It starts with people
“The secret of my success is that we have gone to exceptional lengths to hire the best people in the world”
– Steve Jobs, co-founder of Apple Inc.
Cymbria was founded by entrepreneurs with a history of starting and building businesses. From blueberry farms to real estate organizations to EdgePoint – we pride ourselves on being investors as well as owner operators. As operators, the number-one problem facing a growing business is finding the right people to drive that growth. This is not just a problem in year one, but an issue you must continue to address as the business grows. We do not see growth through the lens of a spreadsheet, but rather, through the quality of the people at our portfolio companies and at EdgePoint. You can never have enough exceptional people.
Our private investment approach is focused on competitively advantaged businesses with high returns on capital and long runways to grow. In these businesses, the difference between what an average person can accomplish and what the right person can accomplish is many times more. Therefore, it should come as no surprise that recruiting talent is what we consider one of the most important pieces in building successful businesses. To us, closing a transaction is just the beginning of our work because one of the most impactful things we can do is referring talented operators to many of our portfolio companies.
When you attend Cymbria Day this year, pay attention to the internal EdgePoint partners with whom you interact. Many of our management teams will be in attendance. We believe that the passion, consistency and imagination that they bring to work every day will be one of the biggest drivers of pleasing returns for Cymbria over the next 10 years.
Achieving business growth takes talent
How do we go about recruiting? We do not have a human resources department. We rarely work with external recruitment agencies. Rather, recruiting is a part of everybody’s job and we have found that our internal partners are some of the very best sources of top talent. Talented people know other talented people and are excited to work together. As we have gone about recruiting, we have also found aspects of our approach that appeal to some like-minded operators:
Cymbria has permanent capital and that allows us to take a long-term perspective when running a business. We do not need to focus on short-term profits, but can make decisions that will continuously improve the quality of our portfolio companies over the next decade. We saw this play out through the last two years, during the pandemic, and we will continue to prioritize long-term decision making at any company we work with. Many of our partners and operators share this long-term perspective and know that working with us will mean they have a long-term home and support
When someone chooses to work with us, they are taking a leap of faith and entrusting us with their careers and livelihoods. In many cases, they will invest a meaningful amount of their life savings alongside us. We do not take this responsibility lightly. It is our imperative to do everything we can to drive growth and ensure that our operators benefit from the accompanying value creation. We do not subscribe to the theory that employees need to fight for every dollar – we will always commit to treating our partners fairly
EdgePoint has always been willing to run lean. We operate with about 25% of the people of a comparably sized asset manager and are always looking to give internal partners new challenges and more responsibility. We apply the same principles to our portfolio companies. Far too many companies want managers with long resumes but with little appetite to roll up their sleeves and do the work. We love to give young, hungry and talented operators a larger platform than what they’ve had before
While we are still early in our journey of growing a talented team of operators, we are beginning to see early signs that these efforts are making an impact:
When we acquired our pest control business, it had the characteristics of a high-quality business but needed operational improvement to become more resilient. We brought in an executive team to make these improvements and accelerate growth. Since our investment two-and-a-half years ago, revenue and earnings have doubled and tripled, respectively. However, these metrics are just the consequence of doing the right things. Many of the improvements go beyond what we see in the financials. For example, we have made key investments in technology that allow us to operate more efficiently than our competition. We have been impressed by what our management team has been able to achieve and hope to be able to deploy more capital through potential acquisitions in the future
Our financial technology business was built by two exceptional entrepreneurs who ran everything from finance and operations to product to sales and marketing. However, this created natural limits to growth, as two people can only do so much on their own. The biggest challenge we faced after investing was attracting talent to the team to ensure the business had the foundation to grow sustainably. Over the last 12 months, we have built a team around the founders, including key people in sales, marketing and finance. Annual recurring revenue has grown by approximately 20% since our investment a year ago, but our investment in people goes beyond a single year’s results. They are crucial to sustain this growth into the future. We are more positive than ever about the prospects of the business, given the quality of people who have joined the team
Our interest in recruiting talent is not limited to our private businesses. We have strong working relationships with many of our public portfolio companies and, in many cases, have referred key executives or Board members. Not only have we found that many of our referrals are making a positive impact on the businesses, but they also improve our conviction in the trajectory of our portfolio companies and extend our investment duration
Our hurdle rate in private investing
On the investment front, 2021 was the busiest year ever for global M&A activity, shattering the previous record from 2007. With unspent private capital doubling over the last five years to roughly $3 trillioni, all of which must be deployed in two to five years, it’s no surprise that private equity investment activity reached similar all-time highs.
In contrast, EdgePoint made zero private investments in 2021. We are always willing to pay up to own great businesses, but found it challenging this past year to invest in a business at a price that would be able to outperform the businesses we own through the public equity markets. In a few cases, the seller had valuation expectations that no buyer could meet, preferring not to transact while comparing themselves to other businesses sold at frothy valuations.
We structurally do not believe that private company investing is more attractive than investing in companies listed in the public markets. We have never had and never will have a target for the percentage of assets that Cymbria aims to hold in private businesses. Rest assured that we will only make a private investment if we believe it will benefit Cymbria’s shareholders. In the meantime, Cymbria’s capital is in great hands, invested in businesses where we maintain a differentiated view. The quality of ideas has never been better, creating what we find to be one of the most challenging hurdle rates in the industry.
In April 2021, space technology firm MDA Ltd. completed a successful initial public offering on the Toronto Stock Exchange. MDA had always been a unique investment, as it occurred at the start of the pandemic and was an opportunity to redomicile a Canadian crown jewel from its indebted U.S. parent. The space technology industry is also more capital-intensive than our other private businesses, and so it made sense to access the public markets to support its future growth plans. We have since sold our position, generating a cumulative return on investment of approximately 72%.ii
One of EdgePoint’s three primary goals is to maintain a company culture that inspires our employees to think and act like business owners. We look to build the same ownership mentality in the private businesses we own and are fortunate to work with business owners and operators who share our approach. We have talked about our goal to be great owners of businesses, but we would also like to be a great partner to exceptional operators and owners. If you have any referrals, please let us know. We look forward to bringing more talented operators into the EdgePoint and Cymbria family of companies.