Uncategorized

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.

 

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 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.

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.

They used to be called “Generation Y”, but today we know them mainly as Millennials.  This of course is the generation born from (roughly) 1980 through the early 2000s, depending on which definition you choose to follow.  They are a large group – larger than Boomers, much larger than GenX – and growing.  They have often been characterized as a lazy, selfish, technology addicted, unmotivated group.  However, many pundits argue, and I happen to agree, that this generation stands be one of the greatest in American history, and they also stand to change our work lives in some amazing ways.  You may wonder – why does this topic show up in a private equity blog post?  Well, fundamentally, our Kestrel Capital Group approach is different.

We intend to hold our businesses for a long time.  And if we are to be successful, we better be worried about attracting and retaining the best and the brightest team members to our organizations.  And in the future, those individuals will increasingly be Millennials.  They are the most researched generation in history, so there is plenty to read, and plenty of guessing going on as to what they will evolve into.  But one of the consistent themes is that culture in the workplace matters.  It matters more so than in any prior generation.  What does that mean for us?  This generation self identifies, and has acted, to say “well you know what, this culture stinks, my boss is a jerk, and I’m just gonna quit and find another job, even if it pays less…”

They care enough to quit and walk away.  Now folks from my generation and above may say “that’s fine, good riddance…”  but I think that’s a big mistake.  You don’t have to become one, but for us and the business leaders we partner with, we sure better try to understand them – and realize that now more then ever, culture in business matters.  If you’re interested in exploring more – check out this Brookings article called “How Millennials Could Upend Wall Street and Corporate America“.  And you may also want to get a tattoo, because almost 40% of them have them, and nearly 20% have 2 – 5…trust me – they are different, and they are coming…

Family businesses come in all shapes and sizes, from the corner store to Walmart; widget maker to Ford Motor Company.  Did I mention Walmart and Ford in the same sentence as family business?  Yes, Ford and Walmart are two of the 150+ family controlled companies in the S&P 500!

Among the resources available from The Family Business Institute (a professional service firm dedicated to serving the needs of family and closely-held businesses) is an interesting article on the topic.  As a private investor focused on partnering with privately held, lower-middle market businesses for long-term (think decades not years), there were several interesting points in the Family Business Institute’s article 10 Things You May Not Know About Family Businesses.  Not surprisingly, family businesses are enterprising and tend to be successful . . . but their life span is not indefinite (24 years on average – see #6 in the article).

Why only 24 years?  Reasons vary for sure, but one of them has to do with transitioning a business beyond the leadership of its founder.  There are many effective solutions to this challenge, and at least one sure fire way to fail and that is to fail to consider the issue.

Are you considering what the future holds for the legacy of your family business?  Beginning to think about liquidity?  Do these thoughts resonate with you?  If so, give us a call.  We would love to talk.

 

A famous paraphrasing of a Thomas Edison quote is “I haven’t failed. I’ve just found 10,000 ways that won’t work.”

…to Learn Faster

While I’m no longer an active venture capitalist in the traditional sense, my Partner Bill and I often still find applicability of what are sometimes considered “start-up” or “venture” philosophies to our current investing model as purchasers of established businesses.  “Fail fast” is one such concept.  In the VC world, whether you say “fail fast” or “fail forward” or “fail often”, it pretty much means you can’t learn, grow, evolve or succeed without trying and failing (hopefully as quickly and inexpensively as possible).  I was reminded of this mantra while listening to a recent podcast on Freakonomics Radio called The Upside of Quitting.

It may seem obvious that this is absolutely true for start-ups.  No product/service, no team, no customers?  There’s only one thing to do – get started!  And fail.  And learn.  And keep going.  In our companies, all of which are established businesses with existing products and services, this dictum is just as applicable as it is to a start-up.  And while I prefer “learn fast” or something with a little less negative connotation than “fail” – the idea is the same.  In business, and in life my opinion, you must embrace learning, evolution and change or you absolutely will fail.  And doing so fast (or at least faster than your competition) can often give you an edge as a market changes / evolves.  Whether in functions inside the four walls or out – trying something new and working to improve, you should expect mistakes, and keep working toward getting it right (or at least – getting it better!).  So if you embrace a culture of organizational learning (a topic for another blog post!), in our view, you are already moving in the right direction!

 

Remember that line from the late 1990’s Apple advertising campaign?
Think Different was the slogan for an ad campaign ordered by Steve Jobs shortly after he returned to the Apple experienced massive growth over the nearly 15 years following Jobs’ return in no small part because they did exactly what the slogan suggested.

As we set out to form Kestrel Capital Group, Steve Vivian and I pushed ourselves do to the same – think different. With combined experience of nearly fifty years financing and investing in lower middle market companies, we have learned a great deal along the way. And while we bring many of those lessons with us, Kestrel Capital Group also departs from the traditional Private Equity model in a few key ways. We are focused on the long-term . . . the really long-term. We go into our investments with an indefinite hold period rather than the intent to sell in five year. We have a preference for being involved with companies for a period of time measured in decades rather than years. And we bring the support of investors who share this long-term mind set.

From this key difference, several other nuances in approach naturally follow. We invite you to browse our website to learn more . . . and to give us a call if our approach resonates for you, or someone you know who may be considering a transaction.