The Startup Ideas Podcast - Generating Wealth by Doing Micro Private Equity with Brent Beshore

Episode Date: January 26, 2023

Today Greg is joined by Brent Beshore of Permanent Equity. In this episode, you'll learn why you don't need a Finance degree to generate wealth as an investor. ►►Subscribe to Greg's weekly newsletter for insights on community,creators and commerce.You'll also find out when new and exclusiveepisodes come out from Where it Happens. And it's totally free.https://latecheckout.substack.comFIND ME ON SOCIAL:Twitter: https://twitter.com/gregisenbergInstagram: https://instagram.com/gregisenberg/TikTok: https://tiktok.com/@gregisenbergLINKS FOR THIS EPISODE:Production Team:https://www.bigoceanpodcasting.comBrent Beshore: https://www.permanentequity.comhttps://twitter.com/BrentBeshoreSHOW NOTES:0:00 - Intro1:07 - An argument for Annual Letters4:10 - Permanent Equity 10112:22 - Applying the Kaizen Approach 18:25 - How Brent values a business25:58 - When should a founder sell?29:06 - Advice for first-time investors34:23 - How to be a better capital allocator

I got a flat tire yesterday. And my immediate reaction was, I got a flat tire. This sucks. Yeah. Toe truck's only coming in two hours. And, you know, I hit a pothole, basically. And, you know, potholes are avoidable. Sure.

And you can sit there and just be like, initially I was kind of like, wow, this sucks. But, you know, I was like, you know, in the grand scheme. of things, the grand scheme of things is just a flat tire. Yeah, yeah. So we had a flat tire with a few flat tires coming into this. Sorry about that. Well, I appreciate you have me on. Thank you.

Of course. Welcome. Welcome to the show. I've been following you for years now because you put out some of the best content around buying businesses, I would say micro businesses. So small to medium-sized businesses. and, you know, I reached out to you because I wanted just to meet you and catch up. And then I figured, why not give the benefit of the listeners to have that catch up?

So let's dig into it. I just got off reading your annual letter. And I would love for you to tell folks why you write annual letters and what was in this one. That's a big question. Yeah, I write annual letters to keep kind of all the stakeholders that we have. informed. I mean, we've got kind of three big kind of pockets of people. One are the people who we work with, right? So the portfolio company leaders, employees, people of the firm here are investors. And then people who potentially would be partners on opportunities. And we found that the best way

to repel the wrong people and attract the right people is to put out content that says who we are and what we do. And so, yeah, the annual letter was a reflection back. Actually, it's been 15 years since I haphazardly started permanent equity before it was even called permanent equity. And so it was kind of a look back. Some announcements on new hires. We did a couple new deals this year and just trying to do a look back and kind of take stock of where we've been. Do you think more companies should do annual letters? I know Chimoth did an annual. I don't know if he still does it, but he was doing annual letters, of course, you know, the Berkshires of the world do annual letters. Like, you know, is this a trend that we think is going to accelerate? I mean, I think there's a lot of organizations

that I see that kind of do an annual wrap-up or an annual letter. I think it can be super valuable. It depends on what you're trying to do with it. I mean, I read a lot of annual letters that look like victory dances when things are going well and look like excuse fest is when when things aren't. And I don't think that is maybe as valuable. I think, you know, just trying to be who you are, I guess in all situations, including your annual letter is probably the way to go. I think what's cool about doing an annual letter is like probably once a year. You really need to reevaluate like what's happening. What's the state of the world? How, you know, where is the wind blowing? Where are the tailwinds? Where the headwinds. And it's just beneficial just to like,

sit down. I love like you called a letter. It's not a letter. It's a blog post or a PDF. Realistically, you know, that's why, yeah, that's why I really like it. I mean, it also gives people like me, like I feel invested in permanent equity. I read the letters. So I feel like more people should go and publish. If you have never published a yearly letter, if you're listening to this, it's worth it's worth doing. Yeah, I would agree. I mean, again, tell people who you are and what you're trying to do and it will attract the right people and repel the wrong people.

Absolutely. So when I was reading your letter before this, I didn't realize how big you were. So today, you know, your portfolio of companies, you know, have 700 full-time employees. And you've got just under $350 million of annual revenue. So the scale has become big. Now, obviously the economy is weak right now. How are you feeling about 2023 and permanent equity? Having a portfolio companies, you're going to have some that are going to do better in certain environments than others.

