Invest Like The Best
Episode 33 REALLY Private Equity
Invest Like The Best

Episode 33: REALLY Private Equity

REALLY Private Equity

Royce Yudkoff and Rick Ruback are Harvard Business School professors. We cover how students in their class practically learn to search for, acquire, and run a small business directly after graduation.

This podcast is sponsored by:

The CFA Institute. The CFA Institute is the global association of investment professionals whose mission is to lead the investment profession by promoting the highest standards of ethics, education, and professional excellence for the ultimate benefit of society. CFA Institute serves a global community of investment professionals working to build an investment industry where investors' interests come first, financial markets function at their best, and economies grow. The Chartered Financial Analyst credential is the most respected and recognized investment management designation in the world. The views expressed in this podcast do not necessarily represent the views of the CFA Institute.

[00:03:11] – (First Question) – Explain the idea of a search fund and why recent MBA grads and LP investors would be interested.

[00:15:26] – A look at the folks that tend to be most active in this space

[00:27:53] – What is the scale of people involved in this

[00:39:55] – Why it tends to remain among smaller investors and not attract larger hedge funds

[00:10:57] – Is there any collectivization happening that are trying to muscle in

[00:12:31] – With a good example, they walk through the process of going through this

[00:15:40] – Exploring the time horizon in these deals

[00:17:41] – Getting into the idea of risk to these businesses

[00:22:36] – The characteristics that people should screen for in these businesses

[00:23:51] – Recurring customer bases

[00:28:36] – Low cyclicality

[00:30:04] – Low customer concentration (supplier concentration as well)

[00:31:46] – Good free cash flow characteristics

[00:32:05] – One that can be transferred away from the selling owner

[00:34:04] – Recurring revenues vs repeating revenues

[00:35:18] – What percentages of business hit these marks and qualify as good enough to be invested in

[00:37:52] – The Castronics example and why you don’t want to be the most important provider to a large customer

[00:42:15] – Looking at the entrepreneurs who get excited about this

[00:44:15] – What are some red flags that you don’t like to see in these types of businesses

[00:45:14] – Technology companies

[00:45:55] – Companies that have stroke of pen risk

[00:47:05] – Lifestyle businesses

[00:48:23] – Why growth is not a massive priority in this arena

[00:51:27] – What financing for these types of businesses is like

[00:54:48] – How do you get involved in this if you have a check you want to write

[00:58:58] – What is the incentive structure for someone running a searcher firm

[01:01:22] – What was right and wrong about the traditional private equity world?

[01:07:28] – What business would they want to own in perpetuity

[01:14:00] – A quick look at margins in this space

[01:14:51] – Looking at the most memorable individual day for each guest

[01:18:15] – Kindest thing anyone has ever done for you

REALLY Private Equity

Introduction

Patrick
In this episode, I continue to pull on one of the most interesting threads that I have uncovered in the course of producing this podcast, the world of permanent equity. My guests today are Royce Yudkoff and Rick Ruback. Two Harvard Business School professors, who have partnered to create a popular class that teaches students how to search for, acquire, and run a small business directly after graduation. The course is aimed at students who want hands-on management experience as soon as possible. After purchase, there's no timetable for selling the business. Indeed, if done well, there's never any reason to sell because the free cash flow yields to owners are higher than most alternatives.

I approached this conversation from an investor standpoint. LP Investors usually partner with the searchers to form what is called a search fund. A search fund allows recent MBA grads to spend time looking for a business and ultimately acquire it. The result is small in scale but it's often a high return proposition for investors. I loved our discussion on what to look for in a business and what to avoid. The principles we list are useful for investors of any kind and will be particularly appealing to those from the buy and hold, value investing, or quality investing camps.

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