Investment Focus
Industry Characteristics
We assess prospective investments first on the basis of the economic characteristics of the industry in which the business competes. We believe that industry economics generally will be more important to investment returns than most other factors. Accordingly, we spend a significant amount of time analyzing industry economics before we determine which sectors to target for investment. The ultimate decision to get involved in an industry is determined by weighting the various economic characteristics and determining, on balance, whether the industry sector is better than average.
Industry niches in which we invest will score high on a blend of the following characteristics:
| Industry Attribute | Target Characteristics | Comment |
| Profitability | Above average | Greater than 10% EBITDA margins |
| Nature of Demand | Stable, recurring | Recession resistant, necessity and near necessity products/services, recurring demand (e.g. consumables) |
| Low Business Risk | Strong free cash flow with low volatility | Generates sufficient free cash flow to repay debt and fund growth |
| Growth | Reasonable growth prospects | Good annual organic growth (i.e. 5% +) |
| Cost of Growth | Good operating leverage | Reasonable investment in working capital and capital expenditures per dollar of new revenue (and/or available capacity) |
| Industry Size | Reasonable size | > $1 billion in revenues |
| Barriers to Entry | Moderate to strong | Relatively high barriers to entry |
| Customer/Supplier Concentration |
Diversified | Industries with a broad base of customers and alternative sources of supply |
| Industry Capacity Utilization | Moderate to high | Industries with strong capacity utilization |
| Competitive Structure | More fragmented | Reasonable number of competitors and follow-on acquisition targets. Reasonable competitive intensity and rivalry. |
| Industry Business Practices | Professional | Professional, ethical, with low levels of litigation |
| Industry Structure | Mature, regulatory environment | Mature industries where competitor entry is limited and there is an ability to pass along price increases. Stable regulatory environment. |
| Substitutes | Difficult to substitute | Difficult to switch suppliers or substitute products |
| Exit Attractiveness | Multiple options for liquidity events | Liquidity options include: IPO, public company merger, sale to strategic buyer or other private equity firm |
