Brent Beshore – Boring Businesses, COVID-19, and Doing Better (EP.20)

Brent Beshore

Jim:                      

Well, hello, everyone. It's Jim O'Shaughnessy with my colleague Jamie Catherwood for another episode of Infinite Loops. Today, I am delighted to have my friend Brent Beshore, CEO of Permanent Equity as a guest. Full disclosure, we are investors with Brent. So, we obviously think very highly of him. Welcome, Brent.

Brent:                  

Hey, thank you guys so much for having me on. Appreciate it.

Jim:                      

So, we were chatting a little bit before recording about this current environment. Before we get to the question that I was about to ask, let's set it up for everyone who might not know who you are, maybe five or six people that might be listening, but Permanent Equity is a really different concept, which invests permanently in family-owned businesses that are mostly boring, and you're willing to roll your sleeves up, get your hands dirty. You have a no-asshole policy, which I got exempted from. Thank you very much. If you could just walk a little bit through the basics of your business.

Brent:                  

Yeah. So, we're very same in some ways, and we're very different in others. So, we're going after family-owned businesses. We try to help them transition well. There's a lot more family businesses out there that need to be transitioned but they don't have a transition plan. Certainly, a lot more than investors who can take good care of those companies for a long time.

Brent:                  

So, contrary to traditional private equity which typically has a three to five-year hold period so that the idea is they buy the company, usually use quite a bit of debt in the transactions, especially for that period of time, there's a lot more existential risk for the business. They try to juice it up and get it all prettied up and bigger, and then sell to somebody else.

Brent:                  

We looked at it and said, "How do families make their money? What is the thing that virtually every family that's wealthy out there did to do well?" They started something, they did well with it, they typically didn't use debt, and they held it for a long time. So, really, our model is just a first principle's rethinking of that. I don't come from a finance background. I joke when I say this, but it's pretty genuine. I feel like I'm the Forrest Gump of private equity because I bumbled and stumbled and fell backwards into this business, and it was from being an entrepreneur and operator myself.

Brent:                  

So, when I think about what I would want if I was in their shoes, it certainly wouldn't be somebody who would come in with a lot of fancy degrees and a finance-focused lever rest up, put a bunch of debt on the business, fire a lot of people in the business, strip it down, and try to flip us in a short period of time.

Brent:                  

Now, that does not describe all private equity. To be clear, there's a lot of awesome people in private equity that have a more traditional model, that still treat people really well, kind and generous. I know some of them. They're fantastic people, but the model in general, I mean, if you've read Barbarians at the Gate, it's a pretty brutal business, certainly not warm and friendly.

Brent:                  

So, we are, in many ways, the kinder, gentler version of private equity. So, our model is we buy with no intention of selling the business. These are typically businesses that are between $3 million of free cashflow on the low end up to 15 to 18 million of free cashflow on the high end.

Brent:                  

We buy with no intention of selling them. We like to partner with the leadership teams that are already in place. We typically don't like to use any debt in our transactions. I think the last four transactions we haven't used any debt at all, no senior, no mess, nothing.

Brent:                  

We can get real creative with how we incentivize the leadership teams. Ultimately, with that time horizon being functionally indefinite and we can talk about that with the fund structure, how that's possible, but it allows us to make decisions that you just can't make any other way. I mean, if you have a three-year time horizon, you can't make good decisions over the longterm. You're trying to make decisions that will pay off within that three-year period.

Brent:                  

So, for us, we love asking the leadership teams, "What are things we can invest in today that maybe wouldn't show up for five, seven, even 10 years but we know are the right probabilistic decisions to make?"

Jim:                      

Really interesting. What initially drew me to you and, again, I met you through my son Patrick, and when I was listening to you the first time we got together, I hit right on that idea of boring, right? So, we manage public equities, but a lot of my first clients were very wealthy families. One of the things that was really common, with a couple of exceptions, was they were in really boring businesses. So, my first billionaire client was an immigrant who came here with nothing in his pockets from China. His family was on the wrong side of the revolution, and literally got out with the clothes on their back.

Jim:                      

He became a billionaire in America through the most boring businesses you could think of. They stamp the metal part that goes in the car between the door and the chassis of the car. He's explaining this to me and I'm like, "Are you kidding me? Really?" But, yeah, very, very boring but also very profitable.

Jim:                      

So, one thing I'd like you to talk a little bit about is the scope of the market because we've been looking for many years at the growth of the private market versus the public markets. The private market is really growing. Our universe is, if we include microcaps, it's maybe 10,000 companies. Whereas your universe is 800,000+ companies. Talk a little bit about that and how, given that number, do you have a checklist that you go through to eliminate? Walk us through that.

Brent:                  

Yeah. So, when you think about the market, I mean, the private market is not growing, it's just the public markets are shrinking, right? So, when you think about what's being able to be accessed, I would argue, actually, probably that the private markets aren't growing too much. Their entrepreneurship is probably the lowest point it's been in the last 35 years right now, which is really unfortunate.

Brent:                  

So, you're seeing a lot of consolidation and the rich get richer, the big companies get bigger type effect going on. There's a lot. I mean, it depends on the strata that you're in. I mean, I think right now we have functionally 250,000. It's really hard to tell exactly how many targets we have. If you do it based on revenues, it's very difficult to get revenue numbers, it's easier to get employment numbers. Very difficult to get EBITDA or cashflow numbers. So, roughly, 200,000 to 250,000 companies I think is our target market right now.

Brent:                  

I mean, we see deal slows down a lot now and we can talk about that in the current environment, but the normalized the last four, five years, we were seeing around 2,000, maybe a little bit more than 2,000 opportunities a year. Yeah, we have an extensive checklist. In fact, the book that I came out with, we actually put the checklist verbatim in the back of the book.

Brent:                  

We've added to it and subtracted, and we obviously use it differently depending on the situation, but just the raw checklist is there. I think it's 22 pages or something like that, single space. So, there's a lot of question you have to go through. The difficulty in ... Everyone has the grass is always greener syndrome, right? So, for you guys in the public markets, the fact that you guys can find something you like and hit the buy button is the most beautiful thing to me because creating a transaction in the private market is just brutally difficult.

Brent:                  

There are roughly 400 decisions yet to be aligned on in a private transaction. If you think about the odd maybe high on each individual thing, some more than others, price being a big determining factor, but I wouldn't even say price is 50% of the ultimate decision making that happens in deal. I guess if the price is high enough, it ends up being a lot. It could be a lot more than that, but there's roughly these foreign decisions and it's a multiplicative system, right?

Brent:                  

So, if you bum out on any one of those decisions, the deal doesn't work. So, the very rough filter that we go through right now is, is it size-wise in our target range? Is there a willing seller, which sounds like a dumb question, but oftentimes, there's a lot of phishing exercises. There's a lot of people who go out there and sign up these small businesses and say, "Well, I'll try to go get you a 10 times multiple." For a business, it should be selling for three and a half or four and a half times multiple on free cashflow.

Brent:                  

If we can go get it, then we go sell it. So, we quickly try to determine. We don't waste their time, waste our time. If there's a willing seller, what would the motivation is? We have a couple of rules that we follow around here, which is we're not going to buy a business from somebody who's not already wealthy because if they didn't get rich doing it, we're not going to, right?

Brent:                  

We also wouldn't buy from somebody who the mote or the competitive advantage of the business is not all tied up in them. Unfortunately, most smaller businesses, especially on the lower end of the market, are really just what we call owner mote. I mean, it's an owner who is a remarkable human being, usually very driven, works their tail off, has an unusual expertise, has all the relationships, and they can do very well. I mean, we call those big hustles. We've seen them. The largest, I think, hustle that we've ever seen is two brothers who the whole business pivoted around the two of them, and they were doing almost $15 million a year in free cashflow. So, I mean, these things could get really big.

