Private Equity in Public Markets?

I used to work in private equity. Simply put, we bought and sold companies. Sometimes, we would buy public companies and take them private. Other times, we would buy private companies.

Usually, after 4 to 6 years of fixing up these companies, we would “exit” by taking them public through an IPO or by selling them to another buyer for a profit, hopefully.

Historically, private equity returns have exceeded public market returns.

• Between 2000 to 2020:

  • Private Equity returned 10.48%

  • Russell 2000 index returned 6.69% 

  • S&P 500 returned 5.91%

It’s debatable whether excess returns are driven by private equity operating prowess or simply leverage (cheap debt); regardless, private equity has been a staple in institutional investing.

However, retail investors typically do not have access to private equity. Even as an accredited investor, you may not have the connections nor meet the minimum check sizes to invest.

That’s why today’s company is so interesting. We’re going to take a look at Compass Diversified Holdings (CODI), a private equity company that is publicly traded.

Baseball and diamonds?

CODI owns and operates a suite of middle market companies. For example, CODI acquired Marucci Sports, a leading manufacturer and distributor of baseball and softball equipment, for $200 million in 2020. It later sold Marucci Sports to Fox Factory for $572 million in 2023. Talk about a home run deal!

Today, CODI owns and operates Lugano Diamonds (a high end diamond brand) alongside 8 other private companies.

CODI operates under a slightly different model compared to traditional private equity firms. Private equity funds generally have a 5 to 7 year life cycle where Limited Partners (LPs) own 80% of the carried interest and the fund managers own the other 20%.

CODI doesn’t have LPs. Instead, it has public shareholders who can enter or exit by selling their shares in the stock market. Instead of carried interest, investors receive quarterly dividends derived from operating income and investment gains from the portfolio.

This means CODI isn’t subject to the same “moral hazards” that fixed private equity funds sometimes face. CODI cites its permanent capital as a competitive advantage.

Insider Buying

Last Friday, 8 different company insiders purchased stock in CODI — including 7 of 9 board members and the CFO. CEO (and board member) Elias Sabo also purchased stock four months earlier in August 2023.

What’s more, members of CODI’s board have consistently purchased company stock near the start of every year!

• James Bottiglieri purchased CODI stock every January since the company IPO’ed back in 2006!

• Gordon Burns purchased CODI stock almost every January since 2009

• The list goes on…

I appreciate the vote of confidence that company insiders have given CODI every year.

Before you invest, keep in mind that CODI mostly operates middle market consumer brands and takes on significant leverage for each deal. As a result, the company stock is subject to macroeconomic factors including interest rates, GDP growth, and inflation.

What do you think? Would you invest in CODI? Why or why not? Let me know!

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