Devonshire Viewpoint Q2 2024
Introducing Devonshire's Quarterly Letter
We are trying something new at Devonshire. My partner, Shahzad Khan, has kept a low profile since he founded Devonshire Partners, mainly because he was so focused on acquiring and building companies. Our priorities have not changed one bit. However, we thought we needed a consistent medium by which to communicate with all of the important stakeholders that are close to Devonshire. Accordingly, like so many investment management firms, we have started a quarterly newsletter, the Devonshire Viewpoint. We know the quarterly letter space is quite crowded, especially when it comes to long missives about the state of financial markets. We are going to try to be brief and to the point—in addition to sharing some recent content that we really enjoyed.
If you are interested in receiving our letters in your inbox, please click here. Otherwise, I will be posting the letters on the Compounders Substack as well.
Please let us know what you like or dislike about the format and content. It will only get better with constructive feedback.
Second Quarter 2024 Update
I recently joined Devonshire Partners in March of this year to lead our new public company investment strategy—and to help amplify what Shahzad has been doing for years on the private company side. Since joining, Shahzad and I have spoken about trying something new and launching a quarterly newsletter, the Devonshire Viewpoint. Today’s is the inaugural letter.
Unquestionably there is value in establishing a consistent touchpoint with all of Devonshire’s stakeholders. But we also want to avoid replicating the type of content a lot other investors send out. On that note, Shahzad and I aren’t sure people want to read a bunch of commentary from us about what is going on in the macro environment or about why a certain industry or asset class is likely to outperform.
You can turn on CNBC or Bloomberg TV for that.
So, with all of that in mind, the format for the Devonshire Viewpoint will be as follows.
High level updates on the happenings within our portfolio companies
Personnel updates
Commentary on current deal flow and where we are seeing opportunities
Links to our favorite articles and podcasts which may include some of our own content
Also, we remain active in our search for new deals. If you know of any private companies that fit the following profile, we would love to hear from you:
General Criteria
Founder-led or family-owned-and-operated companies with EBITDA of between $2-$10 million that have 10+ years of operating history.
Industry Focus
All industries except for metals & mining, natural resources, biotech, banks, and insurance companies.
Investment Type
We are open to buying minority or majority interests as a result of owner liquidity events, succession planning, management-led buyouts, and spin-offs.
Devonshire is willing to pay referral fees to anyone who brings us deals. Please feel free to reach out to me (bclaremon@devonshirepartners.co) or Shahzad (skhan@devonshirepartners.co) if you have any investment ideas, comments or questions.
Thanks for following our journey,
Ben Claremon
Partner
Portfolio Company Updates
As a reminder, Devonshire currently owns two portfolio companies, one is a dealer/distributor of durable medical equipment business and the other provides home services, including HVAC, gas & plumbing, electrical, and pool maintenance and repair. Both of these businesses benefit from a number of secular tailwinds that are detailed below.
Home Services Industry Observations
The market for home services in the US remains strong and as of 2022 was estimated to be $657B in size; $500B of that is focused on single family homes
Demand is driven by regional and local factors including age of residential infrastructure, population size and growth, and weather patterns
While rising interest rates, inflation, and home prices are a reality, homeowner home equity grew by $7.1 trillion during 2 years of the pandemic and should serve as a cushion over the next decade
Higher interest rates are also essentially forcing people stay in their current homes—to maintain what are almost inevitably lower rate mortgages than are available today—and that dynamic makes it more likely that people will spend on home improvement projects
Durable Medical Equipment Industry Observations
The market for DME products in the US was estimated to be $60B in 2022
The largest categories for DME are Monitoring & therapeutic devices, Personal mobility devices, and Bathroom safety devices & Medical furniture
The most ordered categories are oxygen devices and accessories (32.3% of all DME orders in 2023) and humidifier equipment (23%)
Medicare Part B covers medically-necessary durable medical equipment that is prescribed and ordered by a provider
An aging population and growing incidence of chronic disease are the biggest drivers of demand for the industry
The number of people in the US aged 50 years and older is expected to increase by 61% from 137 million in 2020 to 221 million in 2050
As of 2020, Maine, Florida, West Virginia, and Vermont had the largest elderly populations with over 20% of their populations being 65+
Sources: Angi, Grand View Research, Usafacts.org, definitive.com
Personal Updates
We have three incredible interns working with us this summer who are already amplifying our efforts and giving the partners more bandwidth to look at new opportunities.