And the nice thing is that we're very different than traditional private equity in the sense that we don't typically put any debt on the companies. So for us, we have a lot of operating flexibility. I mean, we can, you know, earnings can go down 50, 60 percent and everyone still keeps their jobs. And we actually had a conversation yesterday. We were in Dallas with a new acquisition. And we had this conversation with them. We're like, hey, if you all think that things are going to be tougher this year than they were last year, like, let's not miss an opportunity to invest in people and technology and hopefully come out the other side of this way stronger. or when everyone else is retreating and entrenching,

let's be aggressive because we have the ability to do so because we're not beholden to a bank and covenants and taking all the free cash flow that we have and sending it to a financial institution. So we really encourage our companies when there's adversity, like don't miss the opportunity for a good crisis and served as well. For folks that don't know permanent equity super well,

can you talk more about what type of businesses you'd like to buy? Yeah, so we acquire majority stakes. So we're always doing a majority of the equity in small family businesses that are typically family run as well. So these are when I say small, these are maybe not, depending on what most people think of as a small business. These aren't the local sub shop or, you know, hair salon.

These are typically pretty good sizable businesses making between three and $15 million a of earnings, typically revenues of, call it, 15 million to 150 million kind of in revenue. So, I mean, there's, you know, these are, these are pretty chunky, chunky companies. And yeah, we like to partner for the long term. So we're technically private equity. We buy equity in private companies, but the term private equity comes loaded with a lot of meanings. And typically what it means is, you know, we call it the buy lever strip and flip model.

So you buy the company, you put as much debt as you possibly can on the company. so you can put its little equity in. And if everything goes great, then the equity returns look fantastic. If everything doesn't look great, then there's a good chance of the company detonates. You have to make some really hard choices,

which usually means to cut people. And then they're looking to make significant changes in the business and then sell it to somebody else within typically a call it two to five year time horizon. So we do it in many ways, the exact opposite. So what we do is we buy with no intention of selling the business. We typically use no debt in the transaction. We love to keep leadership

teams in place. We don't replace the leadership typically unless there's a sort of acute problem. And we hold indefinitely and partner with them and try to be kind, generous long-term partners. It's really a first principle is rethinking of what private equity is and should be. And I mean, really just came from looking at how did families build wealth in the first place? I've never met a family who's like, you know, what we did was we levered up a company to the moon and tried to change it within a short period of time and then flipped it to somebody else. It's not at all how typically wealth is built within families. Wealth is built by you're passionate about what you do. You become good at it. You faithfully serve your customers over decades and compound. And so that's what we're trying to do

as well. Could you give some examples of like what types of businesses that are? like. Yeah, so we've got a very diverse portfolio. We own a swimming pool builder. We own a hyacin matchmaking firm, so executive search but for love. Very interesting business. We own a military recruitment firm, picture frame manufacturer, fence builder. I mean, it's really all over the place. So services, manufacturing, construction. We really, we want to get involved in things. We think of as like main street businesses, things that are going to be around for a long time, enduring need for them really enjoy just sort of the main street. How do you deal with acquiring a business that you really don't have domain expertise in?

So for example, like you might realize, you know, swimming pool business is a huge opportunity. The numbers make sense to you. But, you know, you don't know the first thing about how much chlorine to put in a pool. Yeah. We never are experts at the businesses that we acquire. In fact, that's a, you know, we think of as we're the experts in the business of business. So, you know, we joke that everything tastes like chicken layer of business where no matter if you're doing pool building or matchmaking or, you know, recruiting for the military, it's all the same things.

You need, you know, marketing, advertising, sales systems, you need accounting systems. You need to make sure you're in compliance, taxation, HR systems, recruiting. It means all the things that are the business of business is where we really feel like that we want to build expertise and then we want to partner with firms that are deeply knowledgeable, excited about, talented in the thing that they actually do. So, you know, we always say we're not going to be involved with a company that wouldn't be successful without us. What we're trying to do is be good long-term partners and bring a talent about the business of business to them that typically most small businesses lack. I mean, we like to say often that small businesses don't stay small

on purpose. There's a reason why they stayed small. And usually there's some lids on the business that were able to release over time that help the business grow. I recently had Nick Huber on sweaty startup. And he has a really good saying, which is, you know, if there's a fax machine in the building, chances are there's an opportunity, meaning, you know, there's a lot of technology efficiencies when you see a fax machine because no one's really using fax machines. Do you think a lot about, or do you encourage your teams to think a lot about technological efficiencies? Yeah, I would say in some ways it's fools gold and in some ways it is real gold and it just

depends on the situation. We actually, we bought a company a couple years ago that we couldn't figure out why the orders weren't coming in and then we finally figured out it actually went to a fax machine that the fax machine was unplugged. We plugged in the fax machine and orders started coming out. So yes, there are things like that that you can do that will improve the technology of the firm. I would say the thesis that you're going to come into a small blue collar, you know,

sort of main street business and transform the business in any sort of reasonable time frame with, you know, fancy technology is likely a pipe dream. You're going to have a lot of cultural entrenchment, a lot of inertia. You're going to break a lot of systems and people in the process by trying to implement that, especially quickly. Now, over time, of course, we always want to be pushing the companies to be sort of the Kaysen approach, right? The constant improvement of the company, I would say many, because of the time horizon of many investors being so short, they don't have the patience to actually compound that technology advantage over time. And so they've got to come in and break everything, which by the way, you can do and it'll work. it just increases the range of outcomes that you should expect, right?