Brent:                  

We've also seen businesses that are half a million dollars of earnings that were smaller when we used to look at that size of the market that were very sustainable. The mote was very separated from the owner.

Brent:                  

So, our checklist, as we know, we want a seller who wants to sell. We want to see that the competitive advantage can be separated from the owner that's in the size range. Then we go through another filter which is if ... This is going to sound like a weird thing to say, but if it's too down in the middle for everyone else, it's probably not right for us. So, we like to see things that have a little fur on them, there's something unusual with them, that not everyone's going to just jump all over, right?

Brent:                  

If you have a manufacturing business that you have three layers of leadership, it's on a steady growth pattern, good diversification of client's health, good supplier diversification, I mean, look, you're going to go to the market and you're going to get hundreds and hundreds of bids, right?

Brent:                  

We really want to find people that either there's something unusual about the business or there's something unusual about who they want the buyer to be. I think that's where we can step up with a fundamentally different package if they want to stay involved with the business longterm.

Brent:                  

We can basically keep the same culture, keep the same financing structure, and if they want to roll forward and be with the company for the next three, five, 10 years even, we can create a scenario where it's a lot easier for them to do that than maybe traditional private equity.

Jamie:                

What would you say is the biggest difference between the first deal you did, your approach and lessons learned, and maybe the last five you did? Are there cringey things you did?

Brent:                  

Yeah. Having money makes a difference. So, I mean, the first deal we ever did, I had to beg, borrow, and steal, right? I mean, I got an SBA loan and took on a bunch of debt. It was everything I got to get it over to the finish line. Then I remember having two epiphanies, which you'll appreciate how stupid I am, the Forrest Gump theme running through this episode.

Brent:                  

So, it was about two weeks before closing, and I was running the spreadsheet on how this is going to work. My accountant at the time said, "Hey, where are you factoring taxes into that?"

Brent:                  

I said, "What do you mean?"

Brent:                  

He goes, "Well, I see that you're paying back all the cash that you're bringing in, but where are the taxes coming at?"

Brent:                  

I said, "Wait. You have to pay taxes before you pay back debt? How's that work?"

Brent:                  

He was like, "That's a good question. How does that work?"

Brent:                  

The other funny thing was I didn't negotiate working capital. I didn't even think about working capital into the deal. So, again, about two weeks before closing, I went to the seller and I said, "Hey, good news. I got some good news. Good news is that we're all set. SBA loan came through. We're ready to close. Everything is great. Bad news is, how do I fund the operations for the first month or two in the interim?"

Brent:                  

He was like, "Are you kidding me? You got to put more capital in it?"

Brent:                 

I was like, "I don't have more capital."

Brent:                  

Anyway, he was very generous. He gave me an extra loan that I paid off six months into the deal to get it done for working capital purposes, but I'll tell you what, I have a lot of empathy for people who are doing their first deal. In fact, I wrote a piece called How to Buy Your First Smaller Company for this exact reason because I had no idea what I was doing, right?

Brent:                  

I mean, I drove the clown car into the gold mine. Thank God it was a gold mine instead of a, I don't know, bottom most pit. Anyway, yeah. So, how was it different? We know a lot more. There's a lot of professionals now that are on the team that really know what they're doing far more than me. Yeah. We've gotten a lot of experience over the last 12 years, 10-12 years.

Jim:                      

I had the chance to have dinner with Jamie Dimon a long time ago before he was even at JPMorgan. I was peppering him with questions and everything. I said, "So, if there's only one piece of advice you could give, what would it be?"

Jim:                      

His answer was immediate. He said, "I will always take A-rated players at execution over A-rated players on ideas," right? He goes like, "So, there's so many brilliant people in this world and many of them don't get the execution part," right?

Jim:                      

So, I'm obsessed by that. I've started three companies and succession, big deal. Made Patrick my son the CEO a few years ago because people, I find, don't think about things like what other people looking in on you or think about you. You're always sending a message to the marketplace. The message to the marketplace I wanted to send with OSAM was we're not going anywhere.

Jim:                      

So, we're going to be around for a long time. We're going to have a very young, new CEO, et cetera. Is that one of the things that is a hallmark of the companies that have worked for you? Because I know that one of your things is to keep leadership in place. How do you support that? Walk us through how you deal with that because egos are egos, right? We all got one. We're lying if we say we don't.

Brent:                  

Yeah. No. I think that you touched on it there. So, one of the things that makes Permanent Equity fairly different is that none of us had ever really worked in the finance industry or private equity before. So, we're all entrepreneurs and operators, and that's the core DNA and who we hire for. Maybe we end up hiring some traditional private equity experienced people down the road, but the DNA of the firm is we're operators first.

Brent:                

I don't understand why private equity is so different than any other business, right? I mean, you have a customer, you have a thing that you're selling. So, we sell money basically to sellers and to leadership teams. Money is a commodity, but money always comes attached to people, and who it's attached to matters a lot. So, we try to craft everything for the benefit of those sellers and leadership teams.

Brent:                  

There certainly are egos. I mean, we all have an ego. I have an ego at play, but we try to look at things from a servant leadership mentality. I mean, our joke around the office is our job is to get out there with our pooper scoopers and start shoveling, right? I mean, that's the mentality that we want to have. You go to work, you're getting paid to do work. It's not supposed to be easy all the time, and it's not always going to be fun, right?

Brent:                  

I think that that's where we try to opt for the same type of style in these companies. The people who we're partnering with are operators. I mean, they're hardcore day-to-day, grind it out operators. It's brutally difficult. I have a joke before that running a company is like eating glass and getting right? I really believe that.

Brent:                  

Look, I was an operator. I can remember everyday there was a period of time in my life where nothing is going right. We were really struggling. I would get into my car and cry on the way to work. I would get myself together in the parking lot. I would get into the office. I'd walk around, try to show a good face. I'd close my door and probably start crying again, right? It was hard. I mean, everyday was just you did everything you could to not be stabbed to death, and then get back into bed and try to be on your game the next day.

Brent:                  

So, we get it. We get how difficult it is. So, nothing surprises us. I think that's where when your whole life is looking at spreadsheets and numbers and thinking that that's the business, you're going to be really surprised by how difficult and unvolatile these businesses are.

Brent:                  

I mean, look, it's people. People are outrageously messy, me included. When you get a group of people together and that messiness bumps into one another, and then you get another group of people called customers that bump into those messy people, and then you get another messy people that are the suppliers that bump into those messy people, it's a mess. I mean, it's a mess all the time. I mean, businesses, ours included, are all loosely functioning disasters that happen to make money. So, I mean, it's true.

Jim:                      

I know. I know. I know.

Brent:                

Anybody who thinks that ... If you fly at 30,000 feet and you think everything is sanitized and beautiful and all section bought and everything is going great, you get close to the ground and you're like, "My goodness! It is a mess down there."

Brent:                  

So, I think all of that, yes, we like to work with leadership teams, they're messy people. They have certain skillsets that are highly valuable, and then there are some things that they're doing that's not.

Brent:                  

So, one of the things that we try to do is identify with them and in collaboration, what are the things that they really want to do? What are the things that turn them on, that they love to do? Then what are the things that they're not as great at doing? I mean, they've done them. They can do them.

Brent:                  

So, what we try to do is we try to take the Permanent Equity team and fill in the gaps either through recruiting outside talent into these companies or using temporarily the things at the Permanent Equity that we have. We have 13 individuals here that are very, very talented and experienced in different areas.

Brent:                  

So, they may not need a full-time CEO at their business because they're only going to renegotiate lines of credit, bank agreements, things like that once every two years probably, but we can do that work for them and really help them out in doing that. They don't need to have that type of level of personnel and staff that's going to be out in all these developing those relationships and negotiating and understanding the nuances and the legal aspects of them.

