$13m turned into $485M

A quick note before we jump in…

One of my favorite pieces of wisdom I've had in my head for a few years:

• I hear and I forget

• I see and I remember

• I do and I understand (since that day I have become a doer)

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This week I talked with a gentleman who does a lot of M&A deals.

He said something very interesting:

“Bad things can happen. It’s a big mistake I’ve seen over the last 18 months – folks think that when they’re running a successful business today, that it will never be impacted by anything. It’ll always be like that. Big mistake!”

I asked about any examples?

“Imagine if you owned a chain of restaurants or movie theaters when the pandemic hit.”

Bad things do happen.

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Private equity at its best.

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Public companies are slaves to the cycles of the stock market.

They are forced to sell at the bottom and buy at the top.

Small PE firms are small and flexible, and they have a great timing advantage which plays to their strength.

For them, every asset is for sale, and they are always ready to buy a new asset.

That being said.

Today I had a 45-minute chat with a fund manager who is originally from Iran but lived in the US and Europe.

He manages a large fund $300+ million (casually says it's not even a big deal.)

He's in 40s but REALLY wants to get into the private markets.

"Why??" I asked…

"Valuations, curiosity, and I know it's something I will really enjoy doing."

He listened to a podcast I did with Rafael Quinn: "This guy speaks exactly as I think. What he does is something very special. He really has to trust his operators."

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I totally understand why he favors private markets over public one…

And why am I not going to buy public stocks?

Because there is significantly less arbitrage.

At the end of the day, it’s all about how you can buy $10 million for $3 million.

That’s the question you should ask yourself.

This is only possible in private markets.

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You can't learn everything in university and from books... scars are only made by playing in the markets.

I've learned a lot about fundraising through books and reviews, but the best lesson I learned was sitting in my Toyota with a potential investor and listening to what I could do better to attract UHNI and their capital.

The same things about running the companies were brought up by a man in his 50s who runs a large fund…

“We did a lot of mid-market deals… and then the financial crisis came.”

The next moment I was in big trouble.

Harvard hadn’t taught me anything about the coming financial crisis.”

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Few things I believe in as a small business entrepreneur and investor.

From the books I’ve read and the people I’ve met (both IRL and through the podcast)

1. The MOST important motivating force for entrepreneurs is a desire for autonomy not money.

Entrepreneurs want independence and freedom. They want to control their own destiny and get credits for their efforts.

2. A sense of optimism is a precursor to being an entrepreneur.

Cynics and pessimists simply don’t succeed. You gotta believe in possibilities. Risk takers desire games more than they fear loss – they are the opposite of the majority of the population who never want to lose what they already got.

3. The more entrepreneurs there are, the better off we all are.

Yes, the competition might be tough, but that’s what drives improvements, higher quality and a richer society.

4. Work with business partners.

This spreads the responsibilities and makes the journey more enjoyable. You look for someone whose skills complement yours. Working together with business partners makes the bad times better and good times less selfish.

5. Patient money tends to achieve the best results.

Not a big fan of the concept of momentum trading or the idea of overnight success. Genuine companies take years to build. You gotta nurture things naturally over the longer run. 

6. The single most important influence on entrepreneurship are role models.

Role models at work - people they follow, watch, listen to and learn from.

7. Entrepreneurs are people who are obsessive.

They are often workaholics and fail to get their work-life balance in order.

8. Execution matters vastly more than theory in business.

A lot of people could write a great business plan but not everyone can carry it out. Strategists are ultimately much less valuable than those with the hands-on ability to get business done.

It’s all about follow-thought in action not the promises.

9. Entrepreneurs work hard (I’m stating the obvious).

It’s not the right career for somebody who wants very quick financial rewards. It often requires various trade-offs, at least on some stages.

10. All the returns from investing in private businesses have come from the big winners.

You have lots of flops, you make a lot of mistakes – but they are not significant in the grand scheme of things. In equity investment you can lose your stake assuming you haven’t been foolish enough to give a personal guarantee. But your upside, often in theory, is unlimited.

And if you have a spectacular hit then you can multiply your stake 10, 20, 100 (rare!), even a 1000 times (very rare!)

11. Human nature tends to shine the spotlights in any organization on one man or woman.

Be it Steve Jobs or Mark Zuckerberg or whoever, but the finest businesses are constructed by teams not individuals.

12. Entrepreneurs really do matter.

They create a majority of the private sector jobs. Out of these jobs the vast majority come from small medium-sized companies. Entrepreneurs also punch above their weight in terms of innovation. So in economical and societal terms entrepreneurs are incredibly important.

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The 5-second quality control:

“Will my daugher be proud of this?”

In short, we need more doers and better quality.

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How has been the week in my small holdco works?

Traditional business — we had another meeting, this time with the majority owner and his partner, the partner owns a small part of the business. Now it's all about the price expectations of the partner (as very often, when someone comes and shows interest of acquiring the company, the price expectations go very high.)

We are on the same page with the majority owner, but his partner believes the company is worth more.

I will have an answer next week. (I'll keep you posted!)

When it comes to consumer loan company…

Slow and steady growth.

My personal goal in general and in the long term is to acquire a larger stake in this company.

Take care,

Mikk Markus aka PrivatEquityGuy

Lastly,

Here's the podcast episode with Rafael Quinn that I mentioned earlier.

Look at the growth they’ve gone through:

• 2020 $17.0m

• 2021 $44.1m

• 2022 $64.9m

• 2023 $126.8m

All this in a reasonably short period...

While spending tons of time with kids and family.

He built a holding company from zero all the way to doing more than $100 million in revenue. (While having 1,000+ employees)

He shared the blueprint:

1. Reinvest as much as you can. Dividends are a killer because compounding really does work. My partner and I draw a salary that is built into Opex. We live good but not ostentatious lives. Our families are happy. Yet we still reinvest 80%+ of our yearly profits. We have been doing so for years.

2. Laser focus on cash production. You need cash flow. Understand it, focus on it, and maximize it.

3. Always buy bigger. We wasted some time with smaller bolt-on style acquisitions. While most were accretive, we would have been better off hoarding cash and waiting for a larger transformative acquisition.

4. Focus on the CEO. A great CEO is your biggest asset. Find them, cultivate them, and then reinvest as much money into their operation as possible.

He didn't hold back, answering every question I had, even detailing how they make decisions and why they continue to focus on the US market.

(Links to Spotify Apple podcast, and YT can be found in the comment section below.)

Thanks a lot for following the journey.