Summer Associate Domenico Barbieri: Domenico is currently pursuing his MBA at Wharton after spending about 4 years working at Moody’s. Domenico’s analytical and organizational skills are already improving our deal sourcing and investment process. His enthusiasm is also infectious.
Summer Analyst Jeff Salas: Jeff is a recent graduate of Cal State Fullerton where he took part in the excellent Titan Capital Management (TCM) program—where Ben Claremon is involved as an Advisory Board member. The training in company analysis that Jeff received within TCM makes him an immediate asset as we are looking at new investments.
Summer Analyst Matt Lowery: Matt is a recent graduate of University of California Santa Barbara and has recently returned from living abroad. Matt has an intuition for asking the right questions about businesses and has a willingness to dig for information that is already making everyone on the team better.
Deal Flow
Our entrepreneurial interns are already adding an immense amount of value when it comes to new deal generation. Domenico has organized our efforts to connect with investment banks and brokers that focus on lower middle market companies and, as a result, the velocity of ideas has increased meaningfully. On the direct outreach side, Jeff and Matt are in the process of reaching out to SoCal businesses that are in food and beverage retail. Specifically, Devonshire has partnered with a successful founder of a 70-location concept who wants to run his growth playbook again with a differentiated concept that needs our collective experience to help it scale.
In addition to the above, we are currently in the post-IOI stage with three separate businesses:
A company that provides access control and relocatable structures to the construction industry
A company that is a leader in the corporate events space
A company that has established a great brand and reputation within the home furnishings industry
Our process is highly selective and thus finding the right deals requires turning over a lot of stones. We have a detailed screening process that allows us to filter out the deals that don’t make sense for us to pursue. All of this requires a network of people who are bringing us opportunities, and we are always looking to establish new relationships with bankers, business owners, operators, and executives. So, please don’t ever hesitate to reach out if there is a way we can work together or be of help to you.
Podcasts and Articles
Here at Devonshire we are proud of our culture of continuous learning—which we believe is a must for investors in today's rapidly changing world. Below we have highlighted podcasts and articles that have taught us something new or have given us greater insights into specific industries.
External Content
Interview with former Home Depot CEO Frank Blake: This was an incredible interview where Frank outlined what servant leadership looked like during his tenure at Home Depot. The depths that Frank went to in order to make sure the people in the stores knew they were valued serve as an inspiration. This is especially true for the team at Devonshire, where we own and seek to own businesses that represent the life’s work of the founders. For us to maintain and nurture a company’s culture, we must consistently ensure that the employees know how important they are to us.
Interview with Charles Duhigg on the Secrets of Communication: Another aspect of the Devonshire approach is to try to connect deeply with the owners and founders of the businesses we partner with. In this helpful podcast, Charles discusses ways that people can better connect with others, simply by improving the way they communicate.
Devonshire Content
Interview with Whit Huguley of River Oaks Capital: On the Compounders podcast, which is hosted by Ben Claremon, one of the goals is to profile investment managers who take a unique approach to either public or private markets. Whit is a former private equity guy who saw an opportunity to bring his private equity approach to invest in microcap companies in the US. This is a fun interview with a manager who has a very similar view regarding the current opportunity set in microcap that Devonshire has.
Article on The Right to Win in Equity Investing: Within the lower middle market private equity world, there has emerged a lot of competition for deals. For example, these days, just about every MBA from a top school has the dream of starting a search fund where he or she can buy a small business. With that as a backdrop, it is important for Devonshire to know when we have the right to win in a deal—and when we don’t. This article is an exploration of the Devonshire differentiation and the situations we intentionally avoid, all within the context of trying to play a game with can win.