Buying at <5x by Mastering Deal Flow
Benjamin Graham-inspired value investor, Matt Bodnar, views (a) deal flow and (b) valuation discipline, specifically 4-5x, as the two mission-critical components in creating long-term alpha. He is also a believer in permanent holdings, where annual cash flows, rather than exit proceeds, are a source of evergreen capital for future acquisitions.
Matt Bodnar is a dynamic and accomplished independent sponsor based in Nashville, Tennessee. Following a career as a trader at Goldman Sachs, Matt acquired a tiny IT services business in 2011. He ran it, developed it into SaaS, and grew it to a point where he extracted himself from day-to-day management in 2017. Since then, he’s been an independent sponsor.
The first key to generating strong returns, according to Matt, is strong deal flow. Higher volume equals more opportunities. Generating deal flow isn’t the necessary evil before closing a deal and starting value creation - it is rather a key to value creation.
Matt has a TedX presentation on YouTube, where he presents 23 different deal flow strategies in 45 minutes. He is enormously sophisticated on this.
It doesn’t take long to learn that Matt has an expansive footprint online. He’s been a podcast host (with five million downloads), he has an email subscriber list, he posts videos daily. This is all part of a broader content marketing strategy, and also a quest to learn.
Voluminous deal flow is important to identify opportunities that are priced well. And for Matt, a good valuation is below 5x of EBITDA.
At below 5x, the capital structure doesn’t require too much equity. This makes the equity raise easy and high returns more plausible. If you can project high returns, by the way, you may also be able to charge higher fees to the limited partners.
Finally, Matt advocates for larger deals (above $3 million of EBITDA) where there is hair. His perspective is that this complexity constitutes the opportunity.
In a 2 × 2 matrix of good and hairy deals versus big and small size, Matt argues that the best space to funnel your attention is on the larger deals that can be repaired.
Listen for Matt’s insights on deal flow strategies, holding periods, valuations, and other investment philosophy.
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