Quarterly Letter - Q2 2024
Dear Owner Partner -
I have worn Vans shoes since the 7th grade.
Back then, as a skateboard punk growing up in the late '80s/early '90s, Vans were both functional (the shoes' famous waffle pattern provided tons of sticky grip to ride a skateboard) and affordable (much less than the more skateboard popular Vision Street Wear and Airwalks and definitely less than Air Jordans). Today, if you were to run into me, there is a very high chance I would be wearing Vans (I even wore them at my wedding, much to my wife's dismay), mainly because I get stuck in my post-fashion ways, and I still find them affordable.
Paul Van Doren was the founder of Vans back in the mid-1960s, and his fantastic autobiography, Authentic: A Memoir by the Founder of Vans, is an epic tale of entrepreneurship, hard work, learning from mistakes, and being in the right place at the right time. He was the first to create a "factory store" to sell branded shoes (all other brands were sold through department stores), the first to sell customized shoes (in an array of personalized colors and patterns), and the first (and maybe the only?) to sell one shoe at a time. Having roots in SoCal, Van Doren and his grippy shoes were instrumental in helping to grow skateboarding's popularity and culture in the mid-1970s after the sport's move to urethane wheels. As a result, he was the first to sponsor skateboarders by providing shoes to up-and-coming pros.
One of those pros was the legendary Tony Alva, a pioneer of vertical skateboarding and credited as one of the first skateboarders to successfully execute a "frontside air" in a backyard empty concrete swimming pool. He had to gather tons of speed to work his way up the vertical wall to the pool's rim to do this trick. Using the momentum to defy gravity, he would grip the front of the board just as he launched straight up and off the pool deck into the air. Then he'd rotate his board and swoop back down the side of the pool deck. As the story goes, the first time Alva did this, not only was it captured on film (by the great photographer Glen Friedman), but someone yelled, "Man, you just went off the wall!"
Van Doren channeled that stoke:
“As an American idiom, ‘off the wall’ had been around for decades. But when it was picked up by other skaters, the phrase caught on as slang, evolving to mean something new and maybe strange or even a little nuts. Say what you will: to me it screamed opportunity, a chance to push things to make the most of every moment. It captured Vans’ spirt and become Vans’ anthem, mantra, and rallying cry. Looking back, I see that part of my company’s success was that willingness to go “off the wall” from Day One. We were always speeding forward into the unknown, trusting that skill and agility would bring us safely back to earth.”
Today, some may say North Beach Holdings just went off the wall after creating our newest platform, LFG Service Partners (LFG can also stand for “landfill gas”!). This was accomplished in two steps. First, we finally closed the big (for us) landfill and RNG service company acquisition we have been working on since the third quarter of last year: Monitoring Control and Compliance Inc. (MCC), a managed service provider of landfill gas operations, maintenance, and expansion services located in Wadsworth, OH. Second, we contributed BioVac Industrial Services to the platform in exchange for equity. BioVac was NBH’s largest private operating company that provides various cleaning, vacuum, and water blasting services, primarily to landfill gas, municipal water plants, and other industrial facilities.
Today, MCC and BioVac serve similar markets with some overlapping clients. We expect the combination of MCC and BioVac will yield revenue synergies as we merge our service offerings in a new go-to-market platform. Along with MCC's former owner and an external equity partner, our long-term plan is to develop LFG into a premier platform that provides essential landfill gas field and infrastructure services to waste and energy companies across the U.S. By professionalizing the organization, executing organic growth initiatives to increase service capacity, and making strategic growth investments, we are projecting solid future growth prospects.
The off the wall part is this: knowing those LFG growth prospects may be better than the standalone NBH growth prospects, we offered you and your fellow Owner Partners the option to (1) exchange out your NBH equity for LFG equity, (2) receive cash for your interest in NBH, or (3) do nothing and remain a NBH Owner Partner.
Most of you chose option #1. I also allocated a portion of my investment in NBH to LFG. The NBH team and I are incredibly grateful for the opportunity to work for those of you who are continuing on to LFG. It has been an honor to be your partner and help you grow a small portion of your permanent capital.
NBH's significant assets now include ACN Solutions, our equity stake in LFG, Hart's Ambulette, and our collection of minority stakes in a large handful of public companies.
Despite the off the wall reorganization of NBH, our mission stays the same. We will not spend time thinking about stuff out of our control, like the direction of inflation or interest rates or who will win the presidential election. The future outcomes of those things are important but unknowable. Thinking about those pursuits is a waste of our time.
It is more beneficial for us to try to understand what is happening now in the areas we can control. We are business analysts and operators and stay within our tight circle of competence. We focus on finding outstanding small private and public service companies at sensible prices - not mediocre companies at bargain prices. We work hard to understand them deeply from the bottom up and allocate capital accordingly. We then strive to operate our owned private companies well and be an excellent partner for our owned public companies. All the while, we are looking to build an incredible culture.
HOLDING COMPANY UPDATE
Our second 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 10% driven by positive performance from our private operating company collection, including BioVac's one-time "mark-to-market" valuation adjustment after the LFG combination. 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 during the quarter. Our public company collection declined 6% in the quarter.
More importantly, since inception (January 1st, 2021), our equity book value per unit grew 93% (21% compounded annual growth). Our long-term performance compares favorably to the S&P 500 Index’s 53% total growth (13% compounded annually) since inception. We don’t pay much attention to our performance over short periods. Given how our ongoing private operating company “mark-to-market” valuation accounting policy and procedure works, our overall performance can and will be volatile. Nevertheless, we fully believe we will add material value and outperform over long periods.
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 believe we will be the better option over the long term.
…
Our off the wall path forward endures: acquire, operate, and partner with attractively priced, well-run small private and public service companies that can deliver free cash flow growth for a long, long time. There is no fundamental difference between owning an exceptional private operating company and owning the common stock of an exceptional public company. We protect, enhance, and deploy our hard-earned and sacred permanent capital in a durable, concentrated, and differentiated collection of superior service companies. These companies are run by able and honorable entrepreneurs with important and unique long-term competitive advantages. So, free cash flow earnings will likely be materially higher many years from now.
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 LLC
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.