This Boggles My Mind
Slack Water Capital’s Ben Bortner recently announced on X (nee Twitter) that he was done “allocating to new self-funded search opportunities.” Citing greater competition and a “flood of new capital” alongside a “shortage of quality deals of size,” he noted that valuations are going up and governance and downside protection down, which should lead to worse returns for the asset class.
We agree and see a lot of the same dynamics at play upmarket from the businesses earning $1M to $2M that searchers target. Across the board, there’s less good stuff for sale, but more competition, more capital, and more risk-taking. This is among the reasons we haven’t done a deal in more than a year (besides some tack-ons).
Interestingly, Ben cites private equity firms coming down market and family offices “looking for uncorrelated long-term holds with strong cash flow yields” as new entrants in his space. And we’re seeing that as well. But what’s been interesting about those folks arriving is that they are hard to compete against. Not because they’re more sophisticated or have more capital, but because they seem to do things that don’t make traditional investment sense.
Take the private equity firms, for example. You would think that they are disciplined buyers laser-focused on IRR. What we’ve seen down market is that they’re willing to pay up for lesser quality assets because if they can cobble together enough of them, they can stitch together a Frankenstein company with headline earnings of $10M or $20M, which is allegedly attractive to strategic buyers who will pay an even higher multiple. In other words, it’s not an investment, but a product manufactured for a customer.
That’s hard to compete against.
And then take family offices. What’s interesting there is that we have met more than one who are only “making direct investments” now, not because they think they will earn better returns (these families are already incredibly wealthy), but because they are under pressure to buy things that will create employment opportunities for the dozens of fourth-generation offspring who are about to graduate from college. And they’re willing to pay a lot to create those opportunities.
That is also hard to compete against.
I’ve seen a handful of investment firm annual meeting decks over the past year that don’t even have a slide that lists returns. This when, if you’re an investor, your product is returns.
It boggles my mind.
– Tim
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