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The world of private equity is opaque, and arguably suffers from an “image problem.” But a new generation of private equity leaders are redefining the space, including how PE managers interact with their portfolio companies.
Rami Cassis, founder and CEO at Parabellum Investments, joins WealthChannel’s Andy Hagans to discuss his family office’s unique approach to private equity.
Watch On YouTube
- Background on Rami’s career, and how he established his family office.
- Why family offices often struggle to get involved in private equity.
- Why private equity has an image problem (and in some cases, why the image problem is well-deserved).
- How Parabellum Investments takes a different approach to private equity, including better alignment of long term incentives for all stakeholders.
- The smallest PE deal that Rami has ever done (this may shock you).
Featured On This Episode
- Barbarians At The Gate (Amazon)
Today’s Guest: Rami Cassis, Parabellum Investments
- Parabellum Investments – Official Website
- Parabellum Investments on LinkedIn
- Rami Cassis on LinkedIn
- Rami Cassis on Twitter
About The Alternative Investment Podcast
The Alternative Investment Podcast is a leading voice in the alternatives industry, covering private equity, venture capital, and real estate. Host Andy Hagans interviews asset managers, family offices, and industry thought leaders, as they discuss the most effective strategies to grow generational wealth.
Andy: Welcome to the “Alternative Investment Podcast.” I’m Andy Hagans, and today we’re talking about private equity and a unique private equity approach from a very unique family office. Joining me today is Rami Cassis. Rami, welcome to the show.
Rami: Thank you. Thank you, Andy. Thanks for making the time.
Andy: And, you know, before we even get into private equity, you know, anyone who comes on with a family office, that’s always where it starts. It’s always so interesting, you know, if it… And, you know, DJ Van Keuren, we’ve had him on the show. He has very specific rules for if you consider yourself a family office or not. But I would say, as someone who’s not a family office, I think it’s something that a lot of us aspire to, right? So we always want to hear how did it happen? How did you come to, you know, be operating your own family office?
Rami: Right. I’ll probably start off by saying I am not the traditional family office, and I’m happy to talk about what a family office typically looks like. But in answer to your immediate question about how I came to build up my own family office, really, I’ve built enough assets over the period of time that I’ve worked, that I have been working, I’m 54 this year, to have acquired a number of assets that I have the autonomy to run and to continue to do more deals using my own funds. And one of the things that differentiates family offices from other investment vehicles is that they tend to use their own funds only and have the autonomy to decide for themselves how to manage those funds. But the very short answer is I’ve been working in a private equity-type environment using my own funds for about 15 years. And over time, I’ve managed to build up enough assets, as I said, and liquidity to be able to call Parabellum Investments my own family office, even if it’s on the very lower end of the scale in terms of family offices. They start at around $100 million in assets, and they go up to several billions, as you know.
Andy: Yeah. That’s funny that you and I are aligned exactly on that, because I referenced DJ Van Keuren, he’s founder of the Family Office Real Estate Institute. He referenced as well, 250 million is like his point. I’m like, well, maybe. But internally, we all kind of feel like I, you know, personally, at least 100 million, that’s a pretty big deal, right? Like, if I get to the point where I’m managing 100 million in private equity money, I think I’m gonna call myself a family office at that point. So, not to argue with DJ, but I’m actually with you, Rami. Like for me, I’m gonna agree with that as a threshold. But what’s your background though, I guess, managing assets is your background in real estate or is it in operating businesses?
Rami: Not at all. There’s probably quite a lot to talk about, Andy, just to clarify. So I started life I studied engineering in mathematical physics, and I worked in industry for about 15 years. So I worked in oil and gas for 10 years with a company called Schlumberger. And that took me all over the world. Then I got out of oil and gas and worked in business advisory with KPMG on the business consultancy side. Then I went back into line management with Atos, where I led Atos in the UK and part of Europe.
So the first 15 years of my working life were spent in industry and were really the foundational years that taught me how to run a business, how to run a P&L, how to lead teams and how to lead businesses. Then in 2008, I resigned from corporate employment and did my first deal. And it was a tiny business in the north of England that was scanning checks, and those old credit card vouchers we used to have before our chip and PIN. And that was a business with 15 employees, and it was turning over about a million dollars and losing 300K. I remember it vividly. I spent quite a lot of time turning the business around, and then I managed to grow it by acquisition over the course of the coming years.