Brent:                  

So, we have a really strong finance team. We have a legal team in-house, and then we have a whole marketing advertising sales team in-house as well with a technology bent. When you combine all those things, it allows us to fill in a lot of gaps. I mean, one of the businesses we bought is a glass and blazing business. They're fantastic human beings, just awesome guys.

Brent:                  

We really like the industry. Glass isn't going away, has some unusual technology. As an example, we met with, at the time, he was number two in the company, now he's the CEO and we said, "Hey, what's the biggest issue facing the company?"

Brent:                  

He said, "You're not going to believe this. I mean, we're a B2B business, but," he goes, "it's our website. It's horrible."

Brent:                  

I said, "Yeah, it is pretty terrible. You have a really bad website."

Brent:                  

He said, "Yeah, it's awful." He said, "For three years, we've been trying to get a new website up. We've hired lots of different groups to try to do it. We just can't get over the finish line. We can't agree on what needs to be done. We don't know exactly what should be on there. We're all engineers. So, we're all stuck, right? We can't figure it out."

Brent:                 

So, here's something that materially was holding them back. As we dug in, we actually understood more because it didn't make sense to us. B2B business probably don't matter that much. Well, a lot of the contractors that we're bidding up the work were younger, right? The subcontractors were going on the website and saying, "Wait a minute. These guys, they're not professionals. They're a mom and pop operation." Well, it's a big company and it was doing well. It just had a terrible website.

Brent:                  

So, that's something that within I think three days of closing, we have them a new website and within 10 days of closing, it was up, right? I mean, we've gotten everyone on the same page. It dramatically increased sales. I mean, we have more than doubled sales since closing a couple of years ago just by the nature of having ... I mean, that was an increased bonding program, having bigger lines of credit. So, just enabling, almost like taking these leads off the businesses that had been there. They were just stuck, and trying to help unstick the things that are stuck.

Jim:                    

Speaking of which, you just put up a new website. Your homepage is fantastic because it tells your whole story in one page, which I think is just great-

Brent:                  

Thanks.

Jim:                      

... because attention spans have been collapsing all of my life, and I just turned 60 in May. My wife and I sometimes will watch an old movie. Honestly, almost unwatchable because the length of the scenes to set something up is so long that you're like just jumping at the bit to get to the movie. So, is there a certain type of business that draws you in and, also, is there a certain type of business that you just, "No way. I don't care how good the numbers look. I'm not investing in X field"?

Brent:                  

That's a great question. So, we have a thesis. Let me back up. A lot of private equity people are thematic investors. So, they pick a theme that they really like and they're going to go after that and pursue that. We've historically been far more general and learned into these different sectors through the businesses that we own and experience we have.

Brent:                  

I can tell you something certainly through the experience we have we're more like to do certain things and less likely to do others, but I'd say our general thesis is we believe that there are niches within every single industry that are protected, that can generate a lot of value overtime, and that we can really build a great business around.

Brent:                  

So, you traditionally look at businesses like the wine business or the movie business or things like that that are sexy and there's a lot of actors within those sectors that are doing it for other than economic reasons, right? I mean, anytime that you attract people with a lot of money to compete against you, that's probably a bad thing, right?

Brent:                  

There's a lot of these little niches within those sectors. I mean, who are the people that make the corks? Who are the people that make the glass bottles, right? Who are the people that make the foil that goes around the wine? Who are the people who maybe do consulting on vineyards that get some disease? Is there a wholesaling operation? Is there a liquidator in that space? There's all different business models that when you think of the wine business, it's obviously the one I'm talking about, when you go down these pages, you can say, "Okay. Should you own a winery?" Not if you want to make money.

Brent:                  

I mean, there are outliers and exceptions, but the joke in the wine business is if you want to make a small fortune, start with a large fortune, right? I like to say it's like owning a boat, except for pouring money into the water, you pour money into the ground, right? It's just the exact same thing, right? They're terrible businesses for the most part.

Brent:                  

Almost everyone, if you drink a bottle of wine, especially a higher end wine, whoever owns that is subsidizing your wine drinking. You should thank them for subsidizing your drinking habit.

Brent:                  

Anyway, every single one of these industries have a niche, and I think that we tend to be ... You'd use the term boring. We use the term boring a lot. They're not boring to us, right? We say that tongue and cheek. No business is boring to the people that work there, customers and suppliers, the employees. I mean, they're not boring.

Brent:                  

When you consider boring, we think that it's just not a sexy thing, right? I mean, this is where people have this romantic idea or at least did pre-COVID about restaurants like, "We're going to open up a restaurant. It's going to be great. It's going to be awesome." Restaurants are horrible businesses on average.

Jim:                      

Awful. Awful.

Brent:                  

Terrible businesses. You have wholesale transfer pricing power with a landlord in most cases, right? So, even if you are successful, your landlord is going to dig all the top layer profits off your business.

Brent:                  

So, things like that, we would never want to get into the restaurant business and we've looked at a big chain of steakhouses at one time. We looked at some franchises. That's a business that we could just never get comfortable with what the market dynamics were and how, frankly, sexy it was.

Brent:                  

I think you can get into certain segments of the restaurant business even on the food side that look a lot more like manufacturing. I mean, you look at fast food. Fast food is a lot more like manufacturing than it is like a fine dining restaurant, right? I mean, they're combining the same seven ingredients. I mean, God bless Taco Bell, but I think, literally, it's like eight ingredients in the entire restaurant, right? If you want a burrito, you're getting the same damn thing as a taco, right? It's just a different configuration.

Brent:                  

So, I think those things are things that you can get in to that look more interesting. Again, who supplies the meat? Who supplies the taco sauce? Who does all of the packaging? All these different areas, I mean, really the restaurant business one time that was the largest supplier of restaurant furniture. Super interesting business, right? They did custom designed furniture for restaurant franchisees. They had a great business. It almost like a recurring revenue business because all these franchisees, "I need three more of those special chairs that you made." So, it's always recurring. Those are types of things that we really like to get involved in and understand. Yeah, we're fairly agnostic.

Jim:                      

So interesting. I'm always fascinated by the dynamics of businesses. You brought up the movie business. We looked at from O'Shaughnessy Family Partners, which is the family office that we have. So, we've been diversifying out of long US equities for a long time not because we don't like long US equities. We love them, and we have most of our money invested in them, but diversification, you don't want to put all your chips on one spot.

Jim:                      

So, we looked at microcap, microbudget movie making, and an absolutely fascinating business that I went in to new. So, I knew nothing about it, and then learned pretty quickly that if you can bring budget discipline to the process, technology has advanced so far. So, I mentioned to you earlier, you're following Ron Howard as a guest on Infinite Loops, and he's been a friend for a long time.

Brent:                  

That's to be me.

Jim:                      

Actually, no, he's teeing up, I think. So, anyway, I called him and I'm like, "So, Ron, can you walk me through? What do you think of this?"

Jim:                      

He was like, "It's a fascinating concept." He goes, "Jim, I got to tell you what technology has done." He goes, "People with a Mac and an iPhone can make a pretty good movie these days."

Jim:                      

So, we ended up not doing it because, again, personalities and things were really big there. So, we decided against it, but that leads me into two thoughts that I'd like your response to. The first is we mentioned it at the beginning, the time horizon. So, people make fun of me sometimes because I think that time horizon gives you optionality that very few people think about, right?

Jim:                      

So, my time horizon with all of my investments is internet. I have grandchildren. I have charities I want to support. I have children. So, the way I look at the world is I have the longest time horizon possible. I think that it's an overlooked aspect of investing. You mentioned it with private equity.

Jim:                      

I would love to compete with people who have a one year clock versus an infinite clock, right? Bezos thinks about that a lot. He's built that clock out, the forever clock. I'm sure you're familiar with that.

Brent:                  

Yeah, definitely now. They're great.

