These are the fathers of modern leveraged buyouts. KKR, Wesray, Textron. Perhaps you haven’t heard of Royal Little as much but he was every bit as colorful although before even my time. One could have added Warren Buffett to this group but he started out as, and remains, first and foremost an investor – and a dealmaker as an afterthought. The other guys went on acquisition binges using leveraged buyout techniques when such techniques were barely known and little understood. Textron in the 60’s and 70s, KKR and Wesray in the 1980s. In the early 80’s Bankers were just becoming educated on the techniques and Wall Street had just invented junk bonds to finance them. KKR was fortunate enough to have Mike Milken open a floodgate of money to finance these deals.
But I digress. When someone talks to me about doing ten deals(and yes a subscriber mentioned it) – not just one but ten – it brings back fond memories. Indeed there was a time I wanted to do many more than ten deals because I had just watched Wesray start from nothing (ok Simon had some money) and do a deal a month over the span of a couple of years from the IPO Gibson Greeting Cards (where he put in $300k and ended up with $150 Million) and culminating in the billion dollar Permian Oil deal. KKR did a nice string of deals up until the RJR Nabisco Barbarians at the Gate deal, the largest of its day. These were the original LBO guys that used shoestring capital and suckered the banks in to acquiring a string of companies over a relatively short period of time. Their modern day equivalent, Private Equity, is now an overcapitalized mess with too many players chasing too few deals.
Bill Simon, from his summer house in the Hamptons, said at the time “anyone can do what I do”. Even I didn’t believe that. But indeed I was wrong. Small players continue even to this day to do strings of deals. They get “on a roll”. They have a key capital source, they get the banks on board, they have a plan and a team and they likely end up as some form of private equity group with a capital pool. Yet these guys are in the big markets and have to reach down into deals that are below their sweets spots. They have to go below $5mm in EBITDA and sometimes much lower because the big market is pretty crowded. This phenomenon is obvious to anyone watching the deal listings on major sites and see way too many bars and convenience stores for sale.
Private Equity generally refers to a company that has raised a formal capital base and is thus able to deploy an already-funded pool of money at a moment’s notice. Textron became a conglomerate using the public markets, KKR developed private equity pools once they achieved notoriety. Wesray was a better example of an “ad hoc” buyout group. Sometimes called “boutiques” these are investor groups that raise money on an informal or “uncommitted” basis for their deals. They didn’t spend the two years necessary to cultivate pension funds and other institutional investors. Moreover they may not have assembled enough of a team with a strong track record. Yet these groups have a very real presence in the market and can do just fine without a committed capital base. I am one of them, and yes we are in a smaller market but at least one with more deals.
But I digress again. The pipe dream of ten deals is still there. This is what we all have in common with the masters. We all wanted a portfolio of companies. Don’t lie to yourself, you know you want ten companies. But where we went off the track is thinking we would be the big CEO at the top of the pyramid owning the whole thing outright. Can it be done? Of course, but with a few provisos. Obviously your odds are much better once you do your first deal… and so on. Consider that if you are acquiring $1 Million companies it is generally easier than acquiring $20 Million companies. You can do an awful lot worse in this world than owning ten $1mm companies.
Most prolific buyout shops have a team in place and resources(capital). If you are just one person doing deals by yourself you will find it much more difficult. The only advantage of doing it alone is that you aren’t hampered by the partnership process, can make your own decisions fast and can pitch forward without worrying about other people agreeing with you. However, you better be very very good. A group of seasoned professionals will find it much easier to gain credibility, pulling in more deals and capital, than one lone road warrior. Wesray and KKR, as did many many others, found it advantageous to start with more than one person. Usually two key dealmakers.
So to those wanting a ten deal portfolio of small business buyouts.… a dose of reality. Doing even one deal takes time. If you are diligent enough to have developed a team and cultivate some capital sources you should be able to do multiple deals and minimize the time frame. It doesn’t happen overnight but with some hard work and lots of dog-and-pony-shows you can get your deals done.