Great analysis! Now, given that Advent International is indeed one of the largest and most experienced global private equity investors (growth equity vehicle), it is unlikely they are beting on the exit lever alone. Could it be that they are seeing something else?
I agree Advent isn’t solely betting on a rich multiple @ exit, and there are clear investment highlights in addition to the above, 1) As the most scaled, first mover, and lowest cost of capital player, Thrasio has the most resources to take a first & best look at deals, and overpay (to a degree) if its a competitive process. This is huge in the private equity world e.g. competing against Blackstone. 2) E-com is still very much a white space, and there are growth opportunities competing against SMB and unifying brands in ancillary sectors, 3) Downside risk is capped, Amazon may push you around on terms and there may be a few surprises along the way, but they depend on third party seller success.
Not a bad play from a diversification standpoint, but for a name brand growth equity tech fund, there are better pre-IPO candidates.
I know their smaller competitors (e.g. Highfive Brands started out as Shopify only, but appears to have pivoted) are purchasing Shopify stores. Thrasio takes selective looks if the opportunity is right. The gating factor is Shopify fulfillment network isn’t anywhere near Amazon’s scale / efficiency, and disaggregating your assets through multiple 3PL is an operational headache.
Excellent write up and very interesting. I would push back on a few bearish points/assumptions.
1- Not sure where heard PE underwrites to 25-30% IRRs. PE generally targets 20%, and that’s likely what Advent would be underwriting to.
2- Betting on a re-rating of a 3x mom and pop business once rolled up, professionalized, and at scale to 6-7x is not at all an audacious assumption. So right off the bat without any FCF generation, revenue growth, operating efficiency, or leverage you can underwrite it to a 15-17% IRR.
3- One of the things PE does well is optimize the balance sheet to make sure they are running as lean (read: CF generative) as possible. I would expect that a large at-scale PE-backed business can optimize WC needs via better inventory mgmt, squeezing terms out of vendors, and possibly arranging a WC facility. A little goes a long way here. If between those 3 levers they eliminated the cash drag from WC your 2% FCF yield gets to +20%. If they can only optimize a subset of that drag, say 25%, they still get to a 7% unlevered FCF yield, which is pretty damn good in an LBO.
Great analysis! Now, given that Advent International is indeed one of the largest and most experienced global private equity investors (growth equity vehicle), it is unlikely they are beting on the exit lever alone. Could it be that they are seeing something else?
Appreciate the thoughts!
I agree Advent isn’t solely betting on a rich multiple @ exit, and there are clear investment highlights in addition to the above, 1) As the most scaled, first mover, and lowest cost of capital player, Thrasio has the most resources to take a first & best look at deals, and overpay (to a degree) if its a competitive process. This is huge in the private equity world e.g. competing against Blackstone. 2) E-com is still very much a white space, and there are growth opportunities competing against SMB and unifying brands in ancillary sectors, 3) Downside risk is capped, Amazon may push you around on terms and there may be a few surprises along the way, but they depend on third party seller success.
Not a bad play from a diversification standpoint, but for a name brand growth equity tech fund, there are better pre-IPO candidates.
Do you know if they buy Shopify stores? That seems like it would mitigate the Amazon anti-3rd party seller risk
I know their smaller competitors (e.g. Highfive Brands started out as Shopify only, but appears to have pivoted) are purchasing Shopify stores. Thrasio takes selective looks if the opportunity is right. The gating factor is Shopify fulfillment network isn’t anywhere near Amazon’s scale / efficiency, and disaggregating your assets through multiple 3PL is an operational headache.
Would something like Deliverr be the solution there? I think they plug into both
Great analysis - hope to see you posting again soon.
Excellent write up and very interesting. I would push back on a few bearish points/assumptions.
1- Not sure where heard PE underwrites to 25-30% IRRs. PE generally targets 20%, and that’s likely what Advent would be underwriting to.
2- Betting on a re-rating of a 3x mom and pop business once rolled up, professionalized, and at scale to 6-7x is not at all an audacious assumption. So right off the bat without any FCF generation, revenue growth, operating efficiency, or leverage you can underwrite it to a 15-17% IRR.
3- One of the things PE does well is optimize the balance sheet to make sure they are running as lean (read: CF generative) as possible. I would expect that a large at-scale PE-backed business can optimize WC needs via better inventory mgmt, squeezing terms out of vendors, and possibly arranging a WC facility. A little goes a long way here. If between those 3 levers they eliminated the cash drag from WC your 2% FCF yield gets to +20%. If they can only optimize a subset of that drag, say 25%, they still get to a 7% unlevered FCF yield, which is pretty damn good in an LBO.