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Justin Ishbia is likely the best microcap investor in the world. He is the founding partner of Shore Capital Partners, a $7 billion private equity firm utilizing a systematic approach to acquire hundreds of private microcap businesses. Since 2009, Shore Capital has acquired 600 small businesses, which makes them the #1 most active private equity firm in the world.

More importantly, Shore Capital is ranked in the top 1% of all private equity firms globally by performance. They have compounded investor capital at 50% net per year for 10+ years. The firm’s success has made Justin Ishbia a billionaire, and the co-owner of the Phoenix Suns/Phoenix Mercury along with his brother Mat Ishbia (CEO of United Wholesale Mortgage).

What makes the firm unique, beyond the track record and velocity of deals, is the small size of the average business acquired: $18 million in revenues, $3 million in EBITDA, enterprise value of $12 million. They focus on finding, acquiring, building, and scaling platforms of small businesses in growing industry niches.

Do you think public microcap investors can learn something from their process?

Absolutely. You will probably learn more than reading the 38th book on Warren Buffett.

Justin Ishbia was recently interviewed by Patrick O’Shaughnessy on the Invest Like the Best Podcast. I listened to the podcast five times. I would encourage you to do the same.

Let’s breakdown their approach:

1. Identify Industry Niche. They find an attractive industry niche (i.e. veterinary, urgent care) in a long-term growth trend where consolidation and scale could enhance the competitive advantage.

2. Partner with Executives. They study the industry, attend all the conferences, identify the Mt. Rushmore businesses and leaders in the industry. They recruit the board members prior to acquiring a businesses in that niche (platform). Only after a 40-60 page white paper is written/presented, and the right board members are selected is a platform greenlighted by the investment committee.

3. Find MicroCap Targets. They get on the ground and use the board to identify high value targets. Partner with the founder of the target by acquiring 60-80% of the business.

4. Grow Investment for Exit. The first 100-days after acquisition has 23 standard operating procedures that need implemented to create efficiency for scale. The goal is to turn “line of sight management” into “management by metrics”. The result is a platform of businesses that on average will grow 100% per year (organic + inorganic) with the goal of growing EBITDA from $3 million to $15+ million over a few years. They take businesses From Hustle to Scale. Finding buyers isn’t difficult when the platform of businesses is growing 100%, with best-in-class management/board, in a growing industry niche. They have sold platforms to large public companies, and large private equity firms.

5. Systematic Approach Produces Consistent Outcomes: Since inception the firm has invested in 59 platforms (600+ individual business) with 14 exits. The average return has been 7x their money, and the worst return has been 3x their money. In totality the fund’s performance is 70% Gross IRR’s and 50% net since inception.

https://microcapclub.com/building-an-unfair-advantage/