Brent Beshore Takes a Radical Approach to Private Equity
He doesn’t want to replace the founder. He doesn’t want to run up debt. And he doesn’t have a timeline for when he wants to sell.
Brent Beshore likes to say of the businesses he invests in, “Boring is beautiful.” It’s one of the things that sets him and his firm, Permanent Equity, apart. He runs a private equity fund with more than $300 million in capital, but he’s not really a private equity guy. He’s actually more of a Warren Buffett, buy-and-hold guy. He invests in businesses with no timeline to sell. He doesn’t force those businesses to take on debt. He’s happy to keep the leadership team in place. Would he be interested in buying your business? To find out, watch the entire video, or read the highlights below.
Loren Feldman
Hello, everybody. Welcome to the 21 Hats Conversation. I’m your host, Loren Feldman. My guest today is Brent Beshore, who has a $300 million private equity fund he uses to buy and partner with small businesses. But he says he’s really more of an anti-PE guy. In fact, his firm is called Permanent Equity. Hello, Brent. Thank you for joining us today.
Brent Beshore
Hey, thanks a lot. I’m not anti-PE—just to be clear. I have a lot of good friends in PE. We just do things a little bit differently.
Loren Feldman 8:39
I didn’t mean that to suggest that you are against PE. You sort of do the opposite in some ways.
Brent Beshore 8:45
We do things quite differently, correct.
Loren Feldman 10:14
The traditional PE firm business model has worked very well, at least for PE firms. Why mess with that model? Why did you go in a different direction?
Brent Beshore 10:30
Yeah, I mean, so look, I’ve never taken a finance class in my life. I don’t come from a pedigreed background in a private equity shop. You know, I joke that I’m the Forrest Gump of private equity for a reason. I sort of fell backwards. I drove the clown car into the goldmine, whatever analogy you want to use. It started from risk—first principles thinking, right? And the first principles were, I was an entrepreneur. And so I can relate to what operators feel and day-to-day problems of business. I understood that having a ton of debt put on the business would create stresses on cash flow. It would restrict decision-making, having a short time horizon, in which you had to do something with the business that would necessarily create sort of poor longer term decision making. I mean, there’s just no way to make good long term decisions with a short-term time horizon.
The Opposite of How Traditional Private Equity Works
Loren Feldman 11:23
You’re referring to PE firms generally looking at seven years, something like that.
Brent Beshore 11:30
Yeah. And I mean, if you think about it, so maybe the duration is seven years, maybe up to 10 years. But by that time, you’re not going to catch the first investment, probably. And then, of course, you need at least some leeway on the back end. So this is where a normal operating practice for PE firms is to really understand and look for who’s going to buy the business even before they buy it. And so it really creates a kind of a three-to-five-year time horizon, I mean, potentially even shorter than that. And so anything that you’re going to do to reinvest back in the business that’s not going to be felt and felt pretty strongly within that short time period is probably not going to fly.
And there’s a lot of decisions that we ask our operators all the time: What are the things we can invest in today that would set us up for the future, right? And the future is gonna be longer than five years. Gosh, we hope so. And so, Yeah, I mean, there’s a lot of things that I think was just first principles thinking that led us down this path of, Okay, what do we need? We need long-term capital. We don’t want to be using a lot of debt. We have a humility about it. So everyone on our team has come from an operating background. And so we all understand how difficult it is to run these businesses. And so we don’t come in and think that we know how to operate these businesses. I mean, this is somebody’s life work, they are artisans, this is what they do for a living. We must know some things about the everything-tastes-like chicken-layer of business, right? The business of business. But I would say we try to have extreme humility and come in and partner with teams that are already in place and not come in, inject our own people to change everything. We try for progress to be slow over time.
And so, a lot of those things is just the opposite of how traditional private equity works, right? And not all private equity is this way, and I don’t want to sort of paint it with a very broad brush, but the sort of barbarians at the gate style of private equity is, I joke, it’s the buy-leverage-strip-and-flip model, right? And it’s just the opposite of how we like to do business. And we just think life is going to go a lot better for everyone personally and professionally if you don’t have those types of pressures.
Loren Feldman 13:30
Of course, things like those time horizons exist for a reason. Private equity firms take investment money, and they’ve got to return that money. And people want it in a certain amount of time. Does that mean you’re going after a different type of investor? How do you manage to work to raise the money you raise without promising that?
