Invest Like the Best with Patrick O'Shaughnessy - Brent Beshore - Learnings from a Year of Unexpected Events - [Invest Like the Best, EP. 226]

Episode Date: May 18, 2021

My guest today is Brent Beshore. For those that don’t know Brent from his frequent appearances on this podcast, he runs Permanent Equity Fund and has been a close personal friend for the past five years. Brent and I revisit our conversation from the heart of COVID to touch on key lessons learned and where that leaves us today. Brent sits at a unique touchpoint of the economy, so I particularly enjoyed his anecdotes on inflation and how to operate around these dynamics. I hope you enjoy my conversation with Brent.   For the full show notes, transcript, and links to mentioned content, check out the episode page here. ------ This episode is brought to you by Canalyst. Canalyst is the leading destination for public company data and analysis. If you've been scrambling to keep up with the deluge of IPOs and SPACs these days, Canalyst has models on Coinbase, Roblox, Qualtrics, and everything in between. Learn more and try Canalyst for yourself at canalyst.com/patrick. ------ This episode is brought to you by Tegus. Tegus has built the most extensive primary information platform available for investors.   With Tegus, you can learn everything you’d want to know about a company in an on-demand digital platform. Investors share their expert calls, allowing others to instantly access more than 10,000 calls on Affirm, Teladoc, Roblox, or almost any company of interest. All you have to do is log in. Visit tegus.co/patrick to learn more. ------ Invest Like the Best is a property of Colossus, Inc. For more episodes of Invest Like the Best, visit joincolossus.com/episodes.    Stay up to date on all our podcasts by signing up to Colossus Weekly, our quick dive every Sunday highlighting the top business and investing concepts from our podcasts and the best of what we read that week. Sign up here.   Follow us on Twitter: @patrick_oshag | @JoinColossus   Show Notes [00:03:52] - [First question] - Why last year ended up being so bullish [00:07:14] - Deal dynamics of the current landscape [00:09:54] - Lessons learned about managing a team through the pandemic [00:14:39] - Observations on the housing market and the pool industry [00:18:56] - Current labor force dynamics of trades  [00:21:18] - Considering labor dependency when investing in new businesses [00:23:10] - His perspectives on the future of tech through his investment lens [00:25:50] - Seeking out traditional businesses that reinvent age-old frameworks  [00:27:50] - Key stages of the art and science of evaluating and acquiring a company [00:31:45] - How much information he wants to know before making an initial offer [00:34:25] - Psychology of structuring and aligning incentives post-acquisition  [00:37:41] - What defines a great deal negotiator [00:40:05] - His most creative act when structuring a deal that didn’t work out as well [00:42:17] - Hist most creative structuring act that proved useful for the upside [00:43:34] - Notable changes in large-cap private equity markets [00:45:41] - Skills he feels he can improve on over the coming five years [00:48:30] - Coaching small companies on how to recruit top tier talent [00:52:49] - How to effectively get people to say yes to job offers and openings [00:54:19] - Absolute and relative changes in the opportunity set of small to mid-cap markets [00:57:40] - Lessons learned from strong support networks and onramps of upward mobility

This episode of Invest Like the Best is sponsored by Canalyst. Canalyst is the leading destination for public company data and analysis. I'd heard of Canalyst over the past few years and became more interested after meeting the founder and CEO last year to pick his brain about SaaS businesses. Founded by a former byside analyst who encountered friction in sourcing, building, and updating models, Canalist is now used by over 300 institutions, including the largest money managers in North America and by a number of guests on the show. With detailed company-specific models on virtually every investable public equity, Canalist clients are able to react more quickly. If you've been scrambling to keep up with the deluge of IPOs and SPACs these days,

Canalist has models on Coinbase, Roblox, Qualtricks, and everything in between. Their pre-IPO models are built as soon as the S-1 hits and include all segments, KPIs, and non-gap figures. If you're a professional equity investor and haven't talked to Cannibalist recently, you should give them a shout. Learn more and try Canales for yourself. at canalyst.com slash Patrick. That's C-A-N-A-L-Y-S-T-com slash Patrick. If you're curious to hear more about Canalyst, stay tuned at the end of the episode where I talked to Canalist's new chief product

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Like the Best. This show is an open-ended exploration of markets, ideas, stories, and strategies that will help you better invest both your time and your money. Invest Like the Best is part of the Colossus family of podcasts, and you can access all our podcasts, including edited transcripts, show notes, and other resources to keep learning at join colossus.com. Patrick O'Shaughnessy is the CEO of O'Shaughnessy Asset Management. All opinions expressed by Patrick and podcast guests are solely their own opinions and do not reflect the opinion of O'Shaunsi asset management. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Clients of O'Shaughnessy

asset management may maintain positions and the securities discussed in this podcast. My guest today is Brent Beshore. For those that don't know Brent from his frequent appearances on this podcast, he runs permanent equity, a unique private equity firm that buys and holds companies indefinitely. Brent has also been a close friend for more than five years. Brent and I revisit our conversation from the depths of the COVID crisis one year ago to touch on key lessons learned and where that leaves us today. Brent sits at a unique area of the economy. So I particularly enjoyed his anecdotes on inflation and how to operate around these dynamics. I hope you enjoyed my conversation with Brent Bishore. So Brent, the last time we did this on the record, although we've

probably talked a hundred times since, was in the depths of COVID and concerns over its impact on the economy. And I was doing this series with, I tried to get someone from every part of the market from credit, from public equities with you on private equities. And I think it would be fair to characterize that last conversation as pretty dower and dire that we were both really concerned about the knock on effects that COVID might have. And here we are basically a year later. And I think it's gone about as well from an economic standpoint as we ever could have hoped in our bull case last year. I'd love you to begin by describing why. why you think that is. From your seat, you see a ton of businesses, a ton of sort of Main Street

businesses all across the country. I'd love you to just talk through what's happened over the last year, what it feels like today and what's driven the change. Yeah, well, thank verse. Thanks for having me on. Yeah, we talk, I don't know what, three or four days a week, but it's always fun to occasionally record. I would say the last year, it's been interesting to see, of course, we went into the depths, we recorded the podcast then, and things have gone well. I mean, I think the obvious one is government intervention. I mean, that is the thing that I think we were curious about. We talked about you and I certainly a lot privately as well.

And I mean, what? We've diluted the money supply by 20, 25 percent since the last time we went on this podcast. I mean, I think that's the obvious thing. What it's interesting is that all the elements are there. Pre-COVID and post-COVID, there's a crush of capital trying to find anywhere to look for yield. And there's a ton of people running around trying to make deals happen. the difference is really in the appreciation of risk, I feel like. Everyone pre-COVID was becoming risk-insensitive. I mean, one person in January of last year tell me that he saw signs of nothing on

the horizon. There was nothing that he could see that would cause any sort of disruption. Of course, as soon as you say that, everything goes to hell. So then, obviously, COVID hits. Before that, can you say, okay, what does that mean? So if you don't see any risk on the horizon, at least in the private markets, you just pay more and lever up more, right? I mean, obviously in the private public markets, I guess, too, then bam, COVID happens. Everyone becomes completely risk off. I mean, if you think about what happened, all of the capital markets froze there for a while. And in the private markets, there were literally just no deals. Because if you had a good company, you were focused on making sure it got through the storm. And if you had a bad company that was failing,

I mean, you were just trying to somehow get a lifeline. There were no sort of what I would call normal deals. And then by July, everyone was back to basically being risk-consensitive again. And then, of course, what happened in the intervening time? Well, there was a lot of government intervention. Now there's more money than ever sloshing around basically every income slash wealth level. And that new wealth is now trying to find a return and willing to, I think, explore some historically unusual places and some historically low prospective returns. And so I would say the current state of the economy. The current state of the deal market is crazy right now.

