Well, good morning, everyone, and I'd like to welcome you to our, to Compass Diversified Holdings 2024 Analyst and Shareholder Day. And I'd like to welcome the webcast as well. I wanna thank Chef Jonathan and the entire staff here for really an amazing breakfast, and it was greatly enjoyed. And now it is my pleasure to kick off by introducing Moti Ferder, who is the CEO of Lugano Diamonds. Moti comes from a family of jewelers, and he began his career in jewelry far away from Newport Beach, cutting diamonds in the mines of Siberia, actually. He has been involved in every step of the diamond supply chain, from sourcing, to cutting, to designing, to wholesaling, and obviously, to retailing.
He founded the business in 2004 with his wife, Idit, who also joins us today. In their free time, Moti and Idit are amongst the most generous people I think I've ever met, with both their time and their treasure. Moti currently sits on a number of boards, including the Segerstrom Center for the Arts, the Anderson Ranch Arts Center, and the Lupus Foundation of America. Earlier in his career, Moti was a captain in the Israeli Army and was educated as a gemologist and master diamond cutter. It's my pleasure to introduce our partner and, and my friend, Moti Ferder.
Okay, I didn't play with the clicker, actually. This is where it goes? Yeah. Welcome, everybody. Thank you for coming from far and close. Happy to have you here. Welcome to Lugano. Welcome to Lugano Privé, our, one of the newest, jewels in our box. And a little bit about, me, about Idit, about Lugano, and kinda like how it all started. So, as Pat said, I started as a diamond cutter in Israel. For lack of better knowledge, my family was in the diamond business, but then, I decided I didn't want a family business, so I started in a factory and, cut diamonds myself, go through the whole process of cutting diamonds, and then started my business in diamond wholesale in Israel. About a year and a half later, Iron Curtain fell.
There was great opportunity to in Russia to get a contract directly with the mine and get supply directly from the mine. And we had three factories, diamond cutting factories in Irkutsk, on the border between Siberia and Mongolia, which was an incredible opportunity to get amazing sourcing and so on. So kinda like the sourcing started there of understanding, it's not about the negotiating as much as it is to get to the right source and the right strategy. In a really impactful thing that happened in since the 1990s, basically, when I started in the business, De Beers owned about 85% of market share in diamond sourcing.
When the Iron Curtain fell, really, they lost the Russian market, which is 30% of the world production of diamonds. And then Canada found diamonds and said, "Okay, we don't really need De Beers," and so on. And De Beers was thinking: How do we maintain profitability, and how do we make more on a smaller piece of the pie? And they came up with something called Supplier of Choice, where basically they were forcing the diamond cutters to downstream and shorten the chain of supply. This is where the idea to move to the United States and develop our own retail brand started. And when we looked at the market... And I was traveling back and forth from Israel every month, every couple of weeks, two, three weeks.
And I knew I didn't want the usual thing of basically going one step down the downmarket of supplying to retail stores. I thought that the process at the retail store was really challenged and not a great one. And Lugano in the U.S. and the retail Lugano really started with: Let's change how people shop for diamonds and jewelry. The experience when we spoke to people and did market research was really that people equated buying a piece of jewelry and buying diamonds to buying a car, which is not a great, the best experience in retail. And we vowed to change that. So we came with a concept of, we're gonna get socially active. We're gonna get involved in the community.
At the end of the day, number one, that's a good thing to do for the world, and number two, people do business with people they wanna do business with. For you guys, you know, who Cody are is as important as what's their business plan, and that, that applies everywhere. So this was the concept of why we came to America and what we wanted to change. Everything else was really an evolution of, over time, learning and taking every step. The jewelry and the evolution of our jewelry was really... A lot of people can design beautiful jewelry, but can you sell it? And the evolution of the, the audacity of, of the designs that you've seen just now is: Can you sell it? Can you create a structure and a plan of which you inspire people to buy beautiful jewelry?