So if you don't come in and change anything, you should probably expect the company to perform kind of how it's performed in the past. The more you start changing systems and changing out people, it increases the upside opportunity, but it also increases the downside opportunity. So you just have to be careful when you start doing that. What is the Kaysen approach? It's just an idea that you always want to be constantly improving every day

in in sort of measurable ways. So, you know, it's this idea. It's just continuous improvement, right? It's an idea that, you know, just because something's not broken doesn't mean you can't make it better. And I think that's where a lot of we see small businesses fall into this trap of like, you know, sort of it ain't broke, don't fix it, which leads then to have these lids on the business that really keep them from growing.

And so we encourage our leaders to do is to say, hey, look, when everything's going great, like, let's not take it for granted. Let's continue to push the advantage. and when everything's not going great, let's use that maybe downturn and some slack in the system to improve everything. Like, how do you think about technology businesses in general? A lot of people who listen to this podcast either run technology businesses or work for technology businesses.

It sounds like primarily the businesses you buy are more like brick and mortar type businesses. Is that fair to say? Yeah. I mean, we actually have one software-based business. business that we acquired last year, which is, I mean, there's technology in every business, but that was a more technology forward business that we acquired. So we're not Luddites. But yeah, I mean, what do I think about technology businesses? I think they're incredible. I mean, I think

that once you have an advantage in, you know, the business model of a lot of these technology businesses are some of the best in the world, right? I mean, software as a service is an incredible business model. Recurring revenue is stickier than project-based revenue. There's a lot of advantages to And technology can do incredible things, right? In terms of, you know, specific businesses, I think there's an ease in sort of a hype cycle that I've seen where, you know, maybe crappy business models get lumped in with great business models because it's all under the umbrella of technology. And they get funded in a way that doesn't make a lot of sense to me. But it's not my world, right? And I mean, there's a lot of people who are a lot smarter than I am who have done very well for their investors and have done very well.

by companies by funding things that I wouldn't have expected to work. But again, we all have our role to play. My take is I think your model would do really well in the technology world, especially going into 23. Valuations are going down. I haven't announced this publicly, but we just acquired a business that, if you would have told me a year ago or two years ago, I would have been like there's no way that team is willing.

to come work with us, you know? Not that just just in the sense of like people are more interested to come together now during times like these. And so, you know, valuations going down, teams more willing to join bigger, bigger companies. And then with you also like you said, you said, that, hey, like we're not experts in the swimming pool business. We're in the business at business. I'm pretty certain that your model, you know, I'd love to hear more about how you underwrite businesses. Like, how do you think about paying for businesses? Is it like, you know, a three to five times earning thing or how you think about it? But, yeah, why wouldn't your model work for technology? Well, it might. I mean, again, we bought a technology business last year. So I think it does.

My gut reaction is that the competition and what people are, willing to pay for technology forward businesses is typically just more than we can get comfortable with. So, you know, when we look at buying $10 million of cash flow for $50 or $60 million, right? And it's pretty predictable. It's hard to go from that to paying a revenue multiple on something that has very little earnings. And so it just feels like a very different shift in the world.

Now, I understand why people pay, what they pay for the technology businesses. And there's people who do an excellent job of stripping out a lot of costs. And, you know, I hate to use the businessy term synergy, but like creating synergies between businesses. I mean, there's plenty of firms that are known for doing that. You know, we like to keep businesses intact and independent. And we like to take a humble view. I think the humility is something I talked about in the annual letter.

The forms of humility that we try to exhibit are not only in not using debt and being humble in terms of what we know about the business and don't know about the business, but also in the price that we pay. If you pay a ton for a business, the expectations are sky high. You've got to start doing a lot of things to generate that return. If you pay a little bit less, expectations can be lower and you can take your time. So, you know, I think that we would not be opposed at all to continue to acquire and partner with technology companies. We would love to do that if expectations were reasonable. And I think there's a lot of, look, I don't fault technology owners for saying, hey, if somebody's willing to pay me, you know, 10 times revenue over here

and you're willing to pay me seven times free cash flow over here, like, I'm going to choose the guy who's willing to pay me a lot more. Great. No problem at all. A lot of people ask me, Greg, how do you build products that foster community? Well, I've got good news. That's exactly what Late Checkout does, my company. We partner with the largest brands in the world and fast-paced startups to design products that resonate with your community. We add a couple interesting clients every single year. So if you're interested, and that sounds like you, email Front Desk at laycheckout.

dot studio with what you're working on what you need help with and don't forget to mention the where it happens pod thank you my thesis is i think you're going to see a lot more inbound of technology businesses in 2023 and i think some of those valuations are going to be reasonable and i think a lot of them are going to come from indie developers and teams so the equivalent of family businesses and technology are these indie teams where you're talking about two or three people who've iterated on a product. I'll give you an example. I just saw that a product I was using called tweethunter.io was just acquired. It's like a build, you know, build and monetize your Twitter audience fast. You know, it's a monthly subscription. I think

