Buyers and Builders
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?
00:16:45 · Chris Rolls
[00:16:45] S1: Sure. So that was a business, which for clarity doesn't sit inside our serial acquirer model. Was an early portfolio investment in one of our more traditional funds. Although funnily enough, we actually own so they are the largest compliance smoke alarm gas compliance company in Australia. We actually own the fourth largest one as well which is a business portfolio company that is inside the serial acquirer portfolio. But why we found that was we quite like compliance businesses. So our portfolio has five or six out of the nine portfolio companies are in the compliance space. And what I mean by compliance is that businesses that provide a product or service that is required by law, Usually, as a result of some sort of safety requirement imposed by the government. And in Australia, if you own a residential investment property, you are required to ensure that it has smoke alarms installed in that property and that they are checked on a regular basis either once or twice a year depending on which state you're in. And this is an industry that I knew well because my previous business was in property management. I noticed that the legislation which started in one state was starting to spread to other states and legislation when it comes to safety legislation is typically very easy for governments to implement because it's a very easy thing to politically sell. We're making everyone's houses safer. But it's very very hard to unwind politically because there's no upside to a government turning around and removing the need for landlords to spend money checking smoke alarms. And so the compliance industries typically have compliance that gets stricter, not the opposite. So we invested... I'd love to say it sounds like rocket science, we literally just rang up every smoke alarm provider in Australia. Put together a whole list, got on the phone, rang them up, went and visited them, and we settled on initially Detector Inspector. And it it was dominant in a market that had some new compliance coming in which resulted in it growing quickly. Also had two founders that were very proactive, young... Two young guys doing a great job and we were able to help them because we had sort of fairly good connections in the real estate industry because of my background. We're able to introduce them to potential customers.
00:19:16 · Chris Rolls, Mikk
But it's just a classic scenario of an industry that was growing with two founders that knew what they were doing. A business that's largely recurring revenue because once you sign up a customer, the customer is the real estate agency and they have to get it done on all of their properties every year. So you sign them up on a subscription service and you've serviced the job for them. And that's basically the industry and it grew very well. [00:19:45] S0: As this wasn't part of the permanent hold vehicle, did you eventually have to sell it and or what happened next? [00:19:55] S1: No. We still got a minority interest in that. That was a business that we had to sell out of the fund and we actually created a continuation fund. And then we we came across another smoke alarm in the industry and we acquired that one as well in the fund. And so that one we bought at a very low price, know, just a a founder that wanted out, probably wasn't running it particularly well and we were able to improve on that. So it's an unusual scenario. And as I said earlier, once we exit the portfolio companies out of our legacy funds then we'll just focus on serial acquirer model.
00:19:55 · Chris Rolls, Mikk
[00:19:55] S1: No. We still got a minority interest in that. That was a business that we had to sell out of the fund and we actually created a continuation fund. And then we we came across another smoke alarm in the industry and we acquired that one as well in the fund. And so that one we bought at a very low price, know, just a a founder that wanted out, probably wasn't running it particularly well and we were able to improve on that. So it's an unusual scenario. And as I said earlier, once we exit the portfolio companies out of our legacy funds then we'll just focus on serial acquirer model. [00:20:38] S0: Now when it comes to your experience of formerly building those businesses for twenty, twenty five years, you have this wide range of experience of improving those businesses. What are some of the things which you have done when it comes to those portfolio companies post close? One being like you can maybe share a story of just raising prices. In one case, you bought the business. You said you paid quite a high price. It was like 7x EBITDA, but then you discovered that these guys haven't raised prices. And once you did it, the the EBITDA multiple just got better for you when it comes to acquisition price.