Building a Berkshire for the Middle Market – Tracy Britt Cool

JM Test

• Tracy Britt Cool · KanbrickBullish

  JM Test has returned Kanbrick's initial capital in three years while Kanbrick keeps over 70% ownership.

  Cool uses JM Test as proof that Kanbrick's model works. Because the businesses carry little leverage, they generate a lot of cash. Kanbrick has owned JM Test for three years, has been paid out from the earnings over that period, and has returned its initial capital to investors while still owning more than 70% of the business. She presents this as a model where liquidity comes without an exit, which Kanbrick prefers.

  “A lot of our businesses will generate a fair amount of cash because they don't have a lot of leverage. We can return capital. We have a business JM Test. We've owned it three years... returned our initial capital to investors. We still own our 70% plus of the business.”at 21:20

• Tracy Britt Cool · KanbrickBullish

  JM Test is a sticky, high-quality calibration business with room to keep growing via regional acquisitions.

  JM Test calibrates industrial equipment that measures flow, pressure, temperature and electricity. She calls it a great business because customers are sticky and rarely switch. The purchase price is small compared with the cost of a product failure, which supports the moat. She says the business has grown since Kanbrick partnered with it three-plus years ago. She sees further opportunity to keep growing and to partner with other regional players.

  “great business, sticky customers don't change. It's a small purchase price relative to the cost of failure of the products.”at 51:29

Berkshire Hathaway

Across the shows: 3 speakers in other episodes, 2 bullish and 1 bearish calls, past 30 days

• Tracy Britt Cool · KanbrickNeutral

  Berkshire's cash pile is now too large to deploy meaningfully in mid-sized private company deals.

  Cool explains why she left Berkshire: it was getting big in terms of capital. Its cash had grown from about $150 billion to over $300 billion, which makes it hard to move the needle with mid-sized deals. She says Berkshire's approach of thirty or forty years ago, partnering with and accelerating businesses like Benjamin Moore, was more interesting to her. The point concerns the scale of capital, not the stock's outlook.

  “It was getting big in terms of capital. It had a 150,000,000,000 in cash at the time. Now it's 300,000,000,000 plus. Hard to move the needle with that size of check.”at 18:40

Marine Concepts

• Tracy Britt Cool · KanbrickBullish

  Marine Concepts is a high-quality boat-cover business with a moat that has recovered after a rough start.

  Marine Concepts sells high-end aftermarket boat covers built on a patented track system that cuts covering time from about 30 minutes to two. She admits the first deal was a mistake: the company was smaller than Kanbrick usually buys, and the first leader hired was a poor culture fit. The new leader, Steve Handel, has course-corrected the dealer network build-out. She says the business has doubled in size since. She still calls it a high-quality business with a strong moat and continued opportunity.

  “High quality business, still has the strength and the moat, still has the opportunity. ... We've doubled the size of it.”at 50:39

Private equity

• Tracy Britt Cool · Kanbrick

  Buyout returns from buying cheap and selling dear have faded; PE now needs operational value creation.

  Cool argues that in the buyout world, the days of buying businesses at about seven times earnings and selling them a few years later at about twelve times are probably gone. Buyers now have to add more value operationally. She draws on her Berkshire chair roles, where she saw that operating improvement was where value would come from, and concluded that operating experience would make her a better investor.

  “In the buyout world, days of buying businesses for seven times and selling them for 12 a few years later was probably gone and you needed to add more value.”at 10:50

• Tracy Britt Cool · Kanbrick

  Traditional PE's three-to-four-year hold-and-flip model is a poor fit for owners who want long-term stewardship.

  Cool says many owners are concerned about the three-to-four-year treadmill of private equity, in which a business is bought and sold repeatedly. Kanbrick's fifteen-plus-year structure reassures these owners that their company won't be flipped. It also lets management teams build the business for decades rather than for a quick sale, which is how she differentiates Kanbrick from PE.

  “Owners who say, look, I'm concerned with the three to four year treadmill of private equity. It gives them comfort that their business isn't gonna be bought and sold and bought and sold.”at 20:45

• Tracy Britt Cool · Kanbrick

  Traditional fund structures push owners to sell good businesses too early; long holds compound better.

  She argues that many firms exit businesses too soon. When a business is compounding at 20%-plus a year, she would rather keep holding and compounding it than buy a business the firm knows less well that carries more risk. In her view the traditional fund structure forces premature exits. Her firm instead aims to keep owning good businesses and still returns capital through recaps and similar mechanisms. She adds that the usual risk is exiting too soon rather than too late, and she lists the triggers for a sale: a silly price from the market, a riskier outlook such as AI disruption, or a better partner home.

  “Too many firms exit businesses too soon. When you have a great business that's compounding at 20% plus a year, you'd rather continue to hold that and compound it than try to go find a business you know less well that has more risk”at 44:59

IPOs, M&A & deal activity

• Tracy Britt Cool · Kanbrick

  Auctions are giving way to relationship-based deals, as founders reject sales to traditional PE.

  Cool argues that founders and family owners who built their companies over decades often find a traditional auction distasteful, because they care about employees, legacy and the future of the business, not just price. She says a growing group of families and founders wants something different from traditional PE. Over time she expects more businesses to change hands through relationships built in the Kanbrick community rather than through auctions.

  “If you've built your business over decades or it's a family business or your founder, the idea of selling it through an auction doesn't resonate with a lot of people... over time, how more businesses will be transacted will be through those relationships versus a traditional auction process.”at 29:15

AI & jobs

• Tracy Britt Cool · Kanbrick

  AI will disrupt white-collar work, but people, culture and relationships will matter more than before.

  She says her view has shifted. Earlier she worried about what intelligence working at scale would do to white-collar jobs. She now believes AI will still be disruptive, but that people, culture and relationships will become even more important. She says that is more true now than ever before. She argues that society is underinvested in these areas, which she sees as an opportunity to invest more.

  “It'll still be disruptive, but I believe now that the people, the culture, the relationships will be even more important. ... We're underinvested in that as a society”at 53:47