How does our large network of trust help us achieve our goal of protecting capital and growing it faster?
Here are two clear benefits.
First, people trust us with sensitive information about people. Sometimes, this information is critical in telling us who to partner with. Other times, it is critical in telling us who to avoid.
Second, mutual trust is the glue that allows East Rock to partner with talented investors outside of the rigid context of traditional private equity funds.
A positive experience with Tim White, founder of Dunes Point Capital, is an example of both benefits.
When we met Tim, he was a veteran of three high quality private equity firms and was starting a new investment firm. There was a lot about Tim that was intriguing: he had a strong prior track record; a demonstrated skill at improving company operations to yield investment returns; and a commitment to risk his own capital side-by-side with his investors’ money.
But to determine whether Tim was really someone we should partner with, we turned to our network.
We have a close relationship with the former CEO of a major Wall Street firm who was close with Tim’s former boss. We asked the former CEO if he would place a call and get the real story.
The next day, he reported back: “I don’t know who this Tim White guy is, but based on what I just heard, whatever you are doing with him, I want in.” Later, Tim’s former boss, whom we had not met previously, told us directly that Tim was the only person he’d trust to manage all of his assets and his children’s assets if he ever retired and “went to the beach.”
Excited by the strong reference, we proposed to Tim a unique partnership. We would lead a group of investors to commit to a series of Dunes Point deals by providing $5 for every $1 invested personally by Tim, subject to certain conditions. The mutual benefits were clear. We would get access to deals identified and executed by an “A” talent, with great alignment. Tim would get access to user-friendly and flexible capital.
But Tim had concerns and needed to be convinced. He did extensive reference checks on us before agreeing to go forward. This process took time but created a strong foundation for our partnership.
The mutual trust we developed with Dunes Point, and the structural flexibility it permitted, gave our partnership some unique advantages. We were able to acquire a portfolio of industrial businesses owned by an ESOP (Employee Stock Ownership Plan) subject to onerous rules that traditional private equity firms were not able to navigate. Tim’s unique ability to convey trust and portray his firm as a tight-knit group of family investors helped him acquire, at an attractive price, a building products company from two feuding families whose board had been deadlocked for many years. And our partnership dealt optimally with an under-performing investment in a supplier of datacenter equipment, which allowed us to recover the majority of our original investment.
With Dunes Point we built a portfolio we are proud of and believe is on track for a successful result. Recently, Tim and his team engineered a favorable partial sale of our building products company just as COVID-19 was beginning to hit. In executing this complex transaction, Dunes Point showed us, once again, their unique talent — talent we could not have connected to without a large network of trust.
* * *
Returning To Project Skunkworks
To further demonstrate the power of a large trust network, we turn back to “Project Skunkworks.”
JTS needed a partner they could trust on multiple levels to complete the Skunkworks investment. First, all information needed to be kept confidential. Second, the prospective partner needed to be trusted to work quickly towards a commitment and surface issues immediately. Third, if the partner committed to providing the remaining capital, there needed to be 100% certainty of following through to closing or the deal would be lost for lack of funds.
We were the perfect partner for them, but we had not worked with JTS before. Would we find each other? Fortunately, our large network meant that we had a number of relationships in common with people throughout the JTS organization. In fact, we were one degree of separation away from the two co-founders, the head of investor relations, and most of the JTS real estate team. So, it was not a coincidence when a JTS investor re-introduced our two firms in the context of Skunkworks.
Because of our common relationships, it was easy for JTS to confirm our track record as a trustworthy partner in similar situations. And from our first in-person meeting, it was clear to JTS that we had a large trust network within commercial real estate that would allow us to research the opportunity quickly and discreetly.
We got to work right away.
Often, good deals earn investors more than money, and Skunkworks was one such deal. It offered a great opportunity to reconnect with one of the most talented hotel investors we have ever met, Jonathan Wang. Early in Jonathan’s career, when he would take business trips, he would stay in a different hotel within each city each night. It helped him create a vast network of hotel property managers and made him a walking encyclopedia of hotels. Jonathan is also the type of giving individual who will help without needing to know exactly why. This allowed us to maintain confidentiality while getting a very strong sense of the real estate value behind Skunkworks. When we called him for help, all we had to do was mention a submarket (e.g. LA — Burbank area) and he could list the properties in the area, what he thought of them, who managed them, and what they were likely worth per room.
As an important aside, the experience with Jonathan confirmed our strong interest in partnering with him. When he later decided to start his own firm EOS Investors, he gave us the privilege of being his primary backer. It is one of our most valued investing relationships today.
Based on the insights we gained from Jonathan and other advisors in our network, it was clear that Skunkworks wasn’t too-good-to-be-true. We realized quickly that we wanted to lead the outside investors and make Skunkworks one of our largest investments to that date. JTS, based on the rapid development of mutual trust over a few short weeks, agreed to our request to lead. Together, we closed the transaction.
As we look back on Skunkworks, it reminds us that spreading trust through our network offers about as high a return as any other action we can take. After closing, the loans began paying off ahead of schedule and the overall result exceeded our expectations. It was a great deal, made possible by the power of trust.