Will Thorndike - How Skilled Capital Allocators Compound Capital - [Invest Like the Best, EP.36]

Episode Summary

Executive Summary: Patrick O’Shaughnessy interviews investor-author Will Thorndyke about The Outsiders and Housatonic Partners. The conversation distills lessons from elite capital allocators—dividends, buybacks, CapEx, M&A, and leverage—and then shifts to private equity, search funds, recaps, and the current frothy deal environment.

Main Topics: Origin of Thorndyke’s investing interest (Priority: 7/5): A rainy Maine vacation and John Train’s The Money Masters sparked his lifelong interest in investing. The Outsiders research project (Priority: 10/5): An HBS-student-assisted deep dive on Henry Singleton evolved into an eight-CEO pattern study. Capital allocation framework (Priority: 10/5): Thorndyke and O’Shaughnessy dissect the main uses of capital and why disciplined choice matters. Buybacks, dividends, and leverage (Priority: 9/5): The best CEOs favored opportunistic buybacks, avoided routine dividends, and used prudent debt. Operating style of outsider CEOs (Priority: 9/5): The archetype was analytical, decentralized, flexible, and anti-visionary rather than charismatic. Private equity, search funds, and recaps (Priority: 8/5): Thorndyke explains Housatonic’s strategy, early search fund investing, and today’s valuation pressures. Finding durable business models (Priority: 8/5): He favors recurring revenue, secular growth, and capital-light businesses like towers and records storage.

Key Arguments: Dividends were usually avoided because two layers of tax made them inefficient. The best allocators used sporadic, large buybacks at low stock prices, not steady programs. CapEx worked when hurdle rates were strict and enforced through accountability. Most outsider CEOs rejected rigid long-term planning and stayed opportunistic. Acquisitions were usually rare but large, with clear synergy and margin-improvement logic. Leverage was used actively, but within a business-specific band the CEOs understood well. Search funds have produced high returns, with gains concentrated in top-decile outcomes. Private equity is frothy now because auctions and leverage are both abundant.

Data Points: Number of outsider CEOs studied: 8 - The book profiles eight capital-allocating CEOs. Project duration: 8-year - Thorndyke described the research as an eight-year project. Teledyne share repurchases: over 90% of shares outstanding - Henry Singleton repurchased this amount between 72 and 84. Repurchasing CEOs: 7 of the 8 CEOs - All but Buffett repurchased at least 30% of shares outstanding. Share repurchases threshold: 30% or more of shares outstanding - The common pattern across the CEOs’ tenures. Average PE for Teledyne stock issuance: mid-20s - Singleton issued stock when Teledyne traded in the mid-20s P/E range. Average PE for Teledyne repurchases: high single digits - Singleton later repurchased when valuation was much lower. ABC station margin before acquisition: about 30% cash flow margin - Capital Cities targeted ABC’s station business. Capital Cities station margin: about 50% operating margin - The post-acquisition target and benchmark margin level. Margin improvement: 20 margin percentage points - Capital Cities’ planned and achieved improvement at ABC. Margin improvement in basis points: 2,000 basis points - Equivalent to the 20-point margin expansion. Margin improvement timeline: about two, two and a half years - Time needed to achieve the ABC margin gains. Leverage target for cable: four times cash flow - John Malone’s stated leverage band for TCI. Leverage target for General Cinema: between three and four times cash flow - Dick Smith’s leverage discipline. Investor time on IR today: somewhere around 20% of their time - Patrick noted the typical public-company CEO IR burden. Search fund returns: mid-30s IRRs - Stanford’s search fund data shows high average returns. Average holding period for search funds: seven to eight years - Reported in Stanford Business School search fund data. Growth screening threshold: minimum secular long-term market growth of two times GDP - Housatonic’s preferred market-growth criterion. Returns on tangible capital threshold: 20% or more - Housatonic’s target after-tax return on tangible capital. Housatonic transaction mix: two-thirds control / one-third minority - Historical split between buyouts and recapitalizations. Search fund investment history: 15-plus years - Thorndyke has personally invested in search funds for more than 15 years.

Pivotal Quotes: "showing up to steer the ship every day" — Will Thorndyke: He quoted Singleton’s view of opportunistic management. "you just know the probability of bad decisions is very low" — Will Thorndyke: Describing why he would choose Malone among the outsider CEOs. "the whole deal rested on that" — Will Thorndyke: Referring to Capital Cities’ ABC acquisition and margin expansion logic.

Implications: Listeners should watch for businesses with durable economics and management teams that enforce capital discipline rather than promise grand strategy.