My guests on this episode are Kurt Leedy and Kyle Coots, co-founders and managing directors at Miramar Equity Partners. Kurt and Kyle have an interesting vantage point in the search world being backed by a family office with an agnostic time horizon, allowing them to invest in the widest set of opportunities in search and parallel spaces.
Our episode focuses on a concept they developed they call the three ways to make money, those being classic LBO, M&A-driven strategies, and organic growth. We dive into the characteristics of each along with a few examples from their portfolio.
We also touch on how the intersection of two or more methods can create exponential outcomes. Finally, we discuss a few theses they find interesting in healthcare and software and how they develop a thesis on an industry.
Live Oak Bank — Live Oak Bank is a seasoned SMB lender providing SBA and conventional financing for search funds, independent sponsors, private equity firms, and individuals looking to acquire lower middle-market companies. Live Oak has closed billions of dollars in SBA financing and is actively looking to help more small company investors across the country. If you are in the process of acquiring a company or thinking about starting a search, contact Lisa Forrest or Heather Endresen directly to start a conversation or go to www.liveoakbank.com/think.
Hood & Strong, LLP — Hood & Strong is a CPA firm with a long history of working with search funds and private equity firms on diligence, assurance, tax services, and more. Hood & Strong is highly skilled in working with search funds, providing quality of earnings and due diligence services during the search, along with assurance and tax services post-acquisition. They offer a unique way to approach acquisition diligence and manage costs effectively. To learn more about how Hood & Strong can help your search, acquisition, and beyond, please email one of their partners Jerry Zhou at [email protected].
Oberle Risk Strategies– Oberle is the leading specialty insurance brokerage catering to search funds and the broader ETA community, providing complimentary due diligence assessments of the target company’s commercial insurance and employee benefits programs. Over the past decade, August Felker and his team have engaged with hundreds of searchers to provide due diligence and ultimately place the most competitive insurance program at closing. Given August’s experience as a searcher himself, he and his team understand all that goes into buying a business and pride themselves on making the insurance portion of closing seamless and hassle-free.
(3:36) – How did your backgrounds help form this concept of “The three methods to make money”?
(9:18) – Do you have a model of investing that resonates most with what you’re looking to accomplish?
(12:24) – Have Search CEO’s been primarily focused on one of these three buckets in your experience?
(15:51) – What are some characteristics & examples you’ve seen of the Classic LBO investing model?
(18:36)- What questions or risks are you optimizing for when considering LBO?
(22:13) – What are some factors that have correlated with a high retention rate in companies you’ve observed?
(24:23) – Can you walk us through how you divide M&A Driven Strategies into its two subcategories: Roll-Up and Transformative?
(33:46) – Is there some value in having M&A experience for a CEO & their company?
(35:42) – Why do you think there is such increased popularity in the M&A strategy within Search?
(39:00) – Which companies and characteristics fall under the Organic Growth Model?
(46:00) – What are some examples of companies who have combined these methods and found success?
(51:10) – What are your thoughts on Software businesses and any opportunities in that space?
(54:40) – What are some ways you develop and validate different theses?
(1:01:19) – What strongly held belief have you changed your mind on?
(1:03:32) – What’s the best business you’ve ever seen?
Alex Bridgeman: Well, Kurt and Kyle, thanks for coming on the podcast. I’m really excited to talk through a whole bunch of different things from family office investing, roll ups, software, three ways to make money, a whole bunch of things. One of the core concepts for the conversation is this concept you’ve outlined, the three methods to make money, those methods being classic LBO, M&A strategies, and then organic growth. I would love to kind of hear what parts from your background are informing those three methods and that kind of mental framework. I’d love to hear where all of those ideas came from as parts of your background.
Kurt Leedy: Yeah, I guess I’ll start Alex. We started Miramar Equity Partners about four and a half or five years ago. And we got to start with a sort of blank sheet of paper. I had come from a background of- We both started our careers at Bain & Company, Kyle and I both did, but I then went to work for a middle market private equity fund called Ridgemont Equity Partners based in Charlotte, North Carolina. I’d been a sort of tech and telecom investor, very industry focused investor. Kyle can share his background in a moment. But when we started Miramar Equity Partners, we had a blank sheet of paper as to how do we want to invest which was really creative and very entrepreneurial in itself. And we had a really wide mandate. The family office that backs us and gives us the capital that we invest today made most of their money in oil and gas or continues to make most of their money in oil and gas. It’s like oil and gas was off the table and anything else was on the table, which is really, really fun. And we said, well, there’s a whole bunch of industries we could potentially be interested in. I was still interested in tech and telecom. And Kyle had a business services background mostly and so was interested there. But we got to think really broadly. And what we narrowed in on is we know we like a handful of sort of business characteristics. Regardless of industry, we know we wanted to buy businesses that had recurring revenue, that had some tailwinds for growth, and that had great unit economics. And then the style in which we did that, we can be really flexible, but we knew we wanted to work with really talented managers and entrepreneurs and operators. And when we first got going, in fact, actually, before we got going, we’re sort of aligning with the family that was going to back us on how we wanted to invest. They said, you got a blank sheet of paper, what are you going to do? And we said, okay great, how about this industry? How about that industry? But then we started talking about different models and how we would invest in different models, which is how the search fund investing that is now a majority of what we do came to be as well. Going back to, I guess, maybe more directly answer your question about specific parts of my background, Ridgemont, I was there for 13 years. Their philosophy was generally to be the first time institutional capital into a company. And that meant usually buying founder owned businesses. We generally had pretty deep domain expertise. I was a tech and telecom investor. We had a team focused on healthcare, a team focused on business services, industrials. And so, we were very sort of thematic and thesis driven as to the businesses we looked for and then got pretty deep in diligence and tried to identify great businesses that we could back. Generally, we were comfortable paying higher prices for really high-quality businesses, as opposed to being a sort of bottom feeder. And I think that carries through to what we do today as well. So, sort of a number of elements that got picked up from my past both at Bain and mostly at Ridgemont that carry forward to Miramar. And I think Kyle would say very similar things, but I’ll let him maybe just dovetail with his own background and how that ties into what we’re doing now.
Kyle Coots: Yeah, sure. Thanks Kurt. My career in investing kind of started at Austin Ventures. And we were really more focused on kind of LBO, maybe management buyout focused. And so, I saw a lot of business services, saw a lot of kind of private equity deals for the first time. And what I’d say I took away from that is I learned what excellence looks like, founders and some of the team that I worked for, I was really fortunate to get a place on that team. They’re still mentors to us. I still keep in touch with them. When I went off to business school and ultimately ended up at Redbird, what I found was I’m probably a little more entrepreneurial than I had thought. And I focused on that in business school, and I really couldn’t have found a better place to land than Redbird. Redbird’s a large kind of growth equity firm, New York and Dallas based, and all three of the partners there at the time were very entrepreneurial in their own way. There’s a lot of focus on just finding interesting ideas and going and building businesses, no kind of vanilla private equity models. It was all about just going out there, being scrappy, and putting proprietary deals together. And it kind of opened up this whole new world to me that was different than the investing I’d done at Austin Ventures, it kind of gave me an outlet for that entrepreneurial spirit. And in fact, Kurt was talking about how the family kind of challenged us with a blank sheet of paper. It was Kurt who said, hey, have you guys ever heard of search funds? And I had actually talked to a couple investors here in Dallas about becoming a searcher at one point while I was at Redbird. And so, all of that started to come together. I’ve learned a lot from Kurt, just his focus on tech and telecom and some of the things that are in software, some of the things that come out of that business model, and kind of coming to a family that gives us that blank sheet to go pursue some of our passions was kind of a breath of fresh air. And so, I think you can see a lot of that, why we’re continuing to do search and how we’ve put together some of the businesses that we have.