They got acquired for $1.8 million. My hunch is that that was like a reasonable valuation given where they were at. That's one of the reasons why I want to talk to you, frankly, is because, you know, as we get more acquisitive in 2023, I think, like, yeah, I guess this is a question for you, which is how do you value a business? Great question. I mean, I think this is where at the end of the day, what everyone's trying to do, whether they understand it or not, is trying to value how much cash. is going to come out of the business and win, right? And that's ultimately how any business is valued, present value of future cash flows. Now, there's a lot of differences in how you value, how you think about the cash flows that will come out.

And there's a lot of preferences for some people are fine, delaying those cash flows for a very long time. And some people are very excited about having those cash flows now. And so this is where the differences in valuation and preferences in the marketplace. you have one person who's excited about cash flows now. They're probably not going to acquire a technology company with no cash flow. And maybe even that needs more at reinvestment. Ultimately, what that technology company is trying to do is build future cash flows through investments now.

And this is where you see incredible businesses like Google and Facebook were highly unprofitable for a period of time and then flip to profitability. And now they just gush cash. And it's incredible. If you looked at their income statement in the very beginning, it wouldn't have looked anything like what you see now. And so that's the maturation of the business over time in technology in particular is very sort of asymmetric and nonlinear. And so I think that's where, you know, I don't have a good predictability of a business that goes from, you know, losing a million dollars to losing $10 million to losing $150 million to losing a billion dollars. like I don't have a lot of vision for how that business then ends up making five,

10, 15 billion dollars down the road, right? I just see a lot of losses and, you know, seemingly a lot of ways to lose money in that opportunity. Other investors see that and say, that's exactly what they should be doing. This is perfect. They have all the heuristics and sort of mental shortcuts to be able to see through the noise. I just see noise. Now, somebody else takes a look and says, hey, you know, we just bought a really large

fence builder. You know, they literally put pickets in the ground and brackets and they build fences. These are not complicated. It's residential fencing. I look at that and say, okay, I know what the demand for fences is. I mean, I can predict it based on net population migration. I can look at it based on housing starts. The replacement cycle of fences, you know, you can sort of look at the predictability of that. And you can see, you know, what does the labor flow look like? What are the customer bases look like? And you can extrapolate out. okay, over the last, you know, 10 years they've gone from X to Y to Z. It looks pretty linear to me. Maybe we can come in and add some, you know, again, sprinkle on some of the business of

business that maybe they're lacking in, derrisk the business, increase the quality of earnings and hopefully quantity of earnings over time. That feels much more predictable to me. And so I can more easily value a business where I can see cash flows and can see the trajectory of cash flows than something where is going to take a lot of reinvestment back into the business and a lot of assumptions to understand what the present value of those future cash flows would look like. And do you do you have a model for like we won't pay more than 7x earnings or we generally pay 3x earnings? Do you have boundaries that you set for yourselves when you're when you're valuing businesses? Yeah, I mean, I would say maybe we can talk about the lower and upper bounds.

So the lower bounds, it's, you know, if you see a business that you think has, you think, has durability and, you know, is transferable. You know, a lot of smaller companies are just not transferable. We call it owner-mote where all of the value of the business is tied up in the goodwill of the owner. So the owner leaves, all the relationships, all the skills, everything kind of falls apart. They're the linchpin, right? So a lot of businesses are just not transferable. But if you see a business that you think is transferable and is durable, you know, three, three-and-a-half times true earnings.

So not EBIDDA, depending on the capital intensity of the business, but truly what is discretionarily coming out of the business on an annual basis in terms of cash flow. You know, three, three and a half times is really the lower bounds. And that's going to be a situation of typically distress. You know, there's going to be some distress factor. Maybe it's age, maybe it's illness, divorce. There's going to be some, you know, midlife crises happen or three quarter life crises happen. I mean, you know, there are some, something that's happening where the person who owns that says, look, even though I could probably get a higher price elsewhere, I just don't want to go through the hassle and I want to find the right place for that, for that asset. You know, three, three and a half times kind of a lower bounds, I would say, of that.

You know, on the upper bounds, we have paid 10 times in the past for a business. I mean, 10 times, the question is 10 times what, right? It's a multiplier of what. So, you know, I always joke with owners and they're like, well, I was really hoping for seven times. And I say, look, you can make up a number and multiply it by seven. Whatever you want to do, seven times what's the question. So when you look at it, you know, typically what the multiplier is, okay, is it seven times previous year earnings?

