How Ex-Berkshire Hathaway Executive, David Sokol, is Building Atlas Corporation into a Capital Allocation Compounding Machine

Written By Kai Sato

If you’ve read Will Thorndike’s book, The Outsiders, you’ll immediately recognize what David Sokol has been doing at the helm of Atlas Corporation. The book is about capital allocation, and it belongs on the Mount Rushmore of investment texts. Sokol is actually quoted in Thorndike’s book from his time working at Berkshire Hathaway and running companies for Warren Buffett, so it should come as no surprise that he has transformed a global shipping company (formerly Seaspan, NYSE: SSW) into a holding company that seeks to compound capital at a high rate over time.

In Sokol’s own words, Atlas is a “non-fee based investment vehicle.” During the 2022 Investor Day Presentation, he continued, “We’re not a hedge fund. We’re not a fee-based fund. We’re a public company that anybody can invest in, and we’re looking for good long-term infrastructure assets to own, operate, and then expand from.” 

He summarized Atlas as a “diversified infrastructure company with two best in class platforms within maritime and energy solutions.” While it’s still early in the transformation, its strategy is similar to other capital allocators, like Berkshire Hathway, Fairfax Financial, Markel Corporation, and Constellation Software.

What is capital allocation? According to Thorndike, it is “the process of deciding how to deploy the firm’s resources to earn the best possible return for shareholders.” There are a TOTAL of five ways to deploy a firm’s financial resources and ONLY three ways to generate capital. Specifically, they are:


5 uses of investment capital:

  • investing in existing operations

  • acquiring other businesses

  • issuing dividends

  • paying down debt

  • repurchasing stock


3 sources of investment capital:

  • tapping internal cash flow

  • issuing debt

  • raising equity

For a more comprehensive look at how Sokol has approached capital allocation at Atlas, refer to the company’s filings and investor presentations. But, we’ll highlight a few examples of how Atlas has invested extensively in existing operations, acquired another business, improved its debt positioning, and continued to pay a dividend. To finance this, Atlas has tapped cash flow and even sold assets, while also issuing debt and raising equity. 

Capital Deployment

Invested in existing operations

This turnaround started in 2017 when Sokol was first put on Seaspan’s board of directors. Since then, the shipping company has dramatically improved its fleet, expanding from 89 vessels to 191 vessels. According to the company, the vessels were all designed in full cooperation with its customers; they are fully-financed and chartered long-term. In doing so, Atlas has become the world’s largest containership lessor, and it estimates $17.9B in long-term contracted cash flows. Furthermore, its upgraded fleet is arguably the most environmentally friendly, thus creating a strong defensive moat for a company that effectively provides an essential global utility.

Leveraging its improved fleet, the company has grown and diversified revenue, significantly reducing its exposure to Cosco Shipping and expanding its relationship with Ocean Network Express (ONE).

The company has also created a safer, more productive workforce, with lost time injury frequency almost one fourth of when Sokol first got involved. 

Bought another company

With Seaspan in a seemingly strong position, the company purchased APR Energy in 2020 for $750M, putting both assets under the Atlas Corporation. Sokol says that there remains a lot of work to do at APR. But, it’s worth noting that Sokol is not only a celebrated turnaround executive but also an experienced energy operator. He sold the majority of MidAmerican Energy to Berkshire Hathaway and then stayed on to run a number of other companies, including NetJets. Being that APR Energy “provides fast, flexible power solutions” at a time when climate change is undeniably stressing the existing power grid, it could prove to be auspicious.

*Whether Atlas remains a public company or is taken private, it will very likely acquire a number of other companies as part of its capital allocation strategy. However, it will probably be patient and selective, rarely competing in any sort of auction. In The Outsiders, Sokol said, “We (Berkshire Hathaway) simply don’t get swept away by the excitement of bidding.” 

Paid down debt

Atlas reduced its debt ratio and extended its debt tenor, while increasing its credit rating to BB+.


Paid dividends

Atlas has paid a dividend of $.50 per share on an annualized basis. It can be argued that share repurchases are a superior way to return capital to shareholders, and Berkshire Hathaway has infamously never paid a dividend. However, Atlas has kept it in place.

Capital Generation

Raise equity

It’s worth noting that Prem Watsa, through Fairfax Financial Holdings Limited, chose to exercise its warrants in early 2022. This move generated over $200M for Atlas and brought Watsa’s total ownership in the company to over 45%. At the time, Watsa said, "David Sokol and Bing Chen have done an outstanding job since they took over Atlas four years ago. Atlas has huge momentum and we, at Fairfax, are excited to continue to support them by exercising the Warrants. Fairfax remains a committed long-term partner of Atlas and looks forward to its growth in the future."

Issue debt

Atlas issued $1.25B in unsecured notes and completed a $500M private placement of fixed-rate, sustainability-linked senior secured notes in 2021, alone.

Cash from operations

In addition to cash from operations, Atlas generated capital by selling non-core vessels, 2 in 2021 and another 8 slated for 2022.

Conclusion

As evidenced above, savvy capital allocation by David Sokol and his team have not only turned around Seaspan but created the diversified infrastructure company now known as Atlas Corporation. With this foundation in place, there’s no limit to what the company can become. For example, although Berkshire Hathaway owns the largest railroad in America, it would be ridiculous to refer to it as a railroad company. In time, if Sokol’s company is able to keep expanding from shipping into energy and beyond, the same will be true of Atlas Corporation. Great management teams are rare, and those that understand how to serve both employees and customers, while effectively allocating capital are like unicorns. If the company happens to remain public, it could be worth holding. Indefinitely.

Disclosure: I currently own positions in the stocks mentioned and have no plans to sell some or all of the positions in the stocks mentioned over the next 72 hours.

Kai Sato

Kai Sato is the founder of Kaizen Reserve, Inc, which exists to foster innovation and unlock growth. Its primary function is advising family offices and corporations on the design, implementation, and oversight of their venture capital portfolios. Another aspect is helping select portfolio companies, both startups and publicly-traded microcaps, reach $10M in revenue and become cash flow positive. Kai is also a General Partner of Mauloa, which makes growth equity investments into cash flow positive companies; an advisor to Forma Capital, a consumer-focused venture firm that specializes in product-celebrity fit; and a fund advisor to Hatch, a global startup accelerator focused on helping feed the world through sustainable aquaculture technologies.

Previously, Kai was the co-president & chief marketing officer of Crown Electrokinetics (Nasdaq: CRKN); the chief marketing & innovation officer of Rubicon Resources (acquired by High Liner Foods); a board member of SportTechie (acquired by Leaders Group); and a cofounder of FieldLevel. He’s the author of “Marketing Architecture: How to Attract Customers, Hires, and Investors for Any Company Under 50 Employees.” He has been a contributor to publications like Inc., Entrepreneur, IR Magazine, Family Capital and HuffPost; he has also spoken at an array of industry conferences, including SXSW and has been quoted by publications like the Associated Press and The Los Angeles Times. He is also the board chairman of the University of Southern California’s John H. Mitchell Business of Cinematic Arts Program. Follow Kai on LinkedIn or Twitter.