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Follow Munger in Deep, Broad Learning

One of my resolutions for 2016 is to read more across a breadth of topics.  In full disclosure, most of the book content I’ve consumed in recent years has been via Audbile.com which I love and recommend highly – you can speed up the content and consume some voluminous stuff pretty quickly, particularly for a slow-ish reader like me, and you can do it on the go.  I am guessing Audible will still be my preferred content consumption method, but I’m diligently working on reading more too.

To kick off my year, I picked two books to parallel process – a re-read of How to Win Friends & Influence People (one of my all time favorites, quick read, timeless content) and Poor Charlie’s Almanack.  Many of you probably haven’t heard of the Almanack, or, for that matter, Charlie Munger for whom the book is assembled.  Munger is the longtime business partner of a fellow named Warren Buffett, and probably one of the least well known obscenely successful investors in history.  Sure, anyone in the financial services world would know who he is, the same way they would know who Ray Dalio is. (Dalio by the way runs the largest hedge fund in the world as of this writing, Bridgewater, and is an amazing, eccentric guy…here’s a link to a prior Ray related post).  But outside our world, not many folks would’ve heard of Munger.  But his discipline of learning and thinking are of great value to anyone who aspires to be successful and happy in their life journey.

I’m about half way through, and the Almanack thus far hasn’t disappointed.  Charlie is voracious reader, a deep thinker and a lover of learning.  One his key tenets is to view problem solving / decision making / investing, through the use of a “latticework of mental models.”  That is, Charlie believes that understanding the fundamental foundations of as many different disciplines as one can improves one’s ability to make decisions.  Here’s a recent article that does a much better job of explaining this approach than I will endeavor here, with examples / explanations.  This idea in and of itself is a somewhat deep topic, and not conducive to a blog post, but I recommend exploring it – regardless of your field of focus.  I would venture a guess, that when you look back at some of the good decisions you’ve made, they were enhanced by your own ability to synthesize information across multiple disciplines.

Consider Your People A Project…

While the idea of considering the people on your team or in your group or organization as “projects” could sound controversial and sterile, it’s a method I have tried to use working with business executives and leaders to try and get them to both focus their attention and to set rational and realistic goals for themselves and their teams.  And given it’s the beginning of a new year, thinking about your 2016 projects is of course always energizing (well…if you’re a personal development dork like me anyway…).

The intent of this concept – to consider your people projects – is to basically try and convince any leader who is working with a team to realize that, whether it’s a star performer or an average contributor, the likelihood that they will change on their own is quite limited if you as their leader don’t spend time on it.

focus on people as projectsA quick example:  An executive I know had a business development team that had several stars and one question mark.  We discussed the questionable performer from time-to-time until at one point I told the group leader “Look, this person is not changing.  And it’s not their fault.  How many times have you met with him to discuss his goals and your expectations?  How often do you check in and offer support, guidance and feedback?  Have you established a consistent rhythm of communication and accountability – specifically around their performance and development?”  The answer was no.  This was a busy executive and other than group sales meetings, occasional joint sales calls and an annual review, little effort to focus on the development of the sub-par player had been applied consistently over a period of time.

So what should a manager expect?  Your “A” players are often self motivated, driven to evolve, and thrive on positive feedback and rewards.  Thus, often its precisely the question marks that need help.  Their development is your job – their development is a project.  And if you ignore the project, or have so many projects (or other things to focus on) that you don’t focus on THIS project, what should you expect?  Do you think they will change of their own accord?  If you want something (or someone) to change, grow and evolve – consider it a project – apply effort to it – and it will move.  It might not move as fast or as far forward as you would like, and then you can make whatever decision you want.  But if you ignore the project, you have no one to blame but yourself for its continuation on the same path…

Focus…and decide what NOT to do

I was reminded recently of the story about the first meeting between Warren Buffett and Bill Gates.  As told in The Snowball by Alice Schroeder, Gates’ mom, the host, asked the dinner guests at the table what the single biggest factor was in their success.  Both Gates and Buffett chose the same word – focus.  When Jobs returned to Apple as CEO, one of his first actions was to eliminate a plethora of product development activity and to narrow to four products – everything else was slashed – he brought focus.  He is quoted as saying “Deciding what not to do is as important as deciding what to do.”  And he’s right.