Is it seven times what we project to be the future year earnings? Is it seven times a blend of the last three years? Is it seven times EBITDA? Is it seven times cash flow? Is it seven times earnings? Is that pre-tax, post-tax? I mean, you know, you can do all these like, you know, multipliers of what? what really matter. What I would say is of discretionary cash flow is sort of normalizing for

capital expenditures and for reinvestments or necessary reinvestment back into business. You know, we paid 10 times, but that was for a business that was incredibly fast growing and that we felt high competence in. And we were able to get some preferential treatment in terms of the share class that we were participating in. So look, we paid three times for a business. We've paid 10 times for a business. Those would kind of be the, I would say, rough, you know, yardstick to use in terms of range. Most of the time we're paying four, five, six times. And again, four, five, six times what, four, five, six times what we think is going to be the trajectory of the business in the future. It doesn't matter if you made, you know,

$10 million last year. If you're going to make $2 million next year, you can't value the business on 10. You got to value it on two. So we're always trying to understand what does it look like for us to be in the owner's seat and what do we predict to be the cash flows coming from it. Do you have any insight into when an owner should consider selling a business? I talked about on the pod in my 2020 to recap podcast that we had an offer, an eight-figure offer to sell our business. And we decided to decline it because we really like what we do and we want to do it forever. That kind of forced us into the position of like thinking about it. do you think that just like how every year you sit down and you write your letter, should

a business owner every year sit down and be like, should I sell my business? I would say no. I think that largely if going through the exercise of do I want to sell or not is unless there's a reason to, I don't think it's a very fruitful exercise. I mean, you know, you should understand what you have. But I mean, look, if you think about it in terms of private business versus a public business, if you owned a publicly traded company, Greg, like. you would have prices shouted to you every second of every day of exactly what people think

the business is worth, right? Does that mean you should sell your position in the company just because somebody's shouting at you a price? Like, probably not, right? I mean, you should be proactive, right? Yeah. It's just different for private business owners because there's no one shouting prices typically at private business owners, right? So when somebody comes inbound and says, hey, this is how I value your business and you're like, oh, that's flattering. That's interesting. Right. You know, it kind of perks me up. Like I start thinking about, well, what would it look like to not own this business anymore?

What would it, you know, would I rather have $10 million or would I rather have the business? That's a good question to ask. But no, yes, to answer your original question, are there good reasons and bad reasons to sell a business? Absolutely. The good reasons would be change in lifestyle, a change in in sort of need for time. I mean, again, death, divorce, sickness, are three really, really. dominant factors that typically, you know, reorganize somebody's life. But there are plenty of others. I mean, we've bought businesses from people who are like, hey, I, you know, I've just

figured out that I want to be a painter. And as much as I, you know, enjoy the people and enjoy the business, like my real passion is getting in art studio and painting. Fantastic. That's a great reason to sell the business. So there's a lot of bad reasons to sell businesses, so, too, you know, primarily ego, which, you know, I don't know how many people I've heard say, well, you know, my buddy at the country club said, you know, he sold his business and he seems happy. And so I figured everyone else is selling their business. I should sell my business too. And now I want to, you know, try to put up as big of a number on the board as I can so I can

brag to my buddies about it. That's not a great, it's not a great reason. Another not good reason is, you know, I want to time the market and I want to try to, you know, I know the business isn't going to do very well in the next five years. So I'm going to try to screw somebody over. and offload the steaming bag to them. Like, that's probably not a good reason either. So, you know, I think that good deals are win-wins for the buyer and the seller.

And that's ultimately if you can't look somebody in the eye and tell them that you think it's a win-win for both sides. And I don't think you should do the deal. Shifting gears a little bit just because I need to ask you. I heard a little birdie told me that you had lunch with Charlie Munger once. Is that true? I did. Yeah. It was fantastic.

I mean, Charlie was incredibly gracious and kind, deeply thoughtful, very opinionated. I like people who speak their mind and tell you what they actually think. And he certainly did that. I mean, it was a fantastic time. I mean, it was a great opportunity to sit at the feet of an elder who's been there and done that. I mean, I think I'm more broadly just, I'm a big fan of asking people who have a lot more life experience than me and have done things that I would, you know, aspire to when they do, ask them about their mistakes, ask them about their triumphs,

ask them about what they would want to know, you know, what I should be asking them even, you know. So I've got to ask them a lot of questions that, you know, is all off the records. I can't really talk about, you know, what we necessarily, you know, discussed. But it was a wonderful opportunity. I'm really grateful for it. I mean, I see some similarities between what you're doing in Berkshire,

but also some differences. Could you, can you talk more about that? Yeah, I mean, we're not trying to be anybody but us. And I mean, you know, kind of the trajectory of the business that I run, you know, when we first started having cash flow, you know, you become an investor by default. You're like, okay, I have excess cash. What am I going to do? And I, you know, my late 20s, I was blessed to have a business that was cash flow and growing and exceeded dramatically my lifestyle needs. And so, you know, when you have money left over, you start saying, okay, what should I do with

it. And during that period of time, I spent probably two full years studying what I would call like kind of the investing greats, trying to understand what they did, what were the mechanisms they employed. And they're very different, right? I mean, you read Thorndyke's book, The Outsiders, you know, is a really good kind of introduction to a bunch of people who are some of the best investors of all time. But like how John Malone did it, it's completely different than how Sam Zell did it, which is completely different than how Warren Buffett and Munger did it. Yeah, I mean, I would say we try to take the best of what we liked about each model and, you know, be first principles thinking about our own model and then just try to be us. I mean, you know, you accumulate knowledge and experience.

