New Fund, New Partners, Same Old Strategy: 2019 in Review
In many ways 2019 was the hardest and most rewarding year of my career:
We raised Permanent Equity II, a $248M 27-year fund with a 10-year investment period; acquired three companies, which fully invested our first $50M fund (Permanent Equity I); launched the Scout Network; hired two managing directors and two portfolio company CEOs; and co-hosted one heck of a three-day finance festival.
Each alone would have been a highlight. Having them all jammed into one year was spectacular in mostly good, and occasionally bad, ways. The good side is obvious — more resources, more portfolio companies, more profits, more talent, and more friends. The downside is that even the best things are poisonous at some dosage, and we pushed that boundary.
On the homefront, Dr. Beshore and I welcomed our third daughter. Her name is Blaise and she’s an eating, sleeping, and pooping machine, just like her father. The other two girls, ages three and five, are wild women and we’re a couple female pets away from a full blown Venusian circus. Life is full at home and at work, and I wouldn’t want it any other way.
STATUS QUOS
Before I get started on the new and shiny, let me start by talking about the existing fund, portfolio, and team. I’m just so proud of the people God has graciously put into my life. I’m proud of who they are, what they’re accomplishing, and most importantly how they’re doing it. I learn from them daily. Occasionally I’ll have a nightmare that the past ten years have all been a dream and I wake up in a cold sweat. While the work has been rewarding, it’s the people I’d mourn most if it all evaporated.
Permanent Equity I investors have been helpful, thoughtful, and encouraging. As I wrote in the 2017 annual letter announcing the first fund, I had tremendous trepidation raising outside capital. I was repeatedly warned about the hassles and headaches. In fact, my good friend Morgan Housel told me I was backsliding career-wise by raising a fund. I think his exact words were, “Why?! You don’t answer to anyone and you have plenty of money. Are you stupid or something?” While Morgan was directionally correct, my experience with outside capital has been nothing short of game-changing. The additional resources have fueled every aspect of the business. Quite literally, I haven’t had one cross conversation with a single LP in two years, which apparently carries the same odds as winning the lottery while simultaneously being struck by lightning and attacked by a shark.
Companies are collections of people. We’ve got great people and therefore our performance has been better than we deserve. If you focus on the people, the score takes care of itself. Not to say there aren’t hiccups, or even major challenges from time to time, but overall, our portfolio has done well. The norm for us is steady, sustainable growth, which is what most of our companies delivered this year. Having said that, a couple of our companies knocked it out of the park, and one struggled. Both outliers are to be expected, and both should be planned for. Business, like life, is messy and unpredictable. Sometimes you get surprised on the upside, and sometimes you catch a swift kick south of the border. When the latter happens, you want to give yourself the leeway to recalibrate and retool. Not carrying debt certainly helps.
One of the people I’d like to highlight is Bill Keen, who, until his sudden and tragic passing in July, was the CEO of TEPCO, our Dallas-headquartered glass and glazing contractor. Working together on a transaction either bonds people or creates irreconcilable differences. Despite some tough words during due diligence, which are unavoidable, Bill and I shared a respect for one another and a friendship. He was a smart, thoughtful, and faithful man who loved his family and cared deeply for his organization. As a testament to his hard work and planning, and despite the void created by his glaring absence, TEPCO has prospered. He thought highly of his top three lieutenants, as do we, and set them up for success. Now Gary, Brian, and Mark are running the show and growing his legacy beyond what Bill could have imagined. You’re missed Bill. Rest in peace, my friend.
THE MINORS, THE MAJORS, AND THE LONG GAME
I joked in the 2017 annual letter that we “went pro.” This year the National PE League called our number and promoted us out of the minors, with us raising a $248M fund called Permanent Equity II. In the world of finance, $248M isn’t “big,” but it ain’t nothing either. In what turned out to be a surprisingly challenging fundraising environment for new institutional funds, I’m proud that our team was able to find the right investors.
