2020 Annual Letter: A Year of Change

    Jim Moran

    As I write this letter and a warm San Diego breeze comes through my office window in the middle of February, I can’t help but feel relieved that not everything has changed in the past 12 months. It has been a wild year, and one in which we all experienced a shock to our perceptions of normalcy (indeed, we are far from normal still). For ValueStreet it has been a year of change as well, but for different reasons – almost all positive.

    First, we are fortunate that everyone on our teams (both direct and portfolio companies) is in good health and spirits. We hope it stays that way and continue to monitor the situation like everyone else.

    Second, despite the chaos, it was a good year for ValueStreet economically. Amidst the chaos of SARS CoV-2, we were fortunate to close two important platform investments here in San Diego, the city we love. Both deals were affected by the virus and its fallout in different ways. The first, which was scheduled to close in early 2020, took an extra 6 months to make it across the finish line. Not because we had lost conviction in the opportunity or because the sellers (our now wonderful partners) were feeling tentative, but because everyone’s expectations went out the window when the pandemic hit. While large public companies worried about shrinking revenues and ballooning debt, small companies worried about revenues literally going to zero – about survival itself. Our conversations went from boring transition items to helping our potential partners navigate PPP laws that were being written by the Treasury Department in real-time. We feel fortunate to have weathered that initial uncertainty and finalized the transaction with a management team we truly admire. We have already closed several small add-on acquisitions and are doing our best to keep up with this amazing group as the business continues to grow.

    The second opportunity took 11 months to complete from first contact to closing (February to December 2020). A lot changed in that period of time for the sellers and the business itself, and we were fortunate to find a compromise on price and terms that everyone felt good about. We’re still getting our feet under us in this business, but expect it to be around for many decades to come, as it provides a specialized service that is central to the San Diego way of life (and has done so for several decades).

    While things looked better on paper for us this year, the gains we made as a firm in 2020 were the result of more than two years of grinding without a closing to show for it. It was a long time to work without seeing any tangible result, and, in truth, felt like a continual series of letdowns. But as it turns out, in investing, knowing what you don’t want is 90% of the battle. We got really good at saying no over those two years, even if we could’ve said it faster on certain deals. I’m thankful we went through that process because the net result was a deeper understanding of the kinds of opportunities in which we could truly envision decades-long ownership and where we knew we could add real value. Our patience is paying off now as we encounter real long-term opportunities to compound capital within our companies.

    From a personal perspective I’m feeling really fortunate to have my health, to co-own wonderful businesses with talented and driven partners, and to have learned so much and met so many wonderful people in the last few years. I’m also learning to be more comfortable with what my needs are as a businessperson and an investor. This probably sounds like a minor thing, but in practice it’s pretty important. I’ll never add as much value as I can, and ValueStreet will never achieve returns any different from anyone else’s unless we execute the vision that is best-aligned to our talents and opportunity set. For now, that means continuing to invest in our existing companies as much as possible, continuing our efforts to be the best investment firm in San Diego, and creating even more opportunities for our companies’ employees and their families to thrive.

    As a quick comment on the market more generally, the macro world continues to baffle me. When I started evaluating the world of small business investing in 2018, part of the reason I found the opportunity compelling was that public markets looked frothy and unappealing. Today, in 2021, they look downright crazy. I don’t quite know how this liquidity bonanza ends, but I know ValueStreet will remain focused on buying cash producing small businesses in evergreen industries. As long as dollars continue to have value, that will be enough.

    Thank you to our advisors, management partners, legal and accounting partners, and all the family members that accommodate us spending way too much time in front of the computer late at night. We appreciate you all and look forward to the coming year.

    All the best,
    Jim Moran