And so in terms of Berkshire, you know, they grew what I would call up in the market. So there's kind of two ways to grow. This is maybe something we want to discuss. But one way to grow is, I think, the more traditional way, which is you do a deal and then you do a bigger deal after that and then you do a bigger deal after that and do a bigger deal after that and you sort of grow up into larger and larger transactions as you accumulate more and more capital. The challenges with that model, very few people can be good at every stage of the game. I think this is what makes Buffett and Munger so remarkable is that what Berkshire was 50 years ago and what Berkshire was 40 years ago and 30 years ago and 20 years ago were all very different things from one another.

you know, when I've gotten to speak with those guys about the early days, I mean, they were deeply involved with their companies. They were doing things so differently. They were, they had a completely different mindset. And they matched the mindset and they match their skill set to the situation and the needs that they had at the time, which totally makes sense. There's just very few people who are that adaptable and are able to be, uh, learning on the fly like that over long periods of time. You know, I would say the, the model that we prefer is to, to grow out, which is you do more deals of similar sizes or in, you know, sort of a similar range, not bigger and bigger deals. So as you accumulate capital, you say, okay, we're used to doing

two deals of $10 million a year, $20 million total, you know, sort of capital out the door. Okay, well, now we have $50 million a year to put to work. Do you do a, you know, double the size of deals or do you do twice as many deals? I'd say is we want to go out, not up. We really like the area that we're in. You know, we, we, we think we've developed an expertise in a very unusual style of company where it's kind of a common link where they're too big to be small, but too, too small to be big. They're like in this adolescent phase of business, which I think you have a lot of fruits.

It's more volatile, to be honest, because obviously, you know, adolescence is volatility. But, you know, the volatility can be upside volatility as much as downside volatility. And so there's real fruit in helping take a company that maybe doesn't have as isn't good at the business of business, as we've talked about, and helping them get better at that while they have a really great core expertise in the thing itself that they do. So that's the model that we've chosen. That doesn't mean we won't get involved in larger businesses. I mean, the last check we wrote was a $40 million check, which is, that's a big check for us. I mean, you know, it was not too long ago that I was writing million dollar checks and those seemed like big checks. right to be that large now maybe in 10 years we'll be writing 400 million dollar checks but we really

like what regardless of the size of the check we really like to be with companies where we think there are growth opportunities that can come from a skill set or expertise that we can bring to the table i'm in a situation where i'm trying to become a better capital allocator never taken a finance course in my life uh have invested in oh really Okay, that makes me feel much better about it. Yeah, man. Yeah, is that, so that, okay, wait, so you, let's, let's dive into that. You haven't, like, no formal.

No. Education around finance or anything like that. Because you seem to be, like, grooving your way through financial terms and writing checks. And so, you know, you fooled me. Well, just because you don't have a formal training in it doesn't, I don't think me, you know, I've learned over time. I mean, I was not one of these people. I can barely open up Excel. I didn't work at another firm.

You know, I don't have a, I don't have a degree from a fancy school in finance. I, you know, I don't have any of the traditional markers. You know, I often joke that I'm a forest gump of private equity, right? But I've learned along the way, right? You pick up concepts just because somebody didn't teach it to you. It doesn't mean you can't learn it. You know, I've read a lot and tried to really understand, again, the first principles of what people are talking about. And oftentimes jargon just covers up a lack of understanding.

So learned over time. But you said you want to be a better capital allocator. Why do you think you're not a good capital allocator now? I said I want to become a better capital allocator. And I'm saying that because in my world, I'm seeing a lot of opportunities. You know, I've done a lot of like seed stage series A technology investing, probably invested in 50 companies. late checkouts invested in probably 30 companies in the last two years. Some of those have become really big businesses.

But given what I think is happening in the market, I just want to become better. Yeah. And I think there's probably a lot of people listening to this that are like, wow, there's going to be a lot of opportunities that are going to come online and best be prepared. So what would you? What would you recommend to folks who want to level up their capital allocator skills in terms of places to go for that? People to read, books, courses, you name it. Yeah.

