While the world seemed to lose its collective mind for the better part of 2016, things at adventur.es hummed along nicely. 2016 was a year of fundamentals, stability, reinvestment, and organic growth. While we deployed capital into a handful of smaller transactions opportunistically, we didn’t close a late-stage acquisition. And, that’s just fine by us. We’re pleased to confirm, despite plenty of heckling from the grandstands, there are no strikeouts in investing.
By the numbers, we reviewed over 2500 opportunities, deep-dived into 330 deals, and conducted due diligence on 15 companies, of which we made 7 site visits. Two deals got close to the finish line, with one getting temporarily delayed until Q1 2017. Plus, we’re still in contact with three of the others, and have kept the door wide-open. Like a long distance romance, we’re hoping the heart grows fonder with time and space.
Here are some other notable stats from the year:
1 - Portfolio company grew earnings more than 90%
1 - Portfolio company grew earnings more than 50%
2 - Portfolio companies grew earnings more than 20%
2 - New adventur.es team members
1 - New headquarters in Columbia, Missouri
1 - 2017 Southwest Airlines A-List status attained in May
7342 - Collective cups of coffee
LOVE THE ONE(S) YOU GOT
While deals are lusty - new, exciting, and intriguing - meaningful lives and durable companies are built on love. *Cue Sinatra* We welcome new opportunities, but we never lose sight of our commitments. A loving relationship means being there in good times and bad, speaking truth with good intentions, and rolling up your sleeves when dishes need to be done. And that we did.
The 30,000 ft. investor often sees a mirage of corporate tranquility. But we’re more a group of Oregon Trail settlers than jet-setters, choosing to help where we can be helpful. We took our fair share of late-night phone calls, saw the office quite a few weekends, and racked up enough frequent flier miles to get a free trip to the moon. We helped design new systems, negotiate big agreements, find additional leadership, give second opinions in some tight spots, and occasionally served as a release valve when things started to heat beyond a simmer.
After all the peaks and valleys are netted out, we had one heck of a year thanks to the tireless work of our company leaders. If you haven’t run a company, you can’t imagine what they go through. Not only is it lonely at the top, but also stressful, hectic, and all-consuming. Real leadership is absorbing much of that suffering for your team, while shifting the limelight to others, knowing the result is worth it. They do those things, and more, and the results speak for themselves.
Reviewing 2500+ deals is a lot of work, but one heck of a vantage point. While we keep specifics confidential and would never unfairly take advantage of information, getting a peek behind the curtain of that many companies is invaluable. As you can imagine, we’re able to benchmark data, understand competitive positioning, and identify best practices. It gives us a significant head start on trends and the ability to help our portfolio companies avoid challenging situations.
While we often chuckle at the “synergies” that are proposed by some intermediaries, there are real advantages to having a family of companies. Specialized tactics are available for adoption. Regulatory changes are more easily identified and remedied. Cost and scarcity of capital are greatly reduced. Access to talent is enhanced. When mixed with hard work and integrity, it produces a very enjoyable non-linear result.
THE WALL OF TRUST
One of the most frustrating parts of 2016 was what I call “the wall of trust.” It has been built on the unfortunate norms of bad business behavior. Every time an acquirer, or potential suitor, behaves poorly it makes it that much more difficult for us to build trust, or meaningful relationships. As Mark Twain said, “If a cat sits on a hot stove, that cat won't sit on a hot stove again. That cat won't sit on a cold stove either.”
We often hear things like, “An earn-out is meaningless, because everyone tells me that no one ever pays them.” Or, “Just be honest about who’s getting fired post-close.” It doesn’t matter that we have never not paid a bill on-time and in-full, or that we’ve never “downsized” anyone in the history of the companies. The wall of trust is often too tall to scale, despite putting on our best alpine gear.
Here’s what we tell people, and have demonstrated over our ten-year history: 1) We don’t play games especially with money, or peoples' lives. We do what we say we will, when we said we’d do it, every single time. 2) We work hard to create win-win relationships. This goes not only for former owners, but also intermediaries, employees, suppliers, customers, and our communities. 3) We have a permanent time horizon and view decisions in decades, not months.
These principles certainly harm our success in each individual year, but we’re confident that they will guide us well into the distant future.
SHOW ME THE MONEY
We’re not sure how we popped on some peoples’ radars, but interest in investing in adventur.es, or co-investing with us, came unexpectedly and often in a flurry. While we’re not ruling out raising a fund, or taking an outside investment, it’s not high on our priority list. Often what gets you here won’t get you there, but we don’t think that logic holds for us.
In many ways we built our organization on being the anti-PE firm. They must buy because they’re drawing big fees and have to show action. We’re happy to sit on our hands for five years, or do five deals in one year if the right opportunities are presented. Because of fund structure, they must make short-term decisions to position a sale in 3 to 5 years. We plan to hold our investments in perpetuity and make wise long-term decisions. They like to cut costs. We like to increase opportunity. The differences couldn’t be more stark.
The only way we’d bring on outside capital is if we could stay materially similar, if not the same. Since we’re in no rush to get big, time is our friend. Some day we look forward to finding the rarest of rare investors with deep pockets, extreme patience, and unwavering ethics. Until then, we’re happy just doing our thing.
We often get asked about the general market for private companies and it’s always a tricky topic to discuss. With the caveat that I can only speak to our little corner of the world, here are a few observations:
The variance in valuations are currently the most extreme we’ve experienced. We have seen some pure insanity on the high-side, with zero-moat businesses asking 7-8X multiples and fetching 6-7X multiples. We have also seen some good businesses not get sold, repeatedly, because of disappointing bids/buyers. It feels like the market is getting less efficient, not more efficient. While this may seem positive for us, it’s not. The high-side sets unrealistic expectations, which could be partially responsible for driving a lack of activity at lower multiples.
We continue to see traditional PE activity move down-market. Some of the ridiculous prices are being paid by PE funds who have traditionally acquired larger companies. They’re in for a rude awakening if they think the needs, challenges, or stability of a $3M pre-tax earning company resembles anything like that of it’s larger cousins. It’s apples to oranges, but unfortunately the need to deploy dollars can lead to goal-induced blindness, or indifference. How will it play out? We’ll find out in 5 to 10 years.
On the other end of the spectrum, fundless sponsors are gumming up the works. It feels like there is a factory somewhere pumping out early-40s to late-50s former executives who love to make big promises with no ability to deliver. The playbook is simple -- promise the moon, lock up the company in a prolonged due diligence, go hunt for country-club dollars with fancy spreadsheets and nonsensical projections. Does it occasionally work? Yep. Does it often result in tremendous disappointment, a gigantic waste of time, and a management disaster post-close? Almost always. We’re often not the first pick for Prom, but happy to be a last-minute stand-in for the right partner.
On a more positive note, income statements and balance sheets continue to improve. Many of the debts, both financial and otherwise, are being paid down. Profits are steadily rising, even in highly competitive markets. That’s a testament to the strength of the economy, but also signals some additional risk. Just as trees don’t grow to the sky, economies cycle. Are we reaching a peak, or is there still plenty of curve to climb? I’ll throw out that this economic rally feels more stable, but it’s anyone’s guess. We plan to stay conservative both within the portfolio companies, and as an adventur.es family, and be a cash buyer during the next downturn.
I’m going to close this letter the same way as last year: All-in-all, it was a challenging, frustrating, exciting, fun-as-hell, and ultimately fruitful year. We can’t wait to see what 2017 has in store for our small family of people and companies.