And I mean, we can talk about this more, but the fact that Biden has proposed doubling the capital gains tax, which is what all small business owners would get hit with if they sold their business is also just causing a level of craze on the sell side that we've just, I mean, frankly, just never seen before. Last year, I think at this point, you would have wondered how long it was going to be until you deployed any capital again. I think you might have even said that live. It could be a long time before we do a quote unquote normal deal.

And now I think the situation is reversed where you could sort of pick the number of deals you want to do, given the demand to sell businesses of the type that you invest in. How do you navigate that with your team? Like, what are the deal dynamics, I guess is the way of asking the question for you right now? What is your calculus relative to permanent equity's history? Are the things that matter more today than would have, say, two years ago or five years ago? The honest answer is it's messy. I mean, the honest answer is we're trying to work through it. I mean, to go from basically no deals to what I would call the highest velocity deal market in certainly recent memory, if not in history, is jarring. And so how are we dealing with it? I mean, we're just having to shift focus and really buckle down and get efficient. I mean, thankfully, our team has really jelled together. And I'm proud of the way that we're able to get more efficient in what we're doing. But as you said, I mean, in essence, we can pick almost as many deals as we want to do this year. And again, we're only in early May. A lot of the deals typically start picking up midsummer for an end of year close. And a lot depends on how the Biden tax increase

will come down. Some are saying it's going to be retroactive to the entire year. If that happens, then it'll sort of normalize. If there is an artificial deadline midway through the year in which the tax increase would apply to, that's going to create an incredible craze. And of course, they'll be to some degree almost the same craze if it happens at the end of the year. And unfortunately, this is more of a policy discussion. It's not exactly the question you asked me, but it's frustrating because if you think about who's going to get hit sideways, I think everyone thinks about hedge fund people as being the people they're going to cut sideways with the tax increase.

And to some degree, maybe that's true. But in our market, it's all the people who've worked their lives to build these businesses that are literally going to have their taxes doubled on them. If you look and think how unfair that would be to make a decision to sell your sort of life's work and it's a one-time event, recognize income in one year, to have it go back and be retroactive would be really punitive. If you do it in sort of an artificial cutoff, like when the bill's been announced or maybe even when it's passed and not wait until the next year, the argument is, well, we don't want people to prepare for the tax change. And well, that's all fine

and good if you can poke a buyer or a sell button. But if you're having to go through a laborious sale process, it is just highly punitive. Anyway, I'm hoping that for the seller's sake, and for really everyone's sake in the deal markets that they don't do something like that and make it a firm cutoff that's other than the end of the year. In terms of running the portfolios, you really didn't do any investing from the bottom of COVID through the next big chunk of time you were managing the portfolio, I think more focused on that. What lessons did you learn and your team learn through that process? Obviously, I'm sure some of them had dire straits for at least a month or two. What lessons do you take away from that crunch time experience, whether that's managing a balance sheet or

managing a staff, a labor force. What are the big standout lessons in your mind? I would just say that it's so easy to run without margin of safety in almost every way when things are good. Margin of safety, relationally, financially, just from sort of the capacity standpoint, work capacity, you don't know what's coming down the pipe. And I mean, in many ways for us, COVID was an incredible gift. It's a gift I'd never want to get again, but it was an incredible gift. It's a gift that it forced us to hone our communication systems. It forced us to forge deeper relationships with people on our team as well as our portfolio companies. I mean, we literally were on the phone every single day with every single one of our portfolio companies at least

every day, at least every day, sometimes multiple times a day. Everything from cash planning to customer issues, you hear rumors, you're just trying to catch every thing that you possibly can and give these companies the best opportunity to make it through. And thankfully, we didn't have a single company that even got close to not making it through. And I'm really proud of our team for that. In hindsight, it's largely because we didn't have debt on the businesses. That was a huge reason. But also all the time and the energy we've spent, trying to treat people really well

for meaningful relationships. When things are really tough and you're in the trenches, I mean, you don't have time to try to forge those relationships. You have to forge them ahead of time. I mean, for us now, our communications is far more efficient. We now have some new habits about meetings that were formed during COVID that we've carried through that have been really positive. And I think just in general, there's a gratitude from our staff to our portfolio companies

and from the portfolio companies to our staff that I don't know if I saw as much before. I mean, we just got back, we've got a bunch of companies in Phoenix. We just got back from a trip with some of those companies. And I would just say everyone's pleased. Like, everyone's pleased to still be alive. Everyone's pleased to be alive both personally and that the businesses are alive and thriving. Yeah, I would just say is the biggest lessons are we're going to be careful to make sure we don't run on thin margins and to potentially overhire, carry a little bit of extra fat that we maybe don't need to,

but that we can be preventative and be offensive instead of just being purely defensive. And I think that's maybe a nuance too that March, April, and I would say early May of 2020, we're all highly defensive. We're just trying to play defense on every front. Starting late May, early June, when we kind of saw everything normalized to a new normal, and we knew everything likely was going to be okay for all the companies, then we flip to how do we take opportunity, use this crisis as an opportunity? And so as an example, and we wrote about this pretty extensively in the annual letter,

our aerospace businesses, I mean, I can't imagine a worse time to own aerospace businesses. And we just closed the previous year. And so if you'd asked me, okay, here's what you're going to do, you're going to buy these companies, and you're going to go through this incredible deep crisis specifically for aerospace. What would be the reaction? I would have said, oh, my gosh, it's going to be a terrible investment. I feel more strongly about that investment now than pre-COVID. Why? Because we were able to pick up incredible parts packages. We were able to pick up incredible talent. And again, it helped forge the team. I mean, that team is so much stronger,

so much more efficient. And I feel like that now we're starting to see some rebound. We're coming kind of back out of it a little bit. We're still not anywhere close to normal again. And that team is just operating at like two step level functions higher. It's unbelievable. It's like fantastic to watch and see. And I think that company ultimately, if you were to say over a five year period, what were the financials of that firm? My guesses are actually probably positive because of COVID versus negative, which then brings up a whole set of other issues, which is, why in the world do we need a crisis to make ourselves great? Gosh, what if we woke up every day and said, We're not sure what the future is going to hold.

We're not really in control. There's a lot of exogenous factors that can come into play. Let's not wait for the next crisis. Like, let's try to continuous improvement, Kaisen, right? But it's so hard, man. It's like, oh, all of us at the end of the day, we're lazy, we're tired, we're stressed out. We're just trying to make it through the day. And to push and push and push day out, it's remarkably difficult.

And so in many ways, I mean, obviously COVID's been a terrible crisis. Personally, I've had friends not make it. It's been really tough, but I'd say business-wise, try to make the best. Some of the companies you own are this fascinating window into the U.S. economy. And I'd love to just talk a little bit about a few of them. You already mentioned aerospace as an interesting area. I think we're starting to see travel come back. Pools is a fascinating one, right?

Because everyone knows that right now the housing market in the U.S. is just bananas. I mean, just about everywhere you look, it's kind of hard to believe some of what's happening. And given that you've long held this company that builds pools, and I think the largest pool market in the country. I'd love to just hear your observations about dynamics in and around home-related businesses, whether that's pools or other things. What are you seeing on the ground floor? What's the labor story?

