We Invest in Builders

Recurve searches for and invests in companies that are in the midst of building significant competitive advantages into healthy and growing end markets. We call these businesses "Builders." So, what are the qualities we look for in a Builder?

Customer and market validation
Healthy end market
Leadership position and gaining market share
Everything improves with scale

We buy them at reasonable valuations, but we know they often will not trade at rock-bottom valuations because of their business quality and future opportunity. That's okay - we expect the bulk of our returns to come from growth in earnings and free cash flow per share over time.

Now, let's dig into these four qualities in more detail.

Customer and market validation

We look for companies that already have strong brand recognition in their markets and which don't have to spend significant resources to fight for share of voice in their markets. Customers and business should be engaging them for a variety of reasons and keep returning because of their superior products, services, and/or value. We strongly prefer companies that prioritize customers and that deliver significant value to their customers across multiple dimensions: economic (price/value), functional, experiential (service), and symbolic (meaning).

While it can be exciting to speculate on up-and-coming companies and trends, we prefer to lower the risk profile and invest in established brands that already show significant validation in their markets.

Healthy end market

Almost every industry is competitive, but we seek end markets in which participants can generate healthy margin profiles, returns on capital, and future growth. Sometimes it is tempting to buy the best house in a bad neighborhood, but it is often much better to choose a great neighborhood. Let’s briefly explore end market structures. Below we show relative desirability of end market structures, from our most favorable to our least favorable.

Desirability of End Market Structure

Unregulated Monopoly > Oligopoly > Fragmented Competitive > Regulated Monopoly > Concentrated Competitive

We seek returns well above those offered by regulated thresholds, so don’t bother searching among those. Unsurprisingly, the farther left we go, the better our chances are at finding attractive financial profiles. Generally speaking, we find most of our investments within Unregulated Monopoly, Oligopoly, and Fragmented Competitive end markets. However, there can be unattractive Unregulated Monopolies, just as there can be attractive Fragmented Competitive markets. For instance, In-N-Out and Chick-Fil-A operate in the hyper-competitive fragmented fast food industry, but both have carved out impressive businesses with exceptional unit economics despite the competitive intensity among restaurants.

We spend significant time studying market dynamics - how they've evolved over time and how they may evolve in the future.

Leadership Position and Gaining Market Share

What we care about most is a market-tested and validated validated leadership position translates into consistent market share gains over time. That doesn't mean our companies can't have periods of relative underperformance for idiosyncratic reasons, but if those periods persist for too long, we are likely wrong in our analysis.

Many companies we research fail to satisfy our assessment of long-term competitive advantages and the stickiness of market share gains. We ask questions like: “Why won't competitive advantages be competed away? Why shouldn't economics deteriorate as the market matures and growth becomes more scarce? Why should our target company win at the expense of others?”

The simple answer is that we look for companies that have built a business model with competitive advantages that widen with more scale. These advantages can be built across multiple dimensions - culture, processes, infrastructure, superior capital allocation, and more. We tend to find companies that have built market-leading, unique production and distribution advantages and which operate in industries in which new entrants, regardless of their technological prowess, have significant cost and service level disadvantages.

This leads to the final point.

Everything Improves With Scale

If the first three conditions are met, the fourth is where the equity story gets a lot more exciting and attractive. Growing scale in customers, unit volumes, and revenues should translate into:

Better fixed cost leverage and improving economics over time
Lower unit costs -> lower prices (if wanted) -> bigger economic advantages vs. competitors
Better service levels and better price/value vs. competitors

In short, faster/better/cheaper products and services, and future profitability significantly greater than current profitability. We want earnings and free cash flow to outgrow revenues for a long time.

Conclusion

We look for companies that have ambitious, owner-oriented management teams and cultures rooted in innovation reinvestment, not ones focused on merely harvesting a good business, which can lead to complacency and generally does not meet our return thresholds.

Recurve invests in companies across many sectors, including telecom, luxury fashion, technology, auto, building products, and more. At first blush our companies may not seem related, but the common thread is that they are Builders with the characteristics described above.

Disclaimer

No Offer or Solicitation. These documents do not constitute an offer to sell any securities of the Fund. Such an offer may only be made after you have received the Fund’s offering documents. Any decision to invest in a Fund must be based solely on the information in the Fund’s offering documents, regardless of any information investors may have been otherwise furnished. All of the information herein is subject to, and qualified in its entirety by, the terms described in the Fund’s offering documents. Before you make an investment in the Fund, you should carefully and thoroughly review those offering documents. Recurve cannot assure investors that the Fund will achieve its investment objectives. Further, many of the investment techniques and activities described in this document are high risk activities that could result in substantial or complete losses.

No Duty to Update. The statements herein are subject to change at any time in Recurve’s sole discretion. Recurve is not obligated to revise or update any such statements for any reason or to notify you of any such change, revision or update. For example, the discussions regarding investment objectives, processes, typical or ideal portfolio construction, gross or net exposure, position sizing, other portfolio limitations, other investment characteristics and team composition represent Recurve’s current focus and intentions and are subject to change at any time without notice. Depending on conditions and trends in securities markets and the economy generally, Recurve may pursue any objective, employ any technique or purchase any type of security that it considers appropriate and in the best interest of the Fund.

Forward Looking Statements. These documents contain forward-looking statements based on Recurve’s expectations and projections about its future investment methods and techniques and its team. Those statements are sometimes indicated by words such as “targets,” “expects,” “believes,” “will,” “ideal” and similar expressions. In addition, any statements that refer to expectations, annual returns, projections or characterizations of future portfolio composition, events or circumstances, including any underlying assumptions, are forward-looking statements. Such statements are not guarantees of future performance or approach and are subject to certain risks, uncertainties and assumptions that are difficult to predict. Prospective investors are cautioned not to invest based on these forward-looking statements and projections. Recurve’s investment approach and an investor’s returns could differ materially and adversely from those expressed or implied in any forward-looking statements as a result of various factors.

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