And so, if you fast forward, my professional, my working life in the last 10 to 15 years, it has been buying lower mid-market firms in a variety of sectors, enterprise software, medical services, pharma tech, potentially mining and acting as the chairman overseeing and supporting the CEOs of seven businesses all in different sectors, all with our own management team with a view to scaling these companies and driving organic growth at the same time. So that’s the… I’m gonna pause there if that’s already been quite a long answer.
Andy: Well, no, it’s interesting. And I think I, you know, it’s like private equity, and I know that’s something we’re gonna talk about today, can have a little bit of an image problem. It never has with me though, because some deals go well, some deals go not well. But, you know, broadly speaking, there’s always change in the economy. There’s always companies growing. There’s always companies going bankrupt, companies hiring, companies doing layoffs. To me, private equity is almost beside the point.
Like, you know, people might look for scapegoats in certain situations or whatever, but private equity to me, it’s a combination of capital and entrepreneurship because the capital part comes, you know, for you to buy a company or invest in a company to be a chairman, like obviously, you need the capital to go out and acquire a company, and you don’t want to acquire something too small. It’s not really a big enough playground, so to speak. But then the entrepreneurial half is, you’re not just buying a company, you’re unlocking value, right? Because if that company was totally successful, totally optimized as is, you wouldn’t buy it as, you know, it’s almost like with flipping houses or it’s almost like a makeover. It’s like you see the potential, and so you purchase a company, but then you also enhance the operations. You unlock value with your entrepreneurship.
Do you think is that the right way to look at private equity? That’s the way I look at it.
Rami: I think it’s a very healthy way of looking at private equity. And we should talk about the differences between private equity and family offices in the main and where I kind of see what I’m doing being slightly different to either. The fundamentals of private equity are exactly as you described. The practical issues of private equity is that it is an industry dominated by a certain profile of individuals, typically people with either banking, accounting, or legal backgrounds. All of those professions are entirely admirable, but they tend to focus looking at businesses under a certain type of lens.
And I think what private equity could do with is greater professional diversity in the types of roles and the background of individuals who work within those firms. Because it is very much focused on the numbers and on forecasting and a lot of market study, which is perfectly sensible, but what it often lacks is real life… What private equity often lacks, I think, is real-life experience in walking into a difficult meeting with a client or having to deal with an employee dispute, or being able to relate and empathize with the employees of the firm that are one of your portfolio companies. Private equity will typically tend to say, “Well, we’ll leave that up to the managers.” But more often than not, the CEOs need some affirmation. They will always invariably need some kind of support because managing a CEO or developing a CEO is…
Andy: It’s lonely. It’s lonely, right? I mean, that’s where a chairman like yourself or a board, because there’s no one beside you on the work chart. And so the pressure, honestly, the pressure and stress of that job is enormous. I have to say that.
Rami: Absolutely, Andy, and just as any management team has strengths and weaknesses, same applies to a CEO. We look at CEOs as if they’re these all-knowing individuals. And CEOs typically tend to move up to that role, either through sales or operations. And for what it’s worth, my background has been operations, which makes me particularly strong in some areas and not quite as strong in others. CEOs need development in just the same way that management teams do. And providing the CEO with that level of support and guidance is something that is lacking because private equity tends to typically manage through board meetings.
The answer’s not always “let’s make another investment,” or “let’s do another acquisition.” Because often these acquisitions, if they’re not properly integrated make the company look like a green-eyed monster. And there’s also a human element to both a CEO and the employees who know that a company is private equity-backed, they will also know that the business is going to come back to the market for sale in three, four, or five years, and it’s quite destabilizing for employees. It’s just as destabilizing for clients. And that timeline, often dictated by LPs, as you know being one yourself, drives a lot of the behaviors of CEOs and management teams as they get towards the latter stages of the three to five year…
Andy: I wanna pause you there. There’s so much to unpack there, but one really interesting thread, well, first of all, I’m not the target market that private equity is a bad guy. I was thinking before we recorded, you know, I was looking through my notes in preparation and I was like, you know, thinking about private equity having an image problem. And I acknowledge it kind of does, but I was thinking it doesn’t with me. And I remembered there was this book I read, and I think I read it in like eighth or ninth grade. It was called “Barbarians at the Gate.”