Alex Bridgeman: So with being backed by a family office and given a blank sheet of paper, is there a favorite way or style or model of investing that you feel like resonates most with what you want to do?
Kurt Leedy: It’s funny, Alex, as we were preparing for this podcast, and we sort of tried to organize our thoughts a little bit, and Kyle and I, you can see a smile on my face right now on the video, but Kyle and I, we just pinch ourselves that we get to do what we get to do. It’s an incredible amount of fun. Just for context, Miramar invests about, or Miramar Equity Partners invest about $50 million a year, 80 or more percent of that is in the search fund model. The other 20% is in what we call platform businesses. And those are ones that we control, we’re generally writing larger equity checks into those. And that’s a very rifle shot approach. We’ve got two platforms today; we’re not really looking to add a third. But both in our search fund investing and in our platform investing, there’s just sort of a lot of different ways to make money. And sort of, it’s like asking, what’s your favorite child? Like, you don’t have one, you love all your kids. And when we look across our portfolio and we see CEOs that are pursuing different strategies, they’re trying to create value in different ways, it’s hard to pick a favorite, but it’s a fun exercise, I guess, to think through. As we were preparing for this podcast, we sort of thought, there’s sort of, broadly, three ways to make money in investing. Just to lay it out, one of them is the classic LBO – buy a business for relatively cheap, use a decent amount of leverage, you need some growth, but not a ton of growth, and pay down debt, generate a bunch of cash flow, you need to buy a profitable business and generate cash and then exit, and it’s a good way to make money. And we’ve got a number of different businesses in our portfolio pursuing that path. And we can talk about those in just a minute. And then you’ve got sort of M&A driven strategies, sort of maybe 2a and 2b there. The 2a would be this sort of roll up strategy or serial acquisition strategy, which I know you just covered with Jay and Jason on a podcast that just got released earlier this week, which we’ve got a bunch of that in our portfolio as well. And we really enjoy some of those businesses. 2b might be M&A driven strategy. But it’s a little more transformative, maybe more rifle shot M&A as opposed to doing a bunch of smaller deals. And we can talk about a couple of examples there. And then the last one is sort of growth-oriented investments that are going to get all or the vast majority of the returns just from growth and not from any of those other sort of levers. My guess is if we went and divided up our portfolio based on which strategies CEOs are pursuing across our portfolio, it’d be reasonably evenly divided among those three buckets. And so, we’ve got a good amount of all three of those. And that means a good amount of fun and a good amount of variety for us.
Alex Bridgeman: One question before diving into the first one, classic LBO, I’d love to know if over the time of your investing, you’ve seen interest from prospective search CEOs in any particular bucket, or if they’ve shifted around somewhat. Like maybe one of the three has become really popular recently, but wasn’t prior. And I’d love to know, has that distribution shifted around some? Or has it been fairly stable across the board?
Kyle Coots: I guess what I would say is number three in Kurt’s outline there, so the organic growth is usually the most popular focus, at least up front. And I would say probably the least popular focus has typically been number two, which is kind of M&A driven. My guess is that the popularity of an M&A driven strategy has increased. Roll ups seem to be a little bit more common today, or at least the pursuit of roll ups seem to be a little bit more common today than it was even just three or four years ago when we started investing in it, structuring the acquisition with some kind of unfunded commitment amount of front has become a little bit more popular. That gives the searchers a little bit of dry powder to use. And then the LBO, I would say, is pretty rare. Like there needs to be some kind of growth driver for a searcher to really kind of get excited behind an industry. But different things like you’ve seen come out in the industry where there are ways to buy cheap, usually you are getting a pretty good multiple on things. I think the appetite for debt has kind of increased. But I would say like if there’s one that’s become more popular over time, my guess is it’s number two, just M&A driven strategies.
Kurt Leedy: Just dovetailing on that, Kyle, I remember the first Harvard Business School search fund conference that I went to, I think it was actually even before we had officially formed Miramar, but we knew we wanted to figure out investing in search funds. And there was an investor panel, and they were asked a question, somebody asked a question about roll ups, and one of the investors, I can’t remember who it was, mentioned, historically, in the search fund world, roll up was a four letter word. It was, hey, we’re already taking the risk of backing a young, inexperienced CEO, why would we want to add the execution risk of acquiring additional businesses and the integration that comes with that, etc.? And I can see the logic of that. I think if you rewind the clock 15 or 20 years in the search fund world, first of all, there weren’t that many deals getting done, but a lot of them looked more like a bit of a classic LBO, maybe with some growth thrown in, but fundamentally you’re going to buy a business at five times EBITDA, you’re going to put a couple terms of debt on it, and if you’ve got a good recurring revenue business that generates good cash flow because it’s low capital intensity and good margins, then you’re going to make a good return. And so, to sort of historically the classic LBO was the most popular. And then, especially with not advent, but the increasing popularity of software as a target for searchers and just a target for all private equity investors everywhere over the last decade or decade plus, growth has become more in focus, perhaps, then the sort of classic LBO type. And then as some serial acquisition strategies have performed exceptionally well, I think a lot of investors have realized, wait a minute, that’s a really good way to make money too. Why don’t we go do that? And I think you’ve got to pick your spots carefully. We can talk in a minute about what the characteristics are that might make a good roll up strategy and what might not. If you pick your spots well, it can be a really good place to make money.
Alex Bridgeman: Yeah, absolutely. Well, let’s dive into the classic LBO one. Tthat’d be I think a good place to start in terms of walking through the three. What are some kind of characteristics that you’ve seen for this method and then maybe some examples that are helpful?
