Serial Acquirers; The Milken Way; History's Seductive Beliefs #110

Reflecting on a few interesting reads and listens over the past week

Serial Acquirers 

This is a fantastic post by Canuck Analysts on serial acquirers, what makes them special and the challenges/risks associated with scaling them. 

They correctly point out that - "The biggest roadblock to defying the law of diminishing returns to M&A is that most serial acquirers, particularly platforms and accumulators, do not sufficiently scale the human capital involved in M&A and the structures and processes guiding them – as they get larger."

Scaling and retaining human capital as serial acquirers grow will probably be the biggest challenge to maintaining the growth rate within most serial acquirers. The amount of capital available in the market today creates a number of options for experienced investors to build their own shop vs. being a part of a larger serial acquirer. 

Here's a summary chart that points out key risks/opportunities between roll-ups, platforms, and accumulators. The one other row that I would have added is the investment horizon. Typically, I’ve found that roll-ups are the fastest to realize ‘full potential’ vs. platforms and accumulators (which would take the longest in my opinion). This is likely why roll-ups have become a common amongst PE investments.

The Milken Way

This post by Neckar was a great read into the ways of Michael Milken, who is considered to be one of the key 'founders' of the high-yield bond. 

To give you a sense of what his peak looked like: 

"In 1986, the high yield market had grown to some $125 billion in outstanding value. Milken himself reportedly earned $550 million in salary and bonuses that year."

While the post goes into the details, Milken's flywheel to success looked like this: 

  • He built deep domain expertise and an information edge that made him valuable to every player in the market.

  • By taking inventory he increased liquidity and turned his trading desk into the market’s hub.

  • He spread the gospel and highlighted the attractive risk-reward profile to attract a more diverse roster of investors.

  • He backed entrepreneurs and takeover operators hungry for capital.

The step that seems hardest to replicate (in my opinion) is the first one. Despite the feeling that we have more information than ever before, the opposite is also true where there is just as much misinformation out there. Thus, the idea of having an 'information edge' still relies heavily on human effort and building experience. 

The fascinating part about Milken's process is how he was able to apply the process above (along with the power of his network) to successfully build an ecosystem to help solve prostate cancer. 

If you're looking for some prescriptive steps on how you can apply 'Milken's way' - here are some useful steps below: 

  • Go deep in an area of passion or interest. Do the work: collect and unearth valuable information. Identify the key players. Share what you learned.

  • Increase social liquidity. Introduce the old hands and the young guard. Figure out who would benefit from an introduction. Create a venue for the open exchange of ideas and information, whether that’s an email chain, a slack or discord channel, a happy hour, or mountain retreat

  • Increase capitalization and stake new players. If you find yourself with capital (financial, social, intellectual) or influence with those who allocate capital, use it to back deserving new players who will grow the pie for everyone.

  • Maintain an abundance mindset. Be willing to contribute without expecting anything directly in return. Trust that the success of the entire ecosystem will carry you with it.

An interesting point on the third step re: staking new players: For those who don't feel like they have enough capital to back deserving new players, you can start by staking people with a bit of your time and helping them out whether its providing advice or actually helping them out with some of their work. I've had a number of important relationships grow by just 'staking' my time in people I believe in. 

History's Seductive Beliefs 

I always enjoy posts from Morgan Housel (check out The Psychology of Money if you haven't already). Forecasting often focuses on past events vs. underlying behaviors. Morgan sums up human behavior fairly well with this one line:

"They follow the path of least resistance of people trying to simplify a complex world into a few stories that make sense and make them feel good about themselves." 

Here are a few other (misguided) beliefs that he highlights: 

  1. An illusion that other people’s bad circumstances couldn’t also happen to you.

  2. Imagining an unrealistic world where progress and success don’t demand a fee, and a belief that hassle, nonsense, disagreement and uncertainty are bugs rather than a cost of admission to getting ahead.

  3. An assumption that your view of the world is the view of the world, and a belief that what you’ve seen and experienced are the sights and experiences that explain how the world works. 

  4. An assumption that history is a guide to the future and that things will continue working as they did in the past.

The second point is particularly important as I make career decisions. While there are many career paths available, the 'cost of admission' (known and unknown) and the tradeoff associated with pursuing progress/success in one area vs. another has become increasingly apparent to me. Ultimately, it is up to each of us to determine 'what's worth it.'