Podcast Summary
From Entrepreneur to Capital Allocator: Brent Beshore's Journey: Brent Beshore, an entrepreneur-turned-capital allocator, leverages skills in marketing, advertising, and sales development from his past to build long-term relationships and focus on operational improvements in private markets, despite lacking a formal finance background.
Brent Beshore, the CEO of Permanent Equity, transitioned from being an entrepreneur to a capital allocator in private markets through a series of fortunate events. He learned valuable skills in marketing, advertising, and sales development during his entrepreneurial journey, which he continues to apply in his current role. Despite having no formal finance background, Brent emphasizes the importance of building long-term, win-win relationships and focusing on operational improvements rather than financial engineering. His background as an entrepreneur and operator sets him apart from traditional private equity firms and allows him to create value through empathetic leadership and fostering growth within the companies he invests in.
Unexpected business opportunity leads to growth: Identifying potential in unfavorable situations and taking calculated risks can lead to significant business growth.
Sometimes unexpected opportunities can lead to significant business growth. In this case, starting out as a small agency, the founder was introduced to a business owner who had recently been jilted at the altar. Instead of seeing this as a warning sign, the founder saw potential in the complementary nature of the two businesses and was able to negotiate a purchase. With no financial background, he took a leap of faith, securing an SBA loan and putting all his net worth on the line. The acquisition led to the formation of a holding company and the creation of a "baby Berkshire Hathaway." While Buffett's success was built on a strong quantitative background, this founder's success came from a different place - an ability to see the potential in seemingly unfavorable situations and the courage to take calculated risks.
Assessing risks and potential in long-term investments: Successful investing involves long-term focus, considering downside risks and upside potential, aiming for asymmetric bets, and creating sustainable partnerships with stakeholders.
Successful investing, whether in the early stages or with larger sums, requires a long-term perspective and consideration for all stakeholders involved. The speaker shared insights from a dinner conversation with a successful investor, who, like them, focused on assessing downside risks and upside potential, aiming for asymmetric bets. This approach, reminiscent of Warren Buffett's, emphasizes creating sustainable partnerships where all parties benefit. In the smaller end of the market, buying successful but underperforming companies offers better pricing and opportunities to improve their quality. The speaker also highlighted the importance of understanding the perspectives of various stakeholders, including families, leadership, employees, vendors, customers, communities, and regulators, to create deals that are sustainable in the long term.
Approaching Investing as Operators: Understanding a business's value and being comfortable with the price you pay are crucial elements of successful investing. Operational experience aids in this understanding.
Successful business leadership requires a proactive and resilient mindset. The small business world is hectic and stressful, often compared to a knife fight. Instead of running from challenges, it's essential to face them head-on. At 3six forty six, they approach investing as operators, not just financiers. Their team's shared operating experience allows them to understand the nuances of running a company. Buffett and Munger, whose wisdom was gained through precious conversations, also emphasized the importance of understanding the businesses they invest in. Buffett, in particular, believes that price is his due diligence, which has significantly influenced 3six forty six's investment strategy. The art of investing lies in understanding the value of what you're buying and being comfortable with the price you pay. This approach requires a deep understanding of the business landscape and a willingness to face challenges, making it an invaluable lesson for any investor or business leader.
Learning from Buffett and Munger's Success: Buffett and Munger's success can be attributed to clear logic, well-developed principles, and strong relationships. Clarity and brevity are important. Building a community can provide valuable insights and relationships for investors.
The success of investing legends like Buffett and Munger can be attributed to their clear logic, well-developed principles, and the ability to form strong relationships. While both were magnetic personalities, their areas of interest varied, with Buffett being more into sports and Munger showing a strong passion for climate science and battery technology. During a conversation, Munger's response to a rambling explanation was a simple "Makes sense. Very good." which served as a reminder of the importance of clarity and brevity. For investors looking to learn and grow, forming a community, like the TIP Mastermind, can provide valuable insights and relationships to help in the investment journey.
Staying informed with financial news and analysis: Reliable financial news and analysis are essential for making informed investment decisions. Keeping a small, focused business and aligning incentives can lead to better opportunities and outcomes.
Having access to reliable financial news and analysis, like what's available on Yahoo Finance, is crucial for making informed investment decisions. The speaker shared his personal experience of relying on Yahoo Finance to stay updated on market trends and company news. Additionally, the speaker, David Kass, discussed his unique fee structure in private equity and how he resisted the traditional 2 and 20 model due to potential conflicts of interest and incentives. Instead, he preferred to keep his business small and focused on good opportunities, rather than being pressured to take on larger deals for the sake of returns. This conversation highlights the importance of staying informed and maintaining a clear and aligned business model.
