91.4% IRR over 8 years and thinking time in Peru

Important take before we dive in…

Top notch advice I received recently:

• Be it raising capital...

• Finding the best deals where you can acquire traditional sub-$2.2M EBITDA businesses for 4-5 multiples..

• Or building that portfolio of cash flow companies in general…

Be a player and not a spectator.

Despite all the challenges, failures and obstacles, you learn more by actually being in the arena rather than commenting from the sidelines.

That said…

I'm still a big believer that there are plenty of opportunities to generate great returns by getting into an old industry with a fresh new mindset and hunger.

Take a company that wholesales personal protective equipment:

• $5M in revenue with a 10% net margin,

• 100% b2b,

• 11 people on payroll,

• the main customers are both manufacturing companies and local hardware stores

Yes, there may be systems and processes you can improve. But also sales, which they’ve maybe been doing exactly the same way for the last 10+ years. Meaning, being passive, relying on current relationships and not doing much outbound.

Of course, not to underestimate the current owners and team, but adding some new tricks — take 2-3 hungry folks on payroll to become cold-calling maniacs, calling 25-100 companies every day introducing your products and services.

Don't forget about physical meetings, driving around commercial real estate sites to not only introduce, but SELL your products to businesses. Folks are afraid to sell, but when done well, people love to buy things from others they like.

It's not rocket science and you'll get a lot more revenue just by being more active than before.

- - - -

Read this before you go and raise capital for your first venture:

(Is this all true or am I being too sudden??)

- - - -

The world of private equity and SME acquisition is VERY crowded…

Sadly, there is lots of work and long hours, but hardly any time for clear thinking.

Solution: Thinking time on weekends, holidays and on a yearly festive season.

I believe this to be one of THE biggest difference makers whether one will ever manage large sums of capital…

Invests tens of millions in profitable private companies…

Or achieve 20%+ IRR on smaller deals when starting out…

So, here’s the deal…

Things slow down on the weekend: less emails, little or less travel, no meetings.

All this means one thing…

More thinking time.

And that is what makes weekends very important.

From Monday to Friday, you’re all over the place.

But when reading about the top 0.01% capital allocators (people managing big funds; 100s of millions AUM; running a large number of profitable portfolio companies, etc.)

I've realized:

Every single one of them works hard. But the difference maker seems to be.... ‘WHAT you do is more important than HOW…’

And how much you do it.

That said...

WHAT should you spend your time on... is often realized during holidays and weekends.

And not in a stressful situation after another meeting with the managers…

Too many people (60%? 70%? More??): They rarely take time off, so there is already ENOUGH doing, enough action but never enough time to think.

Dare to be different.

"Having one good idea walking down the beach can save you a lifetime of hard work."

If you look at the top 1% dealmakers, private equity managers, capital allocators…

They often plan their years starting from booking the vacations:

• 10 days in January are for skiing

• Then 2.5 weeks in April in South Africa

• In July, a week in Italy

• Something warm again in November, maybe Peru?

• Not counting the long weekend here and there.

And ONLY when the vacations are fixed, they plan the work schedule.

Why?

1. Happy wife = happy life

2. They know the value of a clear mind

3. What’s the point of it all if you can’t spend time with your family and kids?

What do they do when they are away from the office?

Physical activity, padel, tennis, golf, walking, hiking.

Hours in a quiet room, reading, researching, gathering new ideas, taking notes, writing.

All things that many 10% IRR folks consider a TOTAL waste of time…

To sum up:

1. The goal is to work on the business, not in the business.

2. Go places where you are away from it all so you can come back and make bigger, even better bets. To make big bets, you need to rest and gather new ideas.

3. Going places doesn't always mean traveling, it can also be reading a great book or listening to a podcast episode that gives you a new idea on where to make another investment.

4. Start with weekends (2-3 hours of doing nothing is already a great start).

5. Plan your next 3-4 day trip where the mornings are quiet and unscheduled (use this as your thinking time).

Not too many people are willing to do that...

And as a result, we have enough hard workers, but clearly not enough clear thinkers.

- - - -

I am very biased and rely only on my strengths.

