Market Principles

We expect to generate consistently outstanding shareholder returns.  This view might seem at odds with our belief in efficient markets.  So how do we reconcile the apparent opposing views? 

Our asset class of private lower middle market companies affords several advantages for generating higher shareholder returns.  First, because investors forgo liquidity to invest in private companies, as a rule, they can purchase private companies at a discount to comparable public companies to compensate them for the disadvantage.  Second, our particular asset class of private companies is priced at an even greater discount due to the laws of supply and demand.  Supply is plentiful because 95% of all companies in America are less than $50m in annual sales.  In comparison, demand is limited because most of the investment capital is managed by large institutions that can’t feasibly invest in small companies. 

We are not passive investors. Our bet is that we can improve the economic fundamentals of the business over and above the level of performance implied in the purchase price.  The benefits will accrue to our shareholders in terms of higher annual rates of return.  We like our chances of success because we have a demonstrated track record of leading breakthrough performance and we look for companies that have unrealized potential that is not reflected in the purchase price.

Our focus is on maximizing the expected rates of return after taxes and fees.  John C. Bogle, the founder and former CEO of the Vanguard Mutual Fund Group, expresses the harm taxes and fees can have on shareholder returns in his book, "Enough: True Measures of Money, Business and Life."  "Over a 50 year period of time," Bogle states, "gross investor returns on a $1,000 investment in the equity market are reduced from $187,000 to the net nominal returns of $37,000.  When inflation is considered, the return is a miniscule $5,300."  By tying our standard industry fees to investment performance and holding our investments for a 7-10 year period of time, we expect to minimize the impact of fees and taxes.