Jim:                      

Yeah. So, talk a little bit about time horizon and is there anything in your checklist that let's say you've got a 25-year time horizon? Is there anything that could materially change enough prior to that that would make you go, "Hmm. Maybe not going to do this"? Then secondly, so one of our core beliefs is your company might not be in the software business, but software makers are going to be in your business pretty quick. Does that impact you at all or just your thoughts on both of those topics, please.

Brent:                

Yeah. So, time horizon is an interesting thing. So, we get asked sometimes, "Well, do we have to buy a majority?" We say, "We don't have to buy a majority." We had historically always chosen to buy a majority because we can force virtue on the minority partners, right? So, we know what were intentions are. We like to hear people understand and talk about where do those overlap with their intentions.

Brent:                  

At the end of the day, somebody comes along and waves more money in your face and look maybe going through your health issue, maybe there's another issue going on. We want to be able to be in the driver's seat of controlling that decision.

Brent:                  

I would say our time horizon is functionally indefinite. So, the fund structure maybe is something to just briefly touch on is we have a guaranteed 27-year time horizon with an option to renew majority interest at year 25. So, functionally, it's indefinite, right? That's a long time from now.

Brent:                  

That does not mean we never will sell. I think this is something a little bit different. When we talk to sellers and they say, "So, you'll never sell my business."

Brent:                  

We say, "No, absolutely not."

Brent:                  

They say, "Well, then why are you any different than private equity? I mean, if you'll sell my business, private equity is saying they're going to sell my business. What's different?"

Brent:                  

I say, "Well, can we agree? Maybe there's some good reasons to sell and bad reasons to sell."

Brent:                  

They're like, "Well, I don't know."

Brent:                  

I say, "You're selling. So, is there something inherently wrong with selling the business? I mean, you're selling."

Brent:                  

They say, "Well, no. Yeah. Okay. There's good reasons and bad reasons."

Brent:                  

So, the way we think about it is we have the optionality, as you said, to be able to sell at anytime just like everyone else does, but we're not forced to. I think that when I talk to people in the more traditional private equity setting doing 20, 10-year fund, really if you're getting towards the end of that fund life, it's not comfortable for anybody.

Brent:                  

So, really, three to five years is the max you're going to hold, right? In fact, some private equity transactions, if they can do a flip within 18 months, that's a great thing, right? No one is going to punish them for that. So, they're forced to sell, though. They have to sell.

Brent:                  

When you talk to them, they say, "Man, I'll tell you what, the things that hurt me the most are the businesses that we knew and we just had to tiger by the tail. The thing was going to grow to the moon, and we knew it. We ran out of time. The clock ran out and we had to sell it."

Brent:                                

They're like, "I just killed me," because the next people who came in, they got to enjoy all the returns.

Brent:                  

So, for us, we can just look at each individual business and say, "Okay. What is the optimal hold period for that?" Maybe it's shorter, and maybe it's longer. I mean, there's a business right now that we've been in discussions with where everyone agrees that the time horizon shouldn't be infinite on that one. They do something very specific in the hardware industry. There's a large public company that would be the perfect fit as a long-term partner on that business.

Brent:                  

So, it may be a five to seven-year time horizon where we do really, really well, make it big enough and attractive enough towards worth the while of this public company, and then enter into discussions very early. So, it's not a secret, right? We're not going to pull the rug out from underneath any of our company leaders. We get unsolicited offers all the time for the assets and the portfolio.

Brent:                  

Most of the time we just say, "No, thank you." Occasionally, we will run it by the leadership team and say, "What do you guys think? Do you think they'll be good, kind, thoughtful partners? Is the money worth it? Where do we think the business is going?"

Brent:                  

So, yeah. On that end, I mean, I think that we have an incredible advantage. I mean, not having to do something which you don't want to do is most of the time, it doesn't matter. Let's put it that way. Occasionally, it matters a tremendous amount and that's when we really want to have a differentiator return profile based on that probably 5%-10% opportunity set.

Brent:                  

In terms of technology, so the second question you asked, we think about this a lot. So, we got a gentleman we hired last year named Mark Brooks, came from a big technology background. He's been Godsend for us. Prior to that, I mean, we're not Luddites at all. I mean, we love technology. We enjoy following it.

Brent:                  

There's a lot of stuff that comes and goes that the latest fad and trend we think is probably not the thing to do. We don't want to be on the leading or bleeding edge in these businesses. We want to see technology seasoned enough to where it's a no-brainer to put into the business.

Brent:                 

So, we're using, look, ERP systems, CRMs, a lot of these light plugin technologies to help the businesses and adapting. I mean, if you look at our pool business, I mean, I'm so proud of those guys for what they've done. I mean, they went from selling 100% in-person, 100% in-person forever, for the last 30 years to selling 100% not in-person.

Jim:                     

Wow.

Brent:                  

Right?

Jim:                      

Yeah.

Brent:                  

Do you know how difficult that is? I mean, when we think of technology, I think that it's easy to come up with this, "We're going to create the revolutionary app that's going to balance supply and demand," or whatever, right? AI, machine learning, sprinkle some magic on top, whatever that thing is, right?

Brent:                  

For the most part, look, those things are mature enough to where it's a no-brainer to do them, we will, but at the end of the day, when I think of technology, I think of using Zoom to sell. I think of setting an email drip campaigns. I think about using latest basic online marketing techniques, right? I think about having basic tracking on websites, things like that that are table stakes for anybody who's really, really knowledgeable in this space.

Brent:                  

For those of the small businesses, I mean, you'd be shock in how little technology and little processes there are. I mean, most entrepreneurs, what gets them there is not going to get them to the next phase, which is what got them there is there's these forces of nature, they hate processes, they know what's in their head, they got it all running, all that stuff, right?

Jim:                      

Yup.

Brent:                  

That's not going to get them to the next phase when they need to be unplugged from the business or have the optionality of being involved in the business. So, things like Zoom, I mean, this is a great example of adapting to a new world, and things are always going to change. So, anyway, that's our view on things. I mean, we will do some heavier technology implementations, but for the most part, it's very light and just try to do the basics.

Jim:                      

Yeah. That's an interesting part about technology, which I think about a lot. So, I've always been an early adopter, right? So, whenever the latest technology came out, I always had it because I love technology and I love the promise of technology, using it as leverage, right? That's the way I have always thought about it, not like just, "Wow! That is so cool," rather, "How useful is that?" I think Zoom is a great example.

Jim:                      

I was talking to somebody who knew the players, and it was like my question was, "I'm fascinated that there was Skype, right? Everybody was using Skype, and all of a sudden, the lockdown comes, and Zoom blows the doors off Skype."

Jim:                      

He said to me, "Well, you got to look at what kind of design started each company."

Jim:                      

I'm like, "Really?"

Jim:                      

He said, "Yeah."

Jim:                      

So, Skype was designed as a picture phone, right? That was the sci-fi of the '50s and early '60s, and that's really what Skype is. So, it was designed as a one-to-one. You and I could be doing this on Skype very easy, but then he told me, "Zoom, on the other hand was designed completely differently. Zoom was designed as, 'Hey, let's all go to the bar and meet up and we'll see you at about 5:00 and maybe 20 people are going to show up.'" Completely different implementation around the technology. So, I'm fascinated by what drives things and what people think is going to be cool often isn't cool.

Brent:                  

Right. Well, I think there's a lot of opportunities for ... Once there is a new technology set for there to be these applications that are native to this. I mean, if you look at TikTok is a great example of that, right? I mean, it's bubble native. I mean, a lot of these, I mean, Facebook didn't start as mobile at all. It's mobile second.

Brent:                  

So, anytime you have a big change over in platforms, I think there's an opportunity. I was going to say even this, something as strange as this, we were the first people in the world we think to implement 3D goggles and technology into being able to view pools. So, people can walk around their backyards. We could select, what type of dog do you have? We'll put the Cocker Spaniel in the backyard. What type of steaks do you like? Do you want the flay or do you want the T-bone on the grill, right? That type of thing.

