Holding Company Structure and What it Means for Business Owners
We had two primary objectives when starting Eads Bridge Holdings: 1) to help close the digital divide between Tech and Traditional Industries, and 2) maintain a singular focus on building long-term value measured in decades. In our first blog, we addressed #1 and in this piece, we address how our permanent capital holding company structure is important for achieving #2.
Time Horizon
A typical private equity fund operates with a 10 year fund life. That means the fund needs to acquire 10-15 portfolio companies in the first 3-5 years and then sell them in years 5 through 10. Before the ink is dry on the stock purchase agreement, they have developed a plan to church up your business and sell it to a new buyer as fast as possible. For middle market businesses (<$50m EBITDA), that means selling to a strategic acquirer or oftentimes to another private equity fund who will run the same playbook to sell the company again. You can expect that the company you spent your life building will be hard to recognize within 5 years of selling the business. If selling for the highest price is your main consideration, that may be just fine, but a lot of great entrepreneurs we meet want to ensure a different path for preserving the legacy of what they’ve built.
At Eads Bridge Holdings we are structured as a company not a fund. This means there is no predetermined start and end date. Our time horizon is death or obsolescence, whichever comes first. This lets us have an entirely different perspective for how we develop our thesis, underwrite investments, create value, and even approach relationships. Rather than an 18 month plan priming the business to be sold, we can implement a strategy that matches our time horizon.
In particular our strategy is focused on tech enabling companies with a toolkit that creates operating leverage and growth opportunities. An effective “technology strategy” is not the story you pitch the next buyer. It’s an ongoing, critical self-examination of the breaking points that stifle growth and identifying modern technology tools to improve workflows, surface critical data, and ultimately better service customers. Our role at EBH is to help guide and implement the technology strategy that powers a team to reach its full potential.
Alignment with Stakeholders
“Where are the customers’ yachts?” is an all too frequent refrain in the world of finance and investing. Eventually most people come to learn the mantra “show me the incentive, I’ll show you the outcome”. In a traditional private equity fund model, firms are incentivized and often encouraged by their limited partners to grow the size of their fund. Who can turn down the guaranteed management fee income stream or the potential for massive carry dollars? The only way to build equity value at the PE firm level is to create an annuity stream from management fees that encourages you to raise more funds, bigger funds, and add new strategies to increase the size of the income pool.
As fund sizes continue to grow, the firm is forced to abandon the strategy that made them successful in order to find places to put bigger $$$ to work. As this repeats itself across the industry you find more people chasing fewer opportunities, hardly a recipe for investment success and returns tend to suffer as a result.
Operating as a company and not a fund, EBH aligns our success with the success of our investors. Maintaining strong alignment with investors is something we believe is critical for building a firm that can stand the test of time. Our only incentive is to buy and build great companies. Over time, our holding company model creates its own flywheel that allows us to reinvest and acquire new businesses without requiring outside capital to do so. This keeps our focus on compounding cash flow for our investors while also saving them the transaction costs, fees, and taxes associated with PE portfolio swapping that is so prevalent today.
For business owners, this means our objective is not just to preserve the legacy of what you have built, but to enhance it. Furthermore, we can create a path for you and your team to ensure alignment with the future success of the business and Eads Bridge Holdings. While it doesn’t happen overnight, our goal is to create a vehicle for long-term wealth accumulation for our investors, our employees, and our teams.
There is a permanence associated with nearly everything we do, and we have built the model, team, and investor syndicate to align with that vision. We are uniquely suited for businesses that share our goals and for entrepreneurs who care about ensuring the future success of their business long after they are even running the company.