Building an Unfair Advantage

Justin Ishbia is likely the best microcap investor in the world. He is the founding partner of Shore Capital Partners, a $7 billion private equity firm utilizing a systematic approach to acquire hundreds of private microcap businesses. Since 2009, Shore Capital has acquired 600 small businesses, which makes them the #1 most active private equity firm in the world.

More importantly, Shore Capital is ranked in the top 1% of all private equity firms globally by performance. They have compounded investor capital at 50% net per year for 10+ years. The firm’s success has made Justin Ishbia a billionaire, and the co-owner of the Phoenix Suns/Phoenix Mercury along with his brother Mat Ishbia (CEO of United Wholesale Mortgage). 

What makes the firm unique, beyond the track record and velocity of deals, is the small size of the average business acquired: $18 million in revenues, $3 million in EBITDA, enterprise value of $12 million. They focus on finding, acquiring, building, and scaling platforms of small businesses in growing industry niches.

Do you think public microcap investors can learn something from their process?

Absolutely. You will probably learn more than reading the 38^th book on Warren Buffett. 

Justin Ishbia was recently interviewed by Patrick O’Shaughnessy on the Invest Like the Best Podcast. I listened to the podcast five times. I would encourage you to do the same.  

"We have billion-dollar resources and knowledge and apply it to million dollar companies." – Justin Ishbia

Let’s breakdown their approach:

1. Identify Industry Niche. They find an attractive industry niche (i.e. veterinary, urgent care) in a long-term growth trend where consolidation and scale could enhance the competitive advantage.
2. Partner with Executives. They study the industry, attend all the conferences, identify the Mt. Rushmore businesses and leaders in the industry. They recruit the board members prior to acquiring a businesses in that niche (platform). Only after a 40-60 page white paper is written/presented, and the right board members are selected is a platform greenlighted by the investment committee.
3. Find MicroCap Targets. They get on the ground and use the board to identify high value targets. Partner with the founder of the target by acquiring 60-80% of the business. 
4. Grow Investment for Exit. The first 100-days after acquisition has 23 standard operating procedures that need implemented to create efficiency for scale. The goal is to turn "line of sight management" into "management by metrics". The result is a platform of businesses that on average will grow 100% per year (organic + inorganic) with the goal of growing EBITDA from $3 million to $15+ million over a few years. They take businesses From Hustle to Scale. Finding buyers isn't difficult when the platform of businesses is growing 100%, with best-in-class management/board, in a growing industry niche. They have sold platforms to large public companies, and large private equity firms.
5. Systematic Approach Produces Consistent Outcomes: Since inception the firm has invested in 59 platforms (600+ individual business) with 14 exits. The average return has been 7x their money, and the worst return has been 3x their money. In totality the fund’s performance is 70% Gross IRR’s and 50% net since inception.

When Justin Ishbia was asked about the secret sauce of the firm he said:

“The most important part of our thesis is recruiting the right board members.”

I wasn’t surprised because it immediately answered the question, “How Are You Different?”. Most microcap investors don’t focus on the board when they evaluate microcap public companies. What I’ve learned is to be the best in the world (whether it's sports, investing, etc), it normally means a person/firm has innovated on an under appreciated area and it becomes a big differentiator. Shore Capital has turned an area that most investors neglect into its greatest strength.

How does Shore Capital build a board? 

No Big Check Writers: No one gets a board seat because they wrote a big check. This made me laugh because this is exactly how most microcap boards are structured.

Mt. Rushmore 7-Person Independent Board: Each platform has its own 7-person independent board. They seek out the Mt. Rushmore leaders in the industry who by industry standards and reputation are best in class. The over-stacked board creates extreme value. Shore Capital builds a board like a coach builds a basketball team. They don’t want 5 point guards. They want a guard, shooting guard, small forward, power forward, and a center. Each player provides value in different ways to help the team win. Similarly, each board member brings a skillset necessary to scale:

• Two people that ran a business in the same sector 3x the size.
• One person that knows the voice of the supply chain.
• One person that knows the voice of the customer.
• One person with functional discipline/CFO type that knows the numbers/KPI’s cold.
• Two people from an adjacent sector with value added expertise. 

No Cash Comp: All board members get paid in options. They get a number of options where in Shore Capital’s historical base case scenario will equate to $250,000 in 5 years. Most board members reframe it as being paid $50,000 per year for five years and sign up. 

Super Powered Board Ecosystem: In 2024, Shore Capital expects to close on 12-13 platforms. They will need 90 unique board members. The company puts in a lot of time creating a board member ecosystem across platforms to cross pollinate knowledge. All board members come together twice per year to learn from each other and increase the odds of success.

Shore Capital’s moat is their process + volume of transactions. After hundreds of acquisitions and operational reps, they are learning faster than most. They believe they are the best in the world at scaling microcap companies from $3 million to $15+ million in EBITDA. They can use and reuse talent, which creates operational excellence and mobility for executives. The firm has 150 full time people, half devoted to operations, and they have never lost a person above associate level. 44 Vice Presidents at Shore Capital. No one has ever left. Why would they? I can’t think of a more fascinating firm in the world. 

Innovating and creating a systematic approach around an under-appreciated skill is how you create an unfair advantage. Shore Capital has done this with board composition.

Here is great presentation by Justin Ishbia: 

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