Brent:                  

To be able to literally sit around and walk around your backyard, what it's going to look like. So, we'll take a picture of it, we'll design it all out, things like that that can help people visualize more and give them a better idea, a better predictability of what the product will be. I think that's a great example of implementing technology.

Brent:                  

At the end of day, somebody is going to dig a hole in the ground, put rebar in, shoot it with concrete, right? Ones and zeros are not going to replace that, right? So, then you got to think about what are the ways in which you can use technology to increase the fluidity of the transaction as opposed to trying to disrupt the pool business by you can use a digital pool.

Brent:                

It's like, "Look, you're dipping your body in water for pleasure. You're not going to get on an app and be in the pool." So, anyway-

Jim:                      

That's such a great example to me because I often say to people when I'm looking or talking ... because I have the opportunity and great pleasure of being able to talk to a really wide group of people and some really smart people.

Brent:                

Like Ron Howard.

Jim:                    

Yeah, there you go, and Brent Beshore.

Brent:                  

Exactly.

Jim:                      

So, on that topic of people, right? So, I always think that a lot of people forget to put people back in. I know you do. It's what you think about messy, messy, messy. Yet, do you think that there are some businesses. I love the idea about the 3D goggles because people, especially men, are horrible at visualizing things, right?

Jim:                      

So, I always refer to my wife. Now, granted she's a professional street photographer. So, her visualization skills are much better than mine, but they were before, right? Women, I find, I could be wrong, but women are much better at being able to visualize than men, and hearing that 3D goggles, bam! I mean, there you're going to get all the men, right? Do you think there's anything else like that or are you seeing anything else like that that could be seamlessly added to an existing business that you have that could really, like you said, go from 100% in-person sales to 100% online sales?

Brent:                  

Yeah. It's interesting. Some of the things we talked about around our matchmaking business, so we own a very unusual business. It's the highest end matchmaking firm in the world called Selective Search based in Chicago. So, think of executive search but for love not like Yenta Millionaire Matchmaker, that stuff Hitch, right? It was in my head when we first looked to the business. Very different. Think executive search. In fact, all the people that come an executive search background, really amazing company.

Brent:                  

There's a lot of things we talked about with experimenting with connections there. So, right now, it's a completely offline business, and that's actually a huge selling point of the business. It's very bespoke, the whole research team around you, as you'd expect for an executive search, right? Really high end CEO search for a Fortune 500 company type thing.

Brent:                  

So, there are some opportunities, though, for technology and to create a network effect around that business that we're not currently using. As we've talked about, introducing products down the road that maybe would allow us to gain information from other sources, that we could use not only for that maybe specific thing, but also to help with the highest end version of the business, information, everything in that business.

Brent:                

So, helping to find the right people, helping to vet them the correct way, all those things. So, I think there's a lot of these. That's a good example of an industry that is not well-thought of, very backwards, very traditional that for us when I talk about hair earlier in the episode, that's a great example of what I meant is it's a little weird, right? I mean, matchmaking.

Brent:                  

So, we like to get involve in things like that, where we think we can help not only professionalize the company, but professionalize the industry, and, yeah. Technology is definitely a component of that, and I also think that there's outside of technology a lot of things that you can do in that business through partnerships, through normalizing matchmaking as being a perk of employment. I mean, if you think about the highest return on investment, if you want to call it for longevity, for health, it's being a longterm committed relationship, right?

Jim:                      

Yup.

Brent:                  

So, if you look at the things that, especially higher end executives at bigger companies are offered for perks to try to make their life easier, to try to make their life better, to be higher performers at the office, it's hard for me to believe that finding a longterm committed relationship would not be in that top two or three things that they'd want that person to have.

Brent:                  

So, anyway, there's a lot of things like that that I think that technology can be on the innovation. I also think that there's just other areas that you can get involved in and innovate outside of the technology aspect.

Jim:                     

Yeah. Speaking of that business, I remember when I learned about it the first time when you were looking at it. I had an axiomatic reaction, which is as a baby boomer, tail end baby boomer, but born in 1960, online dating was just something that was not cool, but see how wrong I was, right?

Jim:                     

So, the frame of reference that I had was online matchmaking, that is not what your business is about, and you've got to overcome a series of mental roadblocks. Did you find that after you acquired the business? Do your clients also have to overcome mental roadblocks?

Brent:                 

I had to. I had to overcome my ... I mean, I remember when the deal was brought to me, I was like, "There's no way. There's no way we're getting on that business." I was like, "I don't care." I don't care what their financials look like. I don't care. I was like, "There's no way."

Brent:                  

They were like, "Hey, sit down. Shut up. You're not that smart. Let me tell you about why this is the real thing."

Brent:                  

Afterwards, I kept being like, "Ah, maybe." Then I was like, "Oh, wow. Actually, I was wrong." I mean, it's the exact same thing.

Brent:                 

So, I'm happily married. I've not been in the game for a long time, but if I, God forbid, were to have to get back in the game at some point, I would not have used Selective Search based on my purchases, right? It would have taken an introduction from somebody who I knew and trust and who said, "Hey. No. Really, you need to check this out."

Brent:                  

I think that's exactly part of the problem is we love getting involved in these businesses that the problem is the opportunity. So, we pay a price and we got involved in the business and if we just keep it on its current trajectory, it will be a good investment. It will be good for them, good for us.

Brent:                  

The real opportunity is the next horizon, which is if we can normalize that behavior in the marketplace or even just move the needle a tiny bit. I mean, if you have the resources to participate in a business and the starting price is around $25,000 and a lot of contracts go up from there, so it's expensive, but it's worth it, right? I mean, you're getting an entire ... It's like executive search. You're getting an entire team around you. These are highly compensated, very, very specialized talents these people have, and some proprietary technology with the databases we've built and the marketing and advertising we do.

Brent:                  

So, there's a lot of value built in to the system, but if we can take people, I mean, if you look at people that have the means to be able to do it and they're single, everyone should be using the program. So, right now, we're serving a tiny sliver of the population and only in the United States.

Brent:                  

So, there's a lot of upside opportunity. We love to get involved in these businesses where the risk-reward dichotomy is we feel like very, very off. So, if we just keep it on current trajectory, we do fine, do well, and then if we can move it dramatically up, change its trajectory, that's when the real value accrues.

Jim:                    

Yeah. So, total addressable market is huge. Right now, it's tiny because of prior prejudices. I love those kinds of examples because if you can see a little bit further than other people, you've got a really huge opportunity.

Jim:                      

You used a term that means a lot to me and I often tell people that most people don't understand Wall Street and when they go, "What do you mean?"

Jim:                      

I say, "Well, Wall Street is really based on trust."

Jim:                      

In other words, your word is your bond and we have a phrase on Wall Street called DK, don't know. That means if many trades are done, I call you and I say, "Brent, I've got 100,000. What do you give me for them?"

Jim:                      

You say, "100."

Jim:                      

Then the price goes down to 80. If you call me back and say or I call you rather and you say, "No. I didn't say that," boom. What happens is you're done. You are done. You are effectively banned because people will not do business with you because you have violated their trust. People always look at me like I've got two heads when I'm saying this because the popular image of Wall Street is Gordon Gekko and all those kinds of things. That's not really the way it goes.

Jim:                      

If you are that guy, you often get shunned, right? Your word has to still be your bond. That's got to be woven through every single business that you invest in, right? How do suss out trust?

Brent:                  

That's a great question. I mean, we spend ... So, the typical process, if you're running a traditional private equity process is there's going to be a lot of bidders, there's going to be an auction process. In fact, the intermediaries try to have it be designed to where there's the least interaction possible for the transaction to happen, right? Because the way they look at it is the more interactions that are possible, the more friction is created, the more opportunities to lose the deal.

