial end- markets, in which they are the dominant competitor, selling highly technical, often mission-critical, products with significant aftermarket sales and service potential (>50% CFX revenue currently), with an attractive geographic footprint (>50% CFX revenue is in emerging markets, 80% non-US). All of Colfax’s acquisitions are evaluated based on anticipated ROE which includes the expected benefits of the CBS.

This playbook forms the basis for the business and reinvestment legs of our “three-legged stool.” The business leg is a combination of the CBS and the high-quality, highly efficient businesses Colfax owns. The “people” leg of the stool is comprised of the Rales brothers and the fact that the majority of Colfax’s senior executives were formerly employed by Danaher, including CEO Steve Simms, CFO Scott Brannon, and EVP Strategy & M&A Dan Pryor.

The Investment Examples included herein have been selected based on objective, non-performance based selection criteria, solely to provide general examples of the research and investment processes of the Fund. The Investment Examples should not be construed as an indicator of the future performance. The information presented above should not be considered a recommendation to purchase or sell any particular security. There can be no assurance that any securities discussed herein will be a part of the Fund’s portfolio or, if sold, will not be repurchased.

From Chuck Akre (Trades, Portfolio)’s 2014 Q2 Fund Pitchbook .