So a little bit about the jewelry market. Perfect timing. A little bit about the jewelry market. What I'm gonna say is very counterintuitive. Not a lot of people think of the jewelry industry and think, "This is an underserved market." When you walk in the street, you see jewelry stores, you see the windows packed, you go, you see the displays, they're packed with jewelry. So to say that, you know, the jewelry market is an underserved market, is not intuitive to think about things that way. Having said that, when you think of luxury, and I think this is something that will resonate with all of you, people buy, especially, high-net-worth individuals, buy luxury 'cause they want it, not because they need it.
Whether it's shoes, handbags, clothes, cars, art, and everything else, is just 'cause I want—I can, and therefore I will. You know, it's just like it's in... And these industries are really built where they have eight collections a year. They keep creating inspiration as to why do you need the newer model of a Bentley or a Mercedes or whatever it is, or another pair of shoes. Obviously, you can go with three pairs of shoes, one for running, one for high heels, and, and, but yet people have 20, 30, 50 pairs of shoes. So the element is that you get inspired why to do that and, and so on.
De Beers, 40 years ago, I believe, or so, created a structure for the diamond and jewelry industry in which it equated buying jewelry with a momentous occasion in life. What's a lifetime of a diamond for a three-month salary, engagement, you know, a right-hand ring to celebrate a promotion, a birth of a kid, eternity band, and so on. All of it was, the public was educated, buy jewelry when you need it, you know, when you have something to celebrate. I think it's a bad business plan, and I think it left the jewelry industry a step behind or a few steps behind on everybody else. So when you look at the world of luxury or high luxury, high jewelry is this little dot in there, and there's all this white space.
Everything I'm gonna say from here on out is really related to that. That's at the core of what Lugano is trying to attack and the different ways of which we do that. So Lugano changed what ROI means for us. We still have return on investment, pretty good one. But for us, ROI is relationship, opportunity, inspiration. Going back to this white circle with this little dot in it, if you're not interested in jewelry, then the fact that I advertise 10 x as much about jewelry, will it more likely convince you to buy jewelry? And the answer is no. You're not interested into that conversation, therefore, you're not listening to it. So you need a different format to connect with people, to make an impact on people, to first build the rapport and then go from there and create an inspiration.
In our world, the relationship is about the community. How do we create a relationship and an impact on the community, both on a big level and also on an individual level of touching people by hand, making a connection, making an impact on them, and making them want to do business with us? If you'll ask most of our clients, some of them thought about it, most of them haven't even thought about it. Most of them have made a decision, we wanna buy from Lugano before they ever saw a product, before they had an event, before they had anything else. They just wanted to be around us. We were leaders in the community. We were people they wanted to be around.
They wanted to be around the other people who are in our circles, and so on, and they made a decision, "We wanna be around these people." From there, we create opportunities. Opportunities are spectacular events, which Stuart in the back there, our Chief Experience Officer, puts together. And, you know, a lot of people do events. What makes our events different? Well, stage one, the relationship. Stage two is really creating like... It's like baking, putting together something together. If you don't put it right together, the cake is flat. And we know how to put things together where this is a really impactful, momentous occasion that you remember.
And even if I look back, you know, 10, 12, 15 years ago, when we had a smaller office and, you know, we would do a holiday party, California is not known for being the party town of, definitely not Newport Beach, but people would stay until 11, 12 o'clock at night. They would connect between each other, and so on. And really, we had a club before we ever had a club. And then inspiration. Going back to the white circle, and in order to impact, and create inspiration for people who are not in the market to buy jewelry, you need to create something that, you know, that you get them from that point of, "Oh, I don't need jewelry. I don't have an occasion. I don't have this.