Brent:                  

This drives us crazy. I mean, we occasionally participate in auctions when we feel like that we've got some edge in the process. Nothing is more frustrating than for us to say, "Hey, we want to get together. Let's not use decks or PowerPoints and let's just relax. Let's just talk to one another. Let's go share a meal, maybe a couple of meals together. Let's do this a couple of times and get to know one another," right? I mean, this is a marriage, especially if the seller is rolling forward, which we love for sellers to roll forward. We don't want to buy 100% of the business. That's exactly the antithesis of how a process is typically run.

Brent:                  

So, I can remember one in particular. We were on this deal and we sat down. We were so excited. I started talking to the seller across the table, and there's maybe five people on their side of the table. There's three intermediaries there. There's four people on our side of the table. I was just trying to break the ice. Literally, the seller was like, "I can't talk to you. I've been told not to talk to you."

Brent:                  

I was like, "Really? Okay. What are we doing here?"

Brent:                  

He's like, "Well, I'm here to run through my presentation."

Brent:                  

I was like, "Hey, we don't really do that. Can we just talk?"

Brent:                  

He looked down at the end of the table, and the guy shook his head, and he said, "I'm just going to run through the presentation."

Brent:                  

It's three and a half hours. We ran through the presentation. We couldn't ask any questions. At the end of it, he was like, "Okay. That's great. Let's go get on tour."

Brent:                  

I was like, "Okay."

Brent:                  

So, of course, we did move forward with the deal and it was a complete waste of time. For us, the relationship is everything. In the relationship, if you think about it, it's not to say, "Are there flaws in the business?" There's flaws in every business. There's flaws in every human. Nobody is going to be the perfect leader, right? It's not like we're trying to say, "Okay. We're trying to get you," right? We're not playing to play get you.

Brent:                  

What we're trying to do is we're trying to figure out the predictability of the person. So, as long as we can predict their behavior and just understand how they're going to react in different situations, then we're good. I mean, even if their reactions are not always the best reactions, right? We just need to know and where we get very concerned is when we think that somebody projects something that are just frankly aren't, right?

Brent:                  

We've had this happened a couple of times where go through a process and we get to the other side, and the first time there's conflict, they're like, "What just happened? Why is there conflict here?" They just had a fundamentally different understanding of the deal. I mean, we've had that happened before of the situation post-close, expectations of what it means to be a good partner. I mean, a lot of these spellers that are the entrepreneurs and star of the business had never worked with anybody or for anybody in their entire life.

Brent:                  

So, the fact that they've got to run anything by anyone is frustrating to them. Try to get them to understand, "Hey, it's not just a negative thing. We can be valuable. We can help get good feedback. We can bring resources to the table." So, it just takes time, though, to build that trust, as you said. Honestly, it's almost impossible to build the trust prior to close. To some degree, you've got to use the deal terms to, again, force virtue, if you want to call it that, then you hope on the other side that the person is who you think they are.

Jamie:                

My favorite thing is you said to me once we're on the phone and I told you I had started The 48 Laws of Power book and how much I absolutely hated it. I couldn't make it through more than three of the laws. Then you said that you hated it as well, and the only reason you finished it is so that you could use it as a contra for dealing with people who did the 48 laws of power.

Brent:                  

You're born for that cover, Jamie. You're born for the cover.

Jim:                      

Negative consent. Well, I try to help a lot of younger people who are trying to make it in my industry, which is asset management. What I hear constantly from these people is, "I'm building a brand. I'm building a brand."

Jim:                      

I'll try to gently say, "Authenticity. You aren't a brand. What is your personality? Make that your brand." If you're trying to build a brand that isn't you, at some point, that is going to come out, right? It's a simple statement, but what one did yesterday is the best predictor of what one is going to do tomorrow, and consistency is ... I joke around a lot. I make a lot of jokes, et cetera, but I'm very consistent in certain things that I do.

Jim:                      

People work for me for years like Chris Loveless is the president of my company. He's worked for me since '97. He was saying to me the other day, he goes, "What's always interesting about you, Jim, was I knew before I went in to your office what the answer was going to be."

Jim:                    

 I think that is an important aspect because if you are capricious, if you are really unpredictable, I mean, just think about it. Oh, look at that business over there. Earnings have consistency, et cetera. You're not going to invest in it. I'm not going to invest in it.

Brent:                  

Yeah, for sure. Yeah. I was going to say you're in good company because I was blessed to have lunch with Charlie Munger a couple of years ago. One of my questions that I asked him was exactly this question, which was, "How do you think about talent? How do you think about finding talent? How do you think about incentivizing talent?" He's done a lot of different projects in his life. Obviously, people have been the center of it.

Brent:                  

He cocked his head and sat back and ruminated for a second and said, "Well, I just look at what they've done."

Brent:                  

I said, "Oh. So, that's it? You just ..."

Brent:                  

He's like, "Yeah. Just if they haven't done it before, I don't think they can do it. If they have done it before, I think they can do it."

Brent:                  

I was like, "Okay."

Jim:                      

It's so true.

Brent:                  

"Well, I appreciate that."

Jim:                    

 It's like Jamie's, this whole 48 laws of power. I, too, am in that club. Everyone was like, "You got to read this book. You got to read this book." So, I started. I'm like, "Oh, my God! This is awful."

Jamie:                

Suddenly, you're amazed with the sales and it's just like, "Shut up."

Jim:                      

I'm reading it and I'm thinking, "People are going to take this seriously. How much damage is that going to do to their credibility, to their success in the world?" I always say about investing, simple not easy. That is true of life, right? In many, many aspects, there are so many things, like you just said with Charlie Munger. The guy is a legend, right? That's the advice he gives you. Well, because guess what? It actually works.

Brent:                  

He's lived it out. Yeah. Robert Greene who wrote 48 Law of Power, I think he's incredibly a thoughtful sociologist. I would say I appreciated and even at times enjoyed 48 Laws of Power for the insights that he had into base human nature. I think that there are opportunities. I mean, what makes us unusual as humans is we have this incredible fallen nature that's messing this about us, but then we also have, and I believe through my faith, we're imprinted with the image of God. We have this incredible ability to transcend our base nature.

Brent:                  

I think that's where with the 48 Laws of Power and things like that, there's this genre of philosophy in business where it's like, "Hey, it's one times game. Get as much as you can out of the person," or if you're going to play a longer game, I mean, only play the longer game so you can get more out of the person, right?

Brent:                  

At the end of the day, that mentality I feel like is going to implode on itself. It takes a genius sociopath to execute properly on that, right? Actually, my argument would be if that genius sociopath actually execute well on it, they would look like an incredibly kind, virtuous person by the nature of understanding that the time horizon stretches far beyond even a one-time, two-time, five-time game, right?

Brent:                  

So, I think that's where a lot of people who unfortunately aren't nearly as intelligent, they aren't the genius, and I think a lot of us feel that maybe there is something transcendent about who we are and what we stand for, that we maybe shouldn't just treat each other as objects that we bump in to.

Brent:                  

I mean, look, Robert Greene, I think he's an incredible sociologist. So, I don't want to bag on him too much. He's a super smart dude and, yeah, I think worthwhile to have it out there.

Jim:                      

So, that's great because it leads into a different observation, and I'd like to see your thoughts on this subject. S, I read a lot of people that I disagree with. I do it intentionally because, look, I know how little I know, right? One of my most common answers is, "I don't know. I wish I did, but I have ideas, and I have beliefs, but I really don't know." That's why I try to read as broadly as I possibly can.

Jim:                      

One thing that you were bringing up there, it sparked this thought, right? So, yeah. You're absolutely right about Greene as a sociologist. There are things that you can learn. I totally agree, but it's like the secret of that book, right?

