This is part of my operating manual series opening up the playbook of private equity and company-building luminaries. Check out past ones with Mark Leonard, Andrew Wilkinson, Robert F. Smith, Felix Dennis, and Mike Speiser.
If you are interested in buying, growing, and selling small companies, check out my course & community on it at IndiePE.com.
"Boring is beautiful. The sexier the problem space, the more competition."
Who is Brent Beshore? What is Permanent Equity?
Brent is the founder and CEO of Permanent Equity, originally named Adventur.es, a long-term private equity fund.
Permanent Equity invests out of ~30-year funds with no intention of selling and rarely uses debt. He founded the firm in 2007.
“Unless they can buy beer with it, we don’t charge fees on it.”
What is the scale of Permanent Equity today? How many businesses has Permanent Equity bought?
As of 2023, they have 700 full-time employees and just under $350 million of annual revenue.
As of 2023, they have two funds raised. Permanent Equity Fund 1, raised in 2017, is a $50m 30-year fund with a 10-year investment period, and Fund 2, raised in 2019, is a $248m 27-year fund with a 10-year investment period.
Why did Brent Beshore start Permanent Equity? How did he raise the first fund?
Brent’s background was similar to many entrepreneurs. He started a few businesses in marketing and advertising and they started poorly.
The first one was a branding events company. He ended up selling the company to an employee.
Then he started an ad agency, which went better. From there Brent got introduced to someone looking to sell a business and he bought it with an SBA loan.
The first acquisition, combined with the other ventures, allowed for the early repayment of the SBA and then the growing cash flow and the ability to do more investments.
Five years later they had a portfolio of five businesses and a small but growing organization to find, negotiate, diligence, document, and operate smaller companies.
Up until this point, Brent had self-funded everything. Brent would call it “the world’s smallest family office”.
Then he met Patrick O’Shaughnessy on Twitter. Patrick flew out to Colombia and they spend 14 hours talking. At the end of it, Patrick wanted his family to invest.
Patrick asked “What would it take for you all to accept outside capital? You design the structure and terms, and then we’ll let you know if we can invest.”
That’s how they ended up on the unique long-term fund structure described below.
Brent and Patrick structured the partnership to align everyone’s long-term incentives and interests and “encourage a thoughtful long-term approach towards people, organizations, and opportunities.”
The two anchor investors for the first fund were the O’Shaughnessy family and the Vlasic family. Patrick created the first deck for them and sent it to rich family friends.
The rest of the investors were almost all current or former owners of what started as small businesses. They understood the risk, volatility, and potential of these types of businesses.
Most of the investors came from “flyover country” including many from Minnesota, Michigan, Texas, North Carolina, and Missouri.
How are Permanent Equity funds structured?
A conventional structure in private equity has these basic terms:
- 3 to 5 years to invest the capital
- 10 years before you return the capital
- 2% management fee on committed capital
- 20% of gains above a hurdle rate are paid to the fund managers
This incentivizes traditional PE funds to raise larger-and-larger funds to buy bigger companies, pay higher prices, make short-term decisions, and bill the investors and portfolio companies fees for everything they do.
Permanent Equity’s rough terms:
- Practically indefinite time horizon
- Zero fees outside of carry
- Minimum 15% co-investment
- Complete control
Permanent Equity doesn’t take a management fee. They take zero fees outside of carry. No deal fees. No financing fees. No portfolio company fees.
So how do they pay the bills and their team? How is their carry when there isn’t an anticipated exit?
Permanent Equity takes a percentage of cash flow.
They look at the cash available for distribution and measure it against the equity invested. Generally, this is done twice a year. If they don’t have the cash to pay out, they take no fees.
The more cash they have to distribute, the higher the Permanent Equity split.
They have to distribute at least a 15% gross return (an above-average cash-on-cash return). Anything less and Permanent Equity loses money when you factor in the cost structure required to fund firm operations.
The whole idea here is that Permanent Equity only makes money when investors make more money.
