Trends Watch: Execution and Growth
April 25, 2019
By Elana Margulies-Snyderman
EisnerAmper’s Trends Watch is a weekly entry to our Alternative Investments Intelligence blog, featuring the views and insights of executives from alternative investment firms. If you’re interested in being featured, please contact Elana Margulies-Snyderman.
This week, Elana talks to Dan Kipp, Founder & Managing Partner, City Capital Ventures.
Why do you believe that investing in niche, smaller, and consumer-focused businesses (generally sub-$100 million) present the best opportunities?
Our view remains that growth (and therefore, returns) is more possible with “smaller” businesses than larger ones. The trick, of course, is making it happen. And that takes a maniacal focus on planning (what not to do) and execution (doing the right things, right). We look for businesses that have something distinctive about them but perhaps haven’t had the benefit of management strength, capital to invest, and constructive board support and guidance. We frequently say that “we’re looking for the film on the cutting room floor” – compelling, niche businesses that can flourish with our capital and support but are not otherwise held “in favor” by the broader marketplace.
Our recent acquisition of The Redberry Group in Canada is a good illustration of our thinking. Redberry is the largest Burger King (“BK”) franchisee in Canada with almost half of the BK restaurants in that country. We believe that investing in a proven quick serve restaurant (“QSR”) franchise is a great risk-adjusted way to deploy capital, since the multiples are much lower than on franchisors. And as we did our due diligence, we came to appreciate that Canada is not only a great QSR/hamburger market, but it is highly underpenetrated from a Burger King standpoint (relative to other developed countries).
What are your thoughts on the economy?
As a firm focused on smaller, more nimble growth-stage businesses, we are mindful of macro-economic trends but don’t obsess over them from quarter-to-quarter. That said, I would say that our view on the economy remains cautiously constructive. Businesses continue to expand, capital spending is increasing and net wholesale purchasing is growing nicely.
And the consumer seems to be as strong as ever with the employment picture continuing to brighten and consumer balance sheets dramatically improved from their darkest days one decade ago. Not only are household liabilities well below their norms; but the household debt service ratio (at around 9.5-10.0%) is at its lowest level in 40 years.
The counterweight to the strong consumer of course is the leviathan in Washington D.C. Despite our economic growth, the government continues to increase debt at a too-rapid rate. Federal net debt as a percentage of GDP is at its highest level in over 50 years as we’ve had no courage as a nation to use the economic prosperity of the past ten years to reduce debt as was done in other cycles.
From an investment perspective, valuations aren’t cheap by any historical measure, but since we focus on businesses “in the seams” of market niches, and generally under $100 million, we are somewhat insulated from the lofty prices being paid in larger, deeper markets.
Putting it all together, it feels like the stock market will have its ups and downs, but the real economy seems in fairly good shape.
What keeps you up at night?
Wow, what doesn’t? Fundamentally, our small business focus means we are owners of businesses with some common vulnerabilities: management teams that lack bench strength; customer concentration (meaning the loss of any one could deal a huge blow to our plans); and higher breakeven points (SG&A is a larger part of a small firm’s cost structure). While the multiples and growth prospects are enticing, the operational risks feel greater than might be experienced in larger private equity funds. Add to that our necessity to form a bespoke “fund” of capital around each investment – and the timing and vagaries of that – and there are plenty of sheep to count, trust me.