Jim:                      

So, I'm a huge believer in doing intentionality, affirmations, et cetera, but it drives me crazy when they take a really simple kernel of truth and then they pile all of these bullshit on top of it. It just drives me nuts.

Jim:                      

So, you're right. If you remember that the game is not a single player, so in Gödel, Escher, Bach, which is a very hard book to read, but if you haven't read it, I suggest you do because it's really enlightening. So, in Game Theory, there is a thing called the Prisoner's Dilemma. I'm sure you're very familiar with that.

Brent:                  

Sure.

Jim:                      

So, they started a software competition back in the '70s when, wooh, that was a big deal. So, they invited people to come up with various software to win prisoner's dilemma. They got pages and pages and pages of code. That was the norm. They got this incredibly complex code, right?

Jim:                      

What won? A three-line code, which was called Tit for Tat, and that is you cooperate originally. If they rat you out, you rat them out the next time, but you back to cooperation. It's just like my opinion and metaphor for life, right? It's not a single player game as Isaac Asimov said, "Life unlike chess, the game goes on after checkmate," right?

Jim:                      

So, I take a very similar attitude, right? I think that free enterprise, et cetera, is a positive some good, right? The pie is not fixed. People like you, I mean, demonstrate that everyday. What do you think about just getting in to current environment? Another problem that human beings have is we have this horrible recency bias and it's like whatever is happening now we think is going to happen forever. How have you navigated this whole lockdown and what are your thoughts on that?

Brent:                  

Yeah. That's a great question. I would say I've navigated it weirdly. I think anybody who says anything different is probably lying. I went through a period of time. I mean, it's been alternating between confusion and anxiety, and then really a piece about things, and the opportunity to deepen relationships. I mean, I've got three young girls. It's just been fantastic to spend more time with them, be more flexible, be less on the road. It's been a truly Godsend in that way.

Brent:                  

I would say the current environment is volatile, and I think that we're seeing economic volatility on top of social volatility, political volatility that's layered onto that. I mean, there are actors in this world who just wanted so chaos because that's how they keep everyone off balance and punch above their weight.

Brent:                  

So, I mean, I think that we're on the leading edge of understanding how those latest techniques are being implemented. I mean, I'm here in Columbia, Missouri. We had quite a flare up four years ago with the University of Missouri, with a lot of the stuff. There was actually an interesting study that came out, which pretty definitively proved that the vast majority of the social media chatter around the incidents here at Missou were originating out of Russia.

Brent:                  

So, you think Columbia, Missouri, I mean, you joked we're Hodunk nowhere, right? Russia is active here in Columbia, Missouri when they want to be. So, if that doesn't scare you, it should. I think there's a lot of stuff that's going on. Do we have real problems? Absolutely. Is there injustice in this world? It's horrific. Absolutely. We should fight against it and fight for equal opportunity for everyone, right?

Brent:                  

Separate from that, I think there's also when I talk to a lot of people whether it's the economics of COVID, how they're reacting to COVID, the political and social unrest, you talk to normal people in normal face-to-face or even on the phone. Man, everyone seems like a monitor. Everyone seems pretty reasonable and there's very little they disagree on.

Brent:                

 It's a very fascinating thing. Actually, I listened the other day to a podcast of somebody who's on the far right and on the far left. The whole idea of the podcast was where is the common ground. It turns out through the podcast, there's 95% of stuff they agreed on, very little they disagreed on.

Brent:                  

We're pulled through, I think, this goes back to the technology discussion. We're pulled to extremes right now naturally through the technological advancement that we've had. To your point, our brains just aren't wired that way, right?

Brent:                  

So, how have I dealt with it personally? I've tried to be less online, to be completely honest. I've tried to tone down my involvement on Twitter quite a bit. I still enjoy being on there. I think it's an incredible learning platform, a lot of venom, and a lot virtue-signaling going on.

Brent:                  

Just try to spend more time investing in relationships and with people. Then on the business side, we were very fortunate that our business model is built for times like these. I mean, we're all weather in the sense that we don't typically use any debt. Any debt that we have is very light debt. It took me finance working capital needs. I mean, we're built for rough waters.

Brent:                  

When things got choppy, I mean, if you ask me in March and April, which your son and I talk a lot, and Patrick and I would have almost daily conversations about what he's seeing in the market, what we're seeing in the market. I mean, it was rough. I mean, there was a scenario where I thought we could lose a couple of the company's portfolio. We have nine companies' portfolio. I thought there was a time we might lose two of them.

Brent:                  

We were going through the imaginations of how much more capital do we eject. That's without any debt, right? The business is just challenging, right? Thank goodness we didn't go there, and we've gotten out to the other side of at least this squall. Everything is going to survive. We're in a really good shape. We're well-ahead of projections where we thought we'd be.

Brent:                  

So, it was a crucible, though. I mean, I think it's interesting to see how people react. I learned a lot about how I react through that. I was really getting my start at the tail end of 2008-2009, right? I mean, I was really being off the ground. So, I felt it, but I thought that was more normal back then. This is the first time that we legitimate assets. We have a lot of things in play, a lot of bets on the table. I learned where ranked well, where I don't. It's a good learning opportunity.

Jim:                      

You're absolutely right. I think that there are ... I agree pretty much with everything you said. I think that I still hold out a hope for social media that through all the venom and through all of the noise, what I see developing is the world's first global distributed intelligence network. I think it's going to be really powerful. Yes, does it have every one of those problems that you mentioned? Absolutely.

Jim:                    

People will say to me, they are really worried and they're like, "This is unprecedented."

Jim:                    

I'm like, "Not really. Not really."

Jim:                      

So, you do know that in Europe and here in the United States, they burned hundreds of thousands of women as witches, right? You know about that. We have that fellow in Washington who was looking for a communist under every bed, and the 1960s, oh, my goodness, I mean, Google Chicago Democratic Convention 1968, there's been a ton of violence, a ton of discord, everything.

Jim:                      

It's what I love about this country is that it's the people, right? So, I will never short the American people. I'm always long because, yes. Are there are going to be tons of problems? Yup. Are we going to overcome them? Yup. Winston Churchill had a great line, which is at least attributed to him, which is, "I love the Americans. You can always count on them to do the right thing after trying every conceivable alternative."

Jim:                      

So, I'll ask people, "What do you think would happen if we had Twitter on D-Day?" Because any student of history knows D-Day was a total cluster F, right? It was fubar. That's where that acronym came from. So, I agree that we are, yeah, things are challenging, but they always are.

Jim:                      

I think personally that one of the upsides of having to go through this crisis is, as you mentioned, a lot of people haven't gone through really deep shit, and because of my age and my experience, I have. So, younger people, which by the way I'm a huge, I'm long young people because I love all of the creativity. I mean, it's just incredible. That's another one of my hobby horses that I won't even get on, but to paint with a broad brush a generation is insanity, in my opinion.

Jim:                      

Now, with the scars, I think that moving forward and now, I'll get to my question and stop being such a gasbag, now that you've got these scars, are there going to be changes in the way you approach what you do?

Brent:                  

That's a good question. I think that the business model has panned out better than I expected. So, a couple of things that make us unusual, long time horizon. Thank goodness we don't have to get out of these investments quickly because some of them are in some challenging spots, right? We're very optimistic longterm.

Brent:                  

Think about one of the businesses in particular. Super longterm, optimistic about the business. Short-term, there's some pain there, right? I mean, it's an industry that's really suffering. So, that's been a huge advantage.

Brent:                  

Not having a traditional management fee has been a huge advantage, too, in the sense of we don't have investors bringing down our next, you and your family included saying, "Hey, look. We're paying you. Get on with it. Go do deploy some capital," right? So, we can be patient. We can take our time, look at a lot of pitches, not swing at a lot of stuff.