“But you chose Jobs, Gates and Buffett – it’s easy for them to pick out focus with hindsight – they’re among the most successful business people that ever lived” you might say.  “True” I would respond.  However, I have also had the good fortune to work with some wildly successful, and some not so wildly successful, executives and teams and I have seen this play out time and time again.  Focus matters, and if well applied, can forge the structure of success.  As a leader, entrepreneur, or manager, your #1 role is to allocate scarce resources toward hopeful success.  Every nanosecond spent outside your area of focus is arguably a wasted resource.  Every new project you agree to take on, or allow your team to take on, dilutes resources and focus.  I’ve never understood why choosing a focus, and sticking to it, is so hard for so many people, but I can tell you I have seen the the results at both ends of the spectrum.  And if you can improve your ability to focus, learn, and to be patient over long periods of time, you can improve your probability of success.

Talent Retention Post Acquisition

I have played roles on all sides of acquisition transactions – and I have always believed keeping talented people is hard and requires a thoughtful approach and high touch.  But I had not seen much in the way of empirical data.  However, I recently attended an M&A conference hosted by Transaction Advisors, largely to see a session about talent retention and cultural integration post an M&A event featuring research by Towers Watson.

The data and content concluded that, while retention bonuses have become much more the norm, once they run out, cultural issues often drive people away.  Specifically, the TW data indicated that over two-thirds of the firms offering retention packages were able to keep 80% of the targeted employees — for a while.  However, once the retention period expired, less than half of the respondents had figures anywhere near that successful.  The number one reason given for their departure?  The were uncomfortable with the new firm’s culture.

What to do?  Not surprisingly, taking the time to engage, communicate, and to treat your new employees as people who matter can make a big difference.  The TW folks indicated studies have shown a 50 point success gap in employee retention for firms that use a combination of financial and high touch inter-personal tools and programs such as having senior leaders reach out consistently to their new team members, mentoring programs, recognition programs, development programs, etc.  This supports my empirical experience as well.  If you ignore the cultural impact of a new leader, new ownership, etc. – you run a huge risk of losing much of what you thought you were acquiring.

Family Offices, Independent Sponsors & Patience

As most professionals in and around the private equity industry are aware, wealthy families – or “high net worth” families who perform sophisticated management of their assets via a “family office” staffed to manage their often generational wealth – are increasingly showing interest in investing directly into private equity change of control transactions.  However, their methods for doing so vary, and generally, they tend to have a few trusted relationships with whom they seek to partner.  Oftentimes, these relationships will consist of a few independent sponsors such as firms like ours.  John Rogers, a very experienced PE attorney who also represents many families in these types of transactions, recently wrote a short article summarizing his current view on the trend.

We at KCG also call on and have existing relationships with a number of family offices.  Why?  Because they support us in our model of patience.  Patience to buy and build.  Patience to weather economic storms.  Patience in understanding that if your goal is to grow and evolve an enterprise, oftentimes that’s hard to do within the boundaries of a traditional PE fund duration.  We believe this family office trend will continue and become yet another standard facet of the PE industry, and further see it as a good thing for sellers of businesses.  This alternative – professional buyers who have patience – provides sellers with additional options outside sale to a strategic or a financial (i.e. traditional PE fund).  The more options sellers have, the better for them and their organizations.  But more importantly, just understanding this option exists – to sell your business to someone who isn’t in a hurry sell it again – we believe creates a wonderful opportunity all sellers should at least consider.