I don't have that." Once you create the opportunity, now you're in front of people, you put a necklace on them, and now it's a change, shift gear, okay? Before, "I didn't need any jewelry, and now I put it on and I love it," and now everything else, luxury, comes into play as well, where now I need to convince myself, "I like it. Why shouldn't I have it?"... and this is, this is basically what ROI, our, our ROI is about. We have built systems really for scale that allows us to track every step of the process and define, you know, who we're in front of. Define, you know, who do we wanna get to? How do we get to them? Keep our salespeople and the company at large, keep it focused on where is it that we could find success.
We've built a tremendous amount of works, and metrics, and systems that allow us to control, to the best of our ability, those relationship, understand who we're in front of, understand what is it that makes an impact on them, and to manage our salespeople through the process of relationship, opportunity, inspiration. That goes to the movement. We track every step of the movement of the sales funnel, the momentum that you create in a sale, both on a small scale of individual sale and also on a big scale. The most important, you know, part is the 80% retention of clients year-over-year.
One of the big challenges in the jewelry industry, and kinda like this is what I said, that momentous occasion buying is bad business, is obviously the bigger the ticket is, the more effort you need to make to build a better rapport. You know, you invest $1 million in a company is one thing, due diligence. You invest $100 million in a company, it's a different level of due diligence and so on. It's a similar thing in a relationship, meaning the deeper the relationship we want and the bigger the ticket, the more you need to invest: time, effort, and so on.
For us, the repeat is really the fact that we are able to get our customer to buy, 80% to buy again and again and again, creates a really, really strong model that allows the constant growth. Those of you who track, like you see that every year, in a very significant way, our average ticket price is going up, and the reason for that is here, is the 80% retention. You're always gonna drop the bottom. Somebody who comes in and buys a $6,000 ring or a $20,000 ring, and that's their capacity, they're not coming back again another time this year or next year. They're probably coming back in three, four, five years.
The people who have the capacity will return, and therefore, you're constantly dropping the bottom, raising the top, dropping the bottom, raising the top. And then we bring 30% new clients every year. That keeps the funnel going, and this is basically the metrics of how we get to where we are. The pillars of our community and our philanthropy and what we do and how we do it. This is something we have given a lot of thought about. How do I describe to you the difference? Meaning, probably each and every one of your companies is doing things, have done events, are doing events, have done some things in philanthropy and so on. And yet, what makes Lugano different? How do we create a community? How do we create an impact that's different than everybody else?
The answer is we're leaders. We're leaders in our community. We're not just giving a check and to art, to education, to healthcare, and so on. We're involved. We're in the boards, we're on the committees. We're sort of the glue between the people that are supporting those organizations and so on. And this is true for each and every one of these elements. And I think I'm a little bit short in time, so I won't go too deep, but in children, like, we've made a commitment to... There's an organization called CASA, which basically takes volunteers that are mentors to kids in foster care. In Orange County, specifically, there are about 300 kids on waiting list due to lack of funds to train more volunteers and so on.
Lugano took as a commitment to make sure there's no waiting list for any kid in Orange County to— And from our perspective, this is such a wealthy community. Does it make any sense, you know, that poor kids in our community will stay behind? No. And in those things and how, like, the bigger impact in that is that CASA, one of the things that really, like, moved us, and we were supporting this organization for 12 years before this data even came to play, and we became aware of it, is that kids that have a mentor that are in the foster care has 70% less chance of being incarcerated, have 80% chance of finishing high school, more chance than other kids.
Kids that have a mentor in foster care, when they don't have a mentor, they don't have a CASA, their graduation rate from high school is 34%. Average in Orange County, 82%. Average of kid in foster care with a CASA, 84%, higher than average in Orange County, just for that small effect of somebody to mentor them, give them sense of security and so on. In art and culture, we're involved. I actually didn't do the count, but in every city we're involved, everywhere involved in the most important museum. We think that art is the part that really resonates and gives you a window into the opportunities in life.
