The Finish and Starting Line


At the end of 2017, went “pro,” raising Permanent Equity I (PE1). We announced a $38M raise and finalized the fund at close to $50M. If you haven’t read our 2017 annual letter, here’s a summary of the fund’s rather unusual structure: 1) Zero fees outside of carry, 2) Practically indefinite time horizon, 3) Minimum 15% co-investment. The additional resources give us an even firmer footing and more flexibility to provide a caring, permanent home for family businesses.

The big news is we made our first investment out of PE1. While we won’t release the details for another few months, it’s the type of opportunity we daydream about at headquarters. The economics are good and the industry is boring, but the people are what made us commit. From our first management call it felt like love at first sight. We shared a lot in common, from core values and beliefs, to operating style and vision for the future.

It being a competitive deal, we tried not to get our hopes up. If we’re one of twenty potential suitors, we understand the base rate. To our delight, was the buyer of choice, despite not being the most lucrative offer and asking the management team to retain a meaningful amount of equity. As it turns out, they wanted to roll forward even more, which is the strongest of signals.

While we had a few predictable challenges and debates, due diligence was largely uneventful. In fact, it was so uneventful that we kept double-checking our work to make sure we weren’t missing something obvious. Occasionally a small company is just well-run and we couldn’t be more pleased to be their partners.

That doesn't mean due diligence was easy, or fast. In private equity, some firms like to brag about how quickly they can close a deal. While that may sound like a feature, it’s not. Quick-closing a deal is like a shotgun marriage. It may work out, but it’s not the ideal way to enter a long-term, high-commitment relationship. Is it really attractive for a buyer to say “hi,” ask couple questions, dive into bed, roll out the other side in tux, and start dragging you down the church aisle?

Trust is a function of consistency over time. We don’t have an ideal due diligence period. It’s whatever allows us and the seller to develop a meaningful relationship, verify the important facts, and feel good about the paperwork, all while ensuring the business remains healthy. In some situations that could be 90-120 days. For this particular situation, it took six months.

Six months?! That’s an eternity in deal-world. Correct, and it was the perfect amount of time. The sellers were extraordinarily thorough in their responses, which gave us our first-semester MBA in their particular industry. It’s impossible to be a good partner without a basis for judgment, and we’re just starting to ask good questions. Hopefully in the next couple years, we’ll graduate to adding some value.

Also, life happens. During due diligence, the business grew more quickly than anticipated, which led to a couple all-hands-on-deck situations. We like the types of “problems” that increase the organization’s prospects. There were major health issues, unexpected life events, and those pesky holidays that always seem to pop up toward the end of the year. The net result is that we got over the finish line, with a great relationship, and are thrilled to be their partners.

The audacious plan is to continue steady expansion and gradually transition leadership from the CEO to his long-time deputy, who wants to stay on for another “ten years, at least.” The third in command is in his mid-40s and wants to stay with the company until retirement. It’s quite a boring strategy and we couldn’t be more excited about it. Keep calm and profit on.