RDCP’s 2020 Annual Letter

The following are my key learnings from RDCP’s 2020 Annual Letter.

• Hit £110m EV in 2020, 175% YoY growth from 2020
• 5 different businesses, in 2 distinct sectors
• Pointing fingers, blaming the gov, blaming others has never been a successful way of doing business
• ‘We invested early and maintained consistently’
• Opportunity pool got dramatically more limited in just healthcare, “you guys just do healthcare right?”... the need to make that go away
• Rising valuations in UK healthcare as an owner is great, but as a net buyer in the sector it’s a pain
• Tried and failed to negotiate reasonable prices
• Acquired 4 firms in Infra in 2020, diversified across products and services (Killingley, Macair, Su-Fix Precast, Buston Water)
• Resulting EV of £40m
• In construction, chasing turnover instead of profits can be completely disastrous
• Businesses in hospitality have been historically overpriced, thus never had any entry opportunities
• Passed up on a low valuation opportunity (a competitor of Paul and GAIL’s Bakery), as the chain had been struggling
• 10 bids for Chilango, but RDCP negotiated a good deal with secured creditors
• One of the highest EBITDA margins in industry
• Mexican food delivers well
• Previous founder focused on growth (but not profitable growth), site selection and lease negotiation issues, head office bloated
• Goal for Chilango to surpass Tortilla in # of sites
• Real estate in UK quite overpriced, rental yields 3-4%
• Construction and engineering, unlike healthcare, are relatively low-margin businesses
• Hence 2019-2020; the 6.11x run-rate revenue increase only translates to 2.75x group valuation uplift
• Each sector has a very clear buy-and-build strategy

Reasons Behind RDCP’s Success

1. Nimble in investment decision-making
1. Less than a day
2. “Don’t feel the need to know and consider every data point: just the ones that matter. We have a great sense for what these are.”
2. Stay within circle of competence
1. We know what we don’t know
3. Flexible
1. “An investment philosophy should only supply guidance, not rigidity”
2. Willing to change opinions on receipt of new info
4. Fearful when others are greedy, greedy when others are fearful
1. Saw healthcare getting overpriced, hospitality was the least loved sector of 2020, valuations at ~1x pre-pandemic EBITDA
2. Hence entered with acquisition of Chilango
5. Willing to buy companies on operating table
1. It’s emotionally easy to invest when economy booming an risk-taking is rewarded
2. Key to superior returns is not to buy already appreciated assets, hoping to sell them for even higher
3. Greatest bargains are accessed by buying when the economy and companies are suffering
6. We have a completely long-term focus, holding period is forever
7. We never overpay for a business
1. Within minutes of evaluating an investment, RDCP knows the max price willing to pay for it
2. If expectations are higher and negotiation does not bring it to within range, then RDCP walks away. Every single time.
3. Don’t have need ‘to deploy dry powder’, unconstrained decisions

• RDCP tripling down on UK
• UK GDP hit by covid, GBP falling
• Investors view UK negatively, reallocate capital to other European countries
• Baby boomers retiring, children less interested in taking over family businesses
• RDCP offers a much-needed liquidity event to these entrepreneurs
• RDCP’s businesses are all ring-fenced from each other
• Focusing on both organic growth via increased sales and improved margins, and inorganic growth via acquisitions