Well, maybe we just firstly, we can talk about what does it mean to be a good capital allocator and what does it mean to be a bad capital allocator? So when I think of good capital allocation, I think of a keen understanding of opportunity cost is where it all really starts. So everyone's going to have different opportunity costs. Opportunity costs means if I choose to do something, I can't do something else. But choosing to do something means you have access to an opportunity. So a dentist in Des Moines is going to have a different opportunity set and different opportunity costs than you will. Now, that doesn't mean yours are better than his or hers. It just means that they're different.

So you've got to really understand, you know, what opportunities do you have access to? why do you have access to them? And how do you compare opportunities? So this is where, again, as a Series A investor, seed stage investor, you know, you have an opportunity to invest in early stage companies that most people don't have access to. So you've got to create a rubric around what am I hoping to get out of those and what's the financial model that I'm hoping to employ there at what expected return that will compete with you buying the S&P 500 index fund, competing with buying a house.

house competing with everything else. I mean, I'm making this up. You know, you probably have other opportunities. So that that's where you really have to, as a good capital alligator, you have to say, okay, I have to take the capital that I have and then I have to put it to work into some situation, which is going to be suboptimal. There's no perfect situations. There's no perfect returns. There's no risk free investing. So you're taking risk. And the question is, what risk am I taking over what period of time for what expected return? And then you just compare them and you say, okay, this is where capital allocation becomes an interesting art of assembling a portfolio that may be zigs and zags in different scenarios, right?

So if you have only seed stage investments in technology firms that are only in Silicon Valley, I'm making this up, right? There's probably going to be a pretty high correlation between those investments that may create unbelievable upside and unbelievable downside. And depending on your risk tolerance and depending on how you think about holding cash and other investments you might have, that may be fantastic for you or maybe the dumbest thing you could possibly do. That's what I'm saying is everyone's different. What you have to think about is under what scenarios will it produce what return and what do I need that return for. So it'd be really stupid if you said, okay, look, I need to buy a house

in two years. I've got $5 million. I'm just making up a number. And I'm going to go put that into early stage seed investments. Because typically early stage seed investments are not going to pay off for five, 10, maybe even 15 years, right? In terms of, when I say pay off, I don't mean mark to market. I mean cash in your bank account that you can go spend on a house. So that'd be pretty dumb, right? I mean, if you say that that's the objective I'm trying to meet is to buy a house in two years.

For God's sakes, don't put it in early stage seed investments. Now you can take that same amount of money and say, yeah, I'm going to put it in the and P because it's liquid and I feel comfortable taking the risk that the market's going to go up, they're down or whatever it is. And I maybe don't need five. I need three of that five. And I feel comfortable with a 60% draw down. I'm okay with that. I want to take that risk because maybe it's a 60% meltup. Right. You know, conversely, somebody else who says, okay, look, I've got five million dollars of cash on hand. I've got a great diversified portfolio of real estate and, you know, whatever else other sources of income, maybe a W-2 employee somewhere.

I'm good on the cash side. I've got this $5 million and I just want to try to generate the best return I can possibly generate. In that case, and you have access to it, maybe seed stage investments are the best possible thing you could do with those resources. So there's no right or wrong answer. It is trying to pair up your needs, time horizon to need and expected return to opportunity cost.

Like what I want to do with you selfishly is just like open up all my books and just be like, all right, well, how would you, you know, you're me or you're us, like, what would you do? I think like one of the things that is difficult is a lot of capital allocators are in their own world. Like, you might be in your world and I might be able to look at your books and be like, hey, you actually, like, there's this whole new set of like community based businesses or software businesses that are coming up that are going to be at, you know, this valuation that it might make sense to take, you know, five percent. of your capital to go and allocate for these reasons. But vice versa, and I actually think I can

gain a lot more than you potentially can gain, but vice versa, I think like having that feedback is is super, super key. And like I feel like finance is pretty, a lot of people keep it to themselves. Yeah, I mean, people are funny about money, right? Yeah, exactly. People are funny about money. Because money, money is, money is in some ways a tool and in some ways, a tool and in some ways, the measuring stick and in some ways the comparison between people and some ways people see it as the judge of their value. And so there's all these entanglements with money that have nothing to do with the actual money itself. Exactly. And so yeah, I mean, and you're right, people are in their silos. I mean, look, I'll talk transparently about my finances. I hold two types of investments.

I hold highly illiquid small private investments, right? In these companies that we that we acquire, and cash. And that's it. Like literally, I have the, it's the most barbell strategy I've ever seen, right? Now it's important because small private investments are highly volatile. And when you have an opportunity, you need to be able to have cash on hand to be able to not need any of his permission to go and do it. And so, even though I don't earn much on my cash and inflation is suboptimal. I think that the opportunity,

cost of not holding cash is quite high for me. And so I don't invest in the stock market. I don't invest in bonds. I don't typically invest. I mean, I have some exceptions in other managers. I don't invest in, you know,

early stage investing. I don't invest in any of that stuff. I invest in small, private, highly cash flowing companies and, you know, take that cash, harvest it and hold it until I want to redeploy it back into that same sector.