All of the organizations we're involved in are really involved in the communities and involved in creating opportunities for kids, you know, that don't have everything my kids have. Give them a window and give them an opportunity to understand what's the world above their difficulties in their lives and, and so on. We have committed to free admissions in Orange County Museum of Art, a $2.5 million commitment. Zoe here did a survey. The impact of that is like $65 million. So again, the impact and the communities remember it. You know, we walk around in Aspen, people we don't know stop us on the street and say, "Thank you for everything you're doing in our community." Event-driven marketing, again, about our events, they're prettier than everybody else's. That's obvious.
But as I said, everybody does event, but somehow, I—all I need to mean my job in going to events and so on, it really evolved over time as I have less and less time, more things to do, and no time to take on new clients and so on. My job is really to be the nose of giving direction. You know, is this good? Is this not good? Where is the focus and so on. Sorry, I lost my train of thought. So, in going to the events, it's really the energy in the room that I sense, that I know immediately if this is going to be successful or not. It's not, is the food great, which it always is.
It's not are the flowers beautiful, which they always are. But it's about how do you curate the people in the room? How do you create, curate the energy and so on, that creates this sense of camaraderie, that then creates the sense that they make a decision, we wanna do business with Lugano. Just a small note, our return on investment on our events is 10x. Privé. How did Privé come about and why? First of all, a big shout out to Cody for taking on a jeweler and allowing our vision of going into food and wine and experiences. It's such a big investment, as you can tell. We couldn't have done it without him, so thank you. And so back to the white space.
The challenge, as I shared, we have a really incredible relationship with our clients. Yet, when we analyzed how much, you know, referral are we seeing from our clients and how impactful is it to our bottom line, we saw that it's not as meaningful as one would expect it to be. Why is it not? Let's take an imaginary story. A client buys a pair of magnificent earrings. Her and her husband go with a couple of friends. They go to dinner. Her friend immediately reacts on the earrings and says how beautiful they are. Our client goes on a 15-minute rant, on a scale of one to 10 of the rapport that she could give, or report she could give on Lugano, she gives a 15.
And yet, her client, the next day, doesn't show up in the store to look for another pair of earrings. Why? She's in that big white circle. She is not in the market right now. Every day past this dinner, the impact goes down, down, down. Her husband, completely disinterested in the conversation altogether about the earrings. He talks about the stock market, he talks about his golf game, whatever it is, doesn't listen to a word. Then comes their anniversary, and he goes wherever he used to go before. Fast forward to Privé. Our clients bring their friends to Privé, and now this is our profession, to form a relationship with them, to make an impact, to create opportunities, to create inspiration. We're in control of the process. This is why Privé. We're not here to try and make money on food and wine.
We're very fortunate that our clients really understand and trusted us, not in our core business, to deliver excellence and exceptional experiences. But all of it is like very laser-focused on why we're doing this. We're doing this to spend more time with our clients, hence, our clients spend more money with us. We're doing this for our clients to bring their friends and for us to control the process of shortening the time frame and the process from an inspiration to back to the circle of creating the relationship with them to get them through the door, that door, so it's the only way they can come back here. Is every member at Lugano has to be a client.
So people who come here, who are impressed, who wanna be a part of our circle, their only way to come back here is to go back out through the door and back here. Our salons. Well, truthfully, in the beginning, we thought we'd put all these pictures of all the salons and so on, but you're here, and you're seeing what this is like. Our salons make a major impact on people who walk in. It's really like no other experience in any other retail environment. What we do is we create a home away from home, a really place where it's not a everything but transactional, where again, we connect and we dive deeper on the relationship and on the opportunity, and then to create the inspiration, and this is how our salons are built.
From monetary perspective, as you can see, I don't know what's the average for sales per sq ft, but obviously $17,500 is a little bit of a success. But more than that is this number will continue to grow and grow. We see no glass ceiling in any market that we're, that we're at. A store could be $100 million, and it could be $200 million, it could be $300 million. This is, we've been in Newport Beach for almost 19 years. This is obviously our oldest market and also our most successful store. We're scraping that $100 here. And when I look. My office is right over there. When I look outside my window, and I look at all these houses, the vast majority of them are not clients yet. They're all in that white space.
