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.
00:12:56 · Mikk
[00:12:56] S0: Now learning the lessons in in private equity, and then you found the serial acquirers. And if I'm correct, I think you were the first serial acquirer in Australia, the PieLAB. Yes. And How did you structure it in the beginning? Because I guess it was a very new concept for the LPs as well.
00:13:16 · Chris Rolls
[00:13:16] S1: Yeah, it was. And it's... When we first started this, which was only a bit over five years ago here in Australia, people in Australia hadn't heard of a serial acquirer. Most people hadn't heard of businesses like Constellation Software as an example. And so we had to educate them which was difficult because most people looked at it through the lens of, well hang on a minute, what you're saying is you buy a bunch of small businesses and then you run them on a decentralized model where each one has its own CEO and they just couldn't get grasp the concept of, how does that work and how do you deal with key person risk and and all of those sorts of questions, which are which are good questions. But when you understand the model, you can see that many many serial acquirers have dealt with that over a long period of time. And so we we structured it like a like a more traditional fund. In fact, we even called it a fund. We called it the PieLAB Capital Capital Fund. And we called it a fund so that people kind of, you know, understood how it worked. In reality, we are a corporation, so we are a proprietary limited company. So most funds are structured as trusts or or limited partnerships. We're structured as a company just like Berkshire Hathaway or Constellation or any of those businesses. And we acquire the subsidiaries, so the portfolio companies, we acquire the shares in those businesses. If we own them a 100%, we consolidate them for tax purposes. If we don't acquire a 100%, we don't consolidate them. And each one runs independently. So that's kind of at a high level how we're structured. One of the more complex aspects is if you're buying businesses and never selling them in the private market and you raise capital, if it's meant to be permanent capital, how do you return the capital? How investors get liquidity? And that's one of the hardest things of starting a serial acquirer is that it's not a a commonly trodden path especially in Australia. So we basically set out a ten year period where we said, we'll raise capital. We will hold that for ten years, we will make the investments, we'll grow the portfolio and at the ten... End of ten years, we'll create a liquidity event for those investors. But instead of like a normal private equity firm where you...
00:15:31 · Chris Rolls, Mikk
Or fund where you sell the underlying portfolio companies and then return the capital from each sale will create liquidity across the whole portfolio. So effectively, you're doing is you're selling your shares in the portfolio to another shareholder. And we might do that as a result of listing the company which creates liquidity. We could create liquidity ourselves by having some of our other shareholders buy out some of the smaller shareholders. We're not exactly sure but I think the path will eventually lead to a listing which as anyone knows in this industry, most serial acquirers eventually get there because the business model lends itself to the public markets. And so that's what we did and we raised two tranches of capital. We've almost deployed all of that and in fact, we're actually about to raise a third tranche of capital over the next three months or so. [00:16:24] S0: Okay. Now let's talk about some of the specific portfolio companies, one being the success story of Detector Inspector. What did you first see in this business? And how have you been able to twelve weeks, fifteen next the company?