2/20 structure; $20m and a happy wife

A quick note before we jump in…

Three lessons from a CEO of a PE fund which has $13bn AUM.

He shared on how he started out:

• Left investment banking in his early 30s and became an independent sponsor

• Simultaneously started consulting / advisor to support his family and pay dead deal fees

• Didn’t find his first deal for over 18 months

His biggest takeaway was had he not had some money coming in for the dead deal fees and his overall expenses he’d have rushed to do a bad deal.

His first 3 deals averaged close to a 10x multiple on his capital.

Today he runs a PE firm called Platinum Equity and he owns a pro sports team.

He’s name is Tom Gores.

“Don’t put yourself in a position to be forced to do a bad deal – have reserves to support yourself and dead deal fees and do some advisory to help keep you in the game.”

You ONLY get to do your first deal once…

- - - -

The more I read about private equity firms which invest in $1 million to $10 million EBITDA companies, the more I find the following to be true:

The opportunity lies in finding individuals who want to play in a part of the market that doesn't seem as sexy at first.

But once they get in there, the return on invested capital, if they're a founder, a CEO, and they understand what's going on, is much higher than investing in larger businesses.

- - - -

When talking to business owners, operators, investors, CEOs, sales people.

I sometimes like to ask what they learned from their father when growing up.

90% of folks say it's work ethic.

"Dad was always working, getting up early, staying up late. Long hours. He was never watching TV, he was out, working, fixing things, doing something. He just never sat on the couch and did nothing. Never. There was always something going on."

Turns out our fathers motivate so many of us to work harder, to persevere.

During tough days, people really think about it and then carry on.

I find it fascinating.

- - - -

Had a call with a business owner who just turned 53.

"I started my business in 2013, I sold it last year.

I still can't believe it... but I'm retired now.

I wish I knew it was that easy --10 years of grinding and you're set for life.

Knowing that, I'd started right out of college when I was 21, and not 42. Best of luck Mikk!"

What a story.

I can confirm the guy was very happy!

- - - -

Talked with a former professor at the University of Geneva.

His boss at Swiss bank once had a very successful year and received almost $60 million in bonuses.

Me: "Please tell me more interesting stories about business, finance and funds..."

NOTES:

- - - -

You just never know what people are going through at any given moment.

Did my typical daily calls to business owners, folks in 50s, 60s, 70s.

With the goal of seeing if they would be interested in selling their boring niche business or not.

This week's call, a gentleman in his 50s, very polite. We have spoken 5-6 times in the last 2-3 years.

It's 1:30pm, he picks up the phone and when I asked how he was doing.

“Good, but I’m completely wasted, there's too much going on so I started drinking.”

We talked for 15-20 minutes.

Everything is on his shoulders. He said he has trust issues, but at the same time feels like it's all a bit too much.

- - - -

Secret to success in business:

1. Only a few things matter

2. Find these few things

3. Focus on these things & become a master at them

4. Say no to 1000 other things/ideas that don't matter

Do this for 4-5 years straight.

- - - -

How has been the week in the small holdco world?

Traditional business

Talked to business owners, made two offers. They will get back with me by the end of this week.

These are companies with $5 million in revenue and $500,000 in net income.

Consumar loan businesses

We are entering into a DD with one investor who is interested in investing $300,000 in our bonds.

We were joined by one new investor who decided to invest $50,000.

The most important thing is that the portfolio grows step by step and Modena becomes more and more profitable every month.

On average, we finance between $10,000 and $15,000 worth of loans per day.

- - - -

This week I spent 7 hours researching a true master of small cap private equity:

• 586 transactions

• Acquire $1 million to $10 million EBITDA companies

• Average deal $12 million

• 72% IRR

• 7x cash on cash returns

He had two rare public appearances on Patrick O’Shaughnessy's and Harry Stebbings’ 20VC podcast.

His name is Justin Ishbia and he is the founder of Shore Capital Partners.

Here's what I learned:

1. “Constellation Software, Mark Leonard is a friend and a mentor. I'm not smart. I know who to copy. And did I copy -- they did all in software. We've done it in operating businesses.”

2. Biggest lesson from dad: “Don’t do things you don’t understand. You do what you understand and you can execute on it well.”

3. Industry, industry, industry! “If you go into the publishing industry right now, he doesn't care if you are Jack Welsh’s at his prime, you'll probably not end up having a bunch of success.”

4. 80% of our CEOs are first time CEOs. Big believer in early career energy. It takes a really smart person about 18 months to learn 90% of the industry.

5. Margin of safety. Most private equities commit $100 to a thesis, investing between $60 and $80 of that investment for the platform and reserving $20 to $40 for add-ons. Justin and Shore Capital have almost the exact inverse. They’re committing $100 to the thesis, and deploy $5 to $25 for the platform. It gives that great opportunity, he thinks, to increase your margin of safety, increase an opportunity for success.

The biggest take away was how Justin hires 6-7 board of directors for each portfolio company with almost zero $$$.

As the board of directors themselves say when they very first time show up: “There's more people on the board than there's millions of revenue.”

Take care,

Mikk Markus aka PrivatEquityGuy

Here is this week’s podcast episode with Nick Haschka — a co-founder of Cub Investments where they make long term buy & hold equity investments in growth-oriented field services companies.

Very first acquisition in November 2016

As of March 2024, they manage a portfolio of 12 companies.

All done with their own capital.

(Except the one they did in late 2023)

95% of acquisitions have been owner succession & retirement driven buy-outs.

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

Thanks a lot for following the journey.