Rami: Yeah, yeah, yeah. The KKR takeover of Nabisco.
Andy: Yeah. And I never saw it. It was based on a movie, right? But I never saw the movie. But I read that book in literally eighth or ninth grade, some whatever, 13, 14, 15 years old. Yeah. And like, even at that age, I was thinking, well, this is kind of cool. Well, you know, number one it has the drama, right? It’s like corporate warfare, hostile takeover, you know, all that kind of verbiage. Like as a young man, that’s kind of exciting. But even at that age, I think I kind of understood there’s an issue with large corporations, just like in government, any large organization, with alignment of incentives or misalignment of incentives. And the fact of the matter is, at many, many organizations, incentives are not well aligned, correctly in line. And maybe some of that is just intrinsic, right?
An incentive for an employee will never be the same exact incentive as a business owner. But broadly speaking, I like the idea of private equity coming in and helping to align incentives. Because a lot of, even today, like even in the United States, at least, a lot of our major corporations, sometimes their executive team, they’re being motivated by being popular or being fashionable or being applauded by the media. And it’s not in the interest of shareholders. And obviously there’s more stakeholders than is shareholders. But I guess I just, broadly, I don’t have a problem with someone identifying an asset or company and saying, this is being mismanaged. Or at least it’s not reaching its full potential and coming in and buying it and trying to restructure it.
But one interesting thing that you said was just the private equity, the thought that everyone is thinking they’re only gonna be here for three months and then they’re gonna flip this company, or excuse me, three years, and then they’re gonna sell the company again, that does create a lot of psychological toll. But with a family office, I’m thinking, well, wait a minute, I’ve done private equity deals and eight years later I’m still owning it and I’ll be happy to own it another 30 years. You know, I’m thinking of one deal in particular. So does private equity always have to be that kind of a flip? Or are there family offices doing these kind of deals where they’re unlocking value and then they want to own the asset for the long term?
Rami: Well, there’s a couple of questions you raised there. So, does private equity always have to be a three to five-year hold? Probably not, but more often than not, that’s the time horizon dictated by LPs, by their investors. VCs we should come back to, we should discuss briefly, I think have a healthier approach to that, incidentally, because I think they’re prepared to hold on for longer, but they’re also prepared to cut loose some of their poorly performing investments. Whereas private equity, as you probably know, Andy, will be less likely to have a bad sale because it impacts their next fundraising round. So you don’t want to crystallize a loss by selling it on the open market. And it’s easy to mark the market, the valuation on a quarterly basis, which is what most PE firms do, and somehow embellish the valuation of an asset that might be probably worth a little bit less.
Andy: I’ve heard that that can happen, Rami. I’ve heard there could be a little embellishment of valuations. I like that.
Rami: Yes. So crystallizing the loss is never great for your next road show. Now, on the family office, which I’m probably not an expert on either, but from what I know of family offices, there’s a few characteristics. Firstly, it’s their own money rather than an investor’s money. So that means something, I think both emotionally and in terms of the focus it brings to mind for those individuals deploying money. The problem is that the overwhelming majority of family offices have a remit of not losing money. You know, there’s an old saying that it takes two generations to lose the wealth that was made by their great-grandparents.
More often than not, family offices are there to preserve the wealth generated by a generation and ensuring that it’s still there two or three generations down the road. The problem with that is that, firstly, it’s a great burden on the children of subsequent generations, because they either forgive my language up the wall, or are so paralyzed about losing it, that they end up putting it into German bonds or U.S. bonds or something. But their approach and attitude to risk is fundamentally different. Precisely, because the mandate is, well, I can hold onto this asset for a long time but I don’t want to take the risk of losing it. And it drives a much more defensive behavior that is, in many ways, on the opposite end of where private equity and certainly VCs are. So, I don’t know if I answered your question there, Andy, because I feel I was rambling a little bit.
Andy: Well, no, no, no. I liked it a lot. But I guess, my point was to me, you know, when we’re talking about like an LBO fund or certain types of private equity funds, to me, private equity is larger than that. Right? Like, I purchased a portion of a business, you know, six or seven years ago. We didn’t take on any debt, we just did a deal. And to me, that’s private equity. I mean, it’s not a huge deal, but it’s not a stock, it’s not a bond. It’s a private deal. And so if I look at private equity in that very broad lens, and we are kind of talking, technically speaking, venture capital is part of private equity. So to me, part of this makeover, this public image makeover needs to be, private equity is much more than a leveraged buyout fund with a three-year hold. I mean, that maybe is the most notorious part of private equity, but there’s many other types of private equity.