Andy Grove’s Great Management Book

I was recently reminded of a great book about management written by Andy Grove – High Output Management.  The book was published in 1995 and in it Grove summarizes expansive wisdom gleaned over an incredibly successful career as an engineer, manager and leader, most notably at Intel.  You can pick up the book, or you can listen to it online here for free (listening has become my preferred method of ingesting much of the new content I find – if you haven’t tried podcasts or audio books, give it a try on your smart phone).  I was reminded of this book while listening to one of my more recent favorites – The Hard Thing About Hard Things – by  Ben Horowitz (yes, the a16z Ben Horowitz).  I personally think Ben’s book should be mandatory reading for any new VCs or PE types as well as any budding or new entrepreneur.  It’s a great read (or listen) and is full of practical wisdom.  These two books give you a sense of how to manage – Ben’s particularly so in a VC environment.

So why does a PE independent sponsor investor consume books about being an operator?  Because we need to understand the management teams we partner with, respect them, be able to identify the great ones, and also be able to support and help them.  If you are selling your business to any type of financial buyer, or taking any type of “professional” capital from the outside, I would encourage you to make sure your potential partners have an appreciation for what it takes to be a strong operator, CEO, entrepreneur, etc.  And fundamentally I recommend you make sure they understand how to be exceptional listeners and don’t think they have all the answers.  As Ben or Andy will tell you, managing and leading are hard work.  There are no shortcuts.  And partners who understand that and support you on your journey are critical.  Particularly those who are also your investors.

Golden Anniversary of a Goldmine (a.k.a. Berkshire Hathaway)

With the year well underway, budgets are completed, audits are finished, taxes are filed . . . and there is now time to read the famous and always anticipated letter from Warren Buffett to Berkshire Hathaway shareholders.  Buffett’s letter is widely read by investors, but especially those with a long-term and value-focused orientation, and this one is especially unique as it marks the Buffett’s 50 year anniversary at the helm.

Berkshire’s and Buffett’s business principles are well known, and were memorialized some years ago in the Berkshire Owner’s Manual.  Though the deal of a career for lower middle market investors like Kestrel Capital Group would likely be too small to interest Buffett, we approach investment opportunities with the same long-term and partnership-oriented perspective Berkshire employs . . . and we are looking for new deals too!

Like most investors, we look for certain attributes, but the most important aspect in our assessment is evaluation of the overall fit of the people, prospects, and business model of the opportunities we consider.  We welcome the chance to learn about lower middle market investment opportunities and, whether or not there is a fit, we promise a quick and thoughtful response.

Give us a call if you have or know of an opportunity.  And if you want to learn more about Berkshire Hathaway, check their complete annual report here.

 

The Culture Blueprint

At KCG, we are big believers that an organization’s culture will impact how successful it is today.  And, perhaps more importantly, how successful it can be in the future.  An organizational culture that embraces learning, growth, new ideas and is also able to attract, train and retain the best individuals will, in our experience, out compete most competitors – and destroy those with corrosive cultures.  Yet while there is an increasing amount written about culture, there are few “how to” guides that discuss specific ideas on how to create and maintain a world-class culture.

We recently came across a book that has some really thought provoking ideas on the topic and wanted to share it.  Robert Richman recently released a book called the Culture Blueprint which is at the cutting edge of attempting to provide a road map of tools – or – a blueprint.  Robert was hired at Zappos by Tony Hsieh after Tony had begun to realize there was an increasing amount of interest in the Zappos culture.  Tony hired Robert to start Zappos Insights – a consulting arm of Zappos that shares the Zappos culture with the world.  Now granted, the Zappos culture isn’t for everyone – but what’s important is that visitors and clients get to examine what a strong culture looks like, how it behaves, how it manifests itself in providing differentiated products / services, etc.  In the end, or course, that’s what really matters – the results.  But it’s our belief that in the business world of tomorrow, those results will be increasingly impacted positively (or negatively) by culture.

The Rise of the Independent Sponsor

The independent sponsor form of private equity is on the uptick as evidenced by the many the articles written on the topic which speak to the growing prominence of the model.  And though we at KCG may have been on the earlier side of this most recent wave, we are not alone, and we believe this trend is here to stay.  That said, there are also many different forms and styles of independent sponsors, so we thought we’d use this post to speak a bit about the model itself and our similarities and differences.