The typical GP commit is about 1% spread across the partners.
Permanent Equity settled on a structure that requires a minimum co-investment of 15%. Brent is personally in for at least 15% of the equity invested.
The only control investors have is to remove Brent, which requires a supermajority and he is the second-largest LP.
Permanent Equity requires complete control of all investment decisions. What they buy, what price they pay, when they do deals, how they’re structured, how the companies are staffed and operated, and when and if they are ever sold.
Permanently Equity views this as a competitive advantage. They can move quickly and creatively when appropriate. This is only possible when decision-making is streamlined.
Sellers need to know that a “real” decision-maker isn’t lurking in the shadows. We also didn’t want the threat of paralysis that accompanies decision-by-committee.
Permanent equity has ~30-year funds with 10 years to invest. Since they don’t take the usual 2% of the committed capital management fee, they don’t have a short window of time to invest. There is no urgency to “deploy” the capital lest we run out of time or our investors get frustrated by paying good money for us to seemingly do nothing.
Instead, they can wait for the right deals. There’s no incentive to do bad deals on the front end.
Why the 30-year term? Most other private equity funds regularly acknowledge that the biggest drag on returns is not from making bad investments, but from selling good companies prematurely. Permanent Equity wants to hold for the long term and give their companies a chance to reach their full potential.
Brent initially asked for 50 years, but one family office advisor said they couldn't let their family do that. The longest he had seen was 27 years plus extensions which Brent agreed to.
With 30 years to optimize their companies, they can pursue long-term advancements that add real, sustainable value to the business.
At the end of the 30 years, they are expected to return the capital, but there is an option to continue to renew.
How does Permanent Equity structure deals?
Deal structures have ranged from 100% of the purchase price funded at closing to as little as 25% with each deal customized to the seller's preference.
Brent says they rarely use external debt because small businesses are too volatile. It is safer on the way down without debt payments and better on the way up because they have more cash flow to invest as needed. Their businesses are more durable long-term without debt.
They also say debt increases risk and alters decision-making. A good deal shouldn’t require leverage to juice the returns.
Debt would limit their ability to reinvest in growth initiatives, and can also make them more vulnerable to unexpected events like Covid.
Their fees are also based on cash flow and debt would alter that.
What does Permanent Equity do after a sale? How do they operate?
Brent likes to say that they work on the “Everything taste like chicken layer of the business.” or the “business of business”. The partners are talented in running the actual businesses.
“Small businesses, don’t generally stay small on purpose. There is often some lids on the business that they try to remove over time.“
Permanent Equity spends a lot of time on marketing and sales post-acquisition.
One example: Presidential Pools had a great brand when they bought it and they had experimented with a lot of mass media marketing.
Permanent Equity came in and really focused on their digital presence and put in digital marketing best practices. This made it easier for customers to interact with the company in whatever way was easiest for them.
How does Permanent Equity source and find businesses to buy?
Unlike just about all other private equity firms, Permanent Equity doesn’t do any outbound. They rarely attend conferences or participate in auctions and never cold-call sellers anymore.
All their deals come inbound and they have more deal flow than they can handle.
Brent and PE have invested heavily in content to scale conversations. This attracts the right people and repels the wrong ones.
"Useful content attracts the right people, repels the wrong people, and saves everyone tons of time."
To get to this point they have been educating the market for years with their book, The Messy Marketplace, annual letters, blog posts, and podcasts.
In 2019, they also started Capital Camp which is a conference bringing together hundreds of GPs and LPs from many different asset classes in Columbia, MO.
They also have a scout program to incentivize and reward people in their network for sending over deals.
When a deal closes the scout gets a big check ($100,000+) and $25,000 for the “vacation of a lifetime”.
The Scouts are mostly the usual suspects — lawyers, accountants, wealth advisors, bankers, non-competitive private equity investors, business owners, MBA students, and company leaders.
They also make a point of trying to meet all the business brokers and investment banks they can that may have deals that are a fit.
