no MBA, $7.5B AUM and 1.98% management fee

My bold prediction for the future of "boring" $1mm+ EBITDA  businesses:

• More adoption of technology to improve efficiency, reduce costs, and enhance customer experiences

• More consolidation and roll-ups - Small family-owned HVAC companies could be acquired to create a regional powerhouse.

• More businesses to buy - too many traditional businesses are owned by aging entrepreneurs nearing retirement.

Most importantly:

As less and less people are willing to do the hard, dirty work and prefer to stay in the office... There is EVEN MORE opportunity and higher margins for those who commit, act and are willing to play the long game.

Interesting times ahead, so buckle up.

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Yikes!

Lagging the S&P 500 by 50 percentage points while still charging a yearly 1.98% fee on $7.5B AUM

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Exactly 1 year and 69 days ago, my life changed forever...

Especially as an entrepreneur and investor.

I never went to Harvard or Stanford, so that was my two-day MBA on what companies to buy and what not to buy…

Here is the story:

On Monday and Tuesday of this week (this was on September 2023), I visited as many as 7 small businesses.

I did this together with a gentleman whose recent deal was a $30 million investment in a company with $170 million in revenue.

A person who constantly travels between London-New York-Middle East and Israel.

He is an independent investor who co-invests with various PE firms as well as very large family offices ($3-6 billion aum)

And he's definitely someone who in the future will put together deals worth 100's of millions of dollars.

Here are the 22 notes I made while spending two days with him in person:

“People are lazy, how many people have traveled here to visit you and your companies? Me: "Well, you're first."

Works with people who were supposed to take their company public for $2 billion, but it didn't happen because of the war in Ukraine. He is also a shareholder. Two founders who he works with should have made $500 million each. My question is how you and they feel now that the deal didn't go through? "Nothing has changed, we're just enjoying the game. And more importantly, only worry about things you can control.”

“Mikk, what are your strengths, what is the 0.00001% thing you are the very best at? Focus on that.”

”Raising money is f*cking hard. Closing a deal is f*cking hard. Anyone who says otherwise is either lying or selling you something.”

Remember people's birthdays. Under a person's contact on the iphone, in each person's notes section, he has lots of notes about what they've talked about or done together. Also the names of their family members and even their pets.

Once he congratulated an old friend and the response he received: "How the f**** did you remember my birthday?"

Speaks 4 languages.

“Mikk, you’re a hustler. Which is good! But you need to learn and understand the numbers, you gotta understand the numbers Opex, Capex, ROE, ROA, ROI, ROIC, ROCE, etc... and there is much more. It’s not just that you buy a traditional “boring” company and keep growing it.”

I had a friend who bought a business that did $1 million in revenue and $110,000 in profit…at least the seller thought it was $110k. In reality, the profit was $350,000. So the seller thought he made 8x multiple, although in reality it was 3x. Such deals do exist.”

“Absolutely the biggest lesson I wish I had learned 10 years ago - there are a lot of great deals out there. Patience is a virtue."

Their bar is very high. Interestingly, and not even surprisingly, they are looking for no-brainer deals. A company with a moat, or a brand, or strong competitive advantage, or some type of IP. A high return on invested capital at a very very very attractive price. "There are deals like that out there."

• SPENDS A LOT OF TIME WITH FAMILY.

• Even in between meetings, he had calls with his wife and children.

• Personal trainer 2x a week.

• Eats healthy. Little wine here and there.

• Always takes notes.

• In the meeting, asks a questions, and then stays quiet for a very long time.

• Takes long pauses.

“MIKK THERE ARE PLENTY OF GREAT DEALS OUT THERE.”

"I have people who call me today and say they have a deal. I don't ask for anything and I transfer money to them.I have this type of relationship and trust with few people.”

“Your first deal has to be very good! Once you can make that happen, the rest is much easier. When people have trust and confidence in you- one person invests, others follow.”

"I'm only one guy. And that's just my opinion, I could be completely wrong."

Very polite and professional. Always on time.

To sum up the two days spent with him:

1. Find better deals. Better multiples allow you to manage risk.

2. Try to do the first acquisition with local investors as they know the market and culture.

3. Hire or partner up with a very strong CFO and learn more about it yourself.

4. Talk to more investors for the consumer loan business. Debt raising is extremely difficult.

The meetings were like studying an MBA degree.

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Yes, there are industrial holding companies that have built multi-decade track records creating shareholder value.

Take Danaher, Lifco, Halma, Judges Scientific, and the Bergman & Beving

They often have ONE things in common:

Conduct programmatic acquisitions of durable, niche industrial assets with high returns on capital and low-single digit organic growth.

-

However, 99.99% of the time M&A is risky and on average destroys capital.

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When it comes to building a pipeline of traditional $1-3mm EBITDA companies…

I believe the best way to find such good deals is just through action and not spending too much time sitting and thinking, but instead getting out in the world and doing things:

• Talking to business owners

• Talking to investors

• Talking to banks

• Asking questions

• Getting feedback

Then through action and moving forward based on that.

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With outstanding capital allocators on your team, even an ordinary company can become a remarkable compounding machine.

I talked to the owner of a traditional business in the forestry space (wholesale of processed wood); it makes about $700,000 to $800,000 net a year.

That's how it's been for the last 7-8 years.

The timber business has been great, he said, but the real wealth has come from reinvesting in land, real estate and startups.

• Startups (He has 2 home runs out of 7 investments. I mean HOME RUNS!!)

• Investments in land and buildings in hometown

"I know everything about my business, so I try to find people who know their business - land, real estate, startups. Very different personalities, very mixed portfolio, but they're all independent and it's worked out really well. At the end of the day, I've just been lucky. "

It turns out that he runs an average company, but ALL of his above-average returns came from his reinvestments.

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You need an MBA and 3-5 years of experience to acquire a traditional $1-3mm EBITDA company.

WRONG.

Instead:

You can partner with people who have all the experience in your niche…

Ask advice from folks  who have acquired 10+ businesses 

Then you ONLY need that one business owner willing to sell their life's work (ideally at a deep discount. You buy $10 bills for $3)

Then one bank who’s willing to finance the transaction.

To sum up and most importantly:

There are no rules — go find these people.

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

Traditional business

Another exciting week in the "boring" HoldCo space.

Whether it's talking to biz operators, or investors.

This is the kind of energy I have.

Mr. Bernstein is founder of an asset management firm providing investment management to institutional,high-net-worth and retail investors

It has approximately US$779 billion in AUM

Paul is known as a great salesman and was responsible for bringing in MOST of the firm's accounts

That said…

We begin the DD process at a profitable brick-and-mortar company.

I will keep you posted.

Consumer loan company

We had one of the main shopping days of the year:

• Year 2023 we did 819x orders per day (122,000 €)

• Year 2024 we did 1,969x orders per day (316,570 €)

Our portfolio as of today:

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This week’s podcast:

Forget HVAC and trade businesses…

Private equity comes after your kids swim schools…

Meet Josh Scott:

• 5 locations

• 7 figures in revenue (30-35% margins)

• Spending a lot of time with family and children

Again, the riches (both time and $$$) are in niches.

We discussed:

• Raising prices and selling it to private equity (which they choose not to do now).

• Buying more and more swimming pools (property)

• Why aren't $1mm+ EBITDA deals coming to market?

• The cost of building swimming pools

• Why is selling pool fences going to be a very big business?

• A 33% IRR and spending time with the kids

Here is my conversation with Josh Scott, co-founder of SwimSRQ and Swim Academy.

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

That’s all for today.

Take care,

Mikk Markus / PrivatEquityGuy