So the identifiable market of where we could grow has no limit. It's just a question of more time, more effort, you know, and so on, to get to more people, to create relationships, to create opportunities, to create inspiration. But that's what it takes. And the beauty of it, as we were preparing yesterday, we were talking about it, is that with above $300,000 average ticket price, obviously, this investment is very, very much worthwhile for us to do it. Financials, obviously, as you can see, this is a heavy investment business. Our inventory, CapEx, and so on, everything is heavy investment ahead of time. But you can see in a short time frame, the results that this has already created and then also what's yet to come.
On every front, meaning we've zoned in, focused, and really created a structure that on every level, we continue to perform better every year that passes. Scalable. So intuitively, people would think that relationship is not scalable. Everything I spoke about is really describes to you what we've done to make a relationship a scalable business, with a relationship of opportunity, inspiration, and the investment in people, in systems.
I think what distinguishes, you know, Lugano: many things distinguish Lugano in the industry, but the combination of the level of jewelry that we have, the go-to-market that we have, the investment that we've made in building a company and a brand and not just a successful jewelry store, even pre Cody joining in and fuel on the fire, you know, after Cody joined, is really what makes us and makes this story something that we could go on and on, and there's no end in sight of how far we could grow and how much we could. A little bit about the supply chain. Again, counterintuitive. Most businesses, whatever it is that you manufacture, the bigger the scale, typically, the more effective you become. Jewelry industry and diamond jewelry, diamond gem industry is counterintuitive in that regard.
There's no scarcity of meaning that there's diamonds to be had. There's other gems to be had. It's not the fact that there are none, but it is a natural resource. Even if you thought of wood, if you wanted the best kind of wood in the world, and the more, the more you needed of it, the more the price would go up because it's a natural material. You manufacture clothes, you manufacture cars, whatever it is, you manufacture 1,000, costs you X. You manufacture 10,000, costs you X minus ten. You manufacture 100,000, costs you X minus thirty. Gems are the exact opposite. What happens is that the business model for most jewelry stores and chains of stores, brands, is that they need consistency.
They create mass-produced jewelry, and therefore, if they have a model for a ring, even on a one-carat ring, not an extremely rare size, now you need 1,000 or 10,000 of the exact same thing. That part costs money. Reverse than everything else in the industry, you want one diamond, cost you X. You buy 10 diamonds, maybe X - 5 . You want 100 diamonds, X + 10. You want 1,000 diamonds, X + 20 . You want 10,000 diamonds, X + 30 The Lugano model, because we make unique, one-of-a-kind jewelry, we don't need anything. We buy opportunistically, thanks to Cody. We buy opportunistically, and we design around what it is that, and this is one of our ways of creating value, where we buy significantly under market, the opportunities that are given to us.
It's not that, you know, okay, when Lugano wants to buy, then everybody gives, gives us 20% off or something. But when we look for the model of, of buying opportunistically, and because it is that we don't need something consistently and so on, and we can maneuver and shift and, and turn based on, on whatever is available that's a good quality and a good deal, then this is a continuous process that, that allows for extremely scalable and even better and better results, as, as we've proven in the last few years, where profitability is continuously going up even though the scale is going up. Back-end infrastructure, I spoke about it a little bit. We have an amazing team, Idit, Chief Operating Officer, Lisa's here, Chief People Officer.
And we're putting a tremendous amount to everything that I spoke of about the business model and, and everything that we're doing to support it. One of the core values of Lugano is a yes mentality. We try to say yes to everything. It sounds amazing, but it's actually a really difficult business model to function in because that means that, you know, we have already 10 events this month or 30 events this month, and something, an opportunity comes where we're in front of a new client, an existing client, they want us to support something, you know, and then, okay, one week we're doing something else. We have a client in London interested in something. It's not, okay, it takes a week to get there. Somebody goes on the plane, you know, goes to deliver that diamond.
