After starting his first company at age 20, Chris Rolls decided the next phase would be investing in other people’s businesses.
Two years of ‘middle aged work experience’ paid off for private equity funds manager Chris Rolls when he decided to pivot his career after exiting four companies.
Chris Rolls spent the first half of his career starting and running businesses. He founded his first company at the age of 20 and successfully exited four businesses in a variety of sectors. Then he decided that the next phase of his life would involve investing in other people’s businesses and helping them to grow.
However, first Rolls had to get up to speed on private equity, so he spent two years doing “middle-aged work experience”.
“I found someone who owns a private equity firm and I said, ‘I know how to fix businesses. Give me your worst three businesses and I’ll fix them up. In return, please spend eight months showing me everything you know about private equity.’”
Rolls also attended the University of California to study private equity and venture capital investing, as well as Harvard Business School and Columbia Business School. He interviewed scores of private equity firm owners around the world.
By 2016, he felt ready to start his own private equity firm, PieLAB Venture Partners. But it was at a time when Australia’s economy was contracting and there were murmurs of a looming recession – much like now. With the global economy currently in worse shape than ever and inflation soaring in local and overseas markets, Rolls has developed an investment strategy that he believes minimizes his company’s exposure to the risks.
The number one criteria for investment is whether a business provides a non-discretionary product or service. For example, PieLAB recently bought a company that provides fire prevention services to nursing homes and aged care facilities
“Inflation almost inevitably means an economic downturn and the possibility of a recession,” he says. “If you’re a high-end restaurant, you’re the opposite of non-discretionary. The moment there’s a downturn and people start feeling poor, they stop going to restaurants. But if you’re a nursing home, you are required by law to have those sprinkler systems tested every year. Irrespective of economic climate, that business will be fine.”
The other criteria he looks for in a business is high switching costs for the customer if they were to move to another service provider, such as a body corporate services provider.
“Just because you’ve got a non-discretionary product or service, it doesn’t mean someone has to have it done by you,” he says. “But if it’s expensive to move from one supplier to another, then they’re more likely to continue getting it done by you.”
PieLAB began by investing in two types of companies: high growth technology companies and small and medium B2B businesses with recurring or subscription revenue that are earning $1 million to $3 million of EBITDA per annum, and with a strong history of profitability.
It opted to focus exclusively on the latter for the best risk return profile.
“We found we were able to grow both these types of businesses – the difference is that you can invest in those more conventional businesses at a tenth of the price – and therefore your risk is also a tenth,” he says.
In his experience, it is easier to turn a $10 million revenue business into a $30 million revenue businesses than it is to transform a $100 million revenue business into a $300 billion revenue one. Rolls is surprised that very few private equity firms invest in SMEs.
“We are the land of small businesses in Australia – there’s 2.4 million of them and they contribute 57% of our gross domestic product. But when you turn on the news, it’s all about what’s happened on the ASX.”
Rather than selling a business after a few years, PieLAB holds onto it over the long term, after spending considerable time and energy aiding its growth. Part of this is because it would be too time-consuming and costly to exit multiple small businesses.
“Rather than selling the individual businesses when the investors need their money back, we create a liquidity event across the whole portfolio,” says Rolls. “Most commonly, we do this by listing the business or creating a list entity that owns the small portfolio of companies.”
The business model appears to be working well – Rolls said that it has returned more than half of the capital and investors will receive between 30% and 35% per annum net of fees for the life of one fund, and 20% for another.
After acquiring a business, Rolls and his team sit down with the CEO and executives to draw up a plan to get the business firing on all cylinders.
“This is going to sound awfully simple, but the way to add value to a business involves one of three things: increasing prices, decreasing costs and selling more things to more people,” he says. “If you’re not doing one of these three things when you’re running a business, then you’re probably not adding value. You might as well be out playing golf.”