Dear Investors,

Welcome to our 3rd investors’ update! Thanks to your feedback, we are thrilled to unveil our company name!
Breaking News! The Name of our Search Company
Gen Capital Partners “GenCap”
We appreciate your suggestions on our name very much. Eric and I had gone through your recommendations, debated for multiple weeks, brainstormed various permutations and eventually landed on the name GenCap, which means:
Gen = Genesis and Generational - from genesis to generational success, referring to how we are helping founders create a bridge for their business that cuts across generations. Capital = Intellectual and Financial resources - the contribution of our collective know-how (intellectual) and financial assets towards a successful outcome. Partners = Partnership - be the 1st port of call for small & medium business owners.
With this name, our vision is to preserve and scale the lifelong legacies of Southeast Asian businesses, ensuring their growth and sustainability from genesis to generational success.

We have started work on our logo and brand equity, and will keep you posted once our agency, AKIN, has come back with the work. Shout out to Arvin for helping us with this! A massive THANK YOU. Investment Thesis: The type of business that we are searching for This is the second part of our investment thesis where we will cover the ideal type of business that we are searching for. For those who missed the first part of our Investment Thesis - Our Sectors of Focus, you may check them out in the link here. Here we go:

Ultimately, we want to (1) buy a quality business at a (2) reasonable valuation in one of the listed sectors previously covered. Buying a Quality Business…

Our ideal business is one that is operating in a niche space, with a clear value proposition, enduringly profitable, with a long term growth headroom and led by a management team with an intention to sell. Our initial deal screener will be focused on 5 areas:
Size: S$10m to S$20m topline revenue with at least a mid (50%) gross margin, at least a 10% EBITDA margin, and positive free cash flow. Size is important here and we are balancing between too large, which has an implication on the amount of capital we have to raise, and too small, as intended to avoid taking the “zero-to-one” risk covered in our 1st investment update. We are buying businesses that have gone past the valley-of-death and where there is a clear product-market fit. In addition, at S$10 - 20m revenue levels, there is usually (not always) a minimum system or structure in place, and decision-making and execution tend to be diversified from the founders/owners, mitigating the key-man risks. We want to avoid buying a business where the know-how and customer relationships lie within a single warm body, which would create a huge risk to our succession plan. This is a red flag and will be struck off from our initial filter.
Owners: Reputable, long-standing owners of 10 yrs or more with a commitment to exit. We want to deal with sellers who deeply understand their businesses and act with impeccable integrity. These can be inferred based on the way they interact with us, their customers and employees. Importantly, the sellers need to have a strong motivation to sell. Learning from fellow searchers over the last few weeks, this is much more important than it sounds. There must be a strong external factor forcing a sale; some examples are retirement, poor health, divorce, death of an owner, lack of successor, or inability of partners to get along. No matter how much we like the business, young (40s and below) owners shopping for a quote is a red flag, and we don't have the luxury of time to dance around with them. Their asking valuations also tend to be less realistic.
Industry: Serving a niche, small but important, within a non-cyclical industry. Competition is either remote or fragmented. While we previously covered our 7 focused industries in our earlier post, there is a niche or a small but important player that makes up only a tiny % of their customers’ expenditure in every sector. Some examples would be corporate secretariat or fire safety firms with revenues comprising only a low single digit percentage of their clients’ G&A expenditure. Procurement managers start with the big expenditures during any cost cutting exercises typically around an economic downturn. If one is microscopic, one would tend to escape such scrutiny which makes the business highly resilient. Ideally, the target would be the market leader with a small monopoly in the same industry but we know this is a tall order. The next best option would be a fragmented market as we dont want to go against industry giants, the likes of Singtel or DBS.
Product: Clear value proposition and competitive moat with low reliance on critical real estate and labor. This is best represented by short sales cycles and high conversion rates, assuming that the target prices are in accordance with the market norms. At this size of operations, we are unlikely to have bargaining leverage against real estate developers and hence would like to keep our physical footprint small to minimize excessive outflowing rental expenditures and onerous rental contractual terms. At the same time, we would also track employee productivity and cost-per-delivery as a measure of scalability.
Commercial: High quality revenues from diversified and loyal customers that requires little/no capex. Recurring revenue is the best case because it delivers predictable cash flow. Repeated revenue from fiercely loyal customers is the second best as there is a high chance of them buying in the next cycle. This can be observed through the average time they spend with the target (>3 years is best) and supported by strong testimonies. Concentration risk, where the top 20% of the customers generate 80% of the revenues, is a red flag especially if the company has been around for a while. While we aim for generally capex-light business, we will handle capex investment on a case-by-case basis as some of our investors like asset-heavy businesses. Undoubtedly, this has an impact on our planned returns and we will need to scrutinize their margins and payback periods carefully. Ideally, the price and overheads can be further optimized as part of our operations.