Rami: I completely agree with you. And fundamentally doing a deal, whether it’s VC private equity, or family office, they’re all nuances of the fundamentally the same thing. But where the difference lies is in the investment style and behavior of the individuals managing the investment. Private equity, more than other vehicles, investment vehicles, will tend to manage by numbers, by board meeting, and will have a style of governance that is typically dictated by the professions of the private equity individuals. And I come back to the lawyers, the accountants, and the bankers who are very financially driven, very financially astute, very close to their forecasts, but aren’t necessarily able to lead a team of individuals.
Rami: Aren’t necessarily going to be able to provide guidance and support, real managerial support for a CEO and their management team.
Andy: So that is short term then. I mean, as I’m thinking is what you’re describing, that style of private equity, we can send in some lawyers or accountants or financial folks, they can maybe unlock some quick value, but they don’t really have the skill-set to manage this organization for the long run because they don’t really understand that underlying business and they can’t empathize with the underlying business. Is that kind of the…
Rami: I think there’s an element of financial engineering. And I’m intentionally generalizing just to make a point. They’re clearly not all like that. There’s an element of financial engineering, and the profile of private equity professionals is such that they’re not in a position. Like, they don’t have the experience to be able to support a CEO who comes to them and says, listen, I’ve got this problem with so-and-so and how do I deal with it?
Andy: I see.
Rami: The private equity firms will not step in and manage a business themselves, as you know, they will leave that to management.
Andy: And they’re not even good board members, is your point. They’re not, generally speaking, they’re not even supporting the CEO or the executive team very well. Again, generally.
Rami: Well, of course, there are some, but the questions are generally one-dimensional. How are you doing versus forecast? What does your pipeline look like? What’s the conversion rate? You know, what is the gross margin? How are you driving EBITDA? Can we reduce the overheads? I’ve probably summarized about it to our board meeting in the last 30 seconds, but that’s the gist of all of the questions. And it’s okay. It’s okay. But what I’m not advocating for the removal of lawyers and bankers and accountants as private equity professionals. I’m just saying it would be cool to have more people from HR, more people from tech, more individuals from marketing or sales, just a bit more of a blended mix to reflect the reality of the employees who you are leading.
Andy: Totally. Yeah. And, you know, again, long-term versus short-term, if you’re trying to unlock value on a particular timeline, there’s a lot to be said for the discipline of profit margins, EBITDA, hitting your numbers, even pressure. There’s a lot to be said for pressure, but ultimately to me, a sustainable business needs vision, you know, and that usually is a vision that transcends dollars and cents. It’s actually usually something deeper that involves empathy and it’s probably a totally different skills… It is a totally different skill-set than financial engineering. Right? Because ultimately, in my experience, you know, even folks who are very money-driven, that doesn’t sustain something for 10 years, 20 years. It’s I’m on to the next deal, I make my money and then I’m on to the next deal. Right?
Rami: I agree with you, Andy, and there’s an element of leadership that is missing. Leadership is always expected from the CEO, but who’s going to motivate him or her? And who’s going to give the management team something to look forward to beyond the sale in the next three to five years? And I’m intentionally being provocative to make a point, but it is the overwhelming majority of private equity investments. The timeline ends up driving a lot of behaviors, not all of which are very healthy.
Andy: So how is Parabellum different? I mean, obviously, you’re a family office, you know, you’re doing private equity investments or maybe venture capital. I don’t know how you’d define it. You obviously look at it very differently. So, how are you doing things differently?
Rami: Well, firstly it’s my money. Secondly, there is no external investors to answer to. I’ve spent 15 years of my career in gainfully paid employment in operations, senior management and OP roles, so working across most of the globe other than Latin America. I generally tend to stick to sectors that I know well and have some expertise in. And there’s no investment horizon, as I mentioned earlier. It’s not only my funds, but there’s no obligation to sell at any given period of time. So, it’s a little bit of a combination between the private equity and the family office model in that I’m deploying my own funds. Private equity doesn’t do that. I don’t have an investment horizon, which is not a private equity-type of transaction, but my appetite for risk is substantially higher than most of the family officers whose remit and mission is preserving wealth rather than necessarily generating it. Or if they take a riskier investment, it will typically be reduced to 10% to 15% of the value of their total assets.
