Quarterly Letter - Q1 2024
Dear Owner Partner -
Based on experience, I believe good outcomes in life are about 90% showing up and 10% execution.
How I initially met my wife is a perfect example. We were both separately hanging out in a bar with friends. Her friends fancied some of my friends and the groups combined. Luckily for me, she sat down right across from me. However, her opening line was, “I don’t want to talk to you, I don’t want anything to do with you, I am just gonna sit here and wait for my friends to talk to your friends, then I am out of here.”
As the eternal optimist, I thought, “So you say there is a chance!”
If I did not show up in that bar that night (the 90%), I obviously would have missed my chance at meeting the most beautiful woman in the world, the woman of my dreams. The 10% part was just not screwing it up and somehow continuing the conversation. Needless to say, I executed well enough.
There are countless other examples.
I think fishing is 90% showing up in the right spot (i.e., fish where the fish are) and 10% lure choice, color, presentation, retrieval technique and speed, etc.
Surfing is 90% wave and 10% rider skill.
Exercise is 90% showing up in the gym and 10% moving the weights around.
Learning is 90% reading the right source material or showing up in the right room with the right people and 10% processing, retention, and implementation.
I am reading the excellent book 3 Shades of Blue: Miles Davis, John Coltrane, Bill Evans and the Lost Empire of Cool by James Kaplan. And I can confirm basically 90% of the recording of Miles’s Kind of Blue, the best-selling and most beloved jazz album of all time, was getting those three musicians (along with saxophonist Cannonball Adderley, bassist Paul Chambers, and drummer Jimmy Cobb) to show up on March 2nd and April 22nd, 1959 at Columbia Records’ Thirtieth Street Studio and record (in only one take!) each song on the album. The other 10% is just normal music magic mojo.
You get my point.
At North Beach, we think about our investment approach similarly: 90% of our investment success is, and will continue to be, the result of how we show up day in and day out, or, in other words, our positioning. Having ample cash reserves, no debt, and owning a collection of companies generating superior returns on invested capital positions North Beach for future potential success. The other 10% is attempting to get the free cash flow flywheel spinning faster and faster, not interrupting the magic of compounding, and, in the spirit of Charlie Munger, “trying to be consistently not stupid.”
In his fantastic book Clear Thinking: Turning Ordinary Moments into Extraordinary Results, Shane Parrish describes proper positioning perfectly:
“A good position allows you to think clearly rather than be forced by circumstances into a decision. One reason the best in the world make consistently good decisions is they rarely find themselves forced into a decision by circumstances…When you are well positioned, there are many paths to victory. If you are poorly positioned, there may only be one.”
When well positioned, we do not need some highfalutin master strategic plan or have the need to proceed in some ordained or conventional fashion. For us, it is simply to work daily to improve our investment positioning. By remaining flexible, learning from our experience, and keeping our investment and operating options open, we can decide what makes long-term sense to grow equity book value per unit and have multiple paths to victory.
HOLDING COMPANY UPDATE
Our first quarter financial performance was satisfactory on the most important metric we track: we grew equity book value per unit (the increase in NBH’s equity value, which is assets minus liabilities, divided by the number of outstanding NBH membership units) by 2% driven by positive performance from both our private operating company and our public company collections. Once again, ACN Solutions had stellar revenue and free cash growth, while both Hart’s Ambulette and BioVac Industrial Service grew free cash flow modestly. The public company collection grew 16% in the quarter, driven mainly by solid performance from our undisclosed position in a fleet telematics company.
More importantly, since inception (January 1st, 2021), our equity book value per unit grew 72% (18% compounded annual growth). Our long-term performance compares favorably to the S&P 500 Index’s 47% total growth (13% compounded annually) since inception. We don’t pay much attention to our performance over short periods. Given how our “mark-to-market” valuation accounting policy and procedure works, our overall performance can and will be weird and volatile. Nevertheless, we fully believe we will add material value and outperform over long periods.
Alternatively, a more straightforward way (using cash-on-cash results) to characterize our performance since inception: our holding company received cash dividends from the private operating and public companies, equating to 94% of our aggregate purchase cost of those companies.
As a reminder, the above comparisons to the S&P 500 Index are somewhat forced: our asset collection is primarily small private companies with a smaller allocation to public companies vs. the S&P 500 Index comprised of large public companies. On the other hand, you choose how to allocate your capital, and the S&P 500 Index, as an investment option, could be considered your most practical and best alternative. We continue to believe we will be the better option over the long term.
