Let's play a fun game. Say you raised $50M in equity, but you're not constrained by any one strategy. Your investors are OK with you pursuing multiple strategies at once and their capital is locked up for 10 years.
You charge $750k a year in fixed fees, which is your budget to hire staff, prelim DD, research, travel, etc... To keep things simple, all the capital is given to you up front (no capital calls). No restrictions on geo either.
What do you do? Juicy detailed long-form answers only pl0x.
Definitely not give it to Mike Bloomberg because that guy knows how to go through some cash.
It was like 1% of his net worth.
Yeah it doesn’t seem like that much when you phrase it like that...
Short TSLA.
short the VIX
Please tell me more.....
I already have a detailed plan with almost the exact same scenario. Only, my annual management fee is higher. :)
I buy either $50M in liquor stores or $50M in delivery trucks for 15-30% cash on cash returns, consolidate the various stores or trucks under one corporate roof, centralize administration, clean up financial record keeping, improve some processes (i.e. logistics or inventory), and....profit!
Reality is, these small business owners can't seem to sell their businesses for decent money because they do a terrible job (sometimes on purpose for tax evasion reasons) managing their books. As a result, they are stuck selling their businesses well under intrinsic value.
This and multifamily residential real estate.
You think liquor stores are good businesses? I've always read they are better for owner-operators.
Why would liquor stores be more challenging to professionally run than, say, a SoulCyle, which has corporate ownership (ABC stores are corporately run by state bureaucrats--can't be that difficult)? You could have neighborhood or regional managers actively managing the stores themselves. It's not an investor puts in money and walks away like he might with a McDonald's. We're talking very active management.
buying a liquor store? dude you’d get crushed by the big guys like total wine who put so many mom and pop shops out of business. terrible strategy.
Achieving bulk discounts in liquor purchases is very difficult, so there aren't a ton of advantages to size in terms of pricing power. And even if there were significant pricing advantages (there really aren't), the point of the strategy is to buy hundreds of liquor stores in short order to gain market efficiencies, so there goes your objection.
What you're really doing is the same thing that Amazon did with the purchase of Whole Foods--you're buying store locations and/or leases. You can renovate, re-brand, and create an efficient corporate superstructure above the stores. The very point of the strategy is to not be a mom and pop liquor store
As long as you're at least breaking even, free booze for life. Sounds like a deal to me... Hell I'd even take the reoccurring tax right off for that deal
You talking about those franchise Fedex or UPS routes? I wanna learn more about that
Basically, yes. The way I see it, as one-off sales, they have pretty poor value (being sold at 15-50% cash on cash returns), but if you were to buy a bunch of them and to run them professionally then you've got a real business.
Buy up underperforming European assets with juicy IP (gun to my head, something in Italy or the UK), restructure, and sell it to the Chinese.
Nice try.
Public and private equity all-cap (primarily mid caps)
Financials. The American public will get raped on the next bubble.
Give it to me.
Okay, it doesn't have to be me, I'm not that special. All I'm doing is sponsoring investments in unimpressive, lower-middle-market businesses at prices that make sense.
Investing in private, lower middle market (sub $5M EBITDA) businesses (or micro-cap, if you prefer) is a market that can't approach efficiency, at least not in my career. Information is closely guarded (when it even exists), there's very little analysis of micro-markets, owners don't understand the transaction process, bankers or brokers at this end don't understand the businesses, and deal terms vary widely.
The explosion in independent sponsors has arisen because of a desire to access this end of the market. But having dealt with many, the more I find they're carbon copies. The outreach emails all look the same:
"Hi investment banker,
My name is Jenny McLegacy, and I'm looking for businesses from $1-$5M in EBITDA, with high margins, no seasonality, no customer concentration, a history of strong cash flow, low working capital requirements, scalable infrastructure, actionable growth opportunities, and a broad competitive moat. I have 27 years of investing experience, by which I mean I'm 27 years old, and I spent 15 minutes at a bulge-bracket investment bank before reading CIMs for a year at a megafund and taking a break before getting my MBA at Stanvard. I'm backed by patient capital, that comes from my dad's wallet, that he earned busting his ass for 35 years building a real business. Our investment horizon is long and indefinite, which gives us the flexibility to grow with a business and pretend that a 2.1x MOIC is a success even though it took us 13 years to exit.
Please think of us for your current or upcoming mandates."
There are a few hundred Jennys, and in their zeal to invest in small businesses, they're ensuring that any obviously decent business commands a price that would make most investors blush. But there are some of us quietly working away in corners of the market - geographies, industries, or tough assets with hidden value that can only be brought to light with a combination of insight and access.
