Buyers and Builders
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.
00:09:13 · Chris Rolls
[00:09:13] S1: Sure. I think the funny thing about the public markets is that the number of businesses listed on public markets has been declining for quite some time around the world. In fact, did a presentation at the Australian Stock Exchange a couple of years ago and actually had the figures that showed from memory, think it's the number of listed businesses in The US has halved over the last twenty or thirty years. Don't quote me exactly, it's something like that. So if you're an investor, you're getting less and less opportunity. The number of businesses is becoming smaller and smaller that you can invest in. Whereas in the private side, the number of businesses is increasing. There are more and more private businesses. Businesses stay private longer because there is more liquidity as a result of private equity than they used to be. Once upon a time, you you used to list on stock exchange in order to raise capital and create liquidity. Now you can raise capital without listing on a stock exchange much more easily than you used to be. So therefore, there are less businesses going public. And I think when you think about investing, the maths are pretty simple. The more businesses that you have an opportunity to invest in, the better decision you can make. It's kind of like if you've got the opportunity to make an investment in one of two businesses, we're going to choose the best out of those two. But if you've got a 100 that you can invest in, you've just got the ability to make a better decision. So I think that's one of the big factors, just choice. And I think the second one is your ability to do due diligence. If you look at the diligence process that we go through, We sit down with CEOs, we sit down with sales teams, we ask them about what contracts they're signing, what contracts they expect to lose, which customers they expect to gain, who aren't profitable customers, what their forecasts are. And you get to really get under the hood as to speak as to what's actually going to happen in the business. Now if you did that in a public company and the CEO shared all that information with you, that would be called insider trading which is illegal. Yet we do that every day on private businesses so we can make better decisions.
00:11:22 · Chris Rolls
So that's one of the things I look at is that when you're investing in a public company, it's really hard to get an information advantage over other investors. Whereas you do it in the private market, most of the transactions that we do, we're speaking directly with the owner before a corporate advisor or broker is involved and sometimes there's no corporate advisor or broker involved. In fact, that's our preference because we can generally structure a better outcome. As a result of that, we're getting better information to make decisions on. I think the other thing that is good about the private markets is and it's pretty fundamental and that is you pay less for the businesses that you buy. All other things being equal, two identical businesses, one private, one public, you pay a liquidity premium to buy the public company. So therefore, you pay more because you've got the ability to get in and get out. Now if your intention is only to get in and never get out, you don't need the liquidity premium of a public market so therefore you're better off taking the lower price. That's to answer your question around the difference between public and private. I think they are the two biggest advantages of being able to invest in private businesses. And the great thing about the serial acquirer model is that even if a serial acquirer is public which we're not, we're private, at some point who knows, But you're investing in a business that is effectively acquiring businesses on the private market so you get all of those advantages of lower price, more information, more due diligence and more choice.