To Be or Not to Be (a Generalist)

Q1 2025 Devonshire Partners Viewpoint

There is an age-old, perpetually open question in public equity investing about the benefits and drawbacks of being a generalist. The proponents argue that if you are a specialist, you are kind of like the person with a hammer looking for a nail. If you only focus on consumer staple stocks, for example, you will inevitably find some to invest in, even if consumer staples as a whole do not represent compelling investment opportunities. This unattractive setup can stem from either transient or secular reasons: valuation, growth trends, competition, etc. Being a specialist in an industry also puts an investor at risk of focusing too much on relative valuation and qualitative attributes as opposed to absolutes. Again, if consumer staples are the center of your universe, you will inevitably invest in the best ones you can find—the ones that are attractive relative to the rest. But how attractive would those companies be if you compared them to technology, industrial or business services companies?

The generalist on the other hand, is not bound by those constraints. He or she can search through the entire universe of stocks, find the best industries and sectors to research, and then construct a diversified portfolio of stocks that don’t all share similar risk factors. Take an investor such as Warren Buffett. Sure, Buffett has expertise in financials, including banks and insurance companies, but Berkshire Hathaway originally owned a dying textile mill. Over the years Buffett has invested in many different businesses across industries. In fact, arguably Buffett’s best investment ever was in Apple, a technology company of all things, even though he and Charlie Munger never felt like they had an advantage in investing in tech stocks. And clearly the generalist model has worked pretty well for Berkshire over the years.

Don’t Sleep on Specialists

With that as context, why would anyone opt for the specialist model? Being a generalist feels like the rare free lunch in investing. If you talk to a multi-manager investment firm (also known as a pod shop) such as Millennium or Point 72, they would politely take the other side of the argument. And their asset growth and returns over the last decade-plus would suggest they are doing a lot right. These firms assemble small teams of investors focused on specific industries and sectors that do nothing else but try to be the smartest people in the world within their narrow sliver of the universe. These groups relish the opportunity to compete with generalists because they believe they know the companies in their sectors much better than the average generalist. The more specialized the sector (something like biotech, for example) the more of the advantage that conceptually accrues to the specialist.

So, which is it? Is it better to be a generalist or a specialist within the investing context? In my experience and in my humble opinion, the answer is to be both.

Like with many topics in investing, understanding nuance and being able to employ hybrid structures and strategies is where the outperformance comes from. Seeing Buffett as a generalist misses the degree that he has expanded his circle of competence over many years to include industries and companies he might not have felt comfortable investing in during his younger years. I would argue that Berkshire has indeed developed a specialty in various sectors that allows it to be a best-in-class investor in a lot of cases where it decides to take big swings. But Buffett has been at it for decades and investors should not be under the illusion that developing a sufficient expertise happens overnight. It requires patience, intent, and flexibility of mind. But, as an investor, there is no better time to get started than today—or yesterday if you ask Devonshire’s founder.

Our Journey to Specialization

Devonshire is in the middle of its own circle of competence expansion project, caution tape and all. If Shahzad and I want to be investing together for as long as Buffett and Munger did, we have a long, long runway ahead of us. We are currently pursuing the path with a sort of hard-to-get-perfect balance between urgency and patience. The ultimate goal is to be able to combine the holistic skills that come from being a generalist—those that provide pattern recognition that is valuable across industries and investments—with the deep fluency that comes from having invested in an industry for many years. The primary difference between “following” an industry, which is something I did throughout my career in public equities, and what we are doing now has do with how we operationalize the knowledge we glean. We are control investors and that is quite different from being passive investors in public securities. Making minority investments in liquid public companies, while it certainly requires a certain level of research intensity to produce consistently successful outcomes, doesn’t require the level of diligence and understanding demanded when buying the majority of an illiquid private business. There is no button you can click to exit such an investment. As my partner often says, lower middle market PE deals are a lot more like marriage than dating or flirting.

So, what does that look like? Specifically, we’ve chosen to augment our opportunistic investing funnel by selecting three industry sectors to focus on where a few really key things are true:

1. We’re deeply passionate and curious about the space;

2. We have a point of view (POV) about the sector as it relates to private businesses in our target size range; and

3. We have an operating partner on the Devonshire team with 10+ years of operating experience in the sector.

With the help of our amazing intern team, we are in the middle of deep exploration of three industry sectors:

• Asset-light, last mile logistics companies

• Foodservice maintenance and repair companies

• Lake and pond management companies

I will note that this list is subject to change based on the outcome of our process. We are leveraging our own research with personal networking and relationships with operating partners in these industries to develop our POV on each. The objective is to do enough work to decipher whether or not a specific industry is attractive for a lower-middle-market-focused-firm. With that in mind, beyond the general industry characteristics we favor, we are broadly looking for fragmentation, lots of small deals available, and clear benefits (i.e. operational and technological synergies as well as multiple arbitrage) of combining companies in the space. Through our research, we may find that that the industry is not attractive for any number of reasons. Then, we will move on to the next, with the goal of constantly getting smarter each day regarding sourcing and vetting investment opportunities in three verticals at a time.