Unique investment structure aligns interests: 3zero forty six's 30-year lockup and no fees incentivize portfolio companies to generate high cash flow, benefiting both parties in a long-term, collaborative relationship
This investment firm, 3zero forty six, has created a unique investment structure to align interests between the firm and its portfolio companies. They have opted for a 30-year lockup on capital and no fees or reimbursements, allowing them to call capital on a deal-by-deal basis and share in the free cash flow generated by the companies. This structure incentivizes the portfolio companies to generate high rates of return on cash flow, as they keep the majority of it and only send a portion to the firm. The firm's long-term mindset and focus on high-probability projects aligns with the companies' interests, creating a mutually beneficial relationship. The odd 27-year lockup period was a result of negotiations, with the original ask being for 50 years. This structure is an example of entrepreneurial thinking and creativity in private equity, aiming to generate strong returns while maintaining a long-term, collaborative approach.
Building trust and momentum in fundraising: Transparency, commitment to investors, and a focus on generating better returns can help build trust and momentum in fundraising, even if it means asking for longer investment horizons.
Building trust with investors and generating momentum are crucial elements in successful fundraising, even if it means asking for longer investment horizons than the norm. The speaker's experience with raising capital for a private equity fund highlights the importance of being transparent, showing the realities of investing, and demonstrating a commitment to investors' long-term interests. It took time and effort to gain momentum, but once it was achieved, the fund was able to surpass initial goals and attract a large following. Trust was built through open communication and a focus on generating better returns and access to better companies for investors. While it may have seemed unconventional to ask for a 30-year commitment, the logic behind it made sense and ultimately helped establish a strong foundation for the fund's growth.
Finding a trusted connection can lead to new opportunities: Trust from a connection can open doors, expand networks, and lead to new business opportunities. Gerber Kawasaki's focus on cash flow and avoiding debt enables them to make strategic investments and weather economic downturns.
Having a trusted connection who believes in you and introduces you to valuable resources can significantly impact your business growth. The speaker shares his personal experience of meeting such individuals who helped him open doors and expand his network, ultimately leading to new opportunities. The companies Gerber Kawasaki invests in are typically asset light and generate more cash than they consume, allowing them to reinvest in other areas without debt. Even during a pandemic, they have managed to avoid debt and hire new employees, transform their business, and take advantage of opportunities. The lesson here is to find a trusted person who can transfer their trust to others, helping you grow your network and business. Gerber Kawasaki's approach of avoiding debt and focusing on cash flow allows them to make strategic investments and weather economic downturns.
Focusing on businesses with room for improvement: 3five forty seven invests in businesses with straightforward models, between $3M-$8M in cash flow, and seeks to improve operations, particularly talent acquisition. They look beyond simple industries for opportunities.
3five forty seven focuses on investing in businesses with straightforward models, typically between $3 million and $8 million in cash flow, in the size and stage that they can add value. They look for opportunities to improve business operations, particularly in the area of talent acquisition. Their circle of competence is not industry-specific but rather the size and stage of the companies they invest in. They don't aim for companies that are already "shipshape" but rather those with room for improvement. The industries they invest in, such as aerospace, construction, and manufacturing, have relatively simple business models from an operational standpoint, but the challenges often lie in the people and finding the right talent to lead these businesses to growth.
Family obligations impact business performance: Investing in family-owned businesses requires identifying opportunities for growth beyond family cash flow focus and addressing cultural differences during mergers.
When investing in family-owned businesses, there are often hidden obligations and dependencies within the family that can impact the business's operations and financial performance. These families sometimes intertwine their personal finances with the business, leading to a focus on maximizing cash flow for the family rather than investing in the business's growth. Josh McCall from the discussion shares that they often see businesses run for maximum annual cash flow for the family, and they come in to identify opportunities for investment that may not have been considered due to risk tolerance or seller resistance. Additionally, merging cultures during acquisitions is crucial, and investors must be attentive to each company's unique cultural norms to ensure a successful integration.
Empowering Autonomy and Collaboration: Permanent Equity fosters autonomy and decision-making at the operational level while maintaining a collaborative relationship with leadership teams. The CEO prioritizes involvement in acquisitions and close relationships with CEOs, allowing teams to operate autonomously in day-to-day business.
Permanent Equity, as a long-term investment firm, prioritizes fostering autonomy and decision-making at the operational level while maintaining a collaborative and supportive relationship with the leadership teams. The CEO, Josh McCall, emphasizes the importance of making good decisions about involvement and trusting the talented team members to make better decisions than him. He applies a "nose in, rest of the body out" approach, being more involved in the acquisition process and maintaining close relationships with CEOs, while allowing the team to operate autonomously in the day-to-day business. This approach strengthens the health of leadership and provides a strong foundation for bringing up new talent.
