In truth, this risk / reward dynamic puts market participants in a pretty pickle that’s only been exacerbated by trading volumes heavily impacted by both passive institutions and active retail investors. While we aren’t public investors here at Trident, these graphs give us all the more reason to maintain our standard here of being grumpy underwriters and aggressive operators. Now more than ever it feels as if valuation ‘freebies’ are harder to come by, and the margin of error (safety?) has grown all the more thin.

This phenomena has only served to reinforce our thesis that to the extent you are deploying capital¹, best do so A) in places where cash flow and cash flow yields are high and B) where growth can be found by sticking to the fundamentals of good business strategy and operations. This is not to say that our friends taking risk in growth-oriented investments will not see those businesses grow at high CAGRs, but rather acknowledging that they are likely paying for the privilege in ways that we here at Trident don’t think we are, nor need to. For the record, I think what we’re doing is working; as of the writing of this letter, our Fund I has seen approximately 32% EBITDA growth across our 3 investments.

Grumpy Underwriting: Our valuation rule of thumb at Trident is to buy enterprises for anywhere between 12-15% unlevered free cash yield². Even in a high interest rate environment, we are finding that our gross cash-on-cash returns to equity at entry for our target portfolio tends to end up in the 18-22% range, with no growth factored in. This financial theory gets all the more attractive as you start adding tack-ons to cheaply acquired portfolio companies. Approximately 59% of the EBTIDA growth in Fund I can be attributed to growth through acquisition. Anecdotally, I can share that these acquisitions are occurring at valuations below where our initial platform acquisitions occurred, making net creation multiples and outcomes even better.

Good Strategy and Operations: Lack of KPI reporting, antiquated technology infrastructure, lack of human resources–these are just a few of the recurring problems that we identify before buying family-owned small businesses. Approximately 41% of the EBITDA growth in Fund I can be attributed to our portfolio companies organically improving operations to drive revenue or margin growth. Anecdotally, I can share that the contribution split between revenue and margin growth is roughly 50 / 50.

In sum, we think we are sowing good seeds thus far in spite of a market environment that might make some ‘look out below’. More to come.

Why Us?

Private ‘Bull’ Randleman: “Sir, we got nine companies, sir.”

2^nd Lt. Richard Winters: “We do.”

Private ‘Bull’ Randleman: “Well, how come we’re the only one marching every Friday night, twelve miles, full pack, in the pitch dark?”

2^nd Lt. Richard Winters: “Why do you think, Private Randleman?”

Private ‘Bull’ Randleman: “Lieutenant Sobel hates us, sir.”

2^nd Lt. Richard Winters: “Lieutenant Sobel does not hate Easy Company, Private Randleman… He just hates you.”

Band of Brothers (Miniseries, 2001)

Despite our success in portfolio management, 2023 also came with its frustrations, namely in fundraising. We aren’t alone, low private equity allocation in 2023 created a frustrating time period for many private equity investors— I daresay we all felt singled out in our misery. It was hard not to feel this; during a period where Bloomberg News and Fox Business were flaunting investor euphoria about a tech-fueled stock market rally, we were told countless times that investors were over-allocated to our asset class. The reports don’t lie, Limited Partners kept their purse strings tight, with 20% less cash being invested in private equity funds to end the year.³

At the same time, the normally extended journey to find deals had more pitfalls than the Oregon Trail. Why? 1) The price gap between buyers and sellers has never felt wider, 2) interest rates were higher, and 3) an uncertain consumer environment has even the best strategists unsure about whether a soft landing is still possible. Like our competition, we tangle with these issues daily, and have at times had to show real creativity in mitigating them.

We at Trident have attempted to move through this by sticking to our strategic values, placing capital in assets where we have strong conviction on our ability (with our operating partners) to drive growth that the families who owned these assets prior couldn’t quite achieve. We’ve also developed a few top down theses that we would like to see play out over the year, namely in Healthcare Services (roll-ups in spaces like Cardiology, Orthopedics, and Womens Health), Consumer (primarily consumer products that are recession resistant and not fad-related), and Industrials (targeting niche manufacturing and service businesses that will see growth as the Infrastructure Bill continues to get rolled out). The plan is to close on an additional 2-3 deals this year, bringing our total portfolio size in the Fund to 5-6 companies.

