00:00:00 · Mikk, Deiya Pernas, Dean Pernas
[00:00:00] S0: Today, I'm joined by Deiya and Dean Pernas, the founders of Pernas Research. It's a bit different episode, but, Dean and Deiya, I really want to see and understand how you guys think. What you do is you run this public... You're public market investors. So let's get this converse... Conversation started. Thanks a lot for coming to the show today. [00:00:28] S1: Absolutely. Very happy to be here. [00:00:29] S2: Thanks, So [00:00:33] S0: a question I received is if you zoom out, there's been a pretty dramatic shift in in where companies live. Over the last twenty, twenty five years, particularly in the in The US and Europe, we've seen a huge expansion of private capital. And companies are staying private much longer and many great businesses may may never need to access the public markets at all. So how has that changed the opportunity set for you guys as public market investors? Number one. And number two, are public investors increasingly fishing in a smaller or simply different bond?
00:01:18 · Deiya Pernas
[00:01:18] S1: Yeah. If you look at company formation or listings, obviously post COVID, we saw tons of companies come public via SPAC. Some came public via direct listing and you saw IPO Voom. So there are a huge amount of companies actually added during 2021, 2022. And a lot of those companies came to market too early and then ended up selling off and some of them got gobbled up, some of them went private and so on. So you're starting to see a little bit of shrinkage. That being said, there was such a boom from the periods that I mentioned. There was a huge kind of expansion in the amount of companies that are publicly listed. Right now, Nasdaq's in I think there's roughly around, you know, 5,500 companies or something like that, which is enough of a pool. We're developed market investors, so we're looking everywhere, you know, obviously, developed markets. And yeah, that gives us about 10,000 different public trade companies to choose from. So we think the opportunity is set quite broad, but we don't... But generally, we don't like hearing that, you know, oh, well, ten ten billion to 1,000,000,000 companies are cycling to go public. We would like companies to go public earlier, but, yep, private markets are are extraordinarily deep, especially here in The US, maybe not so much in Europe for early stage. But, yeah, that being said, private markets are very deep, but we think there's still, you know, tons of opportunity in inventory, if you will, out there in public markets.
00:02:49 · Mikk
[00:02:49] S0: Mhmm. Okay. I forgot to ask in the beginning. Could you maybe give a brief background, both of you, what has been your background? And we were just discussing before the GAGAR over the last nine years has been 30%, so this is remarkable. So maybe, Deiya, you can start, and, Dean, you can go from there.
00:03:08 · Deiya Pernas
[00:03:08] S1: Yeah. So my background, I got into finance investing really from my... I had a passion. I played a ton of poker in college, before college, after college. Even when I started, working for Morgan Stanley, was playing a lot of poker. And my love for poker, I mean, you know, I think when you're trying to figure out as a kid kinda what career path you're gonna go on, you you try to look back on stuff that you actually like, and maybe, hopefully, you try to find parallels with, you know, adult stuff out there in the real world and stuff you used to like as a kid. And with poker, you know, there's a lot of lot of the dovetails from poker into capital markets. There's a behavioral finance stuff. There's a probability stuff. There's bankroll management, which is essentially portfolio management for poker. A lot of that stuff led me into deciding that both finance and capital markets was going to be an area that potentially that I could enjoy and and, you know... And if you enjoy it, you know, it's not like you're... The the work doesn't feel that hard. So for me, it was... After after college, it was like joint mortgage lending on the private wealth side. There's a team there. There's a huge trend in wealth management where, you know, teams are are going from wirehouses, which is Morgan Stanley's, UBS, the wealth partner in the world. They're starting their own independent kind of wealth management RA practice. And I was kind of part of that trying our team lifted out of my understanding. We started our own, essentially our own business. We grew from there. And one of the things that I noticed was how terrible a lot of the research that we were getting on our side was. And we wanted to start kind of, my brother and I, who've been investing together for close to fifteen years now, we said that, look, there's a better model for stock research, for public equity research, and it's more of a buy side oriented model if you do it correctly. And so we decided to kinda launch our own firm three years ago. And right now, we're launching fun, but that's that's kinda been the evolution. So
00:05:14 · Dean Pernas, Mikk
[00:05:14] S2: Okay. Awesome. Yeah. I came from the chemical engineering world. That's what I majored in college, and I worked in that industry for about five years. And during college, I was investing alongside my brother, and I just love that a lot more than chemical engineering. Chemical engineering, it's a very static field. You want... If you're in a chemical plant, for instance, you're working at some type of oil well, you want the same things every single day. So you want the same recovery, the same production, the same quality. Like, you you want a static environment. Any type of deviation from that is not a good thing. And you're you're kind of a glorified babysitter. And investing, it's pretty much exact ops. Everything's always dynamic. The industries are always changing. Actors are always changing. And I I just... That fit my personality set a lot more. And so come COVID, given just the market sell off, that was... It was an opportune time to get out of the chemical engineering sector and then do investing full time and then subsequently launching the firm with my brother. [00:06:08] S0: Okay. So a lot of the listeners, they own, operate, buy lower middle market businesses, one to 15 EBITDA. So what can those private market investors, again, operators learn from two guys, two brothers whose job is to charge businesses and the management teams from from outside and then maybe watch the scoreboard update every day?
00:06:35 · Deiya Pernas
[00:06:35] S1: Yeah. I think that if you have a long term view, which obviously, the audience... The attributes of the audience mentioned clearly have, they're operators. They're trying to build a business long term, and maybe they're they're trying to, you know, exit later or, you know, own the business for a very, very long time. You end up kinda looking at the same things that that a serious public equity investor might do. We're trying to analyze the, you know, the essence of the company. You know, what... Why is the company... You... Why is it working here? Why is it not working? How are relate... Its relationship with customers, its product strategy? You know, what are the capital allocation decisions being made? You know, what are what are the leadership, who are the managers? What are their style of leadership? And what is their quality like and how this business is gonna evolve going forward? So in my opinion, you end up looking a lot of things. And it's one of the reasons why you know, a lot of hedge fund managers will like to hire private equity analysts. Hedge fund managers that that that play only in public markets will like to hire private equity analysts because they know that, hey, a good private equity analyst is gonna learn a lot of same things that a good public equity investor does. And oftentimes even better because they're more long term focused. So clearly, there's an element of private markets that doesn't exist for us as minority shareholders. There's a control element. You sit on board, you pick managers. There's all that type of thing. But generally speaking, we really mean the same things. As far as what can private market investors look for public market investors, I think that the access can be a double edged sword. I mean, we're all sometimes envious of private market investors given the access they have to different management teams. And, you know, it's funny. We often criticize public market investors for a casually throwing word around trust. Oh, like, I trust the CEO. Like, I read some interviews transcripts. I watched some YouTube videos, I I trust the guy. And to us, it's like we never trust any CEO. I mean, like, I mean, by and large. I mean, a lot of these CEOs, they're they're great talkers, but they're not really there to provide you kinda unvarnished objective... An objective view of their company.