This is the culture of Lugano. This is a part of what we do, but it takes a lot of systems and a lot of people behind the scenes to make that happen, and we've built all that infrastructure to support that. With our tremendous growth, it's definitely something that's challenged every day, but definitely is there to support the business. I think that's it.
Ahead of time.
I think I did a bad job introducing myself before, but I'm Pat Maciariello, the Chief Operating Officer here at Compass. I think at this time, Moti is happy to take some Q&A specific to Lugano. We'll have a separate section afterwards for Q&A as it relates to broader Compass Diversified. So questions? Okay.
Hey, this is Mark Feldman from William Blair. So just my question for you is: you sized the $1.5 trillion luxury market TAM. Is there any way to think about how large the, you know, high-end jewelry TAM is today and the efforts that you are doing to expand that out to what it could become? Thank you.
I wouldn't put a number on it, but I think that basically it can be as big as anything else, you know, out there. I think that since we've identified that there is a sort of challenge, and specifically for the high-end jewelry industry, where the path in general that it's on is not one of extreme growth, and there's so much white space around it, I think that it's equal to everything else that's out there.
Got it. And then if I could just follow up with that is, could you talk a little bit about the competitive environment that you guys are operating in? Obviously, you know, you have very unique pieces that not many others can do, so just a little more detail on that.
I'll say it in the most humble way that I can. It's really not a big factor for us. It's not a factor because we don't address the same clientele, okay? Meaning the people who are there specifically shopping for birthday anniversary and so on, the people who are in the big brands and, like, motivated by being, you know, having the symbol of... I won't name them, but, you know, it is a different market, and we have so little crossover. It doesn't mean that they've never shopped everywhere. Obviously, when we meet our clients, they've bought some jewelry, most of them. As in general, 98% of our clients, the day they meet us, is their jewelry spend goes up exponentially.
Really, the majority of our clients or the most important segment for us in our clients is age 55-75. People had a good lifetime, you know, to get there and consume jewelry and buy jewelry, and yet most of them were in that white space. And then we got them into the Lugano experience and created the inspiration of why to spend on that, similarly as you spend on art and cars and everything else in luxury life.
Thank you.
Hi, my name is Brian Kurnoff. I'm from Beach Point Capital. Just a follow-up on the competition question. So if I saw the slide right, I think it was like average sale price for a piece of jewelry is like $300,000, right?
Correct.
So when you think about, like, the customer journey of people who are coming into the fold, is the average customer already spending $300,000 on a piece of jewelry elsewhere? Or are you really bringing customers up the value chain, where maybe they go buy a $25,000-$50,000 piece of jewelry from a local jeweler, and you're sort of saying: "Well, listen, you got the G5. You know what'll look great on the G5?" "It's this wonderful tennis bracelet that's $300,000." Like, I think that's just be really helpful to understand, like, are you bringing customers farther along the journey, and thus you're broadening the market and penetrating the market deeper for jewelry buyers? Or are you really taking away share from, like, a local mom-and-pop jeweler who has some bespoke pieces in Aspen?
Well, we're taking share from them, from other jewelers, because, as I said, you know, the vast majority of people, their journey doesn't start with us. Their journey takes a turn with us. I mean, most of them have, you know, some pieces of jewelry, you know, either... Many of them still their original engagement ring and so on. And yet everything else in their luxury life has grown. But even their journey with us, and if you go back to the slide where I was talking about the 80% retention and so on, and 30% new clients every year. A first-time buyer for us, the average ticket price is $70,000. So their journey with us starts at a much lower price point, typically in average.
And the reason is, is again, they haven't been exposed yet to much, and they-- you need to graduate into the feeling of, I buy something, I feel good about it, and therefore, I'm gonna do it again, and as I do it again, I get more comfortable and, and so on. Most people don't go zero to a hundred in, in, in one shot. It's the same if you buy art, and you learn with time, your taste buds, you know, and so on, are, are growing with, with time. Your comfort level of doing that level of spending is, is growing with time, and the relationship, as I said, is something that you invest, and the trust is, is a really important factor in, in feeling comfortable in spending that kind of serious money.