And I’ve grown up in operations. I mean, my first three years I was stuck in the desert in Australia on an oil rig. And I’ll spare you the rest of my CV, but I feel I’m able to give some guidance and support to the CEOs that is meaningful. And I also feel as though if, God forbid, something happens to a CEO or they don’t perform, I’m able to take over the CEO role. It’s not something I would do lightly. But my focus is on much more being able to constructively support the CEO because there isn’t a single CEO, including myself, that doesn’t require a certain level of support. But more often than not, the chairmans and the non-exec directors are more concerned about corporate governance and their own professional indemnity, both of which are important, but it’s not how you’re gonna make money. And so my model, I think, is a mixture of both, Andy, because it’s my own, because there’s no investment horizon.
Andy: Well, I gotta stop you there. I mean, so much of this is interesting, but you’re talking about, you know, focused on indemnification, all that stuff, and, you know, how you’re different because you’re more long-term oriented, you’re not taking OPM. I feel like a theme of what I’m hearing is different incentives. And this kind of goes back to me, the core of private equity, you know, maybe a private equity, a normal deal comes in and the private equity guys have a different incentive and that, you know, creates a morale problem or whatever.
But also on the other end of the spectrum, you have a lot of publicly traded companies that I don’t think are being run well, that have a lot of incentive problems. What you’re talking about, I’m coming in and investing in a company, and there’s actually a pretty good alignment of incentives because you’re talking about something that’s sustainable, something that’s long-term. And so if I’m an employee, you know, if you buy a series of ice cream parlors, ice cream shops, and I’m working at the ice cream shop, you know, I’m scooping ice cream, at least I know if you walk in and you’re the owner, you’re not trying to sell this thing tomorrow. We’re on the same team. We’re both trying to operate this store and succeed over the long term. That’s already a huge, you know, it’s a much different incentive that now I feel like we’re on the same team rowing together versus we’re at odds in a confrontational relationship.
Rami: But you’re also prepared to take… I’m also prepared to take commercial risks, and I’m not ever at any point, nor have I ever tried to cover my backside. I’m not saying I’m perfect, far from it, but there is too much… Look, there’s been lots of corporate catastrophes where things have imploded, which have subsequently driven higher levels of corporate governance. But it needs to be applied with a dose of common sense. And more often than not, it’s corporate governance and compliance that rules the day, especially in public companies, obviously. And I understand why, but even to a certain extent in private investments in many of the non-exec type directors that you were referring to earlier. So, there’s a number of considerations and angles that I think are a little bit different once you’ve lived through what a board meeting looks like in the public market. I was listed for about a couple of years previously as a CEO and chairman, it’s a very different environment working alongside private equity.
Andy: I know, Rami, it’s funny, it’s like, I haven’t really been in the corporate world ever because I was an entrepreneur right out of college doing startups. To me, it’s, like, unfathomable almost that we have these large organizations with their board of directors as a bunch of people without skin in the game. You know, I’m just like, of course, that’s going to create huge problems. Isn’t that obvious? You know? So to me, if a private equity family, like just even having your own skin in the game, to me it’s already just better, immediately better.
Rami: I agree with you. Look, I think it’s a super healthy approach that you are taking, Andy, but not having skin in the game applies not only to the corporate sector, but it equally applies to the private equity industry because as you know, if they invest anything, it will typically be a token investment, certainly the sub 5%, but typically around 1% or 2%. And the main incentive other than fees is the carry. And the carry is only realized upon exit. So…
Andy: Different disincentives. I see. Both of those models have different misalignment of incentives.
Rami: Yeah, but ultimately, I guess what I’m saying is, notwithstanding the fees, which are just meant to be there to pay the bills, for private equity professionals, individuals working in that industry, the only reasonably large payday they get is through a carry incentive, which is only crystallized when the asset is sold. And I don’t like that treadmill and it’s not cool for employees. And I’ve had many clients with deals that I’ve done interview me before acquisition or just on the cusp of announcing one, asking am I a private equity person, though? I like to think, I don’t necessarily always… Not always. I don’t think I sound like one, but more importantly, they want to test whether or not this thing is gonna get sold again in three or four years. But anyway, that’s the point we’ve talked about. I think…
Andy: No, Rami, that’s the point where you can say, I’ve bought these other five portfolio companies, here’s their CEOs or their minority owners or whatever. Go call them and ask them, you know, like I’m thinking of Warren Buffet and Berkshire Hathaway where, you know, the guy bought furniture stores or candy companies or whatever in 1970 and he still owns the store 50 years later, you know.