So if I had to choose...

A heavy equipment rental company with $9.6mm in revenue and 15% cash flow or an AI startup with $20mm+ post-money valuation.

The former will produce stable cash flows even in 2033.

I would choose a heavy equipment rental business.

- - - -

Levels in the leveraged buyouts game

Meet Mr. Graeme Hart, who built his fortune in the boring packaging industry, just sold his business  to Apollo backed Novolex for $2.5 billion.

'You can do exactly what I have done'

His simple 4-legged stool analogy:

"These are important because these hold regardless, if you are looking to reach pinnacles–that’s what life is about. I was burning with desire to reach pinnacles. It’s exactly the same whether you are a businessman or a sportsman or an academic."

Leg 1: Passion 

You have to get up every day and love what you are doing. If you do not, make a change, because you will NEVER reach a pinnacle if you don’t have a burning passion.

Leg 2: Focus

You must have goals. You must have timelines and the goals have to be quantified and you must hold yourself accountable.

Leg 3:  You better have determination, and a lot of it.

I’m a very determined individual, but what I’ve learned is that “hey this is hard, this is really hard”

Over the years you have some tough times. It's easy when the wind is behind your back, it gets harder when it’s in your face.

Leg 4: Self awareness

Know yourself well. Understand your strengths and play to them. Understand your weaknesses, work with them, work around them, don’t obsess about them.

Bonus: Be bold

Buy as big as you can.

Borrow as much as you can.  And then work the asset as hard as you can.

- - - -

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

Consumer loan company

December is still going on, so it was November in the numbers.

Traditional businesses

The unheard story of saying no to a job at a private equity firm, then raising capital and doing the deals myself instead.

(Reality: this has been 1,000x more difficult & time consuming than I ever thought)

Spent the last 2.5 yrs talking & meeting local business owners in their 50s and 60s (niche industries $2-15mm in revenue; long history; profitable).

Few things I can confirm:

1. They have a strong history and a great customer base (although the key-man-risk is often the biggest risk)

2. Many of them have all personal expenses on the balance sheet because they never planned to sell; still very profitable.

3. These are many cases they are interested in selling the majority and continue to work with the buyer (incl. seller financing)

4. Opportunity to grow these businesses organically as well as through M&A

(Why? They have no desire because they've been living a good life paying themselves $250-$600k annually in dividends)

5. There is almost NO competition in deals. Lots of opportunities when it comes to 3-5x EBITDA acquisition multiples.

6. Lots of consolidation opportunities as they are small businesses.

Countless DDs, numerous failed deals... The journey continues.

That said, the DD process is ongoing and I have another meeting with the founders on Friday to see how much they are willing to finance the deal.

Banks said they are ready to finance 50-80% of the acquisition.

I will keep you posted.

- - - -

This week’s podcast:

Christmas came early. So please meet ​Iryna Dubylovska and Sameer Rizvi.

Founders of RDCP Group. Over the past eight years, they’ve made 31 investments that have been consolidated into 12 companies, employing a total of 2,000 people.

A combined $400m of revenue and $40m of EBITDA.

1. We pick sectors and businesses where profits and cash-flow are the main driver of value.

2. Decentralize your operations, 'Hire very smart people and leave them alone, let them get on with it.'

3. We ran companies nice and lean. We just reinvest those profits so rather leaving those profits to pay down debt quickly or for the improvement of our lifestyle.

This is how they’ve been able to compound at almost a TRIPLE digit internal rate of return (91.4% IRR) for eight years.

4. When it comes to wealth creation point of view:

Private > public

Because there is significantly less arbitrage…

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

6. 50% industrials, 25% healthcare, 25% consumer – that’s quite a balanced portfolio in sectors and businesses which are relatively critical to the British economy.

***

A true buy and hold strategy experts.

Acquiring manufacturing, construction, engineering and healthcare companies for 3x EBITDA to sell them (if they want to) for 8-10x EBITDA.

Here is my conversation with Iryna and Sameer, co-founders of RDCP Group.

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

That’s all for today.

Thanks for reading and I will talk to you next week.

Mikk Markus / PrivatEquityGuy