Tucker's Farm Corp: an interesting rollup model
A few months ago I found an interesting guy on LinkedIn: Kyle Tucker. I don’t have many skills but I do think one of them is identifying interesting business content creators before they become big (and sorry to calling anyone posting about business a “creator”).
His content is good and you should follow him. His background is at Apollo Global (one of the top private equity funds) and Viking Global (one of the top hedge funds). He left Viking a few years ago to start his own investment firm buying lower middle market businesses. It’s affectionately called “Tucker’s Farm Corp”, named after his dad’s hobby goat farm.
This week he went on a podcast and I just listened to it today (listen here). Some of my favorite blog posts that I’ve written in the past have been off-the-cuff reactions to other content, so here’s a summary of some of the things he talked about and my reaction to them:
As mentioned, he has this prestigious finance background. Interestingly, though, the two shops he was at have quite different styles. Apollo is all about value investing and putting a large amount of capital to work in each deal. Viking is much more of a traditional hedge fund: trying to out-think you, buying and selling a few dozen stocks at a time.
I can’t remember the catalyst for why he left that path, but the reasons behind it should be familiar to anyone on the high finance track. The lower middle market is less competitive. Capital has been pooling higher in the market and so if you can build something of scale, there will almost certainly be a bunch of PE funds waiting to buy it. Doing your own thing is more creative, flexible and autonomous. Tucker’s Farm checks all these boxes.
Now, things like search funds (my experience here) and holdco’s are all the rage these days. A friend who recently graduated from HBS told me that in a matter of just a few years, the most popular career post-grad shifted from VC to search funds. They have all the monetary and lifestyle benefits I previously mentioned, and there are enough market tailwinds (see: silver tsunami) that it’s become a popular route.
Kyle’s operation rhymes with these search funds and holdcos, but he’s got a really differentiated view on this market. It hinges on an important insight: rollups have power law outcomes.
This is interesting because most of the time we bucket the market into PE and VC. PE is a bunch of singles and doubles, with a high on-base percentage. VC’s strike out a lot but then hit a home run — and as long as the home run is a grand slam, they make a bunch of money.
Kyle listed several examples where rollups can just sorta keep going fi they are strong enough businesses. It seems that a combination of A) finding a good platform, B) plenty of reinvestment runway and C) exceptional operating means that sometimes you can find businesses similar to Buffet’s See’s Candies: you just buy and hold an amazing business.
He’s structured his investment vehicle around the insight that most of the investments will do decently well but that he wants to capture the upside of the ones that really excel.
He’s explicitly looking for rollup opportunities (not just a broad “great businesses at great prices” or any other strategy).
He loosely underwrites to a 4-6 year hold period where he can do a bunch of acquisitions to get the business to, say $30m in EBITDA.
If the business is a true winner, he can just hold. If he wants to sell because the market is giving him a good multiple, he can do that too.
In addition to the perspective on the market and structure on his investment vehicle, Kyle has an interesting view on how to create value in his business. He believes that sourcing deals is far and away the most important value driver in the lower middle market (in contrast to, say, having the smartest investment framework).
It’s not quite right to say that evaluating the investments doesn’t matter, but if I’m understanding him correctly it’s almost more like a sequential thing. It doesn’t matter how good you are at evaluating deals unless you can source them (and source enough of them to find the ones worth doing).
Extending what he said: because these businesses are private, you’re also learning new information with every deal sourced. It’s gotta be the core engine in the business.
I really appreciate this perspective and also how he contrasts it with his investing days. When you work at a big PE or HF, your business is about not getting things wrong or finding hidden value, respectively. In lower middle market investing, it’s about finding deals. Very different mentality.
This is something I’m also dealing with real time.
Back in my writing days, my job was to be interesting to a group of smart people. This means working really hard at being and sounding smart. But as more of my job becomes sourcing deals, sounding smart only matters in the context of sourcing (or getting deals across the finish line). It’s a slightly different muscle.
They also discussed how much of this job will be automated or if there’s real value to spending time trying to figure this out right now.
Kyle’s perspective is that sourcing deals in the lower middle market is at a really interesting time: it’s this complicated mix of software, AI and humanity that the industry hasn’t fully cracked yet. It certainly might look different in 5-10+ years but that happens all the time: in pretty much each of the last 4-5 decades, people have been successful in finance because they took advantage of an opportunity that today is a commodity.
He also talked about friction being something to lean into. He first framed this in the sourcing process. If there’s a trade magazine with the size, location and contact info of every business in the space, it’s pretty likely that everyone has already looked there. Very little alpha. But if it’s hard to reach owners (friction), that’s a sign to dig deeper there because it’s not clear that it’s a winning or losing strategy yet.
I agree with this in some ways and disagree in some. It’s worth the effort to try and find these, because the reality is that this is still an inefficient market. There are lots of small businesses out there. On the other hand, information wants to be free. I feel like a more sustainable advantage isn’t necessarily relying on the “finding” part fully — nor the underwriting part — but rather having a unique right-to-win so that you either can get in at a lower price or create more value after the transaction.
He also talked about it as a career path. If you work in high finance, you have the IQ, EQ and work ethic to make it. The big question is if you have the hustle / creativity of an entrepreneur. Some people do and some people don’t.
I just had a conversation with another investor about this. In their context, they were recruiting for basically a #2 / right-hand-man role and how he needed to basically find a diamond in the rough. He was looking for someone on the traditional path who was ready to jump off for the first time. It was at this time where you see if the person has that hustle skill or not. If they already jumped off the path, they are either on their way to success, or floundering because they couldn’t make it work.
It’s still not the right job if you want to do something prestigious :).
Kyle talked about a few other things but these are what stood out the most. Drop me an email with any thoughts / ideas.
More of this!