…At a reasonable valuation Multiple arbitrage, the difference between entry and exit valuation multiples, is our second source of alpha (the first being earnings growth). As the exit valuation multiple is out of our circles of control, Eric and I will have to be extremely disciplined about our entry valuation, which is determined by supply and demand. We covered supply in our investor update #1, that all businesses of such size will have to sell in order to monetize. That said, we have to filter for sellers with a strong motivation to sell which we had covered in the aforementioned paragraph. From a demand perspective, we will work hard to make sure that we are differentiated from the traditional private equity and buyout firms and are the first port of call for our business owners.
First, our targets are small firms, less than S$20m in revenue. These are generally not the targets of the larger PE firms which tend to go for larger transaction sizes for better economics as many of them have huge overheads and expensive headcounts to account for. Most of our targets will be passed over by our PE peers. Second, we can move faster as our due diligence and decision-making process is streamlined – Eric, myself and an independent investment committee member who is a seasoned private equity professional. Under PE firms chaired by global investment committees, we understand Southeast Asia deals intimately and have minimal administrative bureaucracy burden. Third, we are flexible. Any selling owners will be extended options to continue working on the business or to exit completely. Our preference is generally for the selling owner to continue, minimally on a non full-time advisory board member basis, for cultural continuity and guidance for the incoming operator. Fourth, we do not operate a fund structure, which means we can operate with a long term ownership mentality. Without the time pressures of a typical 10-year fund life, we can afford to run the business with a long term mentality, preserving existing culture (that works) and not hastily making a quick flip. Fifth, without the constraints of an investment period, we don't have the pressure to deploy. We will take all the time we need to walk the ground, to deepen and cultivate mutual understanding and management philosophy with multiple targets. As one of our seasoned investors Weng Leong puts it, successful deals tend to be proprietary, not brokered. Last, we hope you concur with our personal assessments that Eric and I are kind people and are very pleasant to work with ;) Through the above, we are aiming for a 3-5x of EBITDA multiple for an annual growth of 10-20%. Our proprietary filter is to divide EV/EBITDA by the annual growth rate and it should not exceed 0.3. E.g. a 5x EBITDA at 20% growth yields a###-###-#### ÷ 20), which passes the test. The valuation multiple offered will be deal specific too e.g. higher quality revenue = higher multiple and higher concentration risk = lower multiple etc.. Over time, we will adjust our expectations accordingly as we evaluate more deals and it is expected that our pricing precision will improve.

Our Key Asks: Thank you for looking out for us If you have made it this far, thank you for reading. We would very much like to stay engaged with every one of you as much as we can. Please reach out to Eric or me if you: Have any questions on our investment thesis or even a related topic in mind that you would like to hear our views on in the future, Know of anyone who may be helpful to our vision and business, Know of any potential investors keen to invest in private companies, Understand the corporate secretariat sector well.

Upcoming update next week: Operating Thesis (1/2): We bought a business. Now what?

Have a stellar week and see you soon!

Best Regards, Eric and Zachary

p/s: If you missed our views of the first part of our Investment Thesis last week, please find it here.