As part of a regular review cadence of our investment process, we assess our capital allocation options, i.e., what we can do with our excess cash. Our ten possibilities include:
Existing operating company internal reinvestment
Existing public company reinvestment
Existing operating company external investment (“add-on” acquisition)
New operating company investment
New public company investment
New risk-free short-term Treasury bill investment
NBH Owner Partner unit buyback
New external investment manager vehicle investment
Hold cash
Pay out a liquidating cash distribution
As a result of our quarterly review, we remain relatively more positive on small public company investments and will add more capital to this bucket when available. Rest assured, we believe that the best long-term use of capital remains to invest in our existing and new operating companies, which we continue to evaluate even as we work on finalizing the acquisition of the landfill and RNG service provider company mentioned in our previous quarterly letters and direct updates to you.
…
Despite our triumphs and challenges this quarter, we plan to keep working on (1) improving our investment and operating positioning and processes, (2) improving our culture, and (3) growing the equity book value per unit of North Beach. We intend to do this all day, every day, in any way possible. Once again, we will push hard on our investment strategy’s self-sustaining flywheel, which is simply owning enduringly profitable companies that generate free cash flow that we will use to own more and more enduringly profitable companies that generate more and more free cash flow. This effort is our purpose and our indomitable will.
As always, thank you for your continued ownership of North Beach Holdings.
Best regards,
Russell P. Moenich
Investment Analyst & Executive Chairman, North Beach Holdings
President & Chief Investment Officer, RPM Capital LLC (North Beach Holdings LLC’s Managing Member)
Disclaimer:
The views expressed represent the opinions of RPM Capital LLC (RPM) and North Beach Holdings LLC (NBH). The views are subject to change and are not intended as a forecast or guarantee of future results. This material is for informational purposes only. It does not constitute investment advice and is not intended as an endorsement of any specific investment.
Stated information is derived from proprietary and nonproprietary sources that have not been independently verified for accuracy or completeness. While RPM and NBH believe the information to be accurate and reliable, we do not claim or have responsibility for its completeness, accuracy, or reliability. Statements of future expectations, estimates, projections, and other forward-looking statements are based on available information and RPM’s or NBH’s view as of the time of these statements. Accordingly, such statements are inherently speculative as they are based on assumptions that may involve known and unknown risks and uncertainties. Actual results, performance, or events may differ materially from those expressed or implied in such statements.
Forward-Looking Statements:
Certain statements in this communication constitute “forward-looking statements” within the meaning of the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended (the “Acts”). Any statements contained herein that are not statements of historical fact are deemed to be forward-looking statements. The forward-looking statements in this presentation are based on current beliefs, estimates, and assumptions concerning the operations, future results, and prospects of RPM, NBH, and its operating companies. As actual operations and results may materially differ from those assumed in forward-looking statements, there is no assurance that forward-looking statements will prove to be accurate. Forward-looking statements are subject to the safe harbors created in the Acts.
There are a number of important factors that could cause our results to differ materially from those indicated by such forward-looking statements, including, among other factors, risks inherent in private equity investments, competitive markets for investment opportunities, no assurance of profit or distributions, illiquidity of investments, economic and market risk, inflation and interest rate risk, lack of liquidity, lack of diversification, and conflicts of interest.
RPM and NBH undertake no obligation to update publicly any forward-looking statements, whether as a result of new information or future events.
Investing in equity securities involves risks, including the potential loss of principal. While equities may offer the potential for greater long-term growth than most debt securities, they generally have higher volatility. Past performance is not an indication of future results.
This letter does not contain all the information that is material to a prospective investor.
Not an Offer – The information set forth in this letter is being made available to generally describe our investment outlook and process. The letter does not constitute an offer, solicitation, or recommendation to sell or an offer to buy any securities, investment products, or investment advisory services. Offers are made only to accredited investors by a confidential offering memorandum and related offering materials, which will contain important disclosures regarding the terms and risks of investment and in accordance with the terms of all applicable securities and other laws. To obtain further information, including a confidential offering memorandum, you must complete our investor questionnaire and meet the suitability standards required by law. The information published and the opinions expressed herein are provided for informational purposes only.
Not Advice – Nothing contained herein constitutes financial, legal, tax, or other advice. RPM makes no representation that the information and opinions expressed herein are accurate, complete, or current. The information contained herein is current as of the date hereof but may become outdated or change.
Risks – An investment in NBH is speculative due to a variety of risks and considerations as detailed in the Confidential Private Placement Memorandum dated April 2022, and this letter is qualified in its entirety by the more complete information contained therein and in the related subscription materials.
No Recommendation – The mention of or reference to specific companies, strategies, or instruments in this letter should not be interpreted as a recommendation or opinion that you should make any purchase or sale or participate in any transaction.