Focus on crucial elements in investment decisions: Effective investment decisions require thorough diligence, but concentrating on top 3-5 crucial factors and delving deep into those areas is more productive than trying to consider every minor detail.
When it comes to making informed decisions in both private and public markets, it's essential to focus on the key factors that truly matter. Stig Brodersen and Charles Ferri discussed the importance of thorough diligence and emphasized that trying to consider every minor detail may not be the most effective approach. Instead, they recommended concentrating on the top 3-5 crucial elements and delving deep into those areas. This strategy applies to various investments, whether in a franchise like Iflex or in public markets. For instance, when evaluating a company, metrics such as competitive moats and NPS scores can provide valuable insights. However, it's important not to get lost in the details and to remember that the success of an investment often hinges on a few significant factors.
Understanding Margin of Safety in Deal Making: Focus on major factors, be cautious, and identify patterns in deal making to increase chances of success. Initial assessment is crucial, but further investigation is necessary.
In the deal-making process, it's crucial to understand your margin of safety and be cautious about falling in love with a deal. The speaker emphasizes that no deal gets better during due diligence and that it's essential to focus on the major factors influencing the outcome. The best deals often come inbound, and it takes time to build a relationship with potential partners. Within minutes of receiving information, the team can get a sense of direction about whether there's an opportunity or not, but further investigation is required. The process involves setting criteria, being thoughtful about marketing, and developing a taste for what works and what doesn't. The team has seen thousands of deals and can quickly identify patterns, making the initial assessment a crucial step.
Price is a crucial factor in buying a business, but it's not the only one: Prices can vary greatly depending on industry and seller's expectations. Aim for a minimum of 3x free cash flow, but be flexible. Value and fit are ultimately more important than price.
The price of buying a business is a crucial factor in the decision-making process, but it's not the only one. A minimum price of three times free cash flow is often used as a baseline, but prices can vary greatly depending on the industry and level of standardization. Sellers may not fully appreciate the work required for a smooth transition, and prices in certain industries may be elevated due to private equity rollups. Discussions about prices can start early in the process, but it's important to be flexible and understanding if the seller's expectations are unrealistic. Ultimately, the price is just one aspect to consider, and what truly matters is the overall value and fit of the business for the buyer.
Partnering with the right people is crucial in business deals with illiquid assets: Focus on making good decisions and partnering with trustworthy, admirable individuals for successful business deals with illiquid assets, rather than dwelling on missed opportunities or outcomes.
In business, particularly when it comes to investing in private companies, the focus should be on making good decisions rather than dwelling on missed opportunities or outcomes. Tony Robbins and Trey Lockerbie discussed their experiences and emphasized the importance of people in business deals. They've learned that working with trustworthy, admirable individuals is crucial when dealing with highly illiquid assets for a long time. They also highlighted that their long-term goal is not just to get rich but to enjoy the process and consider themselves as stewards, not owners. Additionally, they've experienced significant missed opportunities but acknowledged that it's challenging to play the "what if" game due to inconsistent information feedback loops. Ultimately, they believe that focusing on making good decisions and partnering with the right people is the key to success.
Emphasizing the importance of preparation and continuous learning: Successful investors value knowledge and preparation before negotiations, and continuously learn through resources like books and Google.
Successful investors value the importance of preparation and continuous learning. Josh McCallen and Joe Consort of 3six zero six and 024:55, respectively, emphasized the significance of being well-equipped with knowledge before entering negotiations with sellers. They wrote a book, "Messy Marketplace," to streamline their communication process and ensure they cover all essential topics. McCallen mentioned that they found no satisfactory resource for sellers and decided to write their own. Consort also recommended classic investment texts, such as those from Warren Buffett and Howard Marks, as valuable resources. He admitted to relying heavily on Google to fill knowledge gaps during his career. Overall, these investors underscored the importance of being well-informed and prepared to navigate the complexities of business deals.
Connecting with experts for permanent equity insights: Reach out to experts like Jerome Lewis directly for permanent equity knowledge, assess opportunity costs, and build connections through networking and resources like podcasts and platforms.
Importance of connectivity and accessibility for investors in the permanent equity market. Jerome Lewis, a permanent equity expert, emphasized the value of reaching out to him directly through his website or social media platforms for those interested in this area of investing. He encourages potential investors to consider the opportunity costs and assess their skill set before diving in. Brent and Trey, the hosts of the Investors Podcast, also emphasized the importance of networking and staying informed through resources like their show and the TIP Finance platform. Overall, the discussion highlighted the value of building connections and staying informed to succeed in the permanent equity market. If you're interested in this topic or have any questions, don't hesitate to reach out to Jerome or the hosts for guidance.