The key word when it comes to investors is “right,” because adventur.es, now known as Permanent Equity, is an odd group. We take no fees on the capital we raise and cover all our own costs, including travel, dead deal-related expenses, and all overhead. We buy with no intention of selling, typically use no debt, and like to keep leadership teams intact post-close. If you’re familiar with private equity, that makes no sense.
Our unusual structure allows Permanent Equity to be different, puts us in a position to make better decisions, and ultimately gives us a shot at generating superior returns. Anyone who tells you that money is a commodity has never raised capital, done a deal, or had a partner. Money is always attached to people and people come with a variety of temperaments, time horizons, and incentives. A dollar that can walk tomorrow is less valuable than a long-term, committed, and trusted partner.
The problem for my industry is that traditional private equity terms create terrible incentives for buying and operating a company. A private equity firm is being completely rational when it continues to pay higher prices, does increasingly less due diligence, raises larger-and-larger funds, buys bigger companies, makes short term decisions, and bills the heck out of investors and portfolio companies every time they lift a finger. If that sounds like strange behavior, you don’t understand how traditional private equity works. And it’s not because they’re bad people. Some are, but most are decent people who are trying to make a living and doing the best they can under the circumstances. Those circumstances are co-created with LPs (i.e. the people with the money), and the industry standard is to hog tie the dollars with all kinds of nutty and perverse strings attached.
Here’s a big management fee to pay yourself handsomely. Want more? Raise more. Bill us anytime you work with your companies. Don’t worry about putting much skin in the game. Feel free to use copious amounts of debt, just make sure it’s non-recourse. If the company detonates, walk away. And for goodness sake, never hold an investment longer than 5 years. In fact, make sure you sell your winners early so you can raise your next fund.
If the standard model is broken, why don’t more people want to change it? The short answer is career risk. No one wants to break wind in the crowded elevator. To quote the great philosopher Austin Powers when asked how dare he, “I didn’t know it was your turn, baby.”
Private equity continues to be a pleasant ride for both allocators and investors. Returns have recently outperformed everything but Taco Bell franchises in states that have legalized marijuana. The good times are rolling. Why would you as an LP or GP take a fresh look at what’s already working and get creative? Most don’t and won’t. And anyone who dares suggest a better way has committed high finance apostasy and shall be shunned.
Permanent Equity has now raised two funds on almost identical terms that are virtually the inverse of traditional PE. We have a 27-year fund life, with no off-ramps, hoops, or checkpoints. For 27 years we can buy, make long-term decisions, and reinvest in the businesses without any concern for a forced sale. At the end of the fund the LPs can vote to extend the time horizon further. It’s functionally permanent capital. And, my goodness, is it hard money to raise. When you tell most LPs that you’re raising a 27-year fund, you’re met with laughter and incredulity. I stopped counting how many asked, “Are you serious?” Yep, we’re serious.
That time horizon allows us to offer a fundamentally different product to sellers and leadership teams, who are Permanent Equity's customers, which gives us one heck of a selection bias and a competitive advantage. While others offer the buy, lever, strip, and flip, Permanent Equity offers the buy, hold, and reinvest, like families do. We’re one of the few ways a family-owned and operated company can realize their years of commitment and sacrifice by taking chips off the table, while at the same time still retaining their culture, style of decision-making, and leadership. For many sellers, they could care less who buys what they’ve built and how it will be run post-close. But to the select few who care deeply about their people, their customers, and their community, Permanent Equity is highly attractive. Those are the people with whom we want to do business.
The other major oddity of Permanent Equity, outside of having a CEO who looks like he’s 25 years old, is how we’re compensated. There are zero fees or management expenses coming from the LPs or portfolio companies to the GP outside of a split of free cash flow above a hurdle. As we told potential LPs, “If you can’t buy beer with it, we don’t charge for it.” When the companies prosper and our LPs prosper, Permanent Equity prospers too. It’s a highly aligned and entrepreneurial structure, which feels natural to us. We’re not asset gatherers, or even investors in the traditional sense. We’re entrepreneurs and operators who choose to help other entrepreneurs and operators do better. The investment merely enables the work.
