Will Thorndike - The Power of Long Holding Periods

Key Takeaways

• Will believes that industries characterized by low churn are interesting places to look for long-holding period platforms and that a company with 2% customer churn is a powerful indicator of good revenue quality.
• Will also mentions that businesses with low churn tend to have other positive economic attributes such as simple operations, pricing power, and high degree of capital efficiency.
• Capital efficiency, as defined by Will, is measured by return on tangible capital, which is a measure of the cash generated by a business relative to the tangible assets deployed in that business over time. The math for this metric is EBITDA multiplied by (1- tax rate) divided by net working capital plus net PP&E.
• Will is looking for businesses that have low maintenance CapEx requirements, aren’t capital intensive and that get paid in advance. The power of negative working capital.
• The power of patience in the research process allows for a deeper understanding of a company and its potential for success. Long research process allows for the discovery of unique and important details about a company that may be overlooked by a more traditional, shorter research process.
• TransDigm was used as an example, and some specific details about the company that were uncovered during research included:
• Their approach to pacing was unique and differentiated.
• They retained the ability to do small, highly accretive acquisitions even as they grew in size.
• They had a decentralized organizational structure and a unique approach to compensation that was tied to performance and minimum thresholds of compounding for shareholders.
• They had a culture that was centered on the "productivity, pricing, and profitable new business" triad, and every business unit was evaluated on these criteria.
• Two critical factors for success in private equity investing are game selection and culture. Choosing the right industry to invest in and having a simple, repeatable culture within a company can lead to sustainable success over a long period of time.
• Decentralized organizational structures can be effective in retaining an entrepreneurial ethos and lowering costs, but it is not a universal solution and depends on the industry.
• Successful decentralized cultures also tend to have an element of frugality and scrappiness that persists long past the early days.
• The CEO of a company is often faced with the decision of what to centralize versus keep independent, and centralizing can lead to short-term cost savings but can also lead to a bureaucratic and ossified organizational structure and culture in the long-term.
• The biggest change for Will when moving from managing outside client capital to managing his own money was an intensified focus on extraordinarily long holding periods.
• Will's most fun projects have been those where he has had the opportunity to build companies over longer periods of time and he has “postpartum depression” when selling good businesses due to fund life reasons.
• Will also did some work on how great the IRRs would be for the next owners of businesses, which further underscored the value of being able to own these things, setting things up from the outset in a way that structurally you can own them for longer periods of time.
• Will mentions three companies that Housatonic has owned for more than 25 years, Asurion, Carillon, and America's Test Kitchen, which would all score well on the dimensions of recurring revenue, persistence, retention rates, returns on tangible capital, and organic growth over a long period of time.
• Karen E. Moriarty, the CEO of Carillon, who has evolved an excellent model for the operationally intensive assisted living business, which has high persistence, high retention rates, and a unique approach to staffing and employee retention.

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