Making Progress
We have made decent progress at CL1. Our first project – an exclusive partnership with a leading fitness franchise to develop their business in Astana – is currently underway. Our partners have begun the refurbishment of an existing studio, and renovations should be completed by the beginning / end of May. While the CAPEX requirements slightly exceed the expected budget (we are required to put up our share of the necessary investments, or 50%) we expect to nevertheless see strong IRRs over time and are excited to see at what revenue levels the studio settles post-renovation.
That being said, the current studio is just the first building-block of the overall project. There are natural advantages in having a network of studios (likely 4+ within the city) and so we are willing to accelerate new builds if we see strong top-line performance from the first location. We would also need to build more studios to leverage the overhead we are incrementally building up in this business (local management, accounting, etc).
Our ideal end-state is a properly-developed network of studios in Astana which matches the economics of those in Almaty, with the ability to generate attractive cash-on-cash returns and eventually crystallizing the earning-power of this network through an exit (or perhaps some sort of dividend recap). We increasingly feel good about our partner and the way we have been treated so far. Unlike our other projects, here we do not have control and are largely a passive investor / consultant. Our partner has been open in his communications and has economic alignment. We are currently doing extra diligence to get to know him and his team even better. All in, we feel good about the brand’s potential and are excited to share future developments.
Our other project, a B2B language tutoring platform, is still awaiting certain final approvals and documents from the sellers. Nevertheless, we are not waiting for any signatures and have begun our process of strategy-formation, systems standardization, and a broader “integration” of the business within CL1. Here, likewise, we feel very happy with our minority partners. They are honest, competent, straightforward, and have financial buy-in. We are currently planning succession for the company’s current CEO as he will move into a more sales-focused / business development role. In our latest call, we have decided to look more into a certain internal candidate who the CEO thinks might be a good fit. I am a big fan of promoting from within and especially letting ambitious mid-level managers try themselves as first-time CEOs. What the business also needs, however, is someone who can actually lead strategy and development. Here we are yet to find a suitable candidate. Perhaps the sweet spot is having the younger, internal CEO and a more seasoned outsider working in tandem – we shall see.
The business is going to face lower profitability post-acquisition as they are now going to be a fully independent company, but I expect this to improve quickly IF we are able to build the right team and develop the right strategy / model. Even after taking on a big increase in corporate overheads, this business remains very well in the black. We think there is a potential to generate truly outstanding IRRs here but it will require a lot of work and a lot of smart, talented people who are willing to buy into our vision.
The vision is to transition how management and customers view this business. While a “language platform” now, we think the business is actually more of an HR-partner in L&D. The L&D budget is in a lot of cases one of the largest “discretionary” HR spending buckets (not including salary, pensions, travel, etc) as per industry insiders. What’s more, the HR tech stack is unautomated and slow. I think there is an opportunity to build the de facto standard among L&D providers.
I am also growing increasingly more excited with our public equities book. After a lot of trimming and adding, we are left with 6 names (2 of which are highly concentrated in size). Because of our private book, I have been unable to spend as much time researching stocks. I believe there is a chance that this ends up being a net positive. For one, I am “forced” to be concentrated by virtue of not being able to cover so many names. I can also focus on the few truly outstanding names I’d be happy to own for a VERY long period of time, and spend a lot of time thinking deeper about these businesses instead of getting my “reps” in with random equities which (net) will deliver OK returns. Finally, because of my time constraints I am incentivized to actually try and build organizational capabilities within CL1 to help out with public equities. We currently have a very smart recent graduate beginning to learn our style of public markets investing from absolute scratch. I figure that if I am able to “institutionalize” a big part of the research process (expert calls, reading filings, basic modeling), I can save myself time to focus on the “outer edge” of the research process.
We are currently finalizing our capital raising for a flagship SPV to acquire a dominant specialty retailer here that is 3.7x larger than their two closest competitors combined, has grown revenue ~33% CAGR over 5 years and is managed by the best CEO we’ve come across.
I think we are slowly developing a good foundation from which to continue scaling. Our local network has meaningfully expanded, our understanding of the region’s SMEs is probably better than any other active local mid-cap investor (frankly we don’t know of any others), and our team is shaping up nicely, although of course there remain a lot of gaps to fill. As MELI likes to close it out – the best is yet to come.