The Devonshire Playbook

Our research and analysis are deeply focused on the operations of any business we look at. We use financial statements to screen opportunities; we then deeply study the operations to decide if we want to invest. Once we have selected a vertical, we develop an operating playbook that details what we do prior to and after making an acquisition. The subsequent deals we see and the investments we make only strengthen our understanding of the vertical and help continuously refine our playbook. This is not a conceptual exercise. It is a very practical application of the research we are doing that we sincerely believe will pay big benefits over the years. Our success will be measured by our execution and, as mentioned above, how operationally-focused we truly are.

I spent fifteen years flying at ten thousand feet as a public equity analyst and towards the end of that time was itching to get closer to businesses. This is a way for me to really live at ground zero with these businesses and prove that what works best in investing is being a generalist who develops what is almost an unfair advantage in a handful of sectors. My work at Devonshire is focused on building a research and analytics engine that is useful on day one for any investment we make. While this process will take time to bear fruit, we believe that what we are building right now will set us apart from other investors and highlight the help we can bring to any management team with which we partner.

Ben Claremon

Partner

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Our general public service announcement is as follows:

We are interested in expanding our network of all the stakeholders in the lower middle market PE universe. So, feel free to reach out to me and Shahzad (skhan@devonshirepartners.co) if any of the above resonates with you. For anyone with access to deal opportunities, please see our private company deal criteria below. As a reminder, Devonshire is willing to pay referral fees to anyone who brings us deals. Also, we are happy to chat with people even if they don’t have a deal right now that fits the criteria below.

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.

As mentioned above, in addition to our opportunistic investing, we’re currently looking for companies in 3 specific areas:

• Third-party logistics business focused on the last mile (asset light)

• Foodservice equipment repair & maintenance businesses

• Lake & pond management businesses

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Recommended Content

We read a lot and listen to a bunch of podcasts here at Devonshire. We know that there are far too many great podcasts, books, and articles out there for anyone to consume all the content. As such, like with our investments, we try to be highly selective in our recommendations.

External Content

For this issue of the Viewpoint, we are recommending the long but powerful Invest Like the Best Episode with Graham Duncan, the co-founder of East Rock Capital, one of the most thoughtful capital allocators you will ever come across. Shahzad Khan and I have been partners for about a year, and we are constantly working on deepening our levels of trust and refining our spheres of influence. This whole episode was wonderful, but in the context of thinking about making partnerships work, I found Graham’s comments on determining who the source is profound (emphasis added):

But knowing source is super powerful. Like, "Am I source?" I think in some ways at East Rock I didn't fully own source at times as an example. And my partner, Adam Shapiro has become... I kind of handed source off to him and now it's very coherent is my sense. He's a great investor and people in East Rock and the clients are living within Adam Shapiro's world.

I'm helping an entrepreneur right now who I think is at risk of not fully owning source. It's something that Enneagram Threes and Nines in particular I think are subject to where you can be so adaptable and pragmatic that you write yourself out of the narrative. Because it's like, at the end of the day, I'll take care of my own needs, I'm going to take care of everybody else's needs and I'll do anything to make this thing work.

And so there's a very fine line of being flexible and adaptable, but allowing your own creative voice. What's coming through you, the reason you started the thing in the first place and it's why it means so many things do not work. At the end of the day, you need to be comfortable with the power dynamic of who is source. One tiny crimp in that hose and all sorts of weird [stuff] happens. And if it's clean, if everybody in a system says, "Yeah, this guy's source and I want to live in this reality," it has such a healthy vibe to it.

There is no confusion at Devonshire who the source is. Shahzad Khan founded Devonshire with a specific vision, and my role is very clear in helping him actualize his vision and goals.

Internal Devonshire Content

I recently had the opportunity to share elements of Devonshire’s approach to the microcap markets in the latest issue of the Planet Microcap Review. In this Q&A session, we covered:

• Why PE firms are starting to focus more on microcap and nanocap companies, as evidenced by the number of take privates happening in Canada;

• The reasons why there is a structural lack of growth capital available to small public companies in the US and Canada;

• The genesis and evolution of Devonshire Partners’ approach to investing in the microcap space; and

• Why any of the above could be interesting to potential investors.

Please enjoy my portion of the issue here.