What's the demand story? What does this teach us about what's going on in the U.S. economy? Let's see. In March, we thought we were things were going up a cliff. Let's rewind a little bit as history on the pool markets, one of the most cyclical businesses in the world. So peaked to trough, 2006 to 2010, the 2008 crisis. prices, pool market sales in Phoenix, Arizona, which is our primary market, we're off like 91%. So, I mean, you talk about just off a cliff. I mean, just microscopic compared to the previous

demand. So my first reaction, and this just shows you, like, I like to think that I know what's going on, that I can predict well. Honestly, like, I'm going to eat some humble pie here and say, I thought that the pool business was going to get absolutely nuked because that's what happened in the last crisis and I pattern matched. And so we think in early March, I think I remember is March 2nd that I basically sounded the alarm and said, this is a real thing. We thought that business was going to go off a cliff. We slashed prices in March. We were trying to pull forward as much demand as possible.

We called all our subs and we said, okay, we need price reductions and you're going to go along this ride with us and let's buckle down and let's try to make it through this. That was kind of the mentality. Put on your hard hat. And then this weird thing happened, which is in late March, early April, there's this huge influx of demand for pools. and we went from having daily conversations about cash planning and pulling on lines of credit and how are we going to reduce staff if we had to get there to, uh-oh, what are we doing on the

other side? So it was really obvious pretty quickly. And what I would say is that just at the end of the day, anybody with discretionary income and when you live in an oven and you can't escape an oven, you're going to want to look at a pool as a utility. And if you can't access a public pool, which obviously for COVID, we couldn't, it was the perfect storm. It was a lot time spent at home in nothing, and you couldn't access any public pool. So that drove a lot of people instead of going on a trip and using their discretionary income to go on a trip. They chose to build a pool. And really, it's continued since then. We were just out there, like I said, last week. And I mean, to a person, these people have been in the pool industry for 20, 30, 40 years, to a person,

everyone said, we've never seen anything like this market. Never. It's unbelievable. It's a little bit frustrating because I think that we could probably quadruple revenue if we had the labor to support it. And labor is basically the primary constraint now. You also want to play this delicate dance with pricing, right? Can you increase prices? Yes. Have we increased prices? Yes. Our subs increasing prices is, is there inflationary pressure all over the place? Everywhere. It's incredible. I mean, Penn Terr, which is one of the largest pool equipment supply companies, I mean, they're struggling to keep up with just even delivering the stuff to get pools off the ground. So then the questions are becoming, okay, so if you have all this demand and you have a limited supply, shouldn't prices go through the roof? And the answer is, yes, Yes, in a perfect economic world, it would. The reality is that you also have a 30-year brand to protect and you don't want a price gouge. And you want to treat people well and you want to treat people with respect. And you want to not be the people who, when you had the opportunity,

screwed them over. And so it's a really delicate balance because you have a lot of inflationary pressure underneath the business. And to be honest, we're basically just raising prices enough now to support those inflationary pressures underneath while still making good money. But we're trying to make money on volume and doing a lot. a good job for our customers as opposed to just price gouging. So that's our strategy. Is it the right strategy? I don't know. I think that we're giving up quite a bit of money right now to hopefully

build that brand long term. And I think this is where it looked, like permanent equity, we're a little different holding that company for a very long time. We like being partners with them. They like us. And we reaffirmed our marriage last week and said everyone's on board for, let's keep going. And yeah, yeah, let's keep going. So I think that's where we can make some choices to do some tradeoffs in the short term that hopefully are beneficial in the long term and hopefully customers realize that we treated them well. So I don't know. We'll see. Can you say more about the labor force dynamic, not just in the pool business, but across all businesses that were input as a key cost of doing business? I would say the facts are that fewer and fewer younger people want to get into the trades.

And when I say the trades, these are typically dirty jobs. And the level of skill varies. But I would say on average, they're fairly highly skilled jobs. So plumbing a pool is something that takes, call it eight, 10, 12 years to become good at it. Can you do it before then? Of course, but can you do it with excellence? Can you do it with the speed, the lack of mistakes? No, it takes a long time to get good at it. And the same thing would be for how you dig a pool out. As funny as that sounds, you're digging to like millimeter perceptions because you want to make sure that the dimensions of the pool match the specs. And it's really important that this pool is shaped a certain size because the equipment you're putting into it, because the water flow,

everything like that. We've had pools recently where we're bringing on new excavation crews. They're done poorly. We're having to go back and reshoot them with new concrete and having to dig them out again. So there's a lot of, I would say, error that's coming up from inexperienced workforce that's maybe coming in. And so I would say it's just generally, you have a lot of factors, one being that younger people are not excited about coming into it. Two, you have the government, for the most part, paying people more for a big chunk of the year not to work. them to work. That's kind of tailing off now, but that had been a major issue. And to be honest, I'm not faulting people. If the government pays you more to stay at home and you don't like your

job, you got to stay at home. Thankfully, a lot of our workforce had been with us for a long time and are excited about what they do. But there's also an attrition factor there. You're just kind of people exit to the workforce and the aging population in that workforce is going to age out and retire. When you compare that with a lack of immigration, which we've really been experiencing, there's just this perfect confluence of the people who can do the work are very few. The demand is high. And so, of course, those people are making a lot more money. So it's a real problem. To be honest, we're not sure exactly how to deal with it other than just keep grinding through it, try to keep educating people, creating apprentice programs, paying people what they need to be paid. You know, I mean, just there's no

way around it. And ultimately, you've got to build all that into the price. How does this impact your thinking about new businesses that you're buying? So that all makes sense. You know, your long-term partners with some businesses, there's this dynamic you laid out, there's the immigration component, there's the inflation component, all these things are part of the calculus. Does this bias you away from companies where the skilled labor is going to be such a key input in terms of greenfield investments? I think it certainly gives us caution. We want to understand what is making that business capable of continuing to hire. And in fact, one of the opportunities that we're getting ready to partner on here next week, they also are in the construction

business and have a very robust training program. And we think that's a huge long-term competitive advantage is they can out-compete because they can out-train. They can out-recruit. They're taking people from other industries and saying, hey, would you like to double your income by coming on board with us? We'll teach you how to do that. So we think that's a real key component in the future is education as part of it. How does that evolve? I mean, this is not something where you can sit in front of a computer and learn how to plumb a pool. You've got to. to get hands-on, on-site. What does the future of education look like there? I think it looks some like trade schools, but I think it looks a lot more like company-based trade schools that are

trying to really school you in their methodology and trying to help you become a person of higher capacity for that specific purpose. And the rewards are great for them and the rewards are great for the individual as well. I would say it certainly is frustrating to be in a business where you can have almost, it feels like unlimited demand and you can't produce more. It's a pretty frustrating feeling. Usually the opposite is true. I mean, in the past, we've talked about this sort of marketing prowess and advertising prowess. And while that's still important, I've got to tell you, we're having a lot less conversations right now about marketing and advertising. We're having a lot more conversations about demand fulfillment. I greatly envy the

software business model right now where you can just poke a button and add another user license. We've talked about software a lot in the past. It's a fun topic with you because obviously, if you look at the relative pricing, like software models are priced for that feature, right? You have to be an enormous multiple to buy software businesses today at just about every stage. Yet the fundamentals have also been rocket ships that these businesses are growing so fast. How do you think about technology and software and some of these more frontier business models through the lens of the kind of businesses that you buy, own, and operate? I would say we're really excited about technology.