I'm working on a transaction right now that looks like a dumb idea on the surface - taken on its cash flow merits, it's an insanely high valuation for a break-even business. But when volume rationalizes, and its signed contracts will take its fixed asset utilization from 35% to 80% (and we're the only ones who have performed the backlog analysis, including management), then the additional revenue will flow to the bottom line and it will look like we're buying a cash flow stream at 2x.
We have others in the hopper that look like this. Others pass them over because they look like garbage businesses on the surface, and they're not marketed in a way that would help anyone understand the opportunity in the business. We take that disinterest and turn it into downside protection in the form of low prices.
So, with your $50M, you could take $10-15M and allocate it to a handful of guys like me, and make a series of $1-2M investments in their deal-by-deal fundraises, and passively ride your way to long-term capital growth.
How low would you be willing to go? I think anything sub $2M to $3M in EBITDA is really tough since companies don’t typically have enough layers in management and you don’t really have the budget for executives. LMM deals are also still pretty competitive. I agree with many people not understanding their businesses and have run across it repeatedly but it works for and against you. Sellers have insane numbers in their head, have odd objections to doing a deal, books are a total mess so running DD is actually more complex than it should be, etc… but like you said…if you’re willing to put up with a ton of bullshit, you can make really good money quickly.
As you said, being differentiated is crucial, and I’m glad I was able to find a nice little niche early on. I feel it’s quite scalable too as not many people are really willing to touch eCommerce, let alone distressed eCommerce. Good example is a really niche distributor we acquired last year. Looked like total trash and the previous owner managed to rack up some pretty hilarious debt, but the LTV + CAC was ridiculously appetizing once you factored in how poorly the co was being run.
With that said, almost everyone looks at us like we were dropped repeatedly as children until they see the numbers. Very few are willing to finance eCommerce let alone distressed/spec sits that are often light on physical assets outside of inventory. I suspect this will change once people realize just how valuable the data you use to feed programmatic platforms is and how it can reduce customer acquisition costs dramatically…
I have to be able to envision a business that makes around $2M of EBITDA on autopilot in short order (IRR.
You're right that this size limits your executive pool, and for that reason, I don't like businesses that are heavily dependent on their people. The thesis is to depend on a hungry, well-organized sales team to develop organic growth in two years? No thanks. The thesis is that this business has 60 months of backlog visibility and investment in updated processing equipment adds 15 percentage points of margin? Now we're talking.
I don't want business leaders that are deep thinkers or good at solving open-ended, blank sheet problems. If they're good at that, then they're too expensive. And besides, I'm good at that. I need leaders that are operators and executors and have 10+ years of direct experience.
It's decent money. It's not the career path one would choose for highest possible earnings. I wouldn't call it a lifestyle business either - it's a lot of work. But it's a good fit for me.
Some LMM deals are extremely competitive. Those aren't the deals I'm interested in. As to the sellers' psyches and the quality of information ... those challenges are real. One could argue that whatever "alpha" I'm generating is payment to manage those structural challenges to investing in this market.
That all sounds awesome and it would take me a long time to evaluate whether or not I'd invest in it. I would never touch an eCommerce business on my own because my exposure to it is ~0 and I'm afraid I'm too dumb to understand it. I think you could lead me along to understand a more general thesis (as in, it costs x to acquire a customer, and that customer is worth y to the business, and x
can I pm?
Everything both of you have said makes sense, but your investment criteria is also something any mediocre PE guy (including me) can tell you.
You mentioned this, but it boils down to access. If you gave me the same biz to analyze I would also look at how the mfg process is run, backlog, utilization, and what a pro forma margin would be with x / y / z operating efficiencies.
LTV/CAC or unit economic analysis? Cool. Tell me something I don't know.
I simply don't have access, at at the sub $5M EBITDA level, its all about access.
Yes
One spoke of your wheel: Write a few $500k-$1m seed checks to startups operating in the industry where you are a SME. You'll get meaningful equity and be able to leverage your expertise and network to set them up for success. Not that sexy anymore, I know.
Buy the Brazilian Real: - Trading at 15 year high levels - $1usd = R$4.6 (down from yesterday's high of R$4.78)
SYB
Sex dolls from the commodities guy.
this is a badass discussion
There's an investment firm that the Ted Seides podcast did an episode with about a year or so ago that buys farmland up. Interesting approach.
Find the first thing you can spend the $50mm dollars on, prob like calling some banker and telling them to invest the money for you and then call it a day. :).
Head down to Vegas / AC and put it all on the Bucks winning the championship
Or obv just find a way to spend it on Bitcoin
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