YESES, NOES, AND HALLOWEEN LPS
The fun part of raising money is getting to meet some incredible people who study hard, ask fantastic questions, and help us get better. They want us to succeed. They’re resourceful and experienced. Even when they’re skeptical, they’re respectful. They do what they say they will, when they said they’d do it. And when you shake hands on something, they stick to it unequivocally.
Along with many investors from our first fund, including our two anchors, the Vlasic and O'Shaughnessy families, we are thrilled to welcome a couple of top-notch endowments and even more families into the fold. Washington University’s endowment is our new anchor, investing $100M in the fund. CIO Scott Wilson, Senior Managing Director Andrew Choquette, Director Adam Kurkiewicz, and the entire team at WashU put in a tremendous amount of time, committed early, and did so with high conviction. They were tough, but fair in due diligence and treated everyone at Permanent Equity exceedingly well. If you’re looking for a top-notch, long-term partner, I’d highly suggest giving them a call.
A common thread amongst our investors is a lack of or tolerance of career risk. As the head of private equity for one potential LP told us, “If I invest and you flame out, I could get fired. If I invest and you do well, it doesn’t really move the needle for me.” That’s career risk. It’s an obvious principal-agent problem and it’s nothing new. It feels good to be protected by the herd, at least until your returns are indistinguishable. Our investors are willing to invest divergently and we’re grateful for it.
We also met plenty of less-than-incredible people. I’m convinced there’s a rare neurological disorder that afflicts many of those managing large sums of money. Let’s call it “Big Deal Syndrome,” but it could be called “Many Leather-Bound Books Disease” or “Smells Like Rich Mahogany-itis.” Symptoms include an abundance of confidence -- one might even call it arrogance -- coupled with a lack of preparation, critical thinking, or basic decorum. Here are a few quotes I collected during my field exams:
“I know I reached out to you, but I don’t have much time. Do you know how much you sent me to read? It’s over 20 pages. Actually, it doesn’t matter. All you PE shops are the same, so I don’t even need to read the materials. You go after the same market in the same way. The only thing different is the team, so let’s just cut the shit and just tell me about the team.”
“You PE guys raise money every 18 months, so come back to me then.”
“It’s just too much, too quickly. You haven’t paid your dues and aren’t old enough to manage that kind of money.”
“There’s no way you’ll build a team in Columbia, MO. I mean, come on, who’d want to live there?”
“It only took me about 3 minutes to realize that your structure would never work. It’s nonsensical. Why would you buy and hold an investment for even 10 years, let alone 27 years? No company is worth building for that long. Heck, 5 years is an eternity in private equity.”
“I admire your gumption, but in 27 years you’ll be on your fourth marriage with a bunch of step kids splitting time between your vacation homes. And, I’ll be dead. So no, that time horizon doesn’t work.”
“Based on the way you split cash flows, you could artificially create an income stream and take fees off of it. I understand there’s a clawback and you’re personally guaranteeing it, but my experience is that GPs will find a way to screw over LPs, so I’m sure you’d figure out how to get around it.”
“If I’m committing to 27 years, I need to see your entire medical history, including blood work and your doctor’s charts.”
“We’re going to decline because we’re only interested in opportunities with upside.”
Sadly, beyond the inevitable humbling that life tends to deliver, I see no cure for this industry affliction in sight.
There’s an old phrase: “Yeses and Noes will make you a lot of money. Maybes will kill you.” Amen to that. Many smart, thoughtful investors passed on investing for a variety of reasons. The ones we appreciate most, who we would happily engage in any future fundraising discussions, are those who took a hard look, gave honest feedback, and declined promptly with a warm invitation to stay in touch.
The “maybes” are brutal. Like any sales process, allocating resources is a guessing game and some LPs intentionally make it difficult to know where you stand. The decision to do this comes down to how you view the investment business. Is it a big universe of partners playing a zero-sum one-time game? If so, then it’s logical to burn bridges for the sake of short-term optionality. However, I’d humbly suggest they’re playing the wrong game.