Kurt Leedy: Yeah, sure. I guess I’ll start. I learned this recently, this concept, but your listeners and you, Alex, may have heard of Will Thorndyke talks about the rule of 10. I think a lot of investors have heard, especially because of the popularity of software recently, the rule of 40 in software, which is growth rate plus free cash flow margin, to be 40 or better, that’s a really high quality business. And Will Thorndyke has the rule of 10, which is your EBITDA multiple at purchase plus your customer churn rate, or it could be gross dollar churn rate, should be 10 or less. And if you can do that, then you’ve got a really high-quality business. And in my mind, that’s sort of a classic LBO setup. If you can buy something for a mid-single digit EBITDA multiple, and it’s got recurring revenue, it generates cash, if that recurring revenue is such high quality that you retain 98% of it per year, for example, then let’s say, you bought something for 5x EBITDA, it’s got 98% retention or 2% churn, so you just hit a 7 on the rule of 10, that’s probably about as good as you can do. Really hard to hit the rule 10, but if you can do something like that, you’ve got a really compelling way to make money on your hands. So, fundamentally, if you’re buying a business for five or six times EBITDA, so you’re buying at something like a 16 to 20% pretax yield, the business doesn’t have much capex, so it turns EBITDA into free cash flow at a really high rate. And then you can get a reasonable amount of growth, 8-10% a year, which is not heroic, but certainly more than GDP, just add your yield and your growth rate together, and you’ve got roughly your unlevered IRR. So, if you can buy it at a 16 to 20% pre tax yield and then grow at 8 to 10%, you’re sort of in the mid-20s to 30% IRR before you even add leverage or do anything else with the business. So, I mean, that’s pretty simple sort of monkey math. But it turns out, you can make money that way. Kyle, did I miss anything? Or anything you’d add there?
Kyle Coots: No. I mean, honestly, you covered almost all of it. There’s a couple of examples in our portfolio we can dive through. But I think from our perspective as well, it’s just easier to kind of get your arms around diligence compared to a roll up when you’re looking at one single kind of classic stable business, as opposed to thinking about how you’re going to integrate different things and do a bunch of other transactions that we’ll talk about here in a second. But yeah, I think Kurt described it pretty well.
Alex Bridgeman: Yeah, you kind of mentioned it a little bit where it’s not the roll up strategy where execution risk becomes something you have to think a lot about. But within LBO, what kinds of questions or risks are you trying to optimize for or get figured out for this method before making an investment?
Kyle Coots: Alex, at a sort of generalized level, I’ll dive into an example here in a moment, but at a generalized level, what you pay up front really matters. Paying five to six times for this model works really well. Paying eight to nine times doesn’t work nearly as well, mostly because then you rely much more heavily on your ability to grow the business then you do if you’re paying five to six times. So going in price is a sort of pretty fundamental thing. We focus in our analysis of businesses, sort of across the spectrum of all the types of ways to make money that we’re going to talk about today, we focus more heavily on the quality of revenue than we do on anything else, I think. And so, in a sort of classic LBO type investment, we’re going to look pretty heavily at what is the quality of that revenue, and it might be a contractually recurring revenue business, in which case we can get pretty granular on churn stats. It might not be, like if you think about Transdime as a business, not contractually recurring, really, really good business, not contractually recurring, so you’re going to look at other things to assess revenue quality, repeat purchase behavior, you might look at macroeconomic factors and their influence on revenue, those sorts of things. So, you want to have really high retention or really low churn. And then you want to have some growth tailwind for the business, ideally. An example that I would give is we’re an investor in and I’m on the board of a business called ISPN. It’s based just outside of Kansas City. They provide technical helpdesk services to rural internet providers. So, if grandma out in West Texas gets her internet from Big Ben telephone and something goes- her Wi Fi goes down, and she can’t fix it herself, she calls a 1800 number and she thinks she’s calling Big Ben telephone, but in fact, that call is getting routed to ISPN. A service rep at ISPN can help resolve that issue for her so that Big Ben telephone doesn’t have to roll a truck and send a technician out to her house. That’s sort of the way the business works. And we get paid on a recurring revenue basis by our customers to provide that service. They pay us per subscriber, so their end subscriber, they pay us per subscriber per month. And we have very high retention rates in that business. And Jeff Neblett and Scott Lauber who bought the business through their search fund, paid a mid-single digit multiple for that business. So, we’ve got good purchase price, we’ve got high quality revenue, and then the business was growing, call it in the single digits or so, call it mid to high single digits when we bought the business. And that sort of could be good enough. And obviously, Jeff and Scott have been pursuing ways to grow it faster. And they’ve done that since they’ve acquired the business. So, if you put an attractive purchase price, high retention, high revenue quality business, now with double digit growth, you’re going to make money. Like you don’t even need to have anything heroic on the back end happen. You don’t need to go do M&A. Like that will be a successful investment if you put those three elements together. And so that’s one example in our portfolio that I call out of this sort of classic LBO.
Alex Bridgeman: One question before going into M&A strategies on customer churn, I would love to know within the business models or companies that you’ve seen with really low churn and high retention in their revenue, really high revenue quality, what are some factors that have correlated most strongly to a high retention rate with companies? I assume stuff like the product is mission critical, or it’s a small piece of that company’s income statements, I don’t think about nearly as much. But are there any maybe less obvious correlating factors with high revenue quality?
Kyle Coots: Yeah, I’ll start with mainly kind of business services where maybe it’s not contractually recurring but highly reoccurring, it’s usually one of two things. It’s just super painful for somebody to switch. And so they just don’t want to go through the pain when that contract is up for renewal, or you are the best provider or the most logical provider in the service. And so, it just doesn’t even make sense for them to switch, whether it’s because you’re in their location, or you provide a better service visa vie what the other providers provide.
Kurt Leedy: Yeah, and the only thing I’d add to that is that the competitive intensity in a market matters, and you want high switching costs. And you’d love to have in a market relatively low competitive intensity. Maybe that comes from high barriers to entry. Maybe it just comes from being in a reasonably small market. There’s a great line from one of the Harvard Business School professors that teaches about search funds – there are riches in the niches. And in software businesses, oftentimes, where growth is a primary driver of returns, oftentimes, we’re looking for reasonably large market sizes. But in a business like ISPN, serving rural internet providers, it’s a big enough market, it’s not a massive market, but it’s big enough for us to grow at a decent rate for a really long time. But it’s not so big that it’s going to attract a ton of competition to come in and try to cut price to win business or do other things to steal business away from us. So low competitive intensity matters. We’ll often spend a good amount of time in diligence on the front end of an investment looking into the competitive intensity in a market.
Alex Bridgeman: Moving to the second method, M&A driven strategies, you talked about two subcategories, those being roll up and transformative M&A. You also mentioned now this is becoming more popular out of the three methods recently. Maybe give us a kind of a walkthrough of how you divide those two subcategories into roll up and transformative and which falls into which.