From a Fund returns standpoint, our strategy is playing out quite well. We actually expect to be in a position to start returning capital to our investors as early as this year, primarily through recapitalizations for portfolio companies that have generated significant cash flow as they have grown on pace with our financial modeling. Excel Interior Doors is a standout example in this respect as it has seen roughly 30% EBITDA growth since our investment, on a business that was delivering a 25% gross levered cash-on-cash return when we initially purchased the business. I expect you’ll see more announcements and updates shortly here.

Trident Values

2^nd Lt. George Rice: “Looks like you guys are going to be surrounded.”

Captain Richard Winters: “We’re paratroopers, Lieutenant. We’re supposed to be surrounded.”

Band of Brothers (Miniseries, 2001)

I’ve always had this habit of, when under great amounts of stress, reading stories or watching movies about real life individuals who had it much harder than I. For whatever reason, it generally serves to calm my nerves. When under pressure, my old faithful is Band of Brothers, a show dramatizing the experiences of the men of Easy Company, 2^nd Battalion, 506^th Parachute Infantry Regiment of the 101^st Airborne Division during World War II.

Everyone in America has their own way of honoring the men and women of the U.S. Armed Forces; my way is to use their example to humble and remind myself that my challenges are not that serious and that the American economy that Trident is attempting to build an empire on top of is in fact held up by the sacrifices of others. Without those sacrifices, our models and memos won’t get us far; various forms of violence are the coin of the realm. Because of this, I and my colleagues remain eternally grateful.

The other way in which I choose to honor these men and women is to take and incorporate best practices that have been honed over generations of the kind of real-life chaos that only exists in combat. I’ve spent time reading and watching just about every war book or movie I can get my hands on, and here are 3 lessons that I’ve gleaned from the friends I know who have served and the things that I’ve read and watched which I continue to impress upon my team to inspire constructive growth.

1. Improvise – Things Assuredly Will Not Go According to Plan

Improvisation is something we here at Trident are especially good at. The ability to contort ourselves to meet the changing needs of the markets we participate in and the clients we serve is engrained in all of us here.

Nick Wood is a prime example here. In spite of his background primarily being in technology, 2023 was a year in which we spent less time building new technology and more time refining what we’ve already built and attempting to further engrain it in our portfolio company strategy as well as our sourcing. Nick has handheld management teams, our internal investment team, as well as our senior staff as we continue to drive home the fact that what will ultimately differentiate Trident in the long run is our quiet obsession with the type of efficiency and consistency that great engineers like Nick demand.

2. Work as a Team – There Are No Reinforcements

Private equity is an apprenticeship business. Apprenticeship defines a two-way commitment between senior and junior folks that 1) allow the business to accomplish goals even when those goals require tasks that are more pedantic in nature and 2) ensure that junior team members get not only training, but, more importantly, insight into the special sauce that creates returns for our Limited Partners.

Aron Betru and Ragini Chawla embody this dynamic in every way. While their relationship started years before they joined Trident, they’ve emerged as one of the best team duos at the firm. In particular, their work on the annual Doing Well While Doing Good report as well as the graduation of our first cohort of Trident Fellows who are pursuing their own form of entrepreneurship through acquisition. I can definitively say we have made leaps and bounds on the strategy front as a result of their tireless efforts.

3. Absolute Results Matter – Trying Doesn’t Count in the Long Run

In private equity we have hurdle rates that dictate how and when we get paid. In a rising rate environment it’s natural to see the gap between the absolute returns and the risk free rate shrink, and yet the standard that we attempt to hold ourselves to should be maintained. As impossible as this may sound, I think our workaround is maintaining the aforementioned ‘grumpiness’ in underwriting and rigor in sourcing that has gotten us to this point.

A great example of this at work with our team this past year is watching Alexis Rathborne and Ben Rosenbaum at work monitoring our portfolio and continuing to feed the growth engine by sourcing new opportunities from our operating partner network. They particularly distinguished themselves last year in diligencing and closing on Priority Courier Experts, which has since identified numerous levers to pull in order to grow and meet our internal targets. I believe that as a result of their rigor we very well may continue to see this investment be successful in reaching our operational growth targets.

As always, thank you to my amazing team on a job well done this past year. More to come in 2024!

Best,