Perhaps the oddest group are what I call Halloween LPs. They suddenly appear, engage in meaningful discussions, then disappear without a trace. The technical term is “ghosting,” which I incorrectly believed was restricted to the realm of teenage dating. Apparently, it’s alive and well in endowments, family offices, and foundations. I try to abide by Hanlon’s Razor, but the level of ghosting some employed seemed to signal it as their primary strategy.
If someone’s looking for a startup idea, may I suggest the Glassdoor for LPs? Permanent Equity would be happy to seed it with reviews, and thankfully the majority would be glowingly positive.
CAPITAL, OPPORTUNITIES, AND TALENT
“We don't have to worry about money no more and that's good. One less thing to worry about." - Forrest Gump
We’ve been on pace to invest about $30M per year, which feels steady and healthy. If we wanted to lower our bar, we could certainly put a lot more capital to work. But because of our indefinite hold period and unusual fee structure, the arithmetic looks different. We can take our time, buy smaller, spend time helping the companies post-close, make probabilistically good investments that won’t pay off for years, and develop meaningful long-term relationships.
Behavior flows from incentives. Unlike traditional private equity, we view capital as an enabling force, but not the primary driver of our strategy. Whether we had raised $100M or $500M, our investment behavior would be identical. The only difference is how often we’re back out raising capital.
Our constraints are now opportunities and people.
OPPORTUNITIES
Organically, our deal flow continues to compound. We don’t attend conferences often. We never cold call sellers. We rarely participate in auctions. So where do our opportunities come from? It’s all inbound from sellers, leadership teams, the helpers of sellers, friends, and other investors. We try to put ourselves out there, which attracts the right people and repels the wrong people. Not a week goes by when we don’t get an email, Twitter DM, LinkedIn message, call, or text that leads to an opportunity.
That’s the beauty of what Permanent Equity does. Everyone knows great businesses. Permanent Equity was built on friends referring friends who become our friends and refer their friends. That’s how our best deals and most of our colleagues came to be. And that was the genesis of the Scout Network.
Some people (you know who you are) are so generous with their introductions that they blur the lines with Permanent Equity. If you hear them talk, you’d expect they had worked with us for years. And while we always say thank you, send a note of gratitude, and usually a nice little gift, it got us thinking… What if we brought down the wall of full-time employment with Permanent Equity, allowing anyone to contribute and share in the fruits of their work?
The Scout Network was born. Here’s how it works:
Refer a deal to Permanent Equity
If we close the deal, we’ll send a Big Check*
*Big Check: $100,000 + $25,000 Adventure of a Lifetime Vacation
Since we announced the program in May, we’ve had over 500 people join. Every week we are seeing opportunities we’d never know about any other way. And, we’re getting a chance to gather feedback and insights from a group of people who span the professional spectrum. While most of our Scouts are who you’d expect — lawyers, accountants, wealth advisors, and bankers — we also have quite a few non-competitive private equity investors, business owners, MBA students, and company leaders. It’s a diverse group and we’re grateful that they’ve chosen to spend time with us.
If you’d enjoy helping us find opportunities, learning along the way, and getting paid to do it, email Clayton Dorge (clayton@permanentequity.com) and he can set up a time to chat.
TALENT
Let me say this unequivocally, talent is and will always be our primary constraint. The only way to scale beyond a command-and-control leadership style, which quickly caps out, is to find talented and thoughtful people you can trust, who find talented and thoughtful people they can trust. Once the system gathers momentum, it’s a beautiful upward spiral.
In 2018, we launched the Orbit, which is highlighted in the 2018 annual letter. It’s an opportunity for people interested in working with Permanent Equity, from entry-level to CEOs and from accountants to technologists, to get to know us and be ready when the right opportunity comes along. With over 700 members, it has become our go-to source for finding the right person for the right position. If you’re interested in growing a family business, make sure to sign up.