Kyle Coots: Yeah, sure. I think the biggest way to differentiate the two subcategories there is to think about roll up would likely be your strategy going into a deal. And I’ll come back to what characteristics make a target more attractive. But you’re coming into a thesis buying a platform and knowing that most of your growth is going to come through serial acquisitions. Whereas the other one, the transformative M&A, you probably are entering the deal thinking it’s more of a classic LBO or you have some organic growth strategies, and you have the opportunity or you’re forced to kind of pivot and grow or transform your company through vertical integration or expanding geographically, offering new services, but you make a transformative acquisition that may have been unplanned when you started the deal. And so maybe I’ll start with roll ups. One of the reasons I think this is becoming more popular is in markets, like healthcare, frankly, are becoming more popular in search. And what searchers will find is they find good industries where it’s got some of the fundamentals that you want, where there’s tailwinds, it is growing rapidly, maybe there’s a reoccurring or recurring kind of revenue model, but they can’t find kind of a business of scale. They find a bunch of businesses that are subscale. And the idea is, can they combine multiple ones to make one scale platform? And so, from our standpoint, the way we look at it, is there’s still a strong focus on the revenue model. We still want highly recurring or reoccurring revenue. We want to make sure that there’s still good returns on capital. So, we’re still very kind of disciplined in our approach to making sure that the industry and the revenue model makes sense, but where we can maybe squint a little bit and not have to have it perfect is in organic growth with that starting platform. And what you’d like to see, ideally, you find a really solid one platform that’s got scalable systems or people or processes or brand reputation, or whatever it may be, you buy that and then your growth is going to come by organically adding on other acquisitions, either within a region or it can be kind of a broader region if you need, but you’re basically doing the exact same thing at these. And you may or may not integrate them. We’ve got kind of both models in our portfolio. Some run more of a centralized, or decentralized process or decentralized strategy, and some integrate them all. But the idea is, you’re buying kind of similar businesses and adding them together to take advantage of synergies, pricing synergies, back-office integration, whatever it may be. So, I guess where I’d start with there is like giving you an example of one of the deals that we’ve done in that strategy would be HOA management. It’s an industry where we started building the thesis. It’s a large market. There’s a lot of tailwinds for growth. One of the things that kind of jumped out to us in the very, very beginning is there was not a large private equity platform in this space. But when we talked to other private equity firms or we talked to business owners that were running small organizations in this industry, they talked about how common it was for private equity investors to reach out to them to try to buy them. And so, it started to become a pattern of well, if there’s so much PE interest, why is there not a platform? And I think what we ultimately came down to is there’s two giants in the space. One is a public company, one’s family owned that happens to be based here in Dallas, which made diligence a little bit more convenient for us. But we saw that there really wasn’t kind of that third player that could make that platform for middle market private equity. So, if you’re willing to go a little bit further downstream, start with something a little bit smaller, go in with kind of a lean operating team or something that looked a little bit more like a search model, you can take advantage of some of the opportunities by creating this inventory to bundle and sell to private equity. So, one of the things that we’ll look for when we diligence an industry for a roll up is there private equity interest? Is there evidence of private equity firms, middle market private equity firms doing this at a larger scale that would make kind of obvious exit candidates? And if so, how are they doing it and how are we going to compete with those?
Kurt Leedy: And by the way, which is not to say, we’re doing this just with the intention to flip this thing to private equity in the near term. One of the benefits for Kyle and I of working sort of at a family office with family office capital is we don’t have any time horizons. So, we can own businesses for really long lengths of time, but you’d like to know going in that you can get out if you want to. And that can be an attractive exit. And so, we sometimes joke about creating inventory for middle market private equity funds as part of our job. Whether we do that in year five or year ten depends largely on the entrepreneur and whether they want to keep running the business and partly on what happens in the market and whether the market changes in a way that causes us to rethink exit.
Alex Bridgeman: Yeah, it is an interesting concept thinking about, like everyone talks about think about your customer first and design the product for the problem that they need solved. But I haven’t heard it articulated as build your investment strategy for your end customer being the firm that’s going to buy you out one day. It’s an interesting phrasing I hadn’t heard before.
Kyle Coots: I think it just gives you comfort that you’re onto a good industry. Like PE is probably going to target industries where there are tailwinds. So, it confirms kind of the diligence that you’re performing at a very small scale. And it gives you the opportunity that if you’re buying- if you’re disciplined in your buying approach, and so hopefully if you’re doing a roll up and starting with very small assets, you’re entering with a very low multiple, you may not have the growth off that multiple, but hopefully the revenue is high quality to where you’ve got a stable asset that you’re going to tuck under other assets of that similar small multiple and you get a little bit of that arbitrage as well.
Alex Bridgeman: Yeah, that’s a good point. So, within transformative M&A, maybe share an example there and how that differs from the roll up strategy specifically.
Kyle Coots: Yeah, I’ll let Kurt go. Most of the ones that I think fit this this dynamic are kind of under his watch here at Miramar.
Kurt Leedy: Yeah, Kyle earlier hit on one of the key differences between these two approaches, which is mostly the roll up is planned on the front end, usually planned on the front end. And the transformative thing tends to be unplanned and a little more opportunistic. Although I recognize certainly some roll ups happened. Maybe they were unplanned at the time. Jay and Jason, who you just had on with Vector Disease Control, I’m not sure that the roll up was quite planned, I think they were a couple of years into it before they started making acquisitions. And then before they realized, hey, the flywheel is really going and we can really create a lot of value with it. But oftentimes, with the searchers we’re backing today, they might go into a roll up with that strategy in mind, whereas we’re on a number of boards with companies that maybe thought there might be some M&A to do in their market over time, but they didn’t need that to be successful. And then it sort of fell in their lap. So, I’m on the board of a software business called BPD Zenith. It’s an enterprise asset management software business. It’s actually based in the UK. Two searchers that were based in the UK acquired it. And it’s one of a few global players in this enterprise asset management space. We’re sort of tied into the IBM Maximo ecosystem. And we knew who the other global players were. Some of them had presence in one market or another. But we didn’t think we needed to do M&A to have a successful investment. The business was growing nicely, we bought it at a reasonable price, it generates cash. And so, there were other ways, it was sort of a bit of a combination of an LBO and a growth story, sort of method number one and method number three that we’re talking about here. And six months into the deal, one of our sort of primary competitors in North America, specifically a company based in Cincinnati called Projetech, sort of approached us and said, hey, we’re ready to sell. And now’s the time for us to sell and do you want to buy now, or maybe never? And six months in, especially with new CEOs, you generally don’t want to do M&A that quickly. You’d like to make sure everybody’s got their arms around the business, and we feel very comfortable. But you don’t always get to choose your timing. And in that case, we didn’t get to choose our timing. But fortunately, the CEOs that run that business, Henrik Fridlund and Oliver Garthwaite, are fantastic. And they built a lot of trust in the first six months. The business sort of got out of the gates pretty well. And we said, okay, I think we’re prepared to take that risk if the deal looks compelling enough, if the acquisition looks compelling enough, and the price is right, and those sorts of things. And it doubled the size of the business. We doubled our ARR six months in. We did it with mostly debt and a little bit of equity. So, sort of tried to be thoughtful about the capital structure, and knock on wood, now it’s six months later. So, we’re a year in total to the acquisition, and here we are, sitting on twice as much ARR and probably more than twice as much EBITDA as we thought we would have. So, that’s been a fun example that I’ve gotten to live firsthand as a board member. I’m on the board of actually two other companies going through a very similar thing right now; we’ll see whether those acquisitions happen or not. But generally unplanned, very opportunistic, but potentially very transformative. And that can be exciting. It can also add an extra layer of risk, and so you’ve got to be pretty careful.
