$11B fund with 40% IRR for 10 years

A quick note before we jump in…

I found a real world example of the awesome power of compounding

Consider the Coca-Cola story.

If an investor purchased $40 of Coca-Cola stock in 1919 and spent all of his dividends, the total value of his investment at year-end 2018 would have been an impressive $436,000.

Not a bad return.

But if that same investor instead chose to smartly reinvest dividends, his initial $40 investment would have grown to almost $16,00,000 by year-end 2018.

The power of compound interest truly is the royal road to riches.

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Yesterday while driving to a meeting I was listening to Anthony Pompliano’s podcast with Graham Weaver.

The founder of Alpine Investors, a people-driven PE firm that invests in software & service businesses.

The IRR for the past 10 years has been 40%, if not more.

His recent fund raised more than $4.3 billion.

“Exceptional people create exceptional businesses.”

“The will to win.”

When Anthony asks about a specific thing, Graham keeps coming back with the name of the book.

A great sign that Graham reads a lot.

“When interviewing someone, we use the topgrading process, that’s in the book Topgrading — you do this structured interview where you talk to someone for three to four hours; you start in highschool and you go to yesterday…”

Graham’s idea is to find out whether this person has this will to win, or not.

That’s not my point though.

It’s more about that very smart people copy other very smart people.

You do not need to come up with original ideas, for each and every process or part on your journey of building & growing a business — there has been someone who has done what you want to do.

You’re just willing to find an answer; more importantly, ask the right questions.

As an investor and fund manager, if your goal is 40% IRR; Graham is a man to learn from.

However, there is more in this.

Reading and listening to these very smart people, having an overview of their views and thoughts, one thing can happen.

And it’s 1+1 = 3

What it means? There will STILL be different creative ideas on how to manage and grow the company.

So keep reading, keep learning.

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How to value a great company?

There are a lot of things going into valuing a business…

Graham summarized it in two words “revenue quality”

• how predictable is the revenue

• how defensible is the revenue

• how hard would it be to someone take it away

• how recurring is it (reoccurring or recurring)

Graham finds it in subscription software and IT services companies, also plumbing and HVAC companies.

Here again, Graham reads a lot. And it seems Graham has found a system and process for everything from various books.

Lesson: Read as much as you can. And copy the good stuff and implement it in your own life / business.

Find what works and do more about that.

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So here’s another book recommendation.

Competition Demystified

A great book that gives you an overview an easy-to-follow method for understanding the competitive structure of your industry and developing an appropriate strategy for your specific position

The six different ways on how you can have these barriers to entry.

Interestingly, people often ONLY read the book once they really get burnt by that.

Barriers to entry:

1. Economies of scale

2. Switching costs

3. Brand

4. Technology

5. Supply constraints

6. Network effect

“If your business doesn’t have one of those six, no matter how fast you’re growing or what’s happening, you’re going to have people eating your lunch.”

He mentioned a terrible investment he has made…

“During my early days, companies were growing 30, 40, 50% per year; buying them at great prices, it looked great for two years but still they were horrible investments because they didn’t have the barriers to entry.”

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The #1 company-killer is lack of market.

When a great team meets a lousy market, market wins.

When a lousy team meets a great market, market wins.

When a great team meets a great market, something special happens.

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What most investors do NOT do when acquiring a new portfolio company.

And what should be done, at least what the 40% IRR guy does…

The first six months in a new company.

The new CEO goes on a listening tour.

The goal is to ask the opinion from the employees (take an hour and a half and just listen.)

1. What’s going well?

2. What’s not?

3. What would you do if you were me?

4. Where we’re winning; where are we not winning?

5. What’s your advice to me?

Why is this important, it’s because this allows you to come up with a specific plan. It’s YOUR plan now.

A very important thing it does:

It makes everyone feel they had a say in designing that…because they have!

So now you know: the answer is in the room.

What strategy to follow? The answer is in the room.

Almost no one does this!

(The people at the company know; your job now as a leader is to harness that.)

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When I was 22, I hated sales because I was so bad at it.

A year passed and I moved to Melbourne, Australia.

Commission only sales job was the only way to make reasonable money as a backpacker and foreigner…

Since then I have been in love with selling things.

Talking to people, building relationships, listening to people to make sure I have something to offer that is so valuable that they're willing to trade money for it.

So…

One of the best things I've heard about the importance of sales.

Business is 99% of sales. If you don't like it? Go find a job.

When it comes to running a business…

You sell your co-founder to come build a business with you.

You sell your employees your mission to come and work for you.

You sell your investors to invest in your projects.

You sell your customers your products and services.

And then my favorite, you finish your day at work, you go home, and you’re going to sell your 3-year-old on going outside.

- - - -

Find what’s working and do more of that.

Period.

I think a lot of people would do so well if they focused on things they are really great at, and the things that are really working.

It's easy to want to spend time on your companies that aren’t going well.

Or spend time investing in people who aren’t performing.

Instead give more energy to your people who are performing, give them responsibility. Train them more.

Spend more time on people who are winning!

Sounds very obvious but it's so RARELY followed.

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How has been the week in my small holdco world?

Visiting, negotiating, waiting for price expectations. Growing what we already have.

Here's one I'm waiting for, they just hired consultants to value the company (I know that can be "dangerous" and so does the founder, even though he said his expectations aren’t very high. We'll see.)

• He is interested in selling the majority of the company.

• The good news: there is an extremely motivated operator. A lady in her 30s who is also the co-founder of this company.

• The gentleman told me that the lady is so passionate about business that the company is a God to her.

• The 2023 goal is $4 million in revenue and $800,000 in EBITA

• They just moved to a brand new production facility (located in Estonia), but it has a great brand and exports 95% of its production to Sweden, Germany, France and soon to South Korea.

• They sell a premium product; according to the founder, they always aim for 20% net profit, but with different products they achieve 25% net profit.

• They sell to wealthy clients.

(We are negotiating the terms with these companies, if we make an offer, it must be an attractive multiple and we must be making money on day one.)

For example, buying for 3.5-4.5x EBITDA even though it is worth 6x EBITDA, that's our goal and that's why I'm under no pressure or rush to make a quick deal. (I’m here for a long term.)

To understand your interest in what we do, get on my list here and I’ll send you more information about the deals. (36 investors have already done this past few weeks)

When talking about a consumer loan company.

In November:

• We issued loans worth $260 470

• Factoring which has a fee of 1,5-2%, we financed $757 841

• We onboarded 3,074 new customers.

All this with zero cost of advertising.

Here is our backend when it comes to credit customers — 804 contracts in total.

Many of you have been interested in our bonds, here is our current offering.

Btw, I spoke to the lawyers, they created an English version of the contracts, and even better (and hopefully more reliable), you can buy the bonds / securities through your local bank.

Take care,

Mikk aka PrivatEquityGuy

P.S. In short: if you want to co-invest in our deals. Get on my list here and I’ll send you more information about the deals.

Lastly,

I have interviewed sixteen people on the HoldCo Builders podcast. People have said they loved the show. Which is pretty cool.

Here’s the recent one with Andy, a CEO and a President of two banks.

• Flagship Bank - $324 million in total assets

• Security Bank and Trust Co. - $713 million in total assets

As always, thanks a lot for following the journey.