I would say we want to be excited as an appropriate adopter. So are we going to be the first company in the country that's a pool company to adopt Bitcoin that you can pay in Bitcoin? Probably not. We were the first company in the world, actually, to put virtual reality goggles into the pool showroom as an example of technology, which, by the way, was a huge flop and made everyone queasy and no one wanted to use them. And I think they're sitting in some dustbin somewhere. So really cool idea was really awesome. and we actually were the first adopters. And to my point, usually when you're first adopting something, it just isn't quite there yet.

So I would say, look, we're certainly not Luddites. I mean, we're very excited about implementing, for instance, ERP systems and implementing tools for the sales teams, implementing better accounting software. We're very excited about technology. We're probably just going to be less focused on the frontier and more focused on the proven efficiency games. What else are you seeing in terms of interesting business models in this environment? One of my favorite things talked with you about, like every time we see each other, I ask, what are the most interesting companies you've seen in the last couple months?

And what is unique about them? It seems like you're often looking for some traditional business or job to be done with sort of a flare to the business model, some unique way of approaching the market. Does anything stand out in recent memory that's just made you really interested to dig in and learn more? For sure, there's one company. I'm going to have to be very high level about this for a lot of reasons, but we're actually in active discussions with them now, which is taking an older technology, something that's been

available commercially for, gosh, 100 years, and basically retooling it for the age of mobile. And so this is a technology that you can use in medical and defense in a lot of different areas. And what's interesting to me is that the people who develop this, yes, they're experts kind of in this field, but they weren't trying to push the boundaries on the actual technology itself. They were trying to push the boundaries on shrinking down the size of the technology and using that in a completely different use case. So, I mean, one of those interesting things to me is when you see new technology proliferate is all the different unexpected uses of it.

And I would think sort of a hundred-year technology, gosh, is there really any new use cases for this? Sure enough, there are. And like, I didn't even know it was possible until we found this company. And it's unbelievable. This technology is like something that should be on every sports field and in every police car in the world. And it was only able recently through their efforts to make it so. So anyway, that's a company that I would say is probably unexpectedly technology based for who we are.

But it's a very old style mainline type of business with just a new twist on an old technology. That's probably the one that I'm most excited about. Obviously, we're spending a ton of time right now on the business. So it's fresh on my mind. I'd love to talk through just the end-to-end way that a deal is going down these days. And we've done this a little bit before. But I just think for those that haven't done a big transaction, one of the most interesting things about you and your team is just how many reps you've been through over the years.

If you don't mind, like I'd love to hear you describe sort of the key stages to a deal. Like you approach a company. Let's just assume top of funnel. So you've got a company you're interested in. From that point forward, how standard has that. process become? What are the major stages to that evaluation? I even want to talk about things like how you think about the incentives of the seller, what matters to them typically, how you meet them where they are, these sorts of things. Because these deal dynamics, as you do more of them,

becomes kind of like an art form more than a science, but I'd love to start with a sort of rough framework. I would say exactly what you said. It is both a science and an art form. I would say the science is in, it's really an assembly line style that we've created, which is very different than traditional private equity. So maybe back up a little bit. Traditional private equity model is you have a partner who finds the deal or is the point person on the deal, investigates the deal, works with obviously associates and some other people on staff to do this, but is leading the charge to evaluate the deal, negotiate the deal, diligence the deal, document the deal, close the deal, manage the deal post-close. That's like the traditional. And so how do you expand as a private equity firm is you hire more and more senior partners who have been around for a long time, have this expertise, and can really brainmake for the firm. That's kind of the traditional business model.

Our model is almost the exact opposite, which is we want to hire people who are amazing at one stage of that. So we want to hire people who they love to first talk to owners to understand their psychology, to understand how they're thinking about the business, to understand all the dynamics of it. We then want to hire somebody else whose job is to really be amazing at the negotiation. And then another person who's really fantastic at the diligence on it. Because if you've got to think about it, the person who's negotiating and developing the relationship in many ways it needs to have the opposite mindset as the person who's diligently. I mean, we always say to our sellers, hey, look, if you tell us something's true, pre-due diligence,

we're going to assume it's true and we're going to base our offer on it. We're all talking transparently. And by the way, this is not that say that there's a lot of sellers. I mean, some do misrepresent, but many of them are not intentionally. misrepresenting anything. It is just the fact that they just don't know or they thought incorrectly or learned something incorrectly. So if you think about each one of those stages, so again, we find the deal, develop the relationship, understand the dynamics, provide an offer, negotiate that offer, go under a letter of intent, do exploratory due diligence,

and then basically some confirmatory due diligence in there as well, and then documentation. So all the deal documents that need to be put together to make a reality, then close it, and then what happens after close? kind of are all the stages. So we have people who lead each one of those areas for us and we'll build teams over time to be the very best in the world at negotiation. By the way, negotiation is not how do you take every last penny off the table? It's how do you set the table correctly for the best outcome long term for all the parties? Longevity. It's not zero sum. How do you get to be the best of due diligence? Well, the best of due diligence is not always, okay, we have this incredibly long

spreadsheet checklist. How do you tick every box? I mean, that may be the best way to do it, but not always. Maybe the best way to do it on sometimes is to say, hey, look, we're going to see the forest through the trees on this. We actually don't need a diligence that area over there. We need diligence to this thing over here and much more depth. So there's an art form to each one of these. And the more that you can specialize and focus is where you get a lot of gains in value. We've seen that over time. We now have a staff that they are absolutely fantastic. I mean, I'm not completely worthless at this point, but I'm pretty close. I'm getting close to worthless. And that's wonderful. We want everyone to be so excellent at what they do, and we want

to train people underneath them so well that, of course, you create your functionally useless, which means then you can choose to discretionarily use your time however you want. So how's that working? Where's the art of it? I would say we learn a lot about psychology and really kind of where we landed with sellers is we've got to understand why they're selling to us, why they're not selling to somebody else. And at the end of the day, if they're not going to roll forward with us and they really don't care who's going to buy the business, I don't think we're good fit. I mean, at the end of the day, if you're not going to roll forward and you don't care who buys the business, all of it's really going to matter is what's the biggest check you're going to get. And sometimes, by the way,

we're happy to write the biggest check. Obviously, when the deals that we're doing, we're top couple people who are, there's a multiple bid situation. But we're probably not going to give the very best terms because it's easy to win deals. All you do is just write a bigger check. If that's your only competitive advantage and you're probably lacking in a lot of other areas. You've got to cut corners. We want to make sure we make investments in those other areas and really be supportive long term to all the stakeholders. So with that, we're probably not going to be paying the top dollar on top of that. We're typically not using debt. We're writing a larger equity check. We're trying to treat the team post-close the same as they were treated pre-close and add a bunch of

resources to them that can help them flourish. I don't know if I answer your question, but You definitely did in terms of like the stages of the process and what you guys do uniquely. One question I have is around what the right amount of information is for you to make an offer because obviously a lot of the diligence, some exploratory, some confirmatory, as you said, happens after you've made an initial offer. What needs to be there for that initial offer? And how much will that typically change from, let's call it, LOI, letter of intent with kind of rough terms to an end deal based on what you learned. in diligence because I think sometimes people out there might be thinking, well, you do all the diligence

