Insight
Small: PE firms must build public market teams internally for effective collaboration
“Building it internally was important because the relationships of the people were a key to making it work. It wasn't just saying, Geez, Berkshire partners should have a public firm. Let's go hire a team to go do it. That would not get the collaboration that we…”
Opinion
Small: Short selling consumes too much time and rarely makes sense
“Very, very few people were good at it, and it took up most of your time. To get shorts. Plus you were in some ways leveraging your longs in order to justify your shorting. So it just seemed to us to make no sense to do that.”
Insight
Small: Sizing public equity positions purely on modeled IRR is suboptimal
“We were religious about keeping our five-year internal rate of return models up to date and trading off that. The higher the IRR, the bigger the position. We learned that wasn't the best way. We changed over time at that point to adding a conviction element”
Opinion
Small: Public markets exhibit far crazier mispricings than private equity
“We've seen crazier prices on both sides by far in the public markets than I think you tend to see in the private markets.”
Disclosure
Stockbridge requires unanimity among senior partners for new investments
“That's why we demand unanimity among the senior people to invest in something, because you're gonna get hit with a bump, and so when you get hit with a bump, you have to have enough information, enough belief to evaluate the new information, but be able to sti…”
Assertion Partly supported
Small: Private companies traded at higher multiples than publics in 2005-2007
“For the first time, we did comparable sheets with public companies, and we were seeing private companies go for more than public companies. So the control premium was higher than the liquidity premium.”
Insight
Small: Internal data is necessary for operational change theses
“The private data would be great if you had an enormous change thesis. If you thought management was doing the wrong thing on major operational issues and you thought you could do better, I don't know how you make that decision without internal data.”
Disclosure
Berkshire maintains no internal walls between its PE and public equity teams
“Across the firm, we chose not to have any walls between the two businesses.”
Disclosure
Small: Stockbridge avoids biotech approvals and commodity-driven businesses
“So we don't invest in things like, is the drug going to be approved, or where commodity prices will ultimately drive the answer.”
Insight
Small: Investors must be cautious expecting management teams to pivot
“And we found that managements, ah, are really good at executing, continuing to do what they have done in the past, and that you have to be really, really careful before you're asking a management team to do something different.”
Insight
Small: Passing on Investments Means Lacking Conviction, Not Predicting Failure
“Our no is not that this isn't going to be a great investment, it's that we're not going to get to high conviction that this is going to be a great investment, and that makes it a little easier.”
Insight
Small: Fast-twitch trading funds require single decision-makers rather than consensus
“I think if we were a fast-twitch Hedge fund making multiple decisions every day on trading, it wouldn't work. You'd need single points of decision, whether there's a number of them or one of them, but we don't make a lot of decisions.”
Disclosure
Small: Stockbridge Sells for Only Three Specific Reasons
“Well, there's three reasons that you sell. One is you lose conviction in the thesis, and you think you should move on. Two is it gets so expensive that you think the returns looking forward aren't acceptable, or at least certainly compared to what else. Or thr…”
Disclosure
Small: Berkshire Partners Is Largest Investor in Its PE Funds and Stockbridge
“We're the largest investor in our private equity funds, and we're also, as a group, the largest investor in Stockbridge.”
Disclosure
Small: Stockbridge is essentially long-only and has rarely shorted
“We're essentially long only. We have a right to short, but we've done it only a couple times in our history”
Disclosure
Small: Stockbridge models 5 years out and targets mid-teens returns
“We build a five-year model. Which tends to make you have to think at least 10 years out because someone's gonna buy the business from you, and we want mid-teens or better returns.”
Disclosure
Stockbridge limits its portfolio to 15 names, capping positions at 25%
“And so that ultimately leads to a portfolio of typically around 15 names. We've had a position become up to a quarter of the portfolio. That's more the exception. Typically the largest position will be in the 15%. And then a bunch of things around six percent.”
Disclosure
TransDigm was Stockbridge's first investment and largest position through most of its history
“And so when we started Stockbridge, that was the first company we looked at and we invested, it has become and been our largest position through most of our history.”
Disclosure
Rob Small: Stockbridge embeds members into Berkshire PE industry teams
“The private equity side is divided into industry teams. We put one of our people on each one of their industry teams, so that way they can learn about what they're learning about the industry.”
Disclosure
Small: Berkshire will not make macro-timing bets between public and private equity
“I don't think we will make market-based bets of now's the moment to invest in public and now's the moment to invest in private.”