Rami: He’s a tremendous icon, there’s no doubt. So I think… Yeah, I don’t think I have anything to add to that point.
Andy: Well, is this… Let me ask you this. I mean, I think I agree. I guess on a very macro level, I love long-term thinking. Short-term value is okay. Like, I have nothing against short-term value, unlocking value, buying a company, flipping it. It’s not immoral, it’s not evil. But to me, ultimately, it’s not that exciting. To me the really exciting stuff builds huge, long-term lasting value for everybody. Right? Like, think of like a Steve Jobs. He built an enormous fortune, but he also built value for, you know, all of us with our iPhones.
Andy: But that was long-term, right? That’s not something that… That’s not a two or three-year flip. So…
Rami: He was out for many years as we know, I mean, it’s been a long journey for him. Sorry, Andy, I interrupted you.
Andy: No, no, it’s all… But what I’m wondering, it sounds to me, you know, you’re taking, you know, you have a more diverse skillset than a lot of private equity professionals because you are so involved in the operational level. And so you’re saying, you know, we need more professional diversity in private equity. That makes a lot of sense to me. But you also have a more buy-and-hold long-term mindset and, you know, maybe eventually you exit some investments or whatever. But the point is, you don’t come in with a three to five-year timeline. Is this something that can be scaled? I mean, obviously, you’re different. Do you think it’s… Are there other, you know, folks in the industry? Are there other family offices? Are there other private equity professionals who are doing anything similar?
Rami: I’m sure there are. I don’t know them, but it’s because I haven’t taken the trouble of going up to meet them. There’s some very obvious names that have obviously been hugely successful on a much larger scale. So Martin Sorrell from WPP, I think set up his own family office. There will no doubt be a number of entrepreneurs who’ve done very well with their own businesses, and rather than have a passive investment in other funds, will decide to recycle their wealth into other deals. Deals may be different, but ultimately one of the things that is common with all entrepreneurs, as you know, is they don’t like people telling them what to do. They all have a bunch of battle scars, and they’re not afraid of risk. And the fourth one is they all have sufficient self-belief that if hits the fan, they’ll find a way to solve the problem. And I think those four characteristics are probably very consistent with most entrepreneurs. And so if they’ve made money, what you and I know they’re not gonna wanna sit and retire and plan their retirement or pension in Florida. They’ll want to keep doing deals. There are loads of others like me out there who I’m sure have been more successful and have been doing things on a larger scale.
Andy: You’re totally right. I mean, I actually, as you’re talking through this, it kind of hit me. I had a conversation with an entrepreneur that I’ve known for a long time. And he had four or five companies that he built and sold that were very nice exits, maybe not quite at your level, but still financially he is very well off. And he’s back to, you know, basically building something from the ground up. And I’m like, you know, why are you doing that? You have plenty of liquidity, go buy something. And instead of building the first million in revenue, start at a million in revenue, you know, because it’s like the first…
But my point was to him was now you have the capital and you also have the entrepreneurial skillset and, in your language, battle scars. And I think maybe that is the answer here, because with a lot of private equity funds, you have LPs, if they want a five-year hold, that’s a constraint. If you’re talking about a second or third generation running a family office, as you said, it’s a totally different mindset. It’s not even the mindset, the second and third generation of a family office usually doesn’t have the entrepreneurial skillset. Right? It’s the patriarch or matriarch.
So I wonder if it is this, you know, entrepreneurs who this is kind of maybe the second half of their career and in my own career, I’ve built things and then sold them and then started over. And I’ve sort of slowly come to realize I like private equity and alternatives better, because instead of, you know, starting over, starting from zero as an entrepreneur, you can combine your capital with your entrepreneurial skillset. It sounds like that’s what you’re doing. Just at a very high level.