before you make the offer, but I think it doesn't always work that way. Can you explain that nuance? We want to do more work pre-offer than I think almost anybody else. The traditional model and what's easy to do is you get a deal book, you have somebody to look through it very briefly, you say, ah, ballpark, this is a number we could possibly do. And you just start throwing these things out there. In fact, I was talking to a guy at the other day who worked at a firm in Chicago who said, gosh, I got to be honest, like we're throwing out LOIs and term sheets just constantly and we're like landing almost nothing. And it's like, well, how much are you guys doing on the front end? He's like, oh, we do almost none. That's the game. The game is sort of a numbers game. You just keep throwing out

offers and see what kind of sticks. I think for us, we want to be the exact opposite, which is we consider kind of a promise, right? We're saying, hey, if the things you told us are true, then we're not going to change our offer. In fact, we're much more likely to just say, hey, this is probably not the right fit for us if we're going to change our offer, then to change it. I think in the history of the firm, we maybe once have renegotiated an LOI. And that's just solely for the fact that we just didn't understand and they didn't give us a proper understanding. And we admitted that we're like, oh, okay, everyone's on the same page now. And it was fine. It was very nice transition. We want to stick to what we offer. And so we're doing a lot of work. Now, what does that work look like?

I mean, we could throw out kind of a ballpark range often and say, look, based on the financials you shared, situation, the dynamics with sellers, post-close ownership, the leadership team, all these things. This is kind of the ballpark in terms of price and terms where we be. Everything's negotiable. We want to make sure, obviously, you're in a far superior position of knowledge to us. We want to make sure you're comfortable. So if there's a big expectations gap, that probably means that we weren't aware of something that was going on. We probably didn't have all the information we needed. So just come back and educate us. Sometimes that'll happen. I'd say oftentimes, especially with how many deals we've looked at now, we're pretty close. I would say from first offer

to LOI when we go under LOI, maybe things move 10% at most. And terms really don't move too much. How do you think about structuring the incentives for key people at the company? So, of course, the answer here is somewhat or a lot is it depends, right? It depends on the situation, how much you're buying, et cetera. Let's say you're buying the entire company. They're no longer exposed like they used to be to the upside via equity. How do you think about the psychology and the alignment of incentives in how you structure these arrangements after the acquisition? I mean, I would say first, it depends on the culture of the company, and it depends on the

type of work. It depends on the level the person is in the organization. So for the most part, unless we're doing a re-organist style of comp, all of the sales team or something. We're typically not going to get involved in compensation construction beyond the executive layer, maybe the layer below that. So for the most part, we're working with executive compensation. When it comes to executive compensation, I mean, we take a very straightforward approach, which is, look, we want you to be comfortable based on your salary. And beyond that, we want to share in the upside of the company. Depends on the situation, but it's some form of

base bonus and then some sort of equity-based or equity-like arrangement. And, And that can vary pretty greatly depending on the situation. I mean, there are organizations where most of the compensation for the executive is in their base salary. And as a company where that makes a lot of sense, they're not trying to strive for something big. They're trying to kind of steady hand, keep things on the rows. And then there's other organizations where the compend's variable, huge variable on the upside and largely tied to the profitability of the firm. I would say we're typically more in the style of high variability. We like incentivizing people based on cash flow.

and based on cash flow, sort of aligning the executives of the firm with us, with our investors, so that, look, if there's a reason why we should reinvest that cash back into the business, fantastic. That's great. We want to do that. That means we're going to get a high rate of return on it with high probability. If there's not a high probability, high rate of return, then we want them to send the cash up and out. This is kind of the thing that we want to incentivize.

So most of our organizations are based somewhat on that, although not all of them. Again, just depends on the culture. and what we found is the worst possible thing you can do is come into a situation where everyone's fine with their comp. Everyone's good with their comp. They're well compensated. They like their comp arrangement and say, hey, we got this newfangled, awesome thing. We want to throw your way. And they're like, can you just not do that, please?

Like, I just want to live my life. I don't want to have to be worried about how we calculate comp. What you've got to always try to figure out is what are the things that, I guess, when you're changing comp, you come into a new situation, which is obviously every acquisition, we're coming into an established system of compensation. you have to ask yourself, okay, based on the people we currently have, based on the current state of the company, and based on the trajectory of the company, what do we think that a change in comp would stop people from doing that we don't want them to do, or what would encourage somebody to do that they're not currently doing? And when you put it through those two filters,

it's actually quite often, we say, you know, the comp is fine. It may be something we address down the road, but for the most part, we come in and say, look, if you've been comp the same way for 10, 15 years, you're happy with the comp. The company's happy with the comp. Everything's fine. Why would we come in and change it? During negotiation, you mentioned you've sort of developed this spiky expertise at doing just that part of the process.

What does great look like there? So you mentioned it's not just extracting every last dollar, but setting the table. What else defines great, whether it's something you've done, someone on your team, or someone else you've seen do this incredibly effective? Like, what unites great deal negotiators? Being able to look at the whole picture and understand what each party's interests and preferences are is really the starting point. So you can have the same ownership group, the same company, the same situation, and you can have radically different preferences in the seller or in the leadership team slash sellers if they're rolling forward. What it requires is getting to know people as people, forming deep relationships, understanding their fears, understanding their aspirations, understanding what most.

motivates them. And that's hard. That's not something you can typically do. This is why it just pains us. We'll occasionally do it, but participating in broader auctions that have a quote-unquote process around them, gosh, it hurts. The game is the investment bankers want to keep you as little information from both sides because any information might screw up the deal. You want to rush to the finish line. And basically, at the end of the day, what it ends up getting you is two parties that are like, well, if I'd known that, well, if I'd known that, and it doesn't mean you wouldn't have done the deal. It means you would have structured the deal very differently. And now you've got to agreement on something that's suboptimal for both parties. What I would say is that it starts with

getting together with them and getting to know them. And then you have tools in the toolbox. I mean, you have things like an earn out. You have things like a downside protected note. You have a straight seller note. Maybe providing a unitron to you're doing some debt and some equity. You have downside protection, maybe a form of some sort of preference on certain types of equity. You have different structured payments for retention. You have this incredible array of things. That's one things I love most about the private markets. Believe me, most days, I'm really jealous that people in the public markets can sort of poke a button and buy or poke a button and sell. But one of my favorite things about the private market is the creativity that you can express in really getting

to know people and getting to know what you can create that's sort of the best for everyone, post-close. What do you think your most creative act has been in structuring? Well, I would say we to a fault sometimes get so creative, it gets complicated. And I think that's one of the things I'm going to own maybe the opposite side of that question, which is in the past, I have been much more willing to get a complicated deal structure in front of everyone that feels like it touches every preference as opposed to keeping things simple. We've learned post-closed, things can get very strange based on outcomes that can happen, right? So as an example of this, we one time struck a deal with a gentleman who post-closed, he was basically the largest debt holder in the business.

