DM from a $500m AUM fund manager

Just a quick note before we dive in…

IMHO these are some signs of a good life:

- 3-5 kids with 1 woman

- Portfolio of sub $1-$5mm EBITDA traditional businesses

- Headquarters with 5-6 people

- Monthly dinners with folks 10x smarter than me

- Little or no alcohol

- Little or no sugar

- 7 hrs of good sleep

- Always looking 5-10 years younger than I really am

- 2-3x mastermind weekend (hike-sauna-long walks) with folks 10 yrs ahead of me

- 3-4 ski and pool trips per year with kids

- Always around my family

- 1x/month weekend-trip with wife

- Weekly market insights/update newsletter to over 5,000 investors/biz builders

- Plenty of of steps per day (ideally 10k+)

- Lift heavy weights 2-4x per week

- Weekly date-nights with wife

- Reading 1 book per week

- Weekly podcast with top 1% entrepreneur

- 100+ investors who know-like-trust me

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Last week, a gentleman running a $500m AUM fund DMd me to introduce himself. He's been following for a while. Crazy. Over 46,000 of you on twitter and 2,700 here reading this newsletter. Thanks a lot for being here.

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It's never too late to get into the world of traditional $500k to $2m EBITDA business acquisition.

(1) buy a smaller, cash flow positive businesses for reasonable valuations

(2) own those companies for the long-term

(3) reinvested the cash flows into acquiring new businesses

Avoid costly mistakes like buying a bad company and paying too much for it.

Also, avoid using too much leverage and you will do very well.

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Yes, I am very biased towards this investment vehicle and have interviewed over 30 people who build such holdcos.

What I've seen is everyone's story is different and not everyone has all the details figured out, yet, they still went for it and they're doing really well.

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Interesting statistics from a survey of 179 private sector M&A deals.

Deal sizes range from $1 million to $100 million.

Gives you an overview of the transaction process:

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What is to be great in theory but very difficult to execute (although if done well, you could become your LPs favorite GP with 8 to 9-fig aum)...

An ideal plan to build a highly profitable SME portfolio:

Finding an ideal business that earns very high returns on capital and continues to generate high returns on incremental capital.

This same company being exceptionally well managed with uncommonly strong economics and purchased at an appropriate price.

With such an acquisition, you are gaining a successful company along with successful management.

But businesses of this sort are exceedingly rare, and it is even rarer to purchase one at a reasonable valuation.

(It bears mentioning that an exceptional business purchased at too high a price will be a poor investment.)

However, there is also a class of businesses that earns satisfactory returns — and substantial cash — but lacks the opportunity to generate returns of similar magnitude on incremental capital.

Considering everything previously mentioned:

You can structure your holding company in a way that makes such businesses attractive because you can reallocate the excess cash they generate to buy other businesses.

That said, again, all this is great in theory, but very difficult to execute.

Therefore, playing the long game — remaining a student of the game while somehow getting struck by the luck — you may get a few such investment opportunities from time to time.

If these are done well, you could end up managing a fund with $100 million in assets.

Potentially...

And IMHO, that's the beauty of this beautiful game of learning, investing and patience.

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A few tips to success after spending a hot summer with ultra-rich, 108-meter yacht level Australians:

Folks who started their business 30+ years ago and are now in their 50s, 60s, 70s, and somewhere in between become insanely wealthy.

It simply comes down to 1) picking the right industry; 2) and doing it long enough.

That’s all.

When you get this right, you’re halfway there…

You can be lazy, slow and not even the smartest, you’re still halfway there…

So you want to be like Harry because he and his business run the world…

Backstory:

A few years ago I decided to move to Australia to start a business.

I was single, with no debt or responsibilities, ready to explore the world.

On the flight from Singapore to Melbourne I had googled the biggest Aussie entrepreneurs:

• James Packer (CROWN Casino),

• Mike Cannon-Brookes (Atlassian),

• Lindsay Fox (Fox trucking),

• Anthony Pratt (packaging and paper company) etc.

I was curious to see where such people live, deep down hoping to meet some of them during their afternoon walks.

Landed in Melbourne, headed for a walk in the suburb of Toorak (Australia's Bel Air)...

Magic happened!

