From 2000+ to 3: 2015 Year in Review
Adventur.es, now known as Permanent Equity, is entering the new year wiser, stronger and a great deal larger. In the course of making 3 late stage acquisitions and 27 early stage investments, the future of adventur.es, and who will contribute to it, became a bit more clear in 2015.
People consistently ask us: “What makes adventur.es unique in the sea of potential investors?” We reviewed over 2000 qualified deals and deep-dived on 397, leading to 17 indications of interest (IOI) and 5 letters of intent (LOI). This afforded us a feedback loop of learning about how we are different from the norm, in good and bad ways. Here's what came into focus:
WE SAY WHAT WE MEAN, AND WE MEAN WHAT WE SAY.
There were two instances last year in which we submitted IOIs before management calls because it was demanded as part of the "process" (a gut issue for us, given our priority on culture/no assholes). Both submissions received responses of, "Sorry, you didn't make it to the next round." No surprise, but a good reminder to stick to our gut.
When we draft an indication of interest, we take it seriously. We've spent a considerable amount of time evaluating that particular opportunity, calculating a valuation range, and determining an optimal transaction structure that we would stand by should we enter due diligence. That seems to be rare. It seems like the M.O. for most groups is to hastily throw out a big number, with very little interest in actually moving forward at that valuation and we fear that trend is only getting worse.
WE WILL PROBABLY NEVER BE THE HIGHEST VALUATION, BUT WE WILL BE COMPETITIVE - AND TRANSPARENT.
Given our long-term holding approach, we refuse to meet short-term market hype and overpay for businesses in an overcrowded market. We stick to what we know can sustain a lower middle market company through economic contractions: 3X to 5X net owner earnings. That took us out of the running on a lot of deals in 2015, and that’s fine by us.
In several instances, we found ourselves competing on opportunities with particular complexities. Given non-disclosures, we can't discuss them specifically, but in broad terms, it's critically important that all parties understand the tax implications of a transaction and their own company’s working capital requirements. People sometimes got frustrated with us for bringing these things up early in the process, but we do so for a purpose -- to avoid heartburn down the road.
OUR AVERSION TO DEBT WAS A GOOD LEARNING EXPERIENCE IN 2015.
Debt is a tricky thing. It’s not good, or bad. It never creates returns, but merely amplifies the upside, or downside of a transaction. We wrote about it extensively in “Risk, Return, and the High Wire Act.” We’re playing the long game, have been leery to use much leverage, and have been happy to be on the “get rich slowly” plan.
With that said, this year we got an education on the nuances and uses of debt. In the early part of the year, we lost out on a few deals due to our ignorance. To call it like it is, we were stubborn idiots. Good deals, for both sides, can be crafted with a modest amount (2-3X pre-tax earnings) of leverage. Like anything worthwhile, it’s all in the execution. We knew we were lacking, so we went to school (figuratively) and studied how to employ debt responsibly. And, I think we did so. We’re still fairly averse to using much debt, but I’d characterize our mindset shift from “no debt, to responsible debt.”
WE WILL GROW BASED ON OPPORTUNITIES, NOT TIMING.
In spite of the constant deal flow, there were several points in the year where the chances of closing looked dim. It was frustrating, but also a good test of patience. We recovered from our weak moments of “do something” syndrome and held out for the right opportunities. Luckily, it paid off.
This year further reinforced our willingness to sit on our hands and wait for the right pitch. As Warren Buffett would say, “There are no strikeouts in investing.”
NO TWO SITUATIONS ARE THE SAME, AND NEITHER ARE ANY TWO PEOPLE.
Cookie cutter descriptions don't fit us. We’re constantly tweaking the language we use to better articulate what it is that we’re looking for and how we operate, but this year we’ve come to the conclusion that trying to be precise in description may be exactly the wrong thing to do.
Each company is unique, and we work with leadership teams in different capacities as needed to maximize value. Sometimes we have daily contact, while other times we focus on board meetings. We don’t have an adventur.es leadership mold and don’t expect our executives to be cookie cutter in their approaches. This rang particularly true when we began outlining our executive orbit program. We want to find the right people for the right situations. What does the ideal candidate look like? We certainly don’t know, but we look forward to connecting capable, driven people with big opportunities in the new year.
All-in-all, it was a challenging, frustrating, exciting, fun-as-hell, and ultimately fruitful year. We can’t wait to see what 2016 has in store for our family.
Want to get updates like this one in your inbox? Subscribe below to receive our annual letters.