Brent Beshore 13:54
Yeah. So we’ve had a lot of conversations, got left out of a lot of rooms, I would say. I think that what you put out there you attract. And so we repel a lot of people through our writings and through doing things like this, that just wouldn’t be a good fit for us. And you know, there’s a lot of people who— one very specifically sticks out my head — who said, 27 years, 27 years, that’s crazy, I’ll be dead, you’ll be on your third wife, you’ll have vacation homes you travel back and forth to, your kids will hate you, and who knows if you’ll even still be there. And I was like, that seems like an oddly specific example to us. But thanks. And so he’s like, No, I’m not going to invest. Heck no. Right?
And so we don’t look we found a group of families and some institutions that believe deeply in the first principles that we espouse. We believe deeply that you need to be able to have long-term capital to make good long-term decisions—that in the end, being able to let things compound is an incredible source of returns, and that they want to see a better model in the marketplace. And so, you know, for us, I just think it’s about keeping things simple. You know, life is complicated. People are messy. I’m messy, you’re messy. When you get messy people together mess has happened, right? It’s a heck of a lot harder when that messiness interacts with high-leverage situations or short-termism.
And so what we try to do is just just be thoughtful around, how do we set the table the best? So that we can create positive outcomes for not just us: our investors, the executive leadership teams of these companies, but also the employees, the communities that we’re in, the vendors, and of course, our customers. If you look at most private equity firms, you talk to somebody and say, What’s the best investment you’ve ever made? It’s one of my favorite things to ask. And they’ll tell you a story about this incredible return. You say, Okay, how long did you hold that investment? They’ll say, Oh, you know, three years, four years. We had to sell it, because we had to raise the next fund. And you say, Gosh, did the next guy make a lot of money off that investment? “Oh, my goodness! I’ll tell you what, we knew when we were selling that thing that whoever bought it was going to make a ton of money, but we had to sell it because we had to put up our returns and raise the next fund.” I mean, for us, we want to be the exact opposite of that. With things that we know are compounding and have a huge runway, just let them do their thing.
We Don’t Do Turnarounds
Loren Feldman 16:28
Let’s talk about the types of businesses that you look to invest in. I know you like to say, boring is beautiful. What do you mean by that?
Brent Beshore 17:00
Look, a business is never boring, especially to the people working in it, who rely upon it—to the owners, to any of the stakeholders, right? So when we say “boring business,” the joke is, the next line is, it’s boring because typically all they do is make money. We’re not in businesses that are sort of fly-by-night, huge run-ups, likely leading to huge crashes, or sort of the latest fad. We want to invest in things that are going to be durable and around for a really long time and solve an enduring need out there in the marketplace. So you know, we’re invested in glass and the glazing industry. We think that glass has been used for a while and probably will be used for a while into the future in building things. We invested in a swimming pool business. We think people have been dipping their bodies in water for pleasure for a while and will probably continue to do so in the future.
Loren Feldman 18:29
Give me a little bit more description of the type of business you’re looking for. Do you care what industry it is? What size are you looking for?
Brent Beshore 18:54
Yeah, so right now we don’t do turn-around. So all the businesses that we get involved with are successful. What I would say is that the type of business that we really like are businesses that are either right on the edge of or have recently gone through professionalization. So when I say professionalization, there’s no business that’s smaller that’s going to sort of check every box of professionalization—right across marketing and sales and technology and accounting and governance and finance and all those different aspects, right? What we mean is that there are steps to diversify relationships, diversify skill set, to create redundancies, and to create an operating system in the company that moves beyond a small group of people or potentially even one person. So it’s kind of the difference between a hustle and a business.
We typically like to catch them around $2.5 to $3 million, kind of on the low end, and we’ll go as high as $12, $15 million in earnings. These are hefty organizations, but they’re not so big that they are becoming bureaucratic. In terms of industries, we’re really agnostic. I mean, our philosophy around industries is that there are little niches everywhere that you can get into that are protected for one reason or another. Every business, even the most sexy businesses typically have the nuts and bolts organizations that help support them. And so, the example I’m using is you don’t want to own, necessarily, a winery. You want to own the people who make the bottles and the caps and the corks and maybe the distributor—whatever it is that has some sort of moat in that space.
