Thread by @nsheth12

In the past, I’ve written about Tiger Global, Coatue, Dragoneer, Greenoaks: crossover funds that take minority positions in hypergrowth companies.

Today, I want to write about a firm with a different approach. This firm, Invus, is less well known but just as interesting.👇

1/ You probably haven’t heard of Invus, but their track record speaks for itself. They’ve 27x’d investor money in their evergreen fund since ’98 & manage more than $8bn today.

But more interesting is how they did it: they’re a PE firm, but structured diff. from most PE shops.

2/ A little bit of context on PE helps to illustrate how Invus is so different. The major insight of most early PE firms (Blackstone, KKR, etc.) was that by taking companies private, you could aggressively lever them in ways that you couldn’t as a public company shareholder.

3/ If you could combine that leverage w/ some growth and multiple expansion, you could get incredibly high IRRs. That was how PE funds put up incredible returns in the early days.

4/ But over time, the industry got more competitive, and the firms were forced to think about driving returns by operating businesses more efficiently than previous owners. This is when portfolio company operating groups like KKR Capstone and Blackstone Port. Ops became a focus.

5/ In contrast, Invus had heavy strategic & op. involvement w/ portfolio cos. from the start.

Invus’ founder, Ray Debbane, was originally a mgmt. consultant (a BCGer, actually, like me!) while most PE executives are former bankers — so focus on ops early on makes sense.

6/ Unlike most PE funds, Invus has only one LP (a wealthy Belgian whose family made their $ in beet sugar). And they manage permanent capital, meaning they can and do hold investments for 15+ years.

7/ Two of Invus’ most highly successful deals are emblematic of this high-touch approach.

The first, their ’96 buyout of Keebler (my favorite cookies growing up!) was predicated around adding new brands to add volume to their direct-to-store delivery network.

8/ To execute this strategy, they brought in Sam Reed as CEO and advised him on the purchases of Sunshine Biscuits and President’s.

As a result, EBITDA improved from -$93m in ’96 to +$202m in ’98.

9/ The second was Blue Buffalo Pet Products, where Invus worked closely w/ the founding team to grow the business.

They ultimately turned a $59m investment into a $5bn exit over a 12 year period when Blue Buffalo was sold to General Mills.

10/ More broadly, a sampling of the sectors Invus has invested in are: packaged foods (Keebler, Blue Buffalo, Harry’s), services (Franck Provost, WW), retail (Bluemercury), health care (OdontoPrev), medical devices (Avantec Vascular), and technology (Grow.com)

11/ The 3 top ones (pkgd. foods, services, retail), are data & operationally intensive industries that consultants are good at optimizing.

Building great software is not often what consultants are good at — which likely explains the low tech weighting in the portfolio.

12/ The “case studies” page on Invus’ website is super interesting by the way — it is the best breakdown of the drivers of each investment that I have ever seen any private equity firm publish publicly.

13/ Reason I find Invus so interesting is that operational expertise are a true differentiator in a world in which capital is cheap. If you’re a pure financial investor, your success is predicated purely on your ability to forecast cash flows better than other mkt participants.

14/ Operational abilities gives you another lever for alpha since you can afford to pay higher prices for same asset vs. your competitors if you are confident in your ability to operate it better.

You’re not merely predicted cash flows, but actually driving them.

15/ Being an operator also gives you access to deals that you wouldn’t otherwise be privy to, since owner-operators often prefer to sell to investors with proven operational track records. This applies both in venture & in control investments of the type that Invus traffics in.

16/ This approach also makes you a better public investor b/c you have access to data, executives, and know-how that come only from private investments. Invus has a public equities division and I’d guess there is lots of cross pollination.

17/ However, Invus will face challenges going forward. They will have to do larger deals to move the needle, and will have to compete w/ traditional PE more intensively than ever.

18/ Given where valuations are today, they also need to shift their focus away from packaged foods/services/retail to tech if they want to generate strong returns without excessive leverage. This will not be an easy shift.

19/ Yet, I remain bullish on the models of Invus and others similar to it, like IAC and IGSB. Financial discipline, a long time horizon, and a focus on operations should give these firms a sustainable advantage as investing continues to become more competitive.