I want to highlight four new Permanent Equity team members in particular:
Taylor Hall: Prior to joining Permanent Equity as Managing Director, Taylor served as our outside attorney at the St. Louis-based law firm of Greensfelder, while at the same time serving as the leader of the firm’s business services and M&A practice, consisting of nearly 50 attorneys across multiple offices and completing hundreds of middle market transactions. Before that, he was in Chicago with Jenner & Block working on public company M&A and securities. We couldn’t have been more impressed with not only his legal chops, but also his ability to zoom out and understand the economic and political landscape of a deal. In his new role Taylor leads due diligence, negotiation and documentation, along with being active in our investment process.
Mark Brooks: Earlier this year I asked Tim (Permanent Equity CFO), “Who’s the best operator you’ve ever worked with?” Without hesitation he said, “Mark Brooks. But there’s little chance he’s moving to Columbia.” For 19 years, Mark and his family had lived in Washington, D.C., where he held leadership roles at AOL and then The Motley Fool. This fall, they moved down the street from me. Mark, also as Managing Director, is working with a portfolio of our companies, as well as dramatically upgrading our technology and systems expertise.
Jason Harp: Our aerospace acquisitions in Los Angeles needed a new leader and immediately we knew who to call. I first met Jason three years ago when he reached out about the Permanent Equity model and have stayed in touch ever since. His Yale MBA, stint at Bain, and extensive private equity operating experience initially gave me pause, but he’s as down-to-earth and long-term oriented as they come. We couldn’t be more excited to welcome him to the team.
Liesl McDonald: When a friend tells you to take a hard look at someone, it’s for good reason. Over the course of six months, many phone calls, and a couple in-person visits, we got to know Liesl. Each time we met her, our fondness and respect grew. She’s a University of Chicago MBA and a seasoned operator whose values align perfectly with ours. When an opportunity arose at Selective Search, she jumped at the chance to work with Barbie Adler and the team. We can’t wait to see what this talented group accomplishes in the new year.
I also want to highlight the two most tenured Permanent Equity team members. Both Susanne Bylund and Emily Holdman reached the 10-year mark with Permanent Equity this year. They have worn so many hats through the years that I’ve lost count. When you’re starting out, everyone does everything just to survive and much of the success of Permanent Equity can be directly attributed to their efforts. If you get a chance, send them a note of congratulations. They deserve it.
NEW INDUSTRIES AND OPPORTUNITIES
Permanent Equity added three companies to the family this year — Selective Search in May and a pair of sister aerospace companies in September, Pacific Air Industries and Air-Cert.
SELECTIVE SEARCH
Let’s talk about love. No, seriously.
We’re now partners in the top matchmaking firm in the world. If that sounds odd, I get it. The first time I heard about Selective Search, my mind immediately went to the movie Hitch and reality TV. In fact, we almost didn't pursue the opportunity because of my biases, which turned out to be completely misinformed.
About 20 years ago, Barbie Adler was an executive recruiter, helping big companies find c-suite executives. As the daughter of a psychologist, she realized that the same processes could be redirected to help her friends find love. Selective Search was born and my goodness how far it has come.
Today, Selective Search is a leading North American executive recruiting firm, complete with the research capabilities, a proprietary 250,000 person database, repeatable strategies, and professional team you’d expect. The only difference is that instead of helping companies find executives, they help entrepreneurs, executives, financiers, scientists, and retirees find long-term, committed romantic relationships. And, they do it consistently, with an astounding 87% success rate.
The more we got to know the team, the more our skepticism waned and our enthusiasm grew. What we found was a fantastic team serving an enormous market in a highly valuable way. A long-term, committed relationship is strongly linked to both quantity and quality of life. In fact, many medical professionals consider it the single biggest factor in health, happiness, and longevity.
While matchmaking has been around for millennia, it has all the markers of an immature industry, including the stigma. It’s highly fragmented, rife with bad actors, comically misunderstood, and has historically operated in a one-off manner. The same could be said of any industry prior to professionalization.
Selective Search isn’t a dating service and the entire process is offline. In fact, it rejects potential customers who are more interested in exploring than committing. Their clients are busy professionals who have an aversion to dating apps, online services, or matchmaking events, and value convenience, confidentiality, and a highly customized search. Selective Search’s processes are so thorough that the first introduction ends up being “The One” about 34% of the time.