Alex Bridgeman: There has to be some value, though, even early in a CEO’s tenure of going through some sort of M&A process, even if it doesn’t work, just to get that rep under their belt and their team as well. Because I’d imagine there’s probably folks on the team who haven’t acquired a company before and haven’t done a due diligence process that could use that experience, especially that comes up later down the road. Is there some value if M&A is at all potentially a part of a company’s future in getting some reps early on in the company’s history just to get that understanding ready in case they get to use it one day?
Kyle Coots: That’s a good question. It might depend partly, Alex, on how much you think M&A might be a lever in the future for value creation. If in the case, frankly, of BPD Zenith where we figured there might only be a handful of companies we might want to buy over the course of our ownership, getting a rep for reps’ sake probably wasn’t on the table. It was like we’re going to either take this seriously and figure out if we want to buy this or we’re not. Maybe that was partly because Oliver and Henrik both had pretty good finance backgrounds and M&A experience. So, they didn’t need a rep for reps’ sake. And other people in their business had just gone through a sale process. So, they had at least been on one side of that table before. So probably, my answer is generally no, you wouldn’t take a rep just for reps’ sake. You’d only do it if you were going to take that acquisition opportunity seriously. Certainly, if you thought that M&A was going to be a more meaningful portion of your sort of go forward value creation opportunity, then maybe getting that rep becomes more valuable. But certainly, in the case that I just went through with BPD Zenith, it wasn’t.
Alex Bridgeman: Building on these two M&A strategies, I’d love to hear a little bit more about why you think these are becoming more popular. You listed a few examples of Flint Group being one of them, Colin Hathaway was a great guest twice. And I think what he’s doing is really interesting. I’d be curious, is this a strategy that you just hear more about from prospective searchers? Or are there other things you think that are driving increased interest in this one main strategy?
Kurt Leedy: First of all, the good news is that Colin Hathaway, as good as a podcast guest he is, he’s an even better CEO. So, we have that going for us. We’re happy investors in the Flint Group.
Kyle Coots: Yeah, I think Kurt kind of hit on it earlier in the podcast, but I think there’s two things that I’d say would be my guess that are driving most of this. One of it is just people have heard of the Flint Group. People have heard of some of the med spa successes that other searchers are having. And so this kind of story of success through a roll up model may be investors’ propensity to pursue a roll up model has increased as well. And so, it is becoming something that searchers are trying to follow. And then I think the other one is what I mentioned a minute ago, that I think searchers are finding interesting industries where there’s great dynamics, good revenue models, great tailwinds for growth. Some of those we can talk about in a little bit in healthcare where it’s new practices or new forms of care for healthcare, where they’re finding lots of targets, but they’re all very small. And I look at our pipeline of deals we’re trying to close right now, there’s three or four that would fit this model to where they found an industry that they wanted to invest in, they found hundreds and hundreds of targets, and collectively, maybe three or four of them, if they slapped together, can be a really interesting business. But right now, there’s just nothing of scale in the industry for them to go by. So the idea is to start with a handful and build a platform from scratch. And I think those two things are driving- they make it a little bit easier for searchers to find something that might meet the qualifications that investors are looking for and find readily available targets where they’re not having to pay 10 times for something that’s got $5 million in EBITDA.
Kurt Leedy: The other thing I’d add to that is, I think those two things are spot on, and the third thing I’d add is, if you think about the prototype of the searcher that raises a search fund today, it might look a little different than it did 15 or 20 years ago. And one of those differences is there are a number of searchers, maybe 20% or so, that have had private equity experience pre search and pre MBA. The private equity industry didn’t exist like it does today 20 years ago. And so, it’s much less common to have gone and done a two or three year associate stint at a private equity firm before you got your MBA, where then you learned about a search fund, you decided, hey, this is what I want to do. And because the buy and build sort of M&A driven strategy is so prevalent among mid market and just all private equity funds, you get people that actually have had direct experience pursuing that strategy in another context that launch searches.
Kyle Coots: Yeah, that’s a great point.
Alex Bridgeman: Yeah, that’s a good point. Colin owes me a Flint Group hat, which hopefully by the time this episode comes out, it’s in my mailbox, and I get to wear it on the next episode. But yeah, see, that looks awesome. I’m looking forward to seeing that one on my countertop. I think moving into organic growth, this is another really interesting area that I have a lot of interest in, I’d love to hear which companies and characteristics fall into this group. And then let’s dive into some examples here and perhaps even some from your own portfolio.
Kyle Coots: One, this is probably the most exciting for me personally, but two, what I think about the easiest way to frame, there’s a bunch of business services and generic business models that Kurt and I can both kind of manage. But if there’s one expertise that Kurt has that he will 100% handle that Miramar deals with, it’s software. And if there’s one in my bailiwick, it’s healthcare. And I think those two are the easiest ways to kind of describe kind of some of the portfolio companies that are pursuing this strategy within our portfolio. But I’ll let Kurt start with healthcare or sorry, software, because I think it’s the easiest way to display some of this.
Kurt Leedy: Yeah, maybe just zooming, I could give a bunch of examples of great growth companies in our portfolio. I’ll have to narrow down. But before I get there, I’ll maybe just talk at a general level. For each of these strategies, whether you’re doing an LBO, whether you’re doing a roll up, or whether you’re pursuing a growth business, we care about recurring revenue, we care about growth, and we care about good unit economics, it just happens- And we’re not going to sacrifice and have a really crappy recurring revenue business just because it’s growing. That’s not something we’re very interested in. But obviously, with this organic growth story, I mean, it’s literally in the name, we’re focused a lot on growth. And I think one of the characteristics that you see here with successful growth stories is they’re serving markets where there’s some underlying tailwind in the market, and there is a lot of whitespace, a lot of sort of non-consumption today that a good company is going to take that customer from a non-consumer of that product or service today to a consumer of that product or service. So a couple of examples, but one of them is Swoogo. It is just a great software business. They provide event management software. A guy named Chris Sykes is the CEO of that business, fantastic CEO by the way. Chris bought that business at a little bit of a scary time. He got it under LOI in late 2019. We were due to close the business in March of 2020, and COVID hit. And this is an events management software business, so it was a bit of looking into the abyss of what is going to happen here. Fortunately, Chris had the fortitude and persistence, frankly, to get through the scary times of the initial phase of COVID, convince investors that this was going to remain a good business. And the fundamental growth story of Swoogo from April of 2020 when we closed the business to now has been a little bit of stealing market share from some maybe more legacy competitors that hadn’t invested in their product quite as much as Swoogo had. But also sort of converting non consuming customers, it might be an enterprise that’s hosting an event and they didn’t use any sophisticated event management software and now they do, converting those non consumers to consumers. And so, the business has done tremendously well. We bought it with, I won’t give specific numbers, but low single digits of ARR. And the business is up close to four times in about two years from then to now or a little more than two years. So just a tremendous success story. And really fun to be a part of, as well. We’re, again, happy investors there too.
