I’m not the most consistent watcher of television shows, but when I am, I tilt towards the Sci-Fi genre, picking shows like Game of Thrones to spend my time on.¹ More recently however I’ve been captured by the unlikeliest of candidates: Ted Lasso. My favorite scene is one where Coach Ted pulls an Uncle Phil-style finesse on his boss’ ex-husband, Rupert, over an ego-charged game of darts. Rupert was a pub regular but hadn’t realized that Coach Ted had grown up playing darts with his father back in Kansas. As the last round begins and Rupert seems about to win, as he backslaps with the other pub regulars Coach Ted launches into a monologue that I just can’t get out of my head.

“Guys have underestimated me my entire life. And for years, I never understood why. It used to really bother me. But then one day I was driving my little boy to school and I saw this quote by Walt Whitman and it was painted on the wall. It said: ‘Be curious, not judgmental.’ And I liked that.”

[Ted throws a dart and hits a triple 20]

“… all of a sudden it hits me. All them fellas that used to belittle me; not a single one of them were curious. They thought they had everything all figured out… Cause if they were curious, they could’ve asked questions. You know? Questions like: ‘Have you played a lot of darts, Ted?’”

[throws his second dart and hits a triple 20]

“To which I would’ve answered: ‘Yes, sir. Every Sunday afternoon at a sports bar with my father, from age 10 til I was 16 when he passed away.” 

[throws his third dart and hits a bullseye, crowd cheers wildly, Rupert slinks out the back, embarrassed and defeated]

The lesson actually dovetails well with the Trident ethos: Be Curious, Ask Questions, and Don’t Underestimate the Little Guy. With that being said, here are a few burning questions I have and my attempt at answers as they relate to Trident’s outlook in 2022.

Question #1: Is there a place for rational investing in value-based businesses?

Answer: In a market like 2021 where things were moving (often irrationally) up and to the right, value tends to pale return-wise. Private equity benchmarks in the US for 3Q21 indicated a 54% IRR, fueled primarily by Growth and Technology investing.² The YoY growth in the S&P from that same period was 30%. But the growth hasn’t been linear. Over 84% of companies in the S&P as of 3Q21 were below their 52-week highs; in other words the growth was fueled primarily by technology companies like TSLA and AAPL. At one point last year, Tesla’s market capitalization surpassed that of the entire S&P 500 energy sector.³

It seems to me that main street (cashflow positive) businesses, like the rest of the economy (from restaurant chains to optometry groups and specialty manufacturers), aren’t offering investors headline-grabbing returns, so most don’t think it’s worth their time.

But is this exuberance normal? Per Cambridge Associates, private equity produced annualized returns net of fees of 14.33% for the 20-year period ending in September 2021. ⁴ The Russell 2000 index which tracks small public companies returned 6.69%, and the S&P 500 returned 5.91% for the 20-year period ending in June 2020.⁵ History would indicate that if there were an eventual reversion to the mean there is a strong case for focusing our attention on main street value-based business investing.

Question #2: Why do investors keep underestimating Small Businesses, aka the Little Guy?

Answer Part 1: It’s inefficient to find and buy small businesses from the perspective of most analog money managers.

“It takes money to make money” – my father, Eric Taylor Jr. and almost every private equity money manager out there

 The common refrain in private equity is that it takes the same amount of time to write a $10mm check as it would write a $100mm check. So, if you are any good at this, why only write $10mm checks? Well… because that’s where the value is. The fortunate result (for Trident that is) of this logic is that there are plenty of small businesses that we can acquire majority stakes in for incredibly low prices.

Here at Trident, we are the first to think about small business investing at scale through the lens of building a technology company that is as much a part of this asset manager’s DNA as is the investment mandate itself. Our proprietary SPEAR^TM algorithm was created by an internal team of engineers, business development / marketers, and investors; it helps us build a wide funnel of addressable assets and efficiently determine where to spend our time underwriting.

