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In his 2017 Presidential Letter, Mark Leonard Emfasis discussed maintaining investment discipline and making sound decisions through a data-driven approach. Maintaining discipline when evaluating trades using historical data helps investors avoid emotional decisions and keep assumptions grounded in reality. Below is an excerpt from the letter.
I recently worked on a large transaction. As the days went by, I felt my commitment to the process increase…not because the news got better, but simply because I spent more time in perspective. This investment did not fully meet the hurdle rate.
We weren’t able to negotiate a structure that would give us a couple more points of IRR, and the big one got away with it. The difference between investing or not was small.
We currently have 26 operating group and portfolio managers who spend over 50% of their time on M&A.
An additional 60 full-time M&A professionals are spread across CSI. We will strengthen M&A
We have expanded our production capacity from 40 companies acquired last year to 100 companies per year.It was useful once I used it
Relive the temptations these people face every day.
And when we move forward with very large acquisitions, the hard work, structuring, negotiation and integration is led by one person who is one of our experienced acquirers and has process and operational responsibility. I also reaffirmed the necessity. result.
Bernie strives to be our last line of defense when our business groups or BUs propose last-minute investments. Although some of our business groups have developed or are developing senior M&A personnel to help Barney weed out overly optimistic acquisition proposals, Barney remains a key part of this acquisition management function for some business groups. This is a provider.
If a small investment is proposed that is just below the hurdle rate, we may allow it to proceed. Our rationale is that if an investment does not go as planned, it will be a “lesson” for the business group or her BU representative who proposed it.
If the investment goes well, it’s a “lesson” for Bernie and me. Investments are instructive only if you diligently track post-acquisition performance and analyze the results over time while the investment is still fresh in everyone’s minds.
We have a process for this called Post-Acquisition Review (“PAR”). We strive to schedule his PAR approximately one year after the initial investment. PAR began as a headquarters-driven process about four years ago. Just over a year ago, we started delegating them to a steering group.
One useful thing that headquarters can do is pilot new processes and support new ideas. If the idea brings enough value to his BU or operating group that they choose to keep it, I’ll be very happy. Nevertheless, I believe that all processes should be periodically reviewed for costs and benefits.
Ad-hoc analysis done to understand a problem or opportunity is more likely to be acted upon than a quarterly report produced because “that’s how we’ve always done it.” The former requires curiosity and intelligence, the latter requires bureaucracy and compliance.
If sales groups can learn from acquisitions in a less burdensome way than PAR, I’m all for it. At CSI, we leverage data accumulated from past acquisitions to maintain investment discipline as we teach more people how to allocate capital. We offer base rates based on a variety of key operating metrics.
Whether we’re an advocate for a novice investor who insists a particular acquisition is “special,” or a senior executive seduced by a major acquisition, we help make the discussion rational rather than emotional. We have enough data. We all know whether the key assumptions are being pushed to the 55th percentile or the 95th percentile of the historical distribution.
My only serious concern with investment discipline is the temptation to lower the hurdle rate as your cash balance increases.
Mark Leonard – 2017 Presidential Letter
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