583.43% gross return since April 2018

A quick note before we jump in…

“In life it’s often not the How or the What but the Who”

That being said, serial acquirer event in Stockholm was great.

We had a panel for 20-25 minutes with very smart people.

• former CEO Indutrade (portfolio of 200 companies and trading at $7 billion)

• a serial entrepreneur who have started and sold 5 businesses

• up and coming investment professionals who have studied at Harvard and Cambridge

• the people running the famous podcast - Investing By The Books - listened to by 1000s of investors around the world

Here are the masters of M&A who acquired over 15 companies in the last two years alone - Alex and Pavel Prokofjev

Good news: There were a few people who said that once we have our first or second acquisition and fund structure in place, they are interested in investing in our deals.

Analyzing the last 3 months…

It's actually a very good thing we didn't close the deal we should have, because knowing what I know now...

It would have been a bad deal.

The ones we have on our pipeline now are much better.

Patience is truly a virtue.

The longest conversation was with Jonas Ahlberg, executive vice president of Lagercrantz Group ($2.2 billion market cap; 70 acquisitions).

Question for him: "Is it easier to increase a company's profit margins from 10% to 20% or from 20% to 30%? And why?"

His take on this:

"It is much easier to increase a company's profit from 20% to 30%, because if the company's margins are already 20%, it means that they are producing a product that already offers a very high value to customers, otherwise they would not be able to do such margins.

To grow a company's profit from 10% to 20%…

It's very difficult because you're making a product or providing a service that's a commodity and doesn't have a strong brand, or moat or when it comes to manufacturing, it's just a contractor.”

- - - -

The weekly newsletter is often my research for the past week.

Here are some takeaways from a fund manager whose fund has generated (since inception in April 2018) a gross return of 583.43%!!!, compared to the S&P 500's return of 84.80%.

Question for him:

How do you know what to focus on?

“We start by looking for exceptional businesses.”

Exceptional business doesn’t always mean exceptional stock (stock price!) and vice versa.

There can be low quality businesses that are cheap but can do well… I prefer to search for really excellent businesses and the reason is, if you find a really excellent business with true competitive advantages that can protect all sorts of Return on Invested capital from competition over time. You can often make multiples of your money…BECAUSE you have this great niche you dominate. And your competitive advantages prevent that return on capital. (by price competition, or whatever else it may be.)

Another good thing with excellent businesses is, you CAN hold them LONGER vs a cheap stock which you can build up but then you have to sell it.

It is not core to our strategy, but when this happens, then it happens and we sell.

We’re looking for dominant businesses with a competitive advantage that we can understand.

That can be:

• A network effect

• A cost advantage

• Some intangible brand

• Switching cost

Whatever it may be - we really try to understand it by talking to customers; by talking to suppliers; by anyone we can talk in the industry to better understand how this business really makes money? How does it compare versus competitors?

And ULTIMATELY, the end goal is to understand the qualitative aspects of the business which results in qualitative outputs for what we think normalized earnings and free cash flow look like on sort of medium of long-term time horizon.

And if we know that we can wrap our head around what that business is worth and translate that into sort of IRR over forecasted time period and then we’re comparing stream of IRR’s that we’ve calculated based of our own estimates ALONG side other factors like:

• What’s the risk we have to take on to achieve that IRR?

• What’s the quality of the business?

There’s a lot of different things we look at but we’re trying to build our investment brain of IRR’s based on the work we’ve done and then we’re trying to count for all the other factors outside of IRR’s that we analyze.

To conclude, the goal is to have a systematic process of developing the absolute best portfolio that we can.

What businesses do you target?

Well, it can go anywhere.

Geographically, industry.. And you tend to bounce around, like once you find theme you really like or a very good business we THEN GO TALK to every operator, or ex-operator in the industry and say:

• Where would you invest your own money?

What we did is we found a business and we asked from all the competitors: which is the competitor you most admire?

It turned out that all those guys were investing in this other competitor that they really admired so they found out: MAYBE we just started that business.

There are times when we find a business and it seems to be REALLY-REALLY good but there is no actual competitive moat and more often than not it’s going to be the case. BUT if you analyze 100s of companies over the course of the year there is going to be FEW that really stick out and hopefully you get it right more often than not:)

Try to kill ideas quickly.

Try to say “no” quickly. If you feel and see it’s outside of your wheelhouse or it’s not going to be in our circle of competence -> these would be great reasons to pass.

We try to kill ideas quickly because there are so many things to look at.

Take care,

Mikk aka PrivatEquityGuy

- - - -

P.S. Last week I shared a story about our consumer loan business. We even got an offer from a local back to sell the company for $3 million. We respectfully declined as we see a lot of potential.

5 people sent me an email showing interest in investing in bonds.

If you are an investor - here is Modena's bond investment opportunity.

Our portfolio, as of today is 2 721 178€

• Revenue in 2022 - $140,000

• Revenue in 2023 - ca $550,000

That being said, we will raise another round of bonds in October. The interest is 12-14% per year, with quarterly payments.

*Investment capital is secured and controlled by 3rd party vendors LHV Bank and LEXTAL.

Want to co-invest with us? Send me an email.

- - - -

Lastly,

I have interviewed nine people on the HoldCo Builders podcast.

Here's a recent one with Michael.

As always, thanks a lot for following the journey.