So he provided a big trunch of seller debt to the business. And he wanted that because he wanted the yield off of it. And we were going to pay a little bit more for the business as a result of it. So it felt like a win-win. And he was going to retain the CEO role for a period of time while sort of the seller note got paid down. All good, sounds genius. Everyone wins. The problem is because he was the largest debt holder and had very little equity post-close,

he started to run the business like a debt holder. So he would take virtually no risk. risk, and he already came with kind of a predisposition against risk, but it made him every single decision was just agony. And we would ask him, we'd say, hey, what's going on here looks like the situation is that we should easily do X? And he's like, well, I can get that. But let's remember, if we do that, I just want to make sure, I mean, how am I going to get my money come January? And it's like, whoa, wait a minute. Why are we talking about a note payment that's due in January? It's July. It's like, well, I'm just saying, that's $250,000 that, yes,

I agree would be good to spend on that project, but I just want to make sure that I'd get my payment in January. So we quickly learned that that was not ideal. Let's put it that way. We negotiated with him for a discount because he agreed to. He said, hey, look, I'm not running this business like I used to. We're not failing because of it. We're certainly not pursuing opportunities because of it. So we ended up buying out the note for a discount and we sort of got a small win. He got a win. And then afterwards, miraculously, things shifted and it worked out fine. But that's an example of you can get. too cute, the higher the simplicity, the greater the likelihood of success plus clubs.

What about upside creativity? Is there an example of something that you've done that you think is different than the norm, but worked in the correct way? Yeah, I mean, we did a deal. I mean, I think on the pool business to be a good example of this, I mean, we did a deal that was a lower amount of equity with a big amount of seller carryback on it, and it gave them a lot of opportunity if we grew the business. Lo and behold, we've grown the business a lot, and they shared in that. And so I think oftentimes in deals, There's almost a bias. And of course, we can talk about why this is. If you're represented by a bank and the bank's incentive is how do we get you the most cash at close, then sort of any deferred payment or any roll forward in equity is going to be looked at in a negative light. It's just incentives. And so oftentimes, you know, sellers have the bejes scared out of them by banks and lawyers and account saying, oh, man, if anything that you don't get a closed plan, I'm never getting it. And it's like, well, maybe that's true if you want to take a highly cynical view. And I'm sure there's of bad cases out there of that happening. But when you really look at a great deal,

it's, if this thing goes up three or four or five fold, who gets to share in that? And wouldn't you want your partners post-cose to share in that? We certainly would. We'd rather make less money when things go great because we're all driving towards the same goal. If I'm proud of anything, it's in a lot of our deals that we have allowed people and really generously allowed people to stay in deals and roll forward. So us buying 60, 70 percent of an organization, as opposed to buying 80, 90, 95%, and really allowing us all to go on a ride together that provides a great outcome for everything. What have you seen more generally in the entire private equity ecosystem or landscape?

You tend to focus on small to mid-sized businesses defined by their EBIT or the revenue or whatever. Has anything notable changed from your view of the largest buyout market or the larger cap private equity type firms or any other evolutions that you think are notable in that ecosystem? In our area of the market, what's really the limiting factor to people deploying capital is the operating skill set, what to do with these companies post clubs. And that's a very hard skill set to acquire. It's very difficult to find firms who are investment grade in our segment of the market versus up market. There's tons of options, lots of track record, and that skill set can be more easily sprinkled and spun out. And when you go into mega, I mean, really the skill set in mega cap private. equity is largely around how do you create better and better debt structures. And that's more of a

capital market's financial engineering skill set. I would just say is, I mean, the crush of capital continues. There's a lot of capital pursuing very few assets of market. As the public markets rise, it provides an opportunity cost proxy for the private markets. It's unclear to me right now, sort of which is more inflated. They just kind of continue to inflate against each other. And as we talked about earlier, there's been an incredible expansion in the money supply. That money is just seeking any sort of yield it can get in a very low interest rate environment. So it's incentivizing people to raise more capital, to pursue bigger deals, to, I mean, largely live off of fee income, which again, I think we could talk about an earlier podcast, and certainly I've written a lot on

this. It's just the misincentives that that provides long term for everyone is just huge. I mean, when you go into a fee gathering mode as opposed to being an investor, totally different ballgame. And so I feel like upmarket, it's really more of an allocation of capital. And you know, they're in a capital allocator role as opposed to an investor role. And that line gets pretty blurry depending on kind of where you are. Yeah, it's a fascinating observation. It's happening in every single asset class two, venture, real estate. I mean, everywhere, because there's so much LP dollars that need to go to work,

there's a scarcity of what perceived to be great managers. I mean, asset gathering seems rampant everywhere. I don't think that's going to change, which then has knock on effects on price and everything else. I mean, it's kind of a wild world. In closing on sort of the deal structuring type stuff, what has you most excited in terms of skills that you feel you or your team, but kind of you more specifically, can still get a lot better at in the next five years?

Well, first of all, I mean, I think we can get a lot better at everything. If you're going to talk about specific areas, I would say we're further ahead in developing. Deal Flow, and we're further ahead in the capital side, certainly. The talent end is something that is interesting because we've recently made a big push on recruitment of high-quality talent. And look, we've been blessed with incredible access to talent serendipitously, but we've never had somebody on staff who's been full-time focused on talent. And we made that change this last year.

So we've got a person on staff who all she does all day long is recruit talent, develop the talent pipeline. And the yield we're seeing on that is astronomical. I mean, she wakes up every day and basically tries to pair people who want to work in small businesses up with great opportunities. And it turns out there's a lot of people who would prefer to work in a fast-growing, fun, small environment to a large environment, very highly educated people, talented people. And so we're going to be constantly making strides and reinvestments back into sort of our talent pipeline. And long term, I mean, I think, gosh, I'm just so excited about where that can go. Because I think we can offer something.

I mean, the dream scenario is somebody comes into a portfolio company, regardless of the role, right? Maybe it's C-O-O, maybe it's CFO, maybe it's CEO. Maybe it's even a VP level underneath that. As they move up, they ultimately can get opportunities to move into a CFO or C-O, and then they get opportunities to move into a CEO role. And then the coolest part about our system, this thing that we're really excited about long-term, is having those people then step up, back hire a CEO, and manage their own portfolio. We start building a portfolio underneath them.

So really, people are starting to realize it that we offer an ability to do something to get into, quote-unquote, private equity, but in a much different way than traditionally we're not doing these two, three, five-year sprints. You want to build for the long term. And then you can step up and out of what you're doing into bigger and bigger opportunities. And basically, as long as we continue to grow, which thankfully looks like we'll be on a trajectory for a while, there'll be more and more opportunities to do that. And so, man, long term, like, I just want to work with the most enjoyable, smartest people in the world that want to help small businesses grow and flourish. And, yeah, we're excited about that. I'd love to click a little deeper on that in terms of, like, how it works and what the strategy is. Because it strikes me that when you and I first met, one of the unique things about what you were doing was this kind of interesting marketing focus, not just in terms of marketing to sellers, but also in terms of shaping up small businesses to do a better job marketing.

It's funny that earlier you said, now that's not really. the discussion anymore, like demand doesn't seem to be the problem as much. And now it seems like five years ago, everyone said every company has to be a media company. Now it seems like every company has to be a recruiting company. I would just love to hear more about this as a bottleneck, how you approach the problem, like literally what that woman does. How does she prosecute that job and how you think about this strategically, like building this as a function, not just at permanent equity, but as you think about others that might want to do the same thing, just go a level or two deeper on this concept because I think it's really neat.

I mean, we're trying to build a best in class in-house recruitment firm, in essence, with what I would kind of say, talents everything. That's no surprise. And yes, you nailed it. Everyone was saying you need to be a media firm. And now everyone's saying, you know, it's just all about people and it's about recruitment. And I would agree that the issues in small businesses, so I said this before, but small businesses don't stay small on purpose.