I didn't meet the Packers, Cannons and Foxes, but I did meet the Smorgons, Abercrombies and many others.

While talking to them…

It all comes down to which opportunity they pursue - all of them were either in finance, manufacturing, real estate, wholesaling, software, insurance - and they’d all been doing it for a LOOOONG time.

It’s 2024 and looking back on these conversations today…

I really started to understand what they had to say to me 4-5 years ago…

More importantly, act on it 3 years ago, at age 27.

I’ve been incredibly lucky as I’ve talked with many traditional business owners.

The only reason they were able to “make it” is because they stuck to one specific industry that most always had a tailwind, and they did it for a long time.

• Whoever started selling ventilation systems at the end of 1990 – is still doing it today.

• Who started furnishing cattle farms in the early 2000s – is still doing it today.

• Those who started writing software 25 years ago are still doing it today.

What they started doing in their 20s and 30s, they are still doing in their 50s, 60s, and 70s.

Even if they weren't the smartest when they started, they did one very smart thing, they kept going.

Even if they made mistakes along the way, it didn't kill the business because the margins were always good enough (even after they made mistakes!)

Surprisingly, they often don't know the latest trends when you talk to them - yes, they use Gmail and probably read the same news we do.

But when it comes to website conversion rates, upsells, downsells and cross-sells.

They don't know these sexy terms, they focus on the bigger picture while doing things on autopilot.

That being said, when it comes to their industry, they can see through walls. They know absolutely everything and everyone. Plus, they've seen three or four market cycles and recessions.

The reason I am writing this is because many of us are not aware of all this – they are constantly changing companies, professions and even industries.

Not allowing knowledge, expertise and luck to combine and really happen.

So if you've been in business for years and you're struggling and frustrated and you feel like it's gotten boring; no growth; instead I should do it; I should do this…I want you to think about Harry.

Harry has been selling cooling systems for large warehouses for the past 28 years.

There are hundreds of different parts and pieces in the product range.

Harry knows every detail by heart... and not only that. 

Harry knows by heart the 11-digit code on the back of each product.

Not because he studied or researched it, but because he has seen and written down that 11-digit product code so many times as he sold so many of these.

Looking back on my early 20s… Time flies and life is short.

So… less jumping and switching.

And more of 1) picking the right industry; 2) and doing it long enough.

In the end, you want to be like Harry, spending a hot summer on a 108-meter yacht.

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How has been the week in the small private equity world?

I was looking at different “boring” manufacturing companies.

• 2021 $2.3m rev /  $342k profit

• 2022 $2.7m rev /$398k profit

• 2023  $3.3m rev /$476k profit

Great opportunity for the right type of investor

Steady growth with healthy profits: imagine the numbers in 2032…

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This week’s podcast:

Organic growth is great, but if you want to grow through M&A while beating almost every PE firm in deal competition. Learn from Jesse.

He became so good at it that he built the company to $200mm

• 8 acquisitions and counting

• 100% bootstrapped

• Being just 35; hungrier than ever

A couple of notes:

(1) I am a forced entrepreneur, I dropped out of school and then I couldn't find a job so I was forced to start my first company Job Mobz.

(2) Entrepreneurs sell and give up too quickly; had I sold too early I would never have built a $200M company.

(3) Recruiting companies must transform into SaaS companies or they will be replaced.

(4) We've helped build teams for Coinbase, 23andME, Stellar, and Scale AI when they were very small companies.

(5) The way you get big WHALE-like clients: figure out what their problem is. Then do an insane amount of research and sort it out for them. No one does this and you can stand out very easily.

(6) Being in one industry for 10+ years gives you insane “market knowledge” that allows you to acquire companies many times cheaper than newer competitors and private equity firms that “know” less about the industry.

(7) We're having a huge pipeline because of a great reputation in space – the niche focus has been incredibly beneficial.

(8) You can make your business 2x as valuable by reviewing your contracts and making sure you're pricing correctly.

(9) You can't just work 40 hours a week and win.

I hope you enjoy listening as much as I enjoyed talking to Jesse Tinsley from Recruiter dot com

Here are the links to Spotify, YouTube and Apple Podcast.

That’s all for today.

Thanks a lot for following the journey.

Take care,

Mikk Markus / PrivatEquityGuy