Loren Feldman 21:26
Are there characteristics you look at in a business owner you want to invest in?
Brent Beshore 21:43
That’s a great question. I would say, the level of care that they have towards their employees and towards the customers and vendors is something that we take very seriously. So if somebody really just is trying to wring as much money out of the company, kind of treats people as disposable, it’s going to create just a rot in the middle of the organization that we don’t want to deal with. So I’d say, you know, we really just try to get to know the motivations of the owners. We’re all conflicted. We’re not looking for Mother Teresa to run the company at all. What we’re trying to do is understand the motivation of why the person built the company or owns the company, and sort of how does that manifest in day-to-day decision making.
This may seem like a like an obvious thing, but when we looked at a business recently that was doing close to $15 million in earnings—and really, it was two brothers. I mean, there’s just two of them. And they did everything and sort of everyone else was at their beck and call. And I mean, these guys were amazing. They were incredibly hardworking, actually kind of incredibly intelligent. But that’s just a big hustle, right? These guys are making a ton of money, but they’re really doing it. If either of them gets hit by a bus—and certainly, God forbid, both of them—that business would go to zero within six months. So I would say, again, we desire to build a stable, enduring organization.
This may sound like an obvious one, but somebody who’s enthusiastic about doing a deal. We oftentimes will have conversations with people who seem to be, quote-unquote, testing the waters. And really, they’re not serious about getting a deal done. Deals are really hard. Any transaction is going to be, it’s gonna be brutal. I mean, there are roughly 400 decisions that you have to agree on, come to terms on. Of course, some are more important than others. Most people just think it’s price and maybe the very high level terms. It’s not. There’s a lot of moving parts and pieces to it. And so if you’re not enthusiastic about moving forward with an opportunity on both sides, there’s just no way you’re going to have the energy to cross the finish line.
Loren Feldman 26:17
Do you prefer to buy the whole business? Will you take a minority position?
Brent Beshore 26:24
Yeah, so we have not in the past taken minorities. They’re all majority positions, but we prefer not to buy 100 percent. We’re not trying to get rich fast. We’re not trying to squeeze every dollar out of every opportunity we get involved in. And we’d rather partner with people. We’d rather win together. And so our ideal acquisition ranges kind of 60 percent to 85 percent, depending on the situation. We have bought 100 percent, but it was in very specific situations where the seller—it didn’t make sense for us not to buy 100 percent. But I would say that we default to partnership over time.
I Have a Thing for Home Services
Loren Feldman 32:55
How do you think about the multiples that you pay?
Brent Beshore 32:58
Yeah, look, price is such an interesting thing. Because you know, the old phrase, “You set the price, I’ll set the terms.” So when we talk about price, we got to talk about sort of in relationship to terms. What you’re typically seeing in our segment, the market right now is multiples sort of between three and a half, maybe four-ish on the low end up to six or seven on the high end. I mean, that’s kind of the range now.
The thesis in our segment of the market is that most companies shouldn’t be bought. Most companies shouldn’t be sold. They’re really not a saleable asset. And so really, you have to be dragged into doing a deal. And most companies are just not set up for the sale. And so that’s where we need to get into these sort of the prices that you pay. It really does reflect the risk that you’re taking and the amount of effort post-close. The idea that—in our sector of the market, especially—that you’re going to sit back and allocate capital and just sort of place bets, and those bets will hopefully pay off. That’s a fantasy.
Loren Feldman 36:33
Well, tell us about your portfolio. First of all, I think you have nine companies in it. I think you went all of last year, 2020, without buying a business. It seems kind of counterintuitive. You’d think there’d be some low-hanging fruit in a year like that? Why did you not buy any businesses in 2020?
Brent Beshore 36:52
This is maybe a common misconception. Let’s go back to the previous cycle. So 2008 to 2011 was basically dead in our market. So if you’ve got a great business, going into a year like 2020 or 2008, you’re gonna wait it out. You’re going to wait it out unless there’s some really compelling health issue, some family situation. You’re typically going to wait it out, and you’re going to focus on how do you maximize the opportunity for your business in a period of rapid change. So the last thing an owner thinks about is, Gosh, I got my hands full of all kinds of issues. I’m worried about my family safety. What I’d like to do is, I’d like to start a very laborious and time-intensive and stressful sale process, because I think that would be the thing that’s missing from my life right now.