I'm very proud to say that we give an equal experience to somebody who comes in and buys $5,000 or $20,000 as somebody who buys $1 million from us. And first and foremost, because Idit and I worked for every dollar we have, and we know what the value of a dollar is, and we don't get inundated with the fact that, you know, that we are privileged, you know, to sell such high-ticket price items to other people, and what's the value of money in that so...
Maybe just one more quick thing on the supply chain. You mentioned diamond supply chains are very unique. When you guys are looking at, you know, pieces of jewelry that can fetch north of, you know, $250,000, are you guys ultimately accessing very unique cuts of stones, carats, quality, clarity? And part of, like, the moat here is that you can get that, you know, 8-carat oval, you know, Internally Flawless diamond, that there's only four other bidders really out there in the market for? Or is this more the price point gets elevated because of the intricacies of the designers and the piece holistically being put together with smaller jewels?
No, the value is. It has many, many facets to it. One of which is, as you said, carat size, color, clarity, and so on. Other elements is are you actually using it? I think a part of the challenge that again in the format of the jewelry industry is because I call it trophy purchases. Meaning, okay, I have a 25th anniversary, and I may need to make something impactful to this momentous occasion in life and so on. In general, when you go into other brands, other stores, and so on, that jewelry is geared to look like a trophy.
The number one thing that we hear from clients is: "I have plenty of stuff in the safe that I don't wear." We pay a tremendous amount of attention and focus on the fact to make things that are wearable. If they are things that you wear to a black tie, then they're convertible and multi-use and so on, so you can wear it to a nice dinner and a nice restaurant and not just to a black tie once or twice a year. I think that other than the relationship, the factor of using it is the reason that makes you do it again. Again, meaning you, whatever it is that you like doing, you like playing tennis, then you enjoy it, you do it again. You know, it's the same story as everything else.
You know, if you buy from a certain brand and, and the clothes that you buy are beautiful, but you never use them, you're not going back eventually. So the usability is extremely critical. On the supply itself, as I said, we don't have a magic wand that, you know, somebody, you know, okay, we're, we're selling to Lugano, and therefore, we're gonna sell it cheaper. It's more of an element of in the fringes, you always have opportunities. Meaning it's like that, you know, for Cody with companies, it's like that, meaning if you look at the mainstream, there's a price for everything and, and so on. Now the question is building a business model that allows you to identify and situate yourself in the right positioning to find the right opportunities, and those opportunities are worth more than your negotiating skills. That's-
Fair to say that Moti, like, unlike some of our other competitors, though, we own the inventory here.
Correct.
We're buying, we're removing middlemen, where others, though, would be a wholesaler, which may own, you know, a third, a half, 70% of sort of what you see on our store there. So we're able to pass on that value to our customers, I'd say.
Correct. 100%. Yeah.
Matt?
Yeah, thanks. Matt Korando with Roth MKM. Noticed one of the slides, you had some metrics around the salons. I think there were nine salons in existence, and you're targeting about $100 million in sales per salon, and or at least that's kind of a stretch target, I would assume. Wondering if maybe you could talk about sort of at more maturity, where you see the headroom for salons over time? And then also, just in terms of the maturity of a typical salon, once you open it, sort of how does that come up the curve in terms of sales per existing salon?
So first of all, our model is one of which every new salon is seeded by the other salons. It's really something we learned from the equestrian world in being one of the key sponsors in horse show jumping. Everybody's from somewhere, and it really taught us the value of how to create a relationship and how to follow those relationships. Even before we had nine salons, we had clients in 100 cities across the U.S. and some around the world. So what happens is, we open a salon in Washington, D.C., or in Houston. Houston, as an example, has, like, very big contingents in Aspen, in Palm Beach