Invest Like the Best with Patrick O'Shaughnessy
· Daniel Schwartz, Alex Behring
[00:00:00] S2: The TAM for the interior and exterior window coverings is around $70 billion. HD is far and away the largest player. We have this combination of scaled manufacturing coupled with scaled distribution. And that allows us to, either through our own sales force, or through our exclusive dealer network, deliver the product within a week, two weeks, which is typically when people would expect their window coverings to be delivered. Every product is largely custom made-to-measure. So there's no one single SKU. And so we have billions of permutations of styles, colors, patterns, sizes. And the business was around prior to us buying it for about 100 years. And we talk about all the things that can change in the world and disruption risks, but we're highly confident about the sun rising and the sun setting. And you see houses are being built with larger and larger windows because people like natural light. And so it's a product that's here to stay. We're the number one leader. There's some volume growth. There's a little bit of price growth. And as I mentioned, as we mentioned earlier, there's this historical roll-up element of the business, where you're buying small players in the industry. And we are the natural home for many of these small players. [00:00:00] S1: Also, climate change and the increased awareness of the risks associated with that, and the need to save energy and whatnot. I mean, that's a positive driver for this business.
· Alex Behring, Daniel Schwartz, Patrick O'Shaughnessy
[00:00:00] S1: Also, climate change and the increased awareness of the risks associated with that, and the need to save energy and whatnot. I mean, that's a positive driver for this business. [00:00:00] S2: A lot of companies brag about all their ESG initiatives and energy savings. Our window coverings actually save people tons of energy. It's a natural way to keep your house cool. [00:00:00] S0: I mean, it sounds like sort of the ultimate example of, like, there are no two kids in a garage in Silicon Valley wondering how to disrupt Hunter Douglas. It would just be a senseless endeavor. [00:00:00] S2: I think it's one of these things where the TAM is large, but it's not so large. And we really have this scaled manufacturing coupled with the scaled distribution. And so I think gaining distribution is hard. It's quite hard, given the way you go to market. Because there's a service component, there's an installation component to this product, this process. [00:00:00] S0: Given the returns that you've demonstrated are possible – RBI is up 30x multiple on capital or something, and going. Why do you think there are not more firms like 3G that do serial, single investment, extreme focused style? Why are you the one that I'm aware of?
· Patrick O'Shaughnessy, Daniel Schwartz, Alex Behring
[00:00:00] S0: Given the returns that you've demonstrated are possible – RBI is up 30x multiple on capital or something, and going. Why do you think there are not more firms like 3G that do serial, single investment, extreme focused style? Why are you the one that I'm aware of? [00:00:00] S2: I have a few thoughts on this. You've seen how much value and enterprise value has been created in the alternative investments broader landscape. And so how often do people, Alex, tell you, "Why don't you guys buy more businesses? Why don't you raise larger funds? Why don't you get more diversified?" So I think there is this pull to do all that for a reasonably good reason. [00:00:00] S1: I don't presume that our model is superior to others. There are incredibly successful firms that have a very different model, a very different way of going about their business than us. And I think what's important for every successful firm, I mean, we're no exception to that, is find out what works well for you. And for us, for a very long – for decades now, that's the model that works really well for us. To invest our capital, to compound the capital of the people that are close and invest with us. And I think we should stick to that and not try to emulate other people's models. And that's probably true, vice versa. And most successful firms have their own model that they develop that works for them, for their culture, for their people, for their capital.
· Alex Behring, Daniel Schwartz
[00:00:00] S1: I don't presume that our model is superior to others. There are incredibly successful firms that have a very different model, a very different way of going about their business than us. And I think what's important for every successful firm, I mean, we're no exception to that, is find out what works well for you. And for us, for a very long – for decades now, that's the model that works really well for us. To invest our capital, to compound the capital of the people that are close and invest with us. And I think we should stick to that and not try to emulate other people's models. And that's probably true, vice versa. And most successful firms have their own model that they develop that works for them, for their culture, for their people, for their capital. [00:00:00] S2: I think also staying "small" allows us to attract some of the best, best, best people on the investment side here. Because we can still offer people founder-like economics, a path to partnership, a path to taking on responsibility much, much faster than those people might have if they take a kind of traditional investment path. [00:00:00] S1: Yes, and this is a place where we think that over time, the firm should always be owned by the people driving it. And historically, that has been the case, my co-founders and me, and then I'm still here – my co-founders over time have become more on the capital side. Daniel was an analyst and is sitting here today, I was an analyst early on in the predecessor firm of this. So we do have a demonstrated culture that attracts people that way.
· Alex Behring, Patrick O'Shaughnessy
[00:00:00] S1: Yes, and this is a place where we think that over time, the firm should always be owned by the people driving it. And historically, that has been the case, my co-founders and me, and then I'm still here – my co-founders over time have become more on the capital side. Daniel was an analyst and is sitting here today, I was an analyst early on in the predecessor firm of this. So we do have a demonstrated culture that attracts people that way. [00:00:00] S0: I love the notion that both of you ran businesses as the CEO. And I'm especially curious about the forged-in-fire moments from running the Brazilian Railway. What were the aspects of operating as the CEO that you most remember, that most shaped how you think about running a business well or investing well?
· Alex Behring
[00:00:00] S1: Within a few weeks in the business, it was apparent that it was an operations challenge. Meaning the customers around the railroad all wanted to be serviced by the railroad, and they couldn't because the service wasn't good enough. And the focus on basically churning the assets faster and more safely was really the driver of the company's success. Which drove me, in turn, to spend a week, a month, in overalls, driving trains and going around the country. That allowed me first to get close to the engineers in the business. Who were crucial, the people that run the trains. And understand how important they were in that business in every respect. And do things to improve their lives that you could only do if you were out there with them. For instance, I was young and athletic, and sitting in a locomotive for eight hours in those really old chairs. It was really tough. And the cabins were cold because they were not sealed properly. So all of that was not expensive to address. We didn't have the money to buy brand new General Electric locomotives, but we could fix that. And we could also fix all the engineering quarters where people sleep between changeovers, which were also in dire straits conditions. And we were able to get them all fixed, get new beds, get satellite TV for sports and get them all that done. That really drove a lot of support from the engineers. We were able to then capitalize on that by having onboard computers rank people on their fuel and safety performance nationwide. I mean, railroaders are very proud people. And that drove like a 30% reduction in fuel, for example, which was the number one cost in the company. That drove much higher asset returns. Because we then did the same thing in the yards and there were all these ideas and participation. And these people all had the solutions for things. They just needed to be engaged to address this operating challenge, which was the biggest value creation driver. So that taught me a little bit about managing by walking around and not sitting in an office and getting fed information through PowerPoint.