Fundamentally, an independent sponsor seeks to buy strong companies with potential at a fair price like any other PE firm.  However, we do so by funding each company independently, aggregating specific pools of capital partners for each opportunity.  While this in our opinion aligns us greatly with our stakeholders in the transaction, it is also a concentrated bet for us and them.  Simply put, it’s not for everyone.  A traditional PE fund employs diversification by investing in anywhere from 5 – 15 companies (or more) per fund.  When you have that many children in a portfolio, it necessarily impacts your behavior – a topic perhaps for another post.

But at the outset, for the seller, most independent sponsors look and feel pretty much like a traditional PE firm.  At KCG, however, we further differentiate ourselves after the transaction by taking a long-term approach.  We seek to partner with management teams and companies that we think we wouldn’t mind being married to for a long time – because we just might be.  We are specifically not trying to “buy and flip” our businesses, but rather striving to grow and build great companies that can sustain over the long-run.  While are in the minority in this regard, we think focusing ourselves, our management team partners and other stakeholders on building a great business over the long-term by applying good management and PE principles is the best, and most fun, model for generating great long term-outcomes.  And you cannot pursue this style of investing in a fund – fund investors want their money back as fast as possible – which also necessarily impacts the PE fund’s behavior and M.O. with the company and team.

The reality is, there is no “right” or “wrong” way to practice principal investing, and quite honestly most sellers don’t care.  That’s why we seek to find owners of exceptional companies who are looking to transition to partners / buyers who will care about their business and their people as much as they do.  They are hard to find, but we think their ranks are increasing as well.

Life gives you what you deserve, it doesn’t care what you like

For this first post of 2105, I am channeling my nascent inner Ray Dalio. If you’ve never heard of Ray, he runs a hedge fund, Bridgewater Associates, which he started from his apartment in 1975.  He has risen into rarefied air among investors – Bridgewater is, and has been for quite sometime, the largest hedge fund in the world managing in excess of $160 billion.  I believe Dalio is to hedge funds what Warren Buffett is to the public markets.  And for those of us who look to these titans to learn, we sometimes think “Wouldn’t it be great if you could climb inside their head and understand more about how they think?”

Well with Ray, amazingly, you can.  In 2011, Dalio took the bold step of publishing on the Bridgewater website a 123 page document entitled “Principles”.  No, there are no investing tips, but rather the content delves into how he thinks, what he values, and how he has evolved himself and his firm to rise to the top in a very competitive field.  For me, as a student of anything that can enable one firm to compete and succeed over the long-haul, this peek into Ray’s world, and mind, is simply fascinating.  To some, Dalio has evolved to a sort of “cult-like” status, with all the good and bad that entails depending on who you read or listen to.  Having never met Ray (yet!), I don’t really want to wade into any of those tidal pools, but would like to draw a few intersections with what we try to do at Kestrel Capital Group.  The title of this post summarizes one of Ray’s perspectives, and yes, he’s a realist.  In fact, he desires Bridgewater to be a place striving for “hyper-realism”.  With that perspective, if you step back and look objectively at a life, over time, more often than not, one gets what one deserves.  Life doesn’t care what you want, but rather, it more or less delivers you what you deserve.

At KCG, we hold a similar view for companies.  If you sit pat, make no effort to grow, learn, evolve, contemplate your business and its journey – more often than not, your market will give you what you deserve.  And thus we strive to engage with our management team partners to think long and hard about where their business has come from, where it is going, where it could go, what could get in the way and what they could be doing today to carve a new path.  How do they solve problems?  Tackle challenges?  Recruit, train and retain their human capital?  These questions take time, and require thoughtful input from people inside and outside the organisation.  Importantly, in fact in most cases critically, the customers (old, current, new, lost, etc.) can provide the best feedback and barometer to the waters that lie ahead, and how one can compete effectively and win over the long-term.  I don’t think this will be my last post about Ray, and I encourage you to dig a bit into his journey – there is much to learn for organisations who desire to compete and win over the long term.

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