The types of companies that we saw, frankly, in the depths of things, it was all rescues. I saw some stuff. It’s just heartbreaking. There’s a period of about six weeks there where every day, having conversations with owners that were just distraught. Their business had gone from being prosperous to being damn near zero. And they were sort of reaching out to any lifeline that was out there.
Loren Feldman 39:30
What industries are you most interested in that are not in your portfolio right now.
Brent Beshore 39:42
I always start with the same industries. I just have a thing for home services and office services. I think it’s the hardest problem to solve. It’s probably the most rewarding. It’s incredibly sticky if you can do it right. I’ve very rarely seen it done correctly, and we’ve been searching for investments in the home services space for a long time. We just haven’t been able to get there. We would love to find a team that we could back that could create kind of what we call a total solution for the home and the office. I fantasize about this for me personally. I just want to call one number, whatever happens to my house. I want it to be fixed. I want to be treated fairly. I want it to be done on time.
Anybody who’s ever tried to have anything worked on in their home knows that you call 10 people, you maybe get three callbacks. Of the three callbacks, you get one or two guys show up. And maybe one of them even bids. It’s brutal. It’s absolutely brutal. And so I think there’s a lot of professionalization that can be done. I think there’s a lot of software integration and technology that can be integrated into these businesses. And so I would say that’s an area that we’re really excited about. It’s also just a really hard problem to solve, and finding a team that has both the what I call blue collar chops as well as the understanding of business and finance to be able to create a scalable organization is just so rare. It is unbelievably rare.
Oftentimes, we’ve run across a lot of search funders that have bought one or two locations, called HBC service companies or fireproofing or whatever the thing is, and they just don’t understand the actual thing itself. And they’re trying to run this business without providing good service.
Loren Feldman 41:28
What do you mean they don’t understand the actual thing itself?
Brent Beshore 41:31
I mean if I tried to go in and run a home services company, and I don’t know crap about plumbing. And I’m not going to be able to spend 10 years in actual plumbing, to understand with deep fluency what’s going on. And so I’m going to make decisions that are going to be poor, as the CEO of that business. And there’s really no way around it. So what we fantasize about is somebody with a deep fluency in the actual thing itself. They’re excellent at plumbing, HVAC, whatever the service, whatever it is—lawn care—but also have the business chops to understand why you would maybe want to scale the business or integrate software, because oftentimes, we’ve had conversations with people who have a deep fluency in the thing itself but aren’t really knowledgeable. They don’t really want to grow. They don’t really want to expand. They don’t really want to have anything to do with integrating new core technology. And so we’ve never found a team that we felt comfortable with, that we could really go deep in the industry with. But that would certainly be an area that we like a lot.
Loren Feldman 48:41
Have you had any deals that have really gone bad?
Brent Beshore 48:45
Every deal’s gone bad. For sure. I mean, literally. That’s the interesting part about the segment of the market. There’s no way that you can know everything that you should know prior to closing. Hence, you got to have some margin of safety in the price. Every single deal we’ve ever done, I’ve had an “Oh, crap” moment, post-close, in which case we said, Okay, I didn’t realize that. Didn’t know that. Now, some of it is just ignorance and me being an idiot and trying to learn over time.
So yeah, I would say every deal we plan on things going south. Now when I say going south, like we had a seller and CEO unfortunately passed away very tragically on us. That’s not anybody’s fault. Cancer’s a bitch, right? It’s awful. And, you know, it was a huge blow to the organization. It was a huge blow to our plans. And we had to accelerate plans that we had in place. We’ve always got a backup plan for the backup plan, and unfortunately, sometimes you have to use them.
Loren Feldman 54:04
Brent Beshore, thank you so much for taking the time today. This was great. I do recommend your annual letter if anybody’s interested. Can they get that at permanentequity.com?
Brent Beshore 54:18
Yeah, yeah, we’ve got all our annual letters and a bunch of stuff on there. Lots of me talking, unfortunately, my condolences. Yeah, so if anybody wants to know more, that’s the place to go. Or DM me on Twitter, or find me on LinkedIn or whatever. We’re accessible. And if I can be helpful to anybody, let me know.
