Invest Like the Best with Patrick O'Shaughnessy
· Patrick O'Shaughnessy, Daniel Schwartz, Alex Behring
[00:00:00] S0: Yeah, it's the portfolio construction part of it. [00:00:00] S2: Yeah, you have 10 businesses, and if one has some idiosyncratic risk or whatever. It's harder to price risk, so we take that into consideration. But then on the other hand, you have this team here who are really excited to do a great deal. And oftentimes, they're going to bet their own careers, as is the case with Alex and a railroad that he bought in Brazil, as is the case with Burger King that we bought here for me. And so when you're betting your reputation on something, you want to hold it to the highest possible standard. [00:00:00] S0: If you think back to that, the very first days, 2004 or thereabouts, through to today, 20 years. How has your idea of what constitutes a great business changed the most through all of these investigations and running the five, six businesses? What's most changed about your views? [00:00:00] S1: We over the years had to refine our investment process in terms of making that determination of whether a business is great or not, as a function of how the world changed because of technology. The possibilities of a business being disrupted in this day and age, as compared to maybe 20 years ago, are significantly higher. And therefore, the investment process and the investment discussion around disruption needs to be significantly more detailed and thorough.
· Alex Behring, Daniel Schwartz, Patrick O'Shaughnessy
[00:00:00] S1: We over the years had to refine our investment process in terms of making that determination of whether a business is great or not, as a function of how the world changed because of technology. The possibilities of a business being disrupted in this day and age, as compared to maybe 20 years ago, are significantly higher. And therefore, the investment process and the investment discussion around disruption needs to be significantly more detailed and thorough. [00:00:00] S2: Yeah, I agree with that. Disruption and disintermediation. I think we have a greater appreciation today for businesses that own the relationship with their end customers. If you have that, you're less likely, I mean it seems obvious, but less likely to be disintermediated through some new disruptive force. [00:00:00] S0: How did you most learn that specific lesson, the disintermediation lesson? [00:00:00] S2: Since 2004, we’ve followed restaurant businesses. We’ve followed packaged food and consumer packaged goods businesses. And there is this ongoing shift you see in society of the share gain of private label. If you're a large retailer, be it a Walmart or Amazon or Costco, if you own the relationship with your customers, you have this ability to disintermediate the company selling to you. [00:00:00] S0: Kirkland happens, yeah.
· Patrick O'Shaughnessy, Daniel Schwartz, Alex Behring
[00:00:00] S0: Kirkland happens, yeah. [00:00:00] S2: Kirkland's a fantastic brand. It's one of the largest in the country. You and I probably both have plenty of Kirkland products in our household. Compare and contrast that with the restaurant business. So Burger King or Tim Hortons, Popeyes or Firehouse Subs – I mean, those are just a few great brands. I mean, we happen to be involved in them. Each of those brands owns the relationship with our end customers. And so if you want a Whopper, you're coming to a Burger King. Or, in the case of our Hunter Douglas business, if you want blinds, you're coming to a Hunter Douglas dealer or one of our shop-at-home dealers. And so I think we have a much better appreciation for that. [00:00:00] S0: If I think about just the businesses themselves, we were joking before about the simplicity of the business, and maybe when you're talking to Buffett about one of these businesses – don't make the business description complicated. And it's interesting how burgers, shoes, shades – you can actually do it in a word in many cases, with your businesses. You don't even need a whole paragraph. Maybe say a little bit more about that. [00:00:00] S1: We're not well-suited to manage businesses that require high IQ, to be honest with you. [00:00:00] S2: We have some mutual friends who are much better suited to invest in the next technological... [00:00:00] S0: The AI automated workflow.
· Patrick O'Shaughnessy, Daniel Schwartz
[00:00:00] S0: The AI automated workflow. [00:00:00] S2: Exactly. We're just not that. We've managed to stay pretty disciplined, to stick to good, relatively easy-to-understand, well-moated businesses that we and our partners here could kind of wrap our heads around. Businesses that have ideally been around for a long time, with strong brand franchises that we could own and grow and maybe improve a little bit. [00:00:00] S0: As Munger used to say, "Show me the incentives, I'll show you the outcome." In addition to the one investment per fund, I'd love to understand the other distinguishing features of how the capital is set up, who the LPs are, what the incentives are, how the fees work. Because almost everything you do is a little bit different than the traditional model. Maybe you could walk us through what those are, because those then determine the outcomes.
· Patrick O'Shaughnessy, Alex Behring
[00:00:00] S0: As Munger used to say, "Show me the incentives, I'll show you the outcome." In addition to the one investment per fund, I'd love to understand the other distinguishing features of how the capital is set up, who the LPs are, what the incentives are, how the fees work. Because almost everything you do is a little bit different than the traditional model. Maybe you could walk us through what those are, because those then determine the outcomes. [00:00:00] S1: Two of the things that are different – two or three of the things – one is the proportion of house capital. We and our group of co-founders and partners and whatnot, are the largest investors on each and every deal that we do, number one. Number two, the balance of the capital that's not ours, is different from a traditional PE firm. In the sense that it's a much higher component of high-net-worth individuals and families around the world. Some sovereigns also, but a very different LP base. And also the fact that we over the years have devised mechanisms that allow us to be invested for a long period of time. We invested in RBI for 15 years and counting. So I think those are the three main differences.
· Daniel Schwartz, Patrick O'Shaughnessy
[00:00:00] S2: One additional large difference in our case is the folks here have largely all been in both investing roles and operating roles. And so, in Alex's case, he was the CEO of the largest Brazilian rail and logistics company – the largest Latin American rail and logistics company. I was the CFO and CEO of what was Burger King and now is today Restaurant Brands International. That applies to some of our other partners here as well. I think this experience of being an operator and an investor allows us to ultimately be a better investor. And allows us, when we get involved in these businesses, to be able to send our own people in, who are partners of ours here, who have also been CEOs and CFOs and operators of businesses, and who are well incentivized to create value at the company that's directly linked and aligned with us and our limited partners. [00:00:00] S0: If you think about this unique nature of it being so much house capital, you're on the line with all of your LPs. And you think about the search for, let's say, Hunter Douglas, which was a transaction three or four years ago. Talk about the length of time that you're willing to engage with a company, maybe in that specific case, how long it took you to get to know that business and how the transaction came together. These are very unique ways and long durations, and I'd love to just put some meat on those bones.