What does Permanent Equity look for in businesses to buy?
Brent says they invest in adolescent businesses. Too big to be small. Too small to be big.
They are typically investing between $5 million and $75 million in companies in the U.S. lower middle market, which they define as being businesses that are generating between $2m and $25m of cash flow. Generally, it is $3m plus in cash flow.
Permanent Equity only takes majority positions (51-100%) so they have control of the approach the business takes.
They invest in North American-headquartered operations because that’s what we know best culturally and operationally.
Industry - They prefer boring businesses. They look for stable industries that will be fairly unchanged over the next 10-20 years.
They avoid sexy businesses — technology, film, food, and drink. These industries have low margins, and high competition, are subject to changing consumer tastes, and are more easily disrupted.
Culture - Culture is probably the biggest non-financial indicator they look for. As Peter Drucker once wrote, “Culture eats strategy for breakfast.”
Permanent Equity likes to say culture is nothing more than what you reward and punish.
They are looking for cultures that respect employees as valuable partners, and not merely as faceless cogs in a system.
They love to see how conflict is handled, how decisions are made, and how new ideas get treated. They spend considerable time trying to understand company leadership.
Businesses they avoid:
- Consumes more cash than it generates
- Has managers who boast of certainties and invincibility
- Earns a poor return on capital
- Operates in an industry where it's easy for new companies to enter and succeed
- Operates in an unstable industry (maybe due to technological changes, or government regulations)
- Requires consistent infusion of new investment to grow
- Doesn't have the ability to increase prices
- Isn't able to accommodate large volume increases in business with only minor additional investment of capital
How does Permanent Equity value a business and what multiples are they paying?
“Expectations are lower when you pay less. Pay a lot then need to do a lot.”
All companies are valued on the present value of future cash flows. Some are just delayed a very long time.
No price - Many businesses they look at just aren’t transferable. They are wrapped up in an “owner moat”. all of the value of the business is tied up in the goodwill of the owner. So when the owner leaves, all the relationships, all the skills, everything kind of falls apart. When the owner is the linchpin, the business is unsellable.
For businesses that they do buy, they typically value companies based on a multi-year blend of pre-tax net earnings.
Companies on the higher end of the valuation spectrum have a stable and diversified client base, non-owner management in place, low employee turnover, and a below-average risk profile.
Multiple of what is the big question. It is a multiple of true earnings, not EBITDA. Discretionary cash flow. Permanent Equity wants to understand what they think they will be making once they are in the owner’s seat.
Owners often say they want 7x, but 7x what is the question? You can always massage the numbers to get them to 7x in some sense.
is it seven times the previous year's earnings? Projected future year earnings? A blend of the last three years? EBIT? Cashflow? Pre or post-tax earnings?
Discretionary cash flow is sort of normalizing for capital expenditures and for reinvestment sort of necessary reinvestment back into the business.
3-3.5x true earnings is the low bound. This is for distressed companies. Maybe it’s the owner’s age, divorce, illness, or midlife crisis.
It is a situation where the owner says “Even though I could probably get a higher price elsewhere, I just don't want to go through the hassle. And I want to find the right place for that, for that asset.”
4 / 5 / 6x is what they think they will make next year is normal for them.
10x earnings is the upper bound they’ve paid in the past. It was for a fast-growing company and they got a preferential share class.
What does the selling process look like?
Permanent Equity does all its own due diligence. They don’t use outside firms.
From the time a letter of intent is signed, closing and funding typically occur within 60 to 120 days.
They now have specialists for each stage of an acquisition in-house. One partner coursed on intake. Post LOI the deal goes to next person. The lead person changes based on the deal stage. This is different than the usual PE playbook of one partner owning a deal all the way through.
Why do owners sell to Permanent Equity?
Good reasons for selling:
Good deals are win-win for the buyer and the seller. If you can't look somebody in the eye and tell them that you think it's a win-win for both sides then you shouldn’t do the deal.
