Investment Thesis

Seeking $50M for a high risk investment fund focusing on diversification through RE Development, Value Stock Investing, PE Acquisitions and start-ups.  The goal is to build a fully-embedded portfolio invested within every aspect of the US Economy.  To get to that safety with a high return, we’re starting from the bottom.  Building from the small and growing into the big.

Real Estate Development (RE)

Initially, all capital will be invested in real estate development.  We will build entry-level affordable single-family homes utilizing 80:20 leverage.  As the completion and sale of constructed homes increases, cash flow created from profits will be divided in half between homes constructed for sale and homes constructed for renting.  This will continue as the steady-state business plan for the Real Estate Development side of the investment portfolio.  The target is to construct 200 homes per year.

Although all capital will initially be focused on the real-estate development arm, when not in use, it will be sitting somewhere.  This will be in high-yield savings accounts, and a minor portion in bonds and an S&P500 index.

The Real Estate Development side of the portfolio will quickly reach a self-sustaining rate of construction on selling, creating additional profits.  Additionally, as revenue increases and sales become reliable and consistent, banks will be open to putting us on a Credit-Line, reducing the cost and time required to receive financing for the builds.

Profits will be shifted to the whole portfolio shared bucket.  Once in this bucket, The Bailey Fund will split it’s attention between Private Acquisitions, and Value Stock purchases.  Division of capital between these two will not be hard-coded, but vary year-to-year depending on opportunities that arise, and the capital required to move on them.

Private Acquisitions (PE)

There is a generational shift occurring.  Baby boomers are aging out of the workforce.  Situationally this means baby-boomer business owners are ready to retire and either; 1) looking for a succession strategy, or 2) selling.  We’d like to focus on these businesses.  The PE industry is extremely competitive, with many firms seizing the same businesses we’re suggesting.  To out-maneuver them, we will zero in on the small businesses - the <$500K per year revenue “Mom and Pop” enterprises.  The majority of PE firms can’t support their business model with companies of such small revenue.  The resources required to multiply the CAGR for these companies far surpasses the potential annual cash-flow they would generate from operating the business and selling at a large multiple.  In other words, their machine is too expensive to sustain itself on such small fish.  Bailey Funds, on the other hand, is small, with very low overhead.  Our machine would make immense profits off of the little fish.

Specifically, The Bailey Fund will target blue-collar manufacturing-type companies - think cabinet-makers, landscapers, fastener manufacturers.  They will be small, roughly $500k in revenue, with a target after-tax cash-flow of around $100k.  The ideal business operations would be a handful of employees with manufacturing, sales and general business day-to-day being included, while the owner is mostly hands-off, maintaining the back-office duties and general management.  We will particularly target businesses where the owner does not have a website, writes their own checks, doesn’t use software for payroll, and does their own bookkeeping.  This will position us to completely modernize and digitize the back-end duties resulting in immediate value creation.

The most important metric we will look for is a company with a strong reputation.  In the blue-collar fields reputation is everything.  It doesn’t just mean your business is honest and has integrity, but also means it has a reliable market, good profits, loyal customers and employees, and superior products.  With these features in place, all Bailey has to do is rinse and repeat.  When we acquire a business, we will change nothing because we will acquire businesses that are doing it right.  They just need a makeover.

The Bailey Fund intends to keep private acquisitions long-term, with the ultimate goal of scaling nationwide either by internal expansion, or building-out franchises.  Our theory is to buy a tiny player with a superior brand and scale it into a national player.

An important philosophical aspect of blue-collar acquisitions is the drop in people entering the trades.  There is a huge labor shortage.  As someone who started their career in the trades, it is my personal belief that the main cause of a trade career’s unattractive-ness is it’s lack of built-in career growth.  They are dead-end jobs that (outside of the very few who start and grow their own trade business) mostly never lead to a less-physically demanding job.  Trades-people don’t go from the field labor to the office.  We will remove this barrier.  We will actively maintain and provide training and career opportunities to transition from entry-laborer to entry-office, etc.  As a part of The Bailey Fund, employees can be confident in moving from a hole-digger to a director of finance within their personal drive.

Value Stocks

Stock investment will follow the Benjamin Graham method.  Stocks will be purchased based on three metrics: 1) BV vs Stock Price, 2) dividend payment, 3) earnings per share.  By Graham’s proven analysis, performance and price revert to the mean.  Bailey will purchase stocks below the mean.

Book value must be less than the stock price, dividends must be extremely consistent at a high yield over a minimum of 15 years.  In particular, the company’s dividend actions during the 2008 recession are important.  Did they or didn’t they pay a dividend?  Additionally, the company’s earnings per share must be healthy, and their cash to debt ratio in the black.

Startup Investing (VC)

Finally, funds will be oriented towards startups, including incubation and starting of our own companies.  It’s important to highlight that startup investing - though the word ‘investing’ will be in use - is not true investing, but speculation.  Speculation is high risk and full of unknowns.  When a startup is successful, however, the multiples can be enormous.  Only a small percentage of annual profits will be diverted to startup funding.  Startups will be selected based on historical performance, amount already invested, potential market size, the team's ability to execute what is required to meet the market, and the terms.  Initially, investments will be implemented via crowdfunding sites like WeFunder.  On these platforms, we’re able to see, in real-time, how many people have already invested, and how much they’ve invested.  This will give us a statistical measurement of how well the company raises money.  According to the book “The Evergreen Startup”, the number one predictor of a startup’s success is how well the company raises money.  It is, therefore, the primary metric we will focus on.