Okay. So we have a good understanding of what it means to be a good capital allocator now. How does one level up their skills and where could people go to on the internet or yeah, where can they go to learn? I'm a big fan of reading older things that have stood the test of time. And so if you think about many of the best investors of sort of our generation are steeped in thoughtful things were written quite a while ago. And so I would go back and read what I would call the classics, right? Now, it depends on how you define it.

And a lot of these, by the way, people roll their eyes at and are like, oh, everyone's read these. Well, look, if you're already at the level where you've read all of the greats, then, like, why are you taking advice from me? You're probably a better investor than I am, right? Like, that's fine. But I'm probably going to say the things that most people who have been in this space have done, which is go back and read the Berkshire letters. And when I say read the letters, like, get out of, you know, print them out, put them in a binder

and like turn off your phone and go get a pencil or pen out and mark them up. And when you come across a concept that you don't understand and, I mean, you got to really test yourself. Do I really understand what he's talking about? Do I understand this concept fully? If you don't, put your pencil down and go research it. Google the shit out of it. Right?

and try to figure out what people are saying about that concept and really try to make the connections between that he's mentioning and maybe your own life or your own investing. It takes, it's a slow process to really, you know, it's one thing to read about something, to learn about something, really different thing to understand it and have it sort of seep into your logic and process systems. But I would say the Berkshire letters are an incredible education. And like anything else, like, I mean, Buffett's been writing for a long time. Like, the early letters have a lot of the same things the later letters do. They've just been repeated in sort of different situations.

Howard Marks is another one that I think very highly of. You know, I have not, I think that his early letters especially. So these are letters from a chairman of Oak Tree Capital. Same is Howard Marks. Very famous debt investor certainly benefited from falling interest rates over, over basically his entire career. But he's just an incredible thinker and a thoughtful guy and kind and generous. And I would, I would, you know, especially his early letters, I would read them. Book like The Outsiders will, you know, definitely increase your surface area of awareness of a lot

of different investing styles. I think that's the key. The key is how people do things are very, very different. People's thoughts on debt. People's thoughts on risk tolerance. People's thoughts on sector, on stage of company are all going to be so different. What you want to do is you want to go and sample, you know, who are the best early stage investors and why are they really good? Do they just get lucky over and over again? Or does there something in the system that they've created, right? And can you replicate that or replicate part of it? Or do you even want to replicate part of it? That's going to be very different than somebody who's investing in heavy tech or heavy capital expenditure businesses or, you know, industrial businesses or turnarounds or small companies, medium size companies, large companies,

public, private. I mean, there's all these different people that are out there, you know, choosing a very niche thing to invest in. I mean, there's people who invest only in funding lawsuits, right? I mean, the amount of things that you can invest in are almost limitless. I mean, there's a guy I know who he's the largest supplier of debt to the watermelon industry, right? Like, you'd never guess that in a million years. So there's a lot of these really interesting niches that you can fall into, but you got it before you, before you choose your sort of off the beaten path thing that you want to go do. If that's what you choose to do and become a sort of professional investor in that area, you've got to learn what the path is. And to study the path is to study the

sort of the people have gone before you and have done quite well. That's not a good enough place to wrap up. I don't know what it is. There's a temptation to follow, you know, the it person. But there's just so much wisdom in the great. So I think that's, and I'd love your idea around like, okay, go spend like two hours every week or an afternoon every week and go read a Berkshire letter, grab like a pencil and a highlighter and a notebook and write about it. And I think actually what could be fun is also like, you know, grab a group of people to do it with. Sure. Just do something though.

Don't don't not do it because you can't get the group together. Yeah. You know, it's like I could just go do it. And you can be like us who don't have finance degrees too. Amen. You don't need to finance degree. Teach yourself. It's all on the internet. I mean, honestly, I owe most of my career to Google. I mean, I'm not joking when I say that.

I mean, literally, I called up a local lawyer that I had at the time whenever I had the opportunity to buy my first business. It was very, I had no capital. I took an SBA loan. And I said, okay, so what do we do next? And he said, well, we need to do diligence. So I literally typed into Google, DO diligence. Do diligence, right?

And then it pops up DUE. diligence. I'm like, what is, what is a do? Oh, do. That's what he meant. And then, you know, I'm like, are, you know, are there lists out there? And like, you start Googling lists for due diligence. Honestly, like, there's no better way to do it than just to hop in and just try to be humble and learn. I appreciate it. Where could people learn from from you? Well, permanent equity.com is our website. We have a lot of, we've written a lot on there. We have a lot of things published. under the resources tab our view on the world and investing and operating. And that's probably the best place.

I mean, I'm on Twitter and LinkedIn and all the places. I actually not all the places. Those are the only two places. But yeah, I mean, I'm pretty accessible. If I can be helpful to anybody, feel free to reach out. Yeah, grateful to be on the show. Thank you. Thanks.