Rami: No, it is exactly what I’m doing, Andy. Because I have neither the creativity nor the skills to start a business from scratch. That much I know. I also learned from my own corporate career that I was pretty good at running teams, pretty good at running operations in a P&L. So, I ended up getting sent to all of the businesses that weren’t performing. And that gave me the confidence ultimately to, you know, save up a bit of money and do my first deal. So like you, I would prefer to acquire something and help it grow on the basis that I’m starting from a business that’s already got a couple of million or a little bit of revenue rather than a standing start. But there are other individuals like your friend who’s obviously very talented and is able to start from nothing.
But either way, there is a new…I think the point is there is I think a new breed of investor or investment vehicle that’s rising and that’s individuals like you and I and your friend who’ve made some money from previous deals and who choose to reinvest it. And they can then decide whether they’re reinvested and play chairman to help the CEOs or whether they’re reinvested and take a very active role in those businesses. But it is this breed where they’re deploying their own funds, they’re comfortable with the risks that that entails. They know the sector they’re investing into. They don’t like anybody telling them what to do or when to sell. And they enjoy the journey because they can connect with the people they’re working with. I think it gives the employees in the company someone to maybe not necessarily look up to, but at least someone who can inspire them. And, you know, we could all do with a bit more inspiration.
Andy: Totally. Yeah. And this conversation I had with my friend, I mean, it’s only relevant. I’m trying to talk him into a deal. Right? Well, and that’s why you’re a very interesting, the fact that you have a family office and you can do these deals independently. I mean, I think the fundamental problem for a lot of entrepreneurs, let’s say you have a liquidity event, you know, and, and you know, you make $10 million or £10 million or €10 million or whatever, that’s enough. You can do kind of a micro deal, right? But it’s not enough that you’re doing a big deal or five deals or anything like that. What do you think is sort of the minimum scale that a person, that an entrepreneur who’s had some liquidity events or maybe saved, accrued some savings, what’s kind of that minimum scale where you would even consider it to be, you know, a true private equity? I mean, I kind of used the word micro private equity to describe some of this stuff, you know, transaction less than 5 million, you know, deal size. To me, it’s still private equity, but it’s…
Rami: It is, you know, that’s a difficult question to answer, Andy. I think, let me paraphrase, the question is what is the smallest deal size that would classify as private equity?
Andy: Yeah, sure. And that would be, you know, that you’re not just taking over as the entrepreneur, but that there’s enough scale that you can sort of be above the entrepreneur or where there’s enough scale that you don’t feel like you have to come in directly and displace the CEO, but rather you’re an external resource and there’s enough… It’s kind of like it needs to be a big enough sandbox for you to play in. If there’s only two employees and 500,000 in annual revenue, there’s just not enough really for you to optimize. Right? So it has to be an organization of a certain scale for you to really enhance the value from what you do.
Rami: The smaller the business, the harder it is to impact value. And that’s a self-evident statement, but I’ll make it regardless. I have to think about this. I think in terms of… I don’t think…
Andy: What’s the smallest, like what’s the smallest deal you’ve ever sold? I guess that’s really what I’m… Or you know, the smallest deal rather that you’ve ever done with this model. I guess that’s really what I’m asking. Like what’s kind of that entry point?
Rami: What I was going to say, Andy, is that actually the smallest deal I’ve ever done is for $1. And that’s because they were distressed businesses. So there was no consideration upfront because there were more liabilities than assets. But there was working capital that required an investment. So, you know, there were businesses that were turning over £7 million or £8 million or dollars that I’ve acquired for $1 because there were so many liabilities that not only did it require significant restructure but by definition also needed an investment, whatever that investment might have been. So I don’t think that the entry ticket is necessarily a determining factor precisely for those reasons.
There’ve been huge corporates that are, in some instances, they’ve gone bust, and I’m trying to think of there’s a very large retail chain in the UK that was sold many years ago for $1. And they had, I think they had a couple of hundred million in revenues, but about 400 million in debt. So it’s a little bit of an extreme example, but my point is the entry ticket isn’t necessarily the way to look at this. All other things being equal, look, I don’t think there’s a lower limit to how you would call private equity, because ultimately it’s more about the exit than it is the entry point. It’s what you do with that business. And if you start with a… I think if you have a company that’s got less than 15 or 20 employees, it feels like you are the entrepreneur as you say.