Brent:                  

So, I think that's been very valuable, and then, obviously, not using debt has been really, really powerful as well during this time. So, from that standpoint, I would say very, very healthy to reaffirm a lot of the thesis behind what we're trying to do. I think that there's a lot of people that look to what we we're doing, especially during this last fundraise and just said, "Hey, I think you guys are nuts. I think that's not the way to do it. I think you guys are stupid for doing it."

Brent:                  

By the way, we loved hearing that. We've asked them a lot of questions about why. I think I've had two of those people now come back to us and say, "Yeah, I missed it. I thought it was dumb. You guys weren't using a bunch of debt. I didn't realize what I was saying," right?

Brent:                  

I said, "Thanks. I'm glad you changed your mind. Maybe we should change ours in some ways," right?

Brent:                  

So, I think that from that perspective, from the business side, it was really good and affirming. I think, personally, one of the things that I continue to learn over and over again are two principles. One is don't meet problems halfway. We, in April, early May, mid March to mid May, went through so many planning exercises of what ifs that we had backup plans for our backup plans. I'm sure those backup plans had backup plans, right?

Brent:

I think in some ways it's good to plan, and it created ... I think we got to do a little bit, and I love this, for sure. This is my fault is a little bit too much planning and a little too much meeting problems halfway to where you just get all of your focus on the wrong things. Instead of controlling the things that we could control, we were worried about the things we couldn't control or that might happen down the road.

Brent:                 

I think that I would probably be a little calmer about it, be a little more even keeled about it. I think that it leads to the second thing, which is when things are good, they're not as good as you think they are, and when things are bad, they're not as bad as you think they are.

Brent:                  

So, just be a little more even keeled. I mean, I come naturally caffeinated and ready to go, and it's been a good humbling lesson for me, and a lot of the things that I'd assumed, I mean, if you told me ... Let's transport back to early April and we're in the swimming pool business. We are the nations largest direct to consumer swimming pool builder. We were looking at swimming pool numbers. They were down considerably in March, and we were terrified. I mean, we were like, "Okay. What are we going to do? We love the people there. We want to make sure that we take care of the employees, but I mean, in 2008 to 2010, that industry overall was down about 75% nationally. In Phoenix and Tucson, which is where we are, it was down almost 90%.

Brent:                  

So, I mean, you talk about high I mean, we thought the bottom is going to drop out. Then we started getting sales numbers back day-by-day. I mean, we were on the phone everyday with our portfolio companies through the downturn. We started getting sales numbers back in April and we're like, "What in the world is going on?" Traffic on the website is through the roof. I mean, our phones are blowing up, and then you talk about turning a corner, now we're trying to hire as fast as we can. It's the craziest thing.

Brent:                  

So, we still have this complete 180 of ... We thought it was going to be a crash that came out the other side. It just proved to me I have no idea how to predict anything. I mean, if you had told me that in a deep, deep recession, depression, I mean, at least for that quarter that a swimming pool builder would be a strong performer, I would have told you that was insane. It's impossible.

Brent:                  

So, I mean, I think, again, just having a humility has been very positive for me. I run pretty strong on the pride and vainglory meter. Just being able to be humbled by the things that worked that I had no idea why they worked or how they worked or that they were going to work, and things otherwise that didn't do as well that I thought would. So, it's been good all around.

Jim:                      

That's fascinating. Yeah. I mean, so that's the stoics' way of looking at the world, right? I read the stoics since I was 19, as well as Laozi and Taoism. They go together much better than a lot of people would think because the stoics are basically, if your direct action cannot change a situation, don't let it trouble you.

Jim:                      

Unfortunately, that's the inverse of what normal people do, right? We associate activity with effectiveness. Sometimes the best thing to do is nothing. Sometimes the best thing to do is adopt. We'll see, right? This too shall pass.

Jim:                      

Again, so much in my history of learning and everything, wait, it comes down to some really simple, simple things, right? So, it's great to hear you say that that was your takeaway, right? That you realized, again, predictions, boy, I know there's a reason why we were one of your first investors. We are very simpatico, right? Because predictions, I just always ... Jamie knows this. I go absolutely insane with these predictions because ... Flip a coin. I mean, a coin actually does better, right? So, if you can stick to some underlying true principles that have worked over the fullness of time, are they going to have periods where they don't work? Yup, but you know that because you've studied it.

Jim:                      

In our case, we go study things back as far as we can. It's one of the reasons we are ... Jamie is because he knows finance from the paleolithic era. So, we don't want to keep you for all of your time, but two questions, final questions.

Brent:                  

Sure.

Jim:

So, the first question, are you finding that you're still going to be able to do the kinds of deals that attracted us with your first fundraise now that you have so much more money?

Brent:                  

Yeah. That's a great question. So, there's two ways to grow in any business, right? You're either going to grow up or you're going to grow out. One of the things we've thought about a long time is we don't want to just do larger and larger deals because we have more capital, and then you end up playing the game that everyone else has played and you're competing against everyone else. I had no desire to do that.

Brent:                  

Now, what I would say is we are starting to see larger and larger deals because we have access to capital, and I think that there's a deal right now that's $18 million of EBITDA that we're looking at, not much capex, really good strong quality of earnings, and we think we could buy it at a price that we would buy the same company if it was a quarter of the size, right?

Brent:                  

So, if you're moving up market and doing larger deals and you get the optionality as we've talked about the central theme of this discussion is optionality, we get the optionality to do larger deals when the right deals come along to do, but we're not hunting for larger deals just to blow more capital, just to raise more capital, just to do them, right?

Brent:                  

So, our argument is we want to keep our bar very, very high regardless if it's smaller deals or larger deals, and whatever passes that threshold, we want to have the capital there to support it, but the capital doesn't drive the decision making on what deals to do, right?

Brent:                  

So, what the challenge though with that model is, I mean, we still can write a check, probably as small as $6 million, maybe seven. We're just starting to get down into that. Call it two to three million, three on low end with some structure maybe earning companies. Those are very small companies. We've got to be able to stay a lot with the technology and leadership and management of those companies and build a really large portfolio.

Brent:                  

So, our vision has been, we're nine companies right now, we want to be able to be at 50 companies and be able to handle 50 independent companies all at the same time, all the information, all the decisions. Buying one company and running one company is brutally difficult. I would say buying three companies is a whole another level of difficulty because now you've got a portfolio, now you can't be in the leadership of every company.

Brent:                  

Buying 10, where we are now, is probably in order of magnitude harder than buying three. Our guess is that probably 50 as an order of magnitude harder than where we are right now. So, look, it's going to be hard.

Brent:                  

I mean, there's a reason why Berkshire kept doing larger and larger deals as their capital base increase. They also get access to the loan shark to Goldman Sachs, right? So, I mean, there are opportunities that you get if you have larger amounts of capital of business. It isn't always a negative, right?

Brent:                  

I mean, the anchor of capital will overall be a negative, but it's not always a negative. I think there's a sweet spot at flexibility. So, we have a long time horizon, too. I mean, you know this, Jim, but we've got 10 years to invest the money. So, I mean, it's almost like we raised a double fund. So, yes, I mean, our first fund was 50. We're about 300 in the second. That looks like a massive jump up, but it's not nearly as big as ... We were undersized in the first fund in hindsight and because we had a double fund, if you want to think about it that way, the equivalent we go from 50 to 150, which feels much more manageable, especially in those circumstances.

Brent:                  

So, anyway, so all those things in my head, I have no desire to just do what everyone else is doing, basically develop relationships with banks so you can get more and more debts, so you can pay a higher multiple and you can win deals at auction. I had no desire to do that. We want to build portfolio companies that are gems and that we think that we can do something with them and be ... We're far more operationally involved, I think, than most private equity firms, at least in the ways that we are, and really help these companies grow and prosper.

Brent:                  

We want flourishing. We want a shalom in the portfolio, right? That I think can only come through longterm horizon and through doing things in a way where you stick to your knitting and know what you're doing and trying to go after that.