The end result? A small business private equity market that is out of reach for some due to time constraints is suddenly reachable. Without this technology and without a systematized process, the decision other firms end up making to spend time on larger, more expensive, and banked transactions actually seems a lot more reasonable.

Answer Part 2: It’s inefficient to operate and grow small businesses from the perspective of most analog money managers.

Efficiency is also at play for those who would look to manage a dozen or more small businesses from an ivory tower in New York City. Small businesses are hotbeds for the types of idiosyncratic outcomes that occur when new ownership walks through the double doors. Trust me I know—we almost lost the trust and faith of an entire management team because we decided to cancel a portfolio company’s Annual Golf Outing and restrict the issuance of Season Ski Passes. Losing the local talent which eventually helped us read the tea leaves during the latest economic crisis would have been penny-wise and pound foolish. For the record, we kept both the outing and ski passes and that same management team helped us drive 40% EBITDA growth in the first 15 months of ownership.

Our solution since inception is simple: partnering with Entrepreneurs, Operators, and Independent Sponsors who are more native to local markets and can drive commercial value given their experience and networks. This strategy gives us leverage from an operational standpoint, certainty of quality execution, and visibility into the underlying drivers of our businesses. All these things are naturally more difficult to control while sitting in an air-conditioned skyscraper.

How did we come up with this strategy? Well, we ourselves are a hodgepodge bunch hailing from places like Southern Texas, Suburban Pennsylvania, Rural Louisiana, the Bronx, Northern South Carolina, and Burbank, California. What do these places have in common you might ask? Locals who don’t like carpetbaggers. Don’t show up in my hometown of McAllen, Texas trying to build healthcare clinics without knowing the local doctors or recognizing that Mr. Alonzo Cantu is the guy you have to talk to if you want to build anything really within a 100 square mile radius.⁶ We as a team have seen all of our lives how everyday Americans from the unlikeliest of places can fire up commercial value as well as social impact in their communities, and here at Trident we’ve decided to build a company and pour gasoline on that fire.

 Question #3: Is there or is there not a tradeoff between Profit and Purpose?

Answer: No

While speaking at SuperReturns in Berlin last November I sat on a panel with several other investment professionals who had ESG as a core focus of their investing platform. We all concurred that there was not necessarily a tradeoff, and that the very notion of a tradeoff had stemmed from the ‘E’ in Environmental, Social, and Governance. It of course stands to reason that mining coal for energy production is generally cheaper than wind farming. Unfortunately, this simple fact has been used to paint the entire ESG landscape in broad strokes as one that gives up profit to create impact. It’s as if the market believes that by putting women in the C Suite of an organization will cause businesses to falter, when in fact it’s been statistically proven to be the opposite case.⁷ Here at Trident, though we have an investment policy that promotes energy sustainability, most of our impact will come from the ‘S’ and ‘G’ in the acronym.

But how does this work in practice? Can diversity, equity, inclusion, and social impact really be used as generators of alpha? Yes—and we are doing it as we speak.

This past month we acquired a company based in Northeast Alabama that manufactures interior doors. Think perhaps about what the hollow laundry room door at your grandmother’s house felt like—that’s what we make. Though we believe there is plenty of demand for these doors in the Southeastern United States, the company has not quite been able to maximize manufacturing capacity—primarily due to difficulty staffing up unskilled labor. This isn’t all that surprising, Federal Reserve Chairman Jerome Powell just last week signaled that the economy is at relatively full employment. Our plan to create commercial value here actually dovetails well with our pledge to create social impact.

From engaging with diverse suppliers, to employing talent from Historically Black Colleges and Universities (HBCUs), and with significant presence in, employment of, and consumers from low- to moderate-income communities, purposeful social return is engrained every step of the way as the company grows, and, importantly, is accounted for. We can tout social return all we want, but math has no opinion — we’ll show you performance in the numbers.

Thanks for reading.

Best,

Eric Taylor III

Trident Founder, Chief Executive Officer, and Chief Investment Officer