Last week, Family Capital highlighted a talk given by Byron Trott, one of America’s most prominent investors and a big advocate of the family business model, at the Olin Business School at Washington University in St Louis. Here are five insights from his talk:
Do not underestimate the difficulty of deploying capital outside of your business
Trott told a story linked to this, which is what S. Robson Walton said about the dividend policy at Walmart, the huge retail business owned by the Walton family. Rob Walton wanted to make sure the family received a big enough dividend from the business so they had enough excess capital to invest on their own. He felt this would be the only way family members would realise and respect the success of Walmart. In other words, excess capital is difficult to make money out of...
JAB Holdings is a good example of deploying excess capital
Controlled by members of the German-based Reimann family, JAB Holdings has today become one of the most successful family-controlled investment groups. It owns a number of big coffee companies, including US-based Keurig Green Mountain and the Dutch group, Jacobs Douwe Egberts. Earlier this month, JAB bought the US bakery and sandwich chain Panera Bread for $7.5 billion. But its roots go back to a family-owned chemical company based in Germany called Benckiser. Trott’s BDT Capital Partners has been an important force behind the growth of JAB. He said in his talk: “We’ve advised them on every deal...we are a kind of a clockwork team.”
Excess capital should be a successful business as well
Any excess capital a family business makes should be treated as a business as well. And families should run it with the same rigour as they run their business. There are many A+ companies, with C- capital management, Trott said. And he added that excess capital should be an asset that could eventually be as big as the core company. Although Trott didn’t say this in his talk, excess capital in this context is probably deployed through a family office, or similar investment group.
Learn from the masters
Trott talked about his well-documented links to Warren Buffett's - the two have done deals together and Buffett has said Trott is the only banker he trusts. But perhaps Trott’s most interesting observation at his talk is that BDT Capital Partners is a “shameless, small copy” of Berkshire Hathaway. Maybe one day it will be a shameless, big copy...
Wall Street and private equity is not aligned to the interests of family businesses
Of course, this view isn’t anything new. But Trott’s insights into this at the talk added more flavour. He said Wall Street is driven by revenues and they get paid revenues by getting their clients to do deals, whether good or bad. “It’s not a good environment.” The same thing with private equity, said Trott. Private equity has become short term in nature - "three to five-year capital". They force owners to put too much leverage on their companies to get financial engineered IRR - internal rates of return - which are meaningless, said Trott.
“We started BDT Capital Partners because we saw this mismatch…”