So oftentimes the people on staff that are naturally attracted to smaller companies are generally, and this is not always the case, going to be less motivated for sort of ultra high performance or an ultra high performance work environment. What you find is people who stumbled and fumbled their way into that position, they've gotten hired, they've stayed there for a very long time. And by the way, that's awesome. Loyalty is an incredibly fantastic trait to have in a company. Over time, though, if you look, if you're graduating at top university or you've got a really high IQ or you're extremely driven, I'm trying to consider what are the outlier sort of traits? The likelihood that you say, okay, look, I could

go work for the CIA, or I could go work for McKinsey, or I could go work for a Fortune 500 company, or start a venture fund, you're probably most people are not going to say, or I could be director of operations for a $10 million a year local subcontracting business. That's just not in the purview. And so I think the biggest opportunity that we have is to basically take people who otherwise don't have an on-ramp into small businesses and small businesses that don't have a ramp to provide an exposure and basically say, hey, look, you're part of a larger ecosystem here. There's more things in play. So yes, for the time being, you're going to go into maybe not a $10 million subcontractor, but a 30 or $40 million subcontractor with us. Yes, it's going to be difficult and you're

going to have a very different work environment than you had it, fill in the blank before you were. But the opportunity is to make that company incredible and that you can out-competeer. the bar of competition is so much lower. You can more easily out-compete. And by the way, when you out-compete, there's all these other opportunities that unlock, both within that universe immediately, but also in the broader universe of permanent equity.

And so the path is you can have a very fulfilling career coming in at a mid-level. And as you work your way up, you'll get more and more opportunities to where eventually you're running your own portfolio of businesses. And these are legitimate revenue. I mean, one of our portfolio partners is managing, gosh, at a minimum, probably $60 or $80 million of revenue and probably closer to $150,200 million

of revenue. And these are big packages of businesses. And that opportunity is you almost step down to then have the opportunity to go rocket back up. And obviously the compensation that comes with that, I mean, the more revenue and the more profits you sit over, the more impactful you can be, obviously, the more we want to share in that and have you participate. Hopefully long term, we have the orbit, you and I have talked about quite a bit, you're aware of it, talent management system that we have internally. Kelly, who's the woman on our staff who's doing this day to day, is certainly interacting with a lot of people who have raised their hand and said, look, here's my skill set, here's my ideal job, here's what I'm capable of now.

Here's where I'd really like to be. Help me find a place. Almost all of our hires are not coming through that. And then she's filling up that pipeline with, I would say, traditional recruitment techniques. Gosh, of all the things I'm excited about over the next five years, that's probably to take leaps and bounds in that area is just something that I'm just so excited about. I love the concept. At the end of that funnel, of course, is like a candidate that gets placed in a position. I'm really interested right now in how people choose jobs, especially in a tight labor market that's getting tighter. How do you think about that sale? Like, at the end of the day, lots of these things end with a sale of some sort. And a job is sort of like a product being sold to a prospective employee. What have you learned on that last mile there of this system that you're building in terms of how to effectively get people to say yes to jobs?

Yeah, I mean, I would say ultimately, if I was going to boil it down, it comes to have it be feel lateral with a huge amount more optionality and upside. To have it feel at least a minimum laterally financially, hopefully build a better environment, treat people better, give them more opportunities to stretch themselves, invest in them more. And then obviously, from a long-term perspective, give them this array of opportunities that if they can perform in this role, I think that's what most people want. That's what I would want. I mean, heck, I don't know. That's how I kind of look at my career. I mean, I used to be the line cook and then I was the pastry chef and then to use the analogy, right? You can't be the executive chef unless you've been over the friar and over the grill pan and saucier or whatever the person is, right? Like you've got to be the person who's done all the jobs. And I think that over time, providing people the opportunity to learn and grow at sort of their own pace and in a sort of unlimited way, what more could you want? As long as you're properly compensated and you're being kind and generous to people. Isn't that the holy grail of work? How do you think about the opportunity set of your market, the small, the mid-sized market, relative to when you and I first met.

You mentioned five years ago. I remember just being like scratching my eyes out at the free cash flow yields at which you were able to purchase businesses because they were so much different than public markets. How do you think about that today in absolute and relative terms? So I think back then on a relative basis, it was kind of crazy. The difference in perspective returns. I'm sure the absolute valuations have come up. How do you think about the opportunity set today?

Is it as good, the same, worse, and for what reasons? I'm way more excited now than I was five years ago, which is probably hard to believe, considering I bounce off the walls you could barely contain me. I'm more excited about it because, let me back up. There's kind of two ways to look at permanent equity in what we do. One is we're specialists in size of company. So we like to find companies that are either right before or maybe right after professionalization. And that can vary between two and a half, three million dollars a year of free cash flow.

And I mean, some companies are professionalizing around $10, $12 million of free cash flow. So that's kind of our target strike range is most of these companies are in that, call it, $5, $6, $7 million of free cash flow these days with a few lower and a few higher. And that's kind of one specialization. The separate specialization is in a kind, long-term home for these businesses that really transcend size. So, I mean, we're working on a deal right now that's the largest deal we've ever worked on. And it's $35 million of free cash flow. It's a huge business.

And we've been talking to the seller for three and a half years now. Of course, when they first approached it, they weren't quite that big. They were about half the size. We think that smaller than that. But we were a lot smaller. We certainly didn't have the capacity to handle a deal like that. Now we've grown. They've grown too.

And we've continued discussions. And what they said is, look, we want you all not because you're doing things away everyone else, but because you're not doing the way things everyone else to do. I think that we've developed a specialty and we continue to develop a specialty. in treating people really well, using very little of any debt in our transactions, keeping leadership in place and augmenting the leadership team, and really holding for the long term. The other skill set that we're doing a lot more now is that what are the things we could do post-close to really help things flourish?

So this gets into the table stakes of business hygiene across all these different areas, and that we're starting to develop real deep expertise in those different areas, whether it's marketing and advertising, accounting and finance, technology, systems, operations, all the different areas, and really starting to learn and with our view in the marketplace, be able to see all these different things that are working and not working and be able to put those into these companies is really valuable. And so from an opportunity set standpoint, the market's bigger than I thought it was. It turns out there's a lot more demand. And we've really now sort of shifted from, yes, we're still doing a lot of what I'd call

pre-professionalization or right post-professionalization, but also providing a good long-term home that are maybe larger businesses than we would have expected otherwise. When I first met you, I couldn't imagine investing $20 million into what we did. And obviously, we raised our first fund. We invested that in 18 months at $50 million, and then we raised a $300 million fund. And no one knows what the future is going to hold, but it looks like we're going to be quite active. Only the future knows what that'll hold. So another thing that maybe it's fun to talk about just because you and I have been working on it with really key partners that are actually the ones doing all the work on almost replicating the experience that you and I had early on when we first met. And maybe the way