Retirement - The most common. People are ready for something else and their kids either don’t want to or aren’t able to take over the business.
Personal reasons - This can be a change in lifestyle or something that reorganizes someone's life and priorities. Often it is something like a divorce, death, or sickness. Sometimes it can be something like people deciding that their true calling is to be a painter. They want to spend time in the art studio and sell of their business
“If you haven’t gotten rich doing it then we probably aren’t going to.”
Bad reasons for selling:
Ego - They heard a friend sold their business for a big number and they want to do the same now.
Time the market - They know their business just hit a peak of sorts and they want to sell on their high last year numbers. They see something coming in the next five years or so and are going to try to offload the problem onto the next owner.
How does Brent recommend others get up to speed on investing?
Brent did his first deal by Googling terms he didn’t know. On Brent’s first deal, he searched how to “do diligence”.
Brent’s advice to get up to speed:
Read classic investment books and annual letters like the Berkshire letters from Warren Buffett and Howard Marks' letters, the chairman of Oaktree Capital, a famous debt investor. Print out the letters, put them in a binder, and mark them up.
Poor Charlie’s Almanack with everything by Charlie Munger is also great.
When you come across concepts you don’t understand, spend time researching them. Try to make the connections between that concept and maybe your own life or your own investing. It's a slow process. You want it to seep into your logic and process systems.
From there, identify what you want to replicate in your own investing. What do you want to take and what do you want to leave behind?
"Picking your field is arguably more important to your success than your current skill and future capacity. It’s a base rate analysis. Assume you’re only going to be mediocre, then explore what business and life look like if that’s true."
How connected are businesses in Permanent Equity?
The portfolio companies themselves are independent and not directly connected, but Permanent Equity does encourage collaboration and knowledge sharing among them.
They facilitate partnerships when it makes sense and set up meetings and conferences to exchange ideas.
Permanent Equity has offered some shared services around executive recruiting, financial planning, operations, and digital marketing in the past.
It is easy for shared services to become an excuse for everything. If something doesn't work out, "it's not our fault, it was their fault."
Now the head office only gets involved in high value, low frequency activities. This avoids the high value, high frequency activities which should be a core competency at the portco level. Low value, high frequency activities are easily hired for. Low value, low frequency activities are a commodity and can be outsourced.
High value, low frequency projects include hiring executives, implementing a new ERP system, building a one-off piece of software, rebranding, or rebuilding accounting systems.These are highly skilled, highly impactful, and rarely needed in any one company, but often useful across a portfolio.
They also charge for these activities. Everyone loves free stuff, but they don't value it. Free services get used and abused.
Example businesses Permanent Equity has purchased?
Permanent Equity owns 13 companies as of 2023:
Presidential Pools - This is the nation’s largest swimming pool builder, but currently, only builds pools in Phoenix and Tucson. They have a strong regional brand, deep expertise in their craft, and a leadership team that is constantly thinking about how to build pools better.
Pacific Air Industries - California-based aerospace parts distributor serving commercial and defense markets for more than 60 years.
Blue Square Manufacturing - manufacturer and distributor of swimming pool hardware, including in-floor cleaning systems, drains, and colorful pool surfaces.
Mediacross - Marketing, recruitment, and processing for branches of the U.S. military, national agencies, and institutions of higher education.
Air-Cert - Los Angeles-based FAA-certified repair and inspection station.
Selective Search - luxury personal matchmaking firm, applying the executive search model to helping people find long-term relationships.
G.A.M.E. Group - Consumer products manufacturer of pool-related equipment and toys.
TEPCO - Dallas-based manufacturer, designer, and installer of architectural glass for windows and buildings
For more, check out our podcast on Mark Leonard (Constellation Software) and Robert F. Smith (Vista Equity).
If you are interested in buying, growing, and selling small companies, check out my course & community on it at IndiePE.com.
If you know of anything I should add to this please reach out @ColinKeeley or Colin@ColinKeeley.com. I’ll continue updating as I learn more.