If you’re interested in finding The One, it’s a fantastic service that is responsible for over 3,900 couples. You (or a single friend) should give it a try. Mention this letter and they’ll include a little something extra.
PACIFIC AIR INDUSTRIES AND AIR-CERT
Almost 18 months ago I was introduced to long-time Glenair President Chris Toomey about an opportunity. That opportunity involved a 94-year-old CEO, a friend of Chris’s, who was looking for a long-term home for two companies that composed a 60-year-old family business. Shortly thereafter, we had a call, exchanged some materials, came to terms, and I booked a flight out to Los Angeles.
This is the norm for Permanent Equity. A trusted friend makes an introduction to another trusted friend who would like to sell the business, but who also dreads the inevitable process and posturing. We try to optimize for ease of the seller and leadership teams, and yet still do thorough diligence so we can know the business and become great partners. We want to reach a fair deal, but not aggressively negotiate every detail. Most of all, we want everyone involved to walk away not just satisfied, but pleased with the closed transaction.
To make a long story short, that’s what happened here. It was a perfect match. Lady Ridley-Tree, the owner and CEO of the companies, wanted her employees, customers, and vendors to be treated well, for the buyer to help modernize the businesses, and she didn’t want debt put on either of them. This is where Permanent Equity shines.
Due diligence and documentation went slowly, which is to be expected. We say to sellers that we’ll go at whatever pace they’d prefer. For some, like Selective Search, the process moves quickly, with us closing in less than 90 days from having our first call. For others, like TEPCO and in this case, it’s a deliberate march. Either way, the same work is done. It’s just a matter of style, what is going on in the business, and how much has been prepared ahead of time.
Pac-Air and Air-Cert keep planes in the air. Pac Air acquires and resells new airplane parts for commercial aircraft, while Air-Cert inspects, certifies, and repairs them. They’re beautifully symbiotic businesses that allow a part to be bought, certified, and shipped all in the same day, which is rare. When you have an expensive aircraft grounded, every minute counts.
So when your 747 has a maintenance issue, you know who to call.
CAPITAL CAMP
Towards the end of May, about 250 GPs and LPs from 13 countries, five continents, and dozens of asset classes journeyed to Columbia, MO. Despite travel delays and an actual tornado, the inaugural Capital Camp brought together those pushing the frontiers of investing to challenge their best ideas and create new friendships. It was appropriately nerdy, casual, and calorie-intense. Staying true to midwestern celebratory style, we also blew up a bunch of fireworks. Well, actually, we hired professionals to put on a big display.
Planning for Capital Camp 2020 is in full swing. Although we have some fantastic presentations and interviews from the likes of Michael Mauboussin, Alex Danco, and Scott Wilson, we’re focusing more on small group activities and less “stage time.” Morgan Housel is going to do a writing workshop. Sejal Patel will be discussing investment dynamics in Asia. And we’ll have the return of the same James Beard award-winning chefs, entertaining activities, and world-class music.
If you’re an LP or a GP that is pushing the frontiers of investing, join the waitlist and someone will reach out.
SHAMELESS ASK
Most people know the owner of a small company, and when the time comes to transition their business, we’d love to be the first call. Whether it’s now, or later, here are the basics of what we’re looking for:
Willing seller(s)
$2M+ in net income
Leadership team focused on the future
Headquartered in North America
If you suspect an organization would be a good fit, please send them our way. We pledge to be highly responsive and completely confidential. Call us (573-445-0678). Email us (Emily Holdman - E@permanentequity.com). Ping us on social media. Or, stop on by our offices in downtown Columbia, MO or Columbia, SC to chat.
We also launched a weekly newsletter with operators in mind that highlights the best content our team comes across. It covers everything -- operations, HR, money, and demand. If you’re looking for help in the trenches of businesses, we think you’ll enjoy it.
I’m going to close this letter the same way as I have in the past: All-in-all, it was a challenging, frustrating, exciting, fun-as-hell, and ultimately fruitful year. We can’t wait to see what 2020 has in store for our small but growing family of people and companies.
Cheers,
Brent
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