I'll frame this is you and I are both really interested in networks of people and on ramps and ways in which people have mobility, upward mobility, obviously, in a career, in other ways. Maybe it'd be fun for you to describe from your perspective that journey that we've been on together and what you've learned as we've built a few things and have a few things coming out here soon. The truth is, and I mean, you already know this, but my life changed a lot as a result of meeting you and a joke that I monetized Twitter better than Twitter has, but thank goodness for being on Twitter and quote and quote, wasting time. If you back up five years ago when I met you, we were running a small portfolio of companies and it was just our capital internal that we were using to fund these

acquisitions. So we'd have free cash flow come off the companies. We stockpile it. We'd buy another company, kind of just keep rolling it forward and compounding. And you were really one of the people to challenge me and say, Brent, it seems like you could do this at a higher level. And I remember, you know, whenever you first said that, I kind of smiled at you and I was like, well, how's that going to work? And you were like, I don't know, figure it out. You're like, I see people all the time that scale organizations like this and like, you should really think about scaling it. And really until you pushed me, and I think you talk me off the ledge, I don't know, at least twice, maybe even three times from not doing it. But I'd really

never thought about building a larger firm with outside capital. It was something that I had no connections to Wall Street. I mean, look, we operate out of a house in Columbia, Missouri, not exactly the financial epicenter of the universe. You opened my eyes to a completely new opportunity set, and not only opened my eyes to it, but also helped provide, as you said, be on ramps, made introductions, helped me structure things, helped me just frankly learn and grow beyond just the skill set that I had,

but about the larger business and business model. I mean, without you, I mean, you know this, Patrick, and I don't want to get choked up talking about it, but I mean, you changed my life. I'm passionate. I know you are passionate about, there's a lot of other people out there

that they don't have that opportunity that I had. They're not going to just randomly meet you and hop on a call. I can remember what we were going to talk about at the time. It was like capital allocation or something. And you were like, hey, I don't want to talk about any of that garbage. Like, don't talk about that at all. I want to talk about what you do.

And I was like, oh, that's interesting. Okay. I didn't think what we did was that interesting at the time. But I think that's really been the impetus is you and I getting together, we launched Capital Camp, which it's only been one event, but it was a big success. And then brought together people who never would have talked otherwise. And out of that, we said, gosh, what would it look like to have Capital Camp, this really deep, meaningful event and sort of collisions?

What would that look like digitally? What was it, gosh, almost 18 months ago now, 16 months ago, that you and I first talked about it, we started brainstorming. Yeah, what's falling out the other side is for the last, well, really for the last year, you and I and some key partners, as you said, they've been doing all the work. I mean, we're kind of lazy. I guess we're just the pretty faces, right? Or at least you are. I'm not that you are. Anyway, what's falling out the other side is a deal team, which we did a beta last summer on, learned a lot about what our potential people wanted.

It's exciting. It's basically the social and messaging platform for professional investors with the goal of taking people who have grooved online networks, helping them tremendously communicate better with their constituents, whether they're investors or other GPs, as well as provide this incredible on-ramp for people like me who frankly didn't have access, didn't know any better. Our goal is, I think, to just make the investing world more approachable. and communicate better and to make sure the right people have the right resources to create flourishing. Yeah, the on-ramp thing is so interesting, objectively, it's just a good idea, right? Like, obviously, by definition, most of the people that have done exceptional things,

whether that's someone who's an immigrant or came from a difficult background or whatever, like most of the stories you hear start somewhere like that. Like, there was some catalyst, and there probably just aren't enough of those, especially in the investing business where it's kind of well known, you know, if somebody leaves a major hedge fund or has the pedigree, it's not that hard to raise money or begin as an investor. What's interesting about what we've learned together talking to a lot of these people is there's a lot of interesting investors that aren't in the system. They're not on the coasts. They're in the Midwest somewhere. They're doing something atypical. They're doing it

organically at small scale. And to me, what's exciting about this is, first and foremost, I do think you need a professionalization of investing networks. LinkedIn doesn't cut it. Like, nothing cuts it. You don't know who anybody is. You don't know who you should talk to. And that should be fixed. But for me, like even more exciting is the concept of finding someone doing something with tons of talent and experience that's off the run, a bit more unique and enabling that type of person. So it'll be fun. It's been fun to build businesses together, even though, you know, like you said, we tend not to be the ones doing the work. Just this concept of networks and people and talent and on ramps, we can fun to continue to build together. So fun excuse to bring it up here and a lot more to come there. Yeah, I could be more

excited about it. And obviously somebody who probably is not familiar to most of your audience, but the CEO of it is Blas Morose, who's gotten to be a good friend of ours over the years. I'm just so excited to see what comes out of it and how people use it in ways that maybe we don't expect. I mean, at the end of the day, what we want people to do is when they're at work, they bring this up and it provides them all the tools to be able to communicate and to be able to discover who are the partners and people they should have in their lives that maybe they never knew about. So we'll see. We'll see if we can pull it off. I don't know. Awesome. Well, crazy that it's been a year since we did our sad version of this. Now there's, you know,

you can't contain the demand in every business. I call that. Remains to be seen what inflation does here. And there's no free lunch. But it does seem to have been relative to our expectations a pretty good year in the business world. And so cool to check in with you and learn a bit about deal process and everything else. As always, my friend, thank you so much for your time. Thank you, Patrick. Appreciate it. This episode was brought to you by Canalist. In this four-part mini-series, I sit down with Canalyst's new chief product officer, Jeremy Payne, and talk about his background in fundamental data, the role Canales plays in the investment process for its clients, and how Canales products help investors better model and understand companies and their key drivers.

In this week's episode, Jeremy and I discuss how Canales helps investors wade through the various adjustments that companies make to their earnings and results. What do you think the most interesting things are for people out there to understand about changes in how companies report information, how accounting has changed through time, and how that matters for the analysts process, especially as those numbers deviate for simple gap accounting where you can go download a 10K or download a 10Q and look up numbers. Obviously, KANalyst is doing more on top of those numbers. So just talk about that more. What are the most important things that happen in that more? We're really trying to figure out the future.

We're using the past. We're using the facts in place and the expectations in place. But if what you're trying to do is forecast the future, you need a adjusted view of the past. You need a view of the past that's representative what the future is going to look like. So, for example, if there was a fire in the warehouse and we lost a bunch of inventory, And that flows through by accounting rules to cost of goods sold. But it makes gross margin look really funny for the period. There's a concept that almost everybody can sign up for for an adjusted gross profit for that period.

That makes a lot more sense if you're trying to use that number to forecast next period's gross profit. And once upon a time, if you wanted to have that view of the future or from the past, you had to do that work. yourself. And that was what a lot of investment analysts spent their time doing was scrubbing historical data to make it comparable, both to other companies and to itself and to be the right basis for a forward-looking projection. And analysts spent a lot of time doing it. And then vendors started doing it. And that's one of the stories of our industry and one of the value ads that companies over time have provided one of those things that gets done many times in lots of places and used to get done in every investment management shop that then started

getting done by the vendors and people started doing the adjustments for the buy side in data companies. And what changed, and I think this is a really interesting change, is that the companies themselves started producing a lot more adjusted data. And the regulators noticed and there was a period of tension. And eventually it worked out in what I think is actually a win-win for everybody in the sense that companies give their view, that adjusted view of history that they think is more representative of the ongoing forward-looking aspects of their business

and is the right way to judge them on a forward-looking basis. And they give really good reconciliations back to the actual rules-based accounting data. And what panelists does really, really, really well is give full transparency into that data, that data that starts with the company's as reported gap financial statements and is connected through the company's own. own detailed reconciliations to those really important non-gap operating metrics and financial metrics and key performance indicators that are in the view of management and usually the analyst community that follows the company, the right way to understand the company.

And I think analyst does a really good job of giving that view of a company's reporting. If you enjoy this episode, check out join colossus.com. There you'll find every episode of this podcast complete with transcripts, show notes, and resources to keep learning. You can also sign up for our newsletter, Colossus Weekly, where we condense episodes to the big ideas, quotations, and more, as well as share the best content we find on the internet every week.