Kyle Coots: And I’ll draw on the same thing. Like healthcare is the same thing. One of the things we talked about that is very similar software is the whitespace. And so, what we look for in healthcare, I think it’s easy to make a case for demand outpacing supply in healthcare just because of the aging population or general population growth. What we look for is some driver on top of that, and I think the easiest way to explain it is usually providing better access to care, to a certain form of care, or a better mode of care that there’s not enough access to. There’s really two portfolio companies in our portfolio that probably fit that description the best. The first one is called Encore Infusion, its ambulatory infusion practices. It’s not a novel concept. There’s kind of been hospital infusion and home infusion for a really long time. For whatever reason, though, ambulatory had been under built. As we got into the diligence, we saw that, look, there’s more and more biologic drugs coming to market being prescribed. We believe that that’s probably the best mode of care for many patients that have chronic diseases that need to get this care regularly, sometimes weekly, sometimes monthly, sometimes quarterly. And we were reading stories about people having to drive 100, 200, 300 miles to the nearest infusion facility just to get an infusion. And this wasn’t during COVID. This was kind of pre COVID. COVID has kind of accelerated that transformation a bit. But we believe there is an opportunity to go and build de novos and take advantage of some of that whitespace. And so, would we do transformative acquisitions? We might, but we think the unit economics are so strong by building out de novos that that’s our pursuit. Indigo Physiotherapy is kind of very similar. We got to partner with Dr. Sam out of Baltimore. Charlie’s the CEO. Now, I don’t know if it’s a revolutionary treatment. But we’re one of the very few groups in the entire United States that are focused on this particular treatment of care for women. You can get it done at many of the PT chains that are more broadly based, but they don’t specialize in this. Well, we’re specialized in this. I think the more studies that they do show that there are more women that need this care. So the educating of the market is drawing more demand, and there’s just not enough supply of specialized clinics like this. And so again, would we do M&A? Perhaps, but there’s probably not a lot of M&A targets out there. But we can open up these boxes. It’s such great economics, and there’s so much whitespace that we can believe we can grow organically just by opening up de novos. I’d say one of the other ones is med spas that kind of fits this exact same kind of strategy that we were talking about. But the exciting thing about med spas is I do think there’s the opportunity to kind of combine multiple strategies, and that’s where we get really excited. Because I think you can open up de novos. There’s still so much more demand than there is supply. The unit economics of the de novos are extremely attractive. And there are enough M&A targets out there, not really of scale, but small little tuck ins that you can make that you can combine two different growth strategies to really expand. And one of our platforms, I think, the easiest way to illustrate this, and I won’t give a whole lot of details, but in fact, I think we have more EBITDA in that business than we do capital invested, equity invested.
Kurt Leedy: Yeah, Alex, we’re investors in two and about to be three med spa chains, one on the primarily focused on the east coast of the US, sort of partners with plastic surgeons to acquire the minimally invasive part of their plastic surgery business, which might otherwise be known as a med spa, and then one on the west coast, two groups of awesome entrepreneurs. And then we’re hopefully, knock on wood, two or three weeks away from investing in one in the UK, based in London. So go get your Botox, give us a call, we’ll hook you up.
Alex Bridgeman: One thing we talked about earlier was that within these three methods, like each of these are one great way to make money, but there are really exciting outcomes when multiple methods combined together. I’d love to kind of hear about some examples where companies have combined multiple methods to create really exciting or interesting outcomes.
Kurt Leedy: Absolutely, I guess if you could do all three, you’d be in heaven. Usually, it ends up being two out of the three if you put them together. Yeah, I mean, Kyle already mentioned the med spa businesses which combine just like really good organic growth. I mean, if you could look at what’s happening in the med spa market, go look at Allergan Botox numbers or anything related to that, whether it’s laser hair removal or fillers or microdermabrasion or whatnot, it’s this classic space of turning non consumption into consumption. So, at first, it was designed for women in their 40s call it, or not designed for, but it was used by women in their 40s. And now it’s increasingly used by women in the 30s and 20s and now men in their 40s and men in their 30s. And so, everybody wants to look younger. So just tremendous market growth, a lot of whitespace left to grow. And each of our med spa platforms has sort of taken advantage of that value driver in addition to the value driver of M&A. And so, there will be some combination of M&A and de novo openings, which sort of inorganic growth and organic growth is going to drive those businesses forward. Super exciting, and just a lot of fun to be invested in those. Another one that maybe combines the organic growth path with the transformative M&A path is a business that we’ve invested in, I guess it’s been probably three years or so, down in Brazil. So we actually invest a portion of our portfolio is invested internationally. I’ve already mentioned the software business in the UK. We invested in a business called Agisis down in Brazil in Sao Paulo in 2019. We sort of thought when we went into it that this was going to be an organic growth story. It’s going to be sort of method number three, that was the value creation lever that the CEOs were going to pull. So two searchers in that case bought the business. The company provides computer rental, sort of computer rental as a service, if you will. So, PepsiCo Brazil has a thousand employees that need laptops. It’s more of a custom in Brazil than it is in the US to rent those laptops instead of buy them. And so Agisis would purchase a bunch of laptops, do all the work to load the software onto it and security and whatever the customer needed, deliver those laptops under some long term lease agreement, three to five years usually with that customer. So just the business had good unit economics, the market had a bunch of growth behind it. And so that was sort of leg one of the stool. Well, some transformative M&A, I don’t want to say fell in our lap because I don’t think that gives proper credit to the CEOs that have executed on the M&A, but we have found ourselves with the opportunity to acquire a few different businesses so far. One of them that was perhaps the most transformative from a business model perspective, was a company that was in a related business. They were in the business of reselling used computer hardware. And if you think about the business model of a company like Agisis that rents hardware, well you buy all these Lenovo laptops and you rent them out for five years, you’ve got to do something with them at the end when they come off lease and maybe you can re-lease them, you can try to sell them. Well, it sure helps when you have channels built out to then sell that resale equipment. So, we did an acquisition, a fairly small acquisition of a company that gave us that capability to go resell those computers, so now the unit economics look even better. We buy the computer for x, and we lease it out for y. But what we sell it for on the back end now has dramatically improved based on that acquisition. So just the unit economics got way better. And then we’ve also had the opportunity with that business to acquire two direct competitors in the computer leasing business, one of which was the number one player in all of Brazil. They sort of served regions of Brazil that Agasis had previously had not served. And then the next, the last acquisition, the one that we’re doing actually right now or just closed is one that is a smaller, more regional player. But we now sort of went from being the number two provider in the market when we acquired Agisis to sort of far and away the number one player in the market. We did that through M&A, and then we have also layered on top this really nice organic growth story. So, the business pro forma for the M&A which probably all told the M&A is roughly doubled the size of the business if you look at just EBITDA, but from the time that we acquired the business to now, EBITDA is up 10x, roughly, in three years. And there’s only been about 50% more equity that went into the business to make that happen. So just like a tremendous value creation story of the last three years.
Alex Bridgeman: One other thesis, I’m kind of jumping ahead here to perhaps our best business question, but I would love to hear some other theses of interest. And I know one of them is software. I would love to hear kind of your thoughts around software, vertical market software, Constellation, any roll ups there that you find interesting, and maybe where you feel like there’s still opportunity in that space. It feels like an area that’s become pretty popular. And there’s a lot of lot more folks that I’m aware of doing something in software. But I’d love to hear your take on it and what your view is.