But I think anything from 20 employees onward, you can have a CEO and be involved to support him or her as appropriate and help to develop the business. So I think I’m… Hopefully, that’s answered your question. So, I don’t think there’s a minimum ticket size. If you were to really press me hard on a trading business that is a bust, I was gonna say 5 million or 10 million, Andy, but I don’t think that’s right because it’s much more about the exit and the value that you can build in a business. There’s no special league of saying, well, you know, I work in private equity. Any private transaction where you’re taking an investment risk, risk with your time and you get to run your own show, I think is a private equity/entrepreneurial gig.
Andy: Totally. Yeah. And I’ve started using, and I didn’t make it up, but I didn’t coin this myself, but I’ve just started saying micro private equity, which is sort of a gray area between, it’s not a passive investment, but I’m not taking over as the entrepreneur either. I’m there to support and typically, you know, cool thing is if you make the right investment, you have the right skill-set, you might be able to add just a tiny bit of your time, but in a way that’s very value-adding for them. And then typically, you know, you are investing at a much more attractive multiple than if you go and buy a mutual fund or, you know, the multiples in public markets are crazy. So like all things considered, if you can afford the risk, and then especially if you can add value, I believe it’s just a better form of investing just in terms of the returns. Would you agree with that? Maybe that’s an obvious question, but would you agree with that?
Rami: Oh yeah, of course, I agree. You need to have a certain risk appetite because it’s easier to buy a mutual fund and you need to be willing to make the time and clear enough head space to be able to deal with it. For many individuals, if they haven’t had experience or haven’t grown up as an entrepreneur, taking a direct position could be a bit scary. You know, there are a whole bunch of dimensions and concerns you’ve got with a CEO and a management team that you won’t have if you buy a financial instrument.
Andy: Totally, totally. Well, I actually love, you know, I did kind of press you and to your credit, you know, you were willing to kind of attack it from some different angles. But I think the point was with private equity, you’re not running a startup. You’re not trying to build something from scratch. And, you know, you kind of referenced 15 or 20 employees, not necessarily a dollar size of the deal, because there’s some deals, a dollar, you reference a dollar deal size. But if there’s 15 or 20 employees, again, it’s a very rough proxy. It’s inexact, but the point is there’s a big enough sandbox, there’s enough there there organizationally that someone with your experience can come in and help to optimize and actually add value. And you do wanna leverage that really over as much as you possibly can, right? Like that’s a form of leverage or value-add that you’re bringing.
Rami: Yeah, no, absolutely. I mean, if you started with 15 or 20 employees and you manage to get the business to be cash flow positive and you win a couple of contracts, you might be able to do another acquisition with your own funding, part of which may be self-generated by the business, to buy another business that has 10 or 15 employees. Clearly, it’s a much slower and much harder route than going out there and trying to raise a whole bunch of money. But the money won’t be yours. You’ll have a small minority stake and by default you end up becoming a glorified employee because you get to play with much bigger numbers. Commercially, I have to say with a bigger upside, but it’s not your venture anymore. You know, you are deploying a lot of other people’s monies and you are constantly pedaling influence rather than have the ability to say what happens.
Andy: I love it. And you know, Rami, I can’t thank you enough for coming on the show and talking about this and it’s just…
Rami: My pleasure.
Andy: It’s just great. You know, we talk about so many investments and including passive investments, you know, LP investments, but there’s just so much entrepreneurship occurring in the world of private equity. And that’s actually the piece that I love, you know, because I’m an entrepreneur that’s come into private equity almost by accident. And so to me the approach that you’re taking, the fact that it’s different is probably the most appealing, you know, thing about it. So that being said, where can our audience go to learn more about Parabellum Investments or to see more of your thought leadership?
Rami: Yeah, I guess the website or my own personal website, Andy, I’m not… Yeah, parabelluminvestments.com I guess is the website or if they search my name if they’re interested. I’m sure they’ve got better things to do, but in case they’re very bored.
Andy: No, they don’t, no. You know what, we’re linking it in the show notes, but, you know, I’ve been following some of your content as we were discussing before the call, and I think the fact that you’re talking about it and talking about what you’re doing, I think is so important because it just lets folks know that there are other options out there. There’s other approaches. And so, again, I really appreciate you coming on and sharing your unique perspective.
Rami: My pleasure. Thank you so much for your time. It’s great to speak to you.