00:01:13 · Chris Rolls, Mikk
[00:01:13] S1: No worries. I'm I'm looking forward to it. It's gonna be gonna be interesting. I've listened to some of your episodes. [00:01:17] S0: You have a very interesting background. I believe you are very systematic when it comes to what type of opportunity to approach. We will get into this. But first, give us an overview of of the key attributes or characteristics of the PieLAB Capital and the portfolio today and what have you built so far, and then we will cover all details.
00:01:39 · Chris Rolls
[00:01:39] S1: PieLAB Capital started as a more traditional venture capitalsmall scale private equity business and that came out of my background of spending pretty much my entire life running small and medium businesses of various shapes and sizes. I've built and sold four businesses and when I had my last business, which was in the property management industry, I knew that when I sold that, what I wanted to do was invest in other people's businesses in order to not go through that often time consuming and difficult first three to five years of from zero startup which is a whole lot of hard work and generally you don't earn much money. So once you've got capital, it's much easier to avoid that by getting in once they've gone through that of harder period. And so I stepped out of that previous business, that was a business called Rental Express that I owned and I looked around at where I could get experience investing because I knew I'd spent sort of twenty years running businesses or probably more twenty five years running businesses, really since I was a teenager. But I've never been a professional investor. Read countless books but never actually done it so I rang up a whole bunch of private equity firms around Australia, had 20 or 30 meetings with people working in private equity firms and came across one group who had a couple of struggling businesses and I proposed to the principal of that private equity firm, Well how about I fix those two struggling businesses for you and that might take me eighteen months to two years and in return you show me everything there is to know about the private equity industry. Call that a good swap. So I went and did a couple of years of middle aged work experience in a private equity firm. I learned a lot and fixed those businesses and as we got to the tail end of that, it turns out we had a buyer come and look at buying Rental Express. So we officially put it on the market, went through a formal process, sold the business and then I had a bit more capital and I figured I knew enough to start my own funds management business and so we started PieLAB. We ran our first fund which was an early stage fund. There are mix of kind of growth technology assets although later on, so not early stage stuff, so Series B type investments. And then there are also a group of more conventional sort of small scale private equity assets.
00:04:07 · Chris Rolls
So profitable businesses that were more mature that we felt that we could help grow. And that funded very, very well. We've almost exited that last investment. In fact, think that will happen over the next six months and that fund will have generated around about a 25 ish percent IRR. And it's also structured effectively in Australia. There are some rules around tax that's effectively tax exempt for all our investors which is great. The problem with that though, I found was that when you exit a good business, it's hard to find more. And we had a couple of businesses in that fund that were doing well but because the fund was a typical closed end private equity fund where you have to sell the businesses and return capital after a period of time, We didn't have much choice. So we sold a couple of good businesses and then I thought, well, surely there's a model around the world somewhere where people buy good quality businesses and hold on to them forever. Obviously, I was familiar with Berkshire Hathaway, but I really started looking around what other businesses were out there doing that. Turns out there were quite a lot, I just had never heard of them. The ones that really I came across quickly were of course businesses like Constellation Software, TransDigm, Pieco, those sorts of businesses. And then I came across the Swedish serial acquirers that most people are familiar with and that's where I started the learning journey on serial acquirers and pivoted our model to become a full time serial acquirer. So as we exit the legacy investments in our previous couple of funds, the only thing we will do is focus on the serial acquirer strategy.
00:05:51 · Mikk
[00:05:51] S0: So your middle aged work experience as you described this, What were some of the lessons when you said to those GPs and partners of this fund, like, teach me teach me everything you know about PE, investing buying businesses. What were some of the things you learned? Because you have this great background of building businesses yourself. So what was some eye opening stuff for you?
00:06:16 · Chris Rolls
[00:06:16] S1: Yeah. It was really interesting. I think the first observation was there are a whole lot of really smart people. So they're certainly very very good, great at financial engineering, very good at working their way around spreadsheets and forecast and that sort of thing. And so I learned a lot about that aspect of investing in the private equity sort of space. But what I I I particularly found was that... And it could adjust, you know, being where I was, but there wasn't a lot of day to day operational experience. So people that had spent time running businesses. And so I felt they were, as a general rule, weaker on things like people decisions, really understanding during due diligence how businesses work. I remember this one time we were doing due diligence on a business and there was this discussion about the sales team. And then the DD had shown that all the sales people were making roughly the same amount of sales. There might have been, I can't remember how many there were, maybe eight sales people. And I thought to myself, you know what, I've managed lots of sales teams in my time and I've never had one where all eight sales people were performing to the same level. Usually, you've got two or three that are doing really well, you've got two or three that are making no sales, and you got somewhere else kind of just breaking even in the middle. So it just didn't make sense. And then when we went and I went down and spoke to the sales team and in particular the poorer performing sales people who, my experience is, tell you what's actually going on. And what it turned out was that the two key sales people that were making most of the sales were actually spreading the leads across everybody else. It looked like they were all even. And one of those key sales people was one of the people selling the business. And so it was in their best interest to show good sales results across everyone when in reality that wasn't the case. And if I hadn't have had that insight of running sales teams across various businesses in different industries over twenty, thirty years and running businesses, I wouldn't have probably looked there.
00:08:21 · Chris Rolls, Mikk
And so there are some differences and I think some of those operational things are often in private equity firms where most people come out of investment banking and they are super super clever people, much smarter than me especially when it comes to financial equations and spreadsheets but sometimes they miss some of the more human elements of running a business. [00:08:43] S0: Now when it comes to your decision making, I found this while while doing research on you, you've been writing about this as well. So why does private market investing generate better returns and you have there brought out like different reasons, one being that there are just more opportunities. So maybe you can share your thought process on why you decided with the liquidity you had, you decided to go after private businesses, not public ones.