Kyle Coots: Yeah, I first started investing in vertical market software in 2007 when SaaS was sort of something that was maybe still a little bit on the horizon to some degree. And it’s just a wonderful business model. It has all the things we’re looking for, recurring revenue, generally growth tailwinds due to whitespace and nonconsumption, conversion, great unit economics. That doesn’t always translate into great free cash flow margins. Oftentimes, if you’re growing a business, you might be reinvesting, but just a wonderful business model generally. Kyle and I, in addition to backing searchers that are working on their own theses, we’ve also got sort of a list of theses we’re interested in and are pursuing on our own via this sort of platform strategy. And if we invest, if we make one new platform investment every two years, that would be plenty for us. So, it’s not like we’re spending every day thinking about this. But we enjoy thinking about it. And one of the things we would love to do in our platform business or really otherwise, even in our search fund business, is replicate Constellation Software, which has been done before. We would not be the first by any stretch. David Burkle is doing a wonderful job at Banyan software with the same thing. And there have been others as well. But I sort of fell in love with Constellation many years ago, and I’ve owned the stock personally in my portfolio for a bunch of years, and I’ve been very happy to have had that. But it’s just, they’re pursuing a very different strategy than a lot of other software investors are. They get to the rule of 40 a very different way than most folks do. It’s 5% growth and 35 or more percent free cash flow margins. And the magic of that business in terms of the market to acquire software businesses is so vast, and they’ve got so much white space in this context to go acquire businesses, that they’ve been able to deploy really large amounts of capital to grow their business. And the most amazing statistic about Constellation is that they’ve raised $25 million of primary equity when they got started. I believe the year was 1995. Omerus was the investor, probably best investment Omerus ever made by a wide margin. And they’ve never raised another dollar of outside equity, and the business is worth $25 billion today. That is just absolutely phenomenal. And we don’t need to make a thousand times our money. We can make a lot less than that and still be really happy. But I just still think there’s more to do. And you might have a different flavor to it. And you might buy stuff that’s a little growthier than what Constellation buys. They’re pretty strictly on premise. And if on premise software business is converting to SaaS, they might even shut down that conversion. So we might have a different spin on it. But I love that business. We love that business model. We’d love to find more ways to do something like that in the future.
Alex Bridgeman: Obviously, most of your search investments are entrepreneur driven in terms of what theses they find interesting. It’s hard to take an entrepreneur and give them a thesis and say go execute. Often, they’re doing that work on their end. But for the platforms and investing that you do that’s directly from Miramar, what are some ways that you develop theses and then validate that they exist and have markets? One thing we talked about earlier is that if there’s PE interest in a certain area, that’s one indicator that it could be fruitful. But what are some other kind of indicators that you’re on the right track with a given thesis?
Kurt Leedy: Kyle, do you want to talk about the origin story of our infusion thesis and sort of how that came to be?
Kyle Coots: Yeah, sure. So, that one started with we got sent a little teaser from a business school friend of mine who had found a really tiny little deal in California. I didn’t even know what an infusion was, frankly. It came across my desk, and you start reading about the business model. And it’s everything that I mentioned earlier. There’s kind of a drastic under supply of this particular treatment. And this sounds dark, but at the end of the day, these patients that you’re treating need this care, they’re chronically ill. From a recurring revenue standpoint, that’s kind of what you’re looking for. And so, we literally looked at the business model of an ambulatory infusion clinic, and it looked a lot like DaVita, which is a terrific business model. And so, we dug in a little bit on this little bitty bespoke clinic out in California. That ultimately didn’t end up being the right platform for us for a lot of different reasons. But every waking moment, if I had spare time, I was trying to make calls to people who may or may not understand this industry. A lot of healthcare private equity firms I called said, yeah, we’ve heard of it, there’s just nothing of scale for us to go buy. We started getting on industry newsletters, started going to conferences, and just kind of developing the thesis in the background. And there’s been other kind of search theses that have been I’d say tangential to this. We do have a business called Nutrishare out in California that’s similar to what we’re doing. It’s a mail order, kind of TPN pharmacy. But same thing, kind of a very specific ailment, it’s chronically, if you have this ailment, you’re going to be chronically ill for likely the rest of your life. I think 5% of people end up healing from it, but you’re going to be on these medications for life. And so, if you can serve these patients, you can provide them access to better care, you’re going to serve them into perpetuity. And so, we started digging on the ambulatory infusion clinic, every private equity guy I talked to had heard of it and said they gave up trying to find a platform. And so really, the next part was trying to go find a proprietary platform to start with and build a management team. And through the industry conferences, we met a couple people in our own network who had expertise in certain models of this care. And we started kind of organically building this management team and found a proprietary deal and put it all together. But it usually starts with kind of a little spark. I think one thing Kurt and I have in common is that we’re intellectually curious. And so, if you give us an idea, we’re kind of like a dog on a bone, like I couldn’t leave this thesis alone, no matter how many times it just looked impossible, and it ultimately kind of came to fruition. I think that’s similar with all of our platforms. The HOA thing was similar. The marina platform that Kurt leads was very similar to where it starts a little spark, it grows and grows and grows. And ultimately, it kind of all comes together with a management team and a deal.
Kurt Leedy: Can I tell the marina story really quick? Because it’s fun. It’s a funny story a little bit. So we had come up with this thesis. Kyle mentioned just being curious, we love what we get to do partly because it’s very creative. But my wife’s family has a boat in a marina out on a lake two hours west of Dallas. And we were out there for the weekend on the lake, and there was a customer appreciation barbecue, and the owner of the marina was there thanking customers, that sort of thing, just a very classic sort of thing. And we were like, hey, we’ll go get a free beer and a burger. That sounds like fun. And we show up and the owner of the marina is there, and I just got to talking to him. What’s it like owning marinas? How many marinas do you own? Talk to me about the business model of a marina. What are you paying for these things? And I just got fascinated by it. It’s recurring revenue. It’s like a parking garage on water and recurring revenue business, just predictable cash flows, great margins, just a good business. And so, we sort of put it on this list. Kyle and I have a list of 10 or 12 theses, industry ideas, just stuff we might pursue at some point. And we had three undergrad college interns that were working for us. This was three summers ago. And then we said to each of these interns, you’re going to work on deals as deals come up, but we also want you to have sort of a research project over the course of the summer. So, pick one off of this list, pick one thesis that you might be interested in researching and helping us sort of either build the case or reject the case to pursue this thesis. And we had this awesome intern named Noah Penny from the University of Texas, and speaking of a dog on a bone, man, Noah got fired up about this thesis. There’s really two big marina aggregators in the country. They both happen to be based in Dallas, which is where Kyle and I are based. And Noah, as a sophomore in college, cold called the CEO of both of these marina aggregates, took one of them to breakfast, and picked his brain for an hour, comes back with all these notes about the industry, and that was what catalyzed our sort of we’re going to go run with this thesis a bit harder. We started doing our own diligence. Through the course of that, we ended up meeting a couple of guys who had been at the number two aggregator called Suntex. And we ended up partnering with them, sort of backing them almost in a search context to go search for and acquire marinas. That was about two years ago. And here we are, by the end of the year, we’ll have ten marinas, and it’s a lot of fun along the way.
Alex Bridgeman: And is Noah running it now?
Kyle Coots: He could be. Give him five years and he might be running it. Fortunately, we’ve got two really capable guys running it. But Noah is fantastic. And it’s just a great example, Kyle talked about being curious, we both get to pull the thread on things that we’re interested in in the course of our work, and Noah got interested in this and he pulled the thread and did a wonderful job of doing it. And that ultimately was the sort of starting point to get quite a bit of capital to work in this marina thesis.
Alex Bridgeman: It’s also a great name to have for a marina roll up. Noah, it’s a great one. I’m not sure if he used that in his cold call or outreach. But I had that name, I would definitely be using that. We need to get to closing questions, otherwise, we’ll be here for two hours, which would be great, and I would love that. But we unfortunately can’t do that. What strongly held belief have you changed your mind on?
Kyle Coots: I’ll go first. I think mine is the value of executive coaching. I’ll be honest, I’d seen it deployed in the private equity world kind of before we started doing search funds, and I was always a little skeptical of its value. I thought it was kind of more of a check the box exercise that you went through as you’re trying to kind of improve the likely churn of senior management teams. Now that we’ve been in the search fund ecosystem for a while, and we’ve talked to multiple searchers and investors who have worked with executive coaches, I think their value- like I think if I were a searcher, I would be very interested in trying to partner with an executive coach. I think the value is pretty clear. I haven’t heard any bad stories. So, I think my belief in my- I guess recognizing the value that an executive coach brings has flipped 180 degrees.
Kurt Leedy: Mine’s softer than that. I’m going to go a little more personal maybe. Mine is that I used to believe that the world was more of a strict meritocracy than it actually is. And I used to think that the people that rose to the top always got there by hard work and intelligence and that sort of thing. And people that remained at the bottom must not have been hardworking or intelligent or what have you. And I think I’ve come to appreciate, part of this is wisdom that comes with age, part of it is just getting a lot more humility over time. But I think I’ve come to appreciate the degree to which I’ve personally been really lucky to get where I am. And I hope some of that came from hard work and intelligence, but I recognize a lot of it has come from luck. And I recognize that not everybody gets lucky in the ways that I have. And so, I think I have a lot more respect and grace for people who may be really hardworking and smart and just haven’t had the breaks that I’ve had or that others have had.
Kyle Coots: I’m really glad I answered that question first because I would not have wanted to follow that answer.
Alex Bridgeman: Your answer reminds me of that conference room scene in Margin Call where the banking CEO is saying like, explain to me like a golden retriever. It’s not brains that got me here. What’s the best business you’ve ever seen?
Kyle Coots: I’ll go first again, just in case Kurt blows me out of the water. But as we mentioned, this is actually a question that we sort of ask, and so I’m going to steal probably the best answer we’ve had to that or the one that sticks with me is one of our searchers or prospective searchers said it was a drug cartel. And I laughed when I heard it, and then I started thinking about it, and there’s a lot of merit to that. I think if you’re actually asking for mine, mine’s probably a pretty obvious answer. And it’s probably Microsoft. Like, it’s easy to take Microsoft with 15% year over year growth, really high, 50% cash flow margins, it goes through our box of recurring revenue, and then every single day I look at my computer; I could not function in my job without Microsoft. It is just an obvious answer to me.
Kurt Leedy: I’m going to cheat, Alex, and give you three answers. The first answer is Constellation Software for reasons we’ve already talked about. So, I’ll be quick on that one. But I love that business. If you think about the framework to answer this question, it’s like, well, what would the best business look like? It would look like a natural monopoly. And so, Google comes to mind, a business with sort of decades long horizon to grow as it steals share from traditional media sort of advertising methods, really high operating margins, just sort of a wonderful business. The cheeky one that I give that I don’t think is actually the best business but it’s just a fun answer is I’d love to own an NFL football team. If you think about the industry structure, you have a local monopoly in a cartel industry, doesn’t get much better than that. The only way to get better than that is to have a natural monopoly, I guess. You have really long recurring revenue because most of your revenue comes from contractual TV rights that seem to be more and more valuable every year because live content is the most valuable content in media, and especially sports content. You have somehow the NFL has become like the only professional sports league where every team is profitable. And that is largely, I think, a function of sort of perhaps supply and demand of labor. And the commissioner, as much of a bumbling idiot as he sometimes seems to be, has struck really good collective bargaining agreements that allow the NFL football teams to continue to be really profitable. So, you got recurring revenue, you’ve got growth tailwinds, you got great unit economics. The only bad thing is its capital intensive because you got to build $2 billion stadiums, but usually you can get the city to give you big tax breaks or cover a lot of that or something like that. And the last thing is it would just be incredibly fun to own an NFL football team.
Alex Bridgeman: That has to be one of the top 10 most fun jobs I would imagine. Which team would you want to own?
Kurt Leedy: I mean, I’d love to own the Dallas Cowboys just so we could get rid of Jerry Jones. But give me any one of them. I’ll move to Green Bay, Wisconsin. It’s a great team. Give me any one of them.
Alex Bridgeman: Yeah, that would be a great one. Did you listen to- there was a business breakdowns episode on the NFL that Patrick O’Shaughnessy did that was fantastic. It’s pretty mind blowing how profitable these teams can be, even if they don’t sell any tickets and their stadiums are- their teams don’t play very well. And performance is not a very strong correlator to profitability, which is fascinating. Kyle, to your point around kind of odd businesses with drug cartels being someone’s example from you, one of our guests talked about the Mormon church being one of the best businesses they’ve ever seen. Because there’s a very strong tithing rule. And they help you with your finances, so you can tithe more effectively. And they encourage you to have lots of kids, so there’s a very large up and coming generation of Mormons also giving 10%. So that’s a pretty phenomenal business, but definitely a strong monopoly. It’s a hard one to try to replicate, I’d say.
Kurt Leedy: I love that. Kyle and I have a colleague, Chase Banks, he is our vice president. He’s Mormon. I’m not sure whether he would love that answer or hate that answer.
Alex Bridgeman: Yeah, you’ll have to ask him and get back to us. And then, we’ll get to share that later. But thank you both for coming on the podcast. This was really, really fun. I’m excited to come to Dallas and have breakfast with you guys at some point and chat more. But thanks in the meantime for this conversation and hopefully others in the future.
Kyle Coots: Great. Well, Alex, thanks for having us. This is a ton of fun. We love what we do. And we love talking about what we do and appreciate the opportunity to do that today.
Kurt Leedy: And we’ll see you on the field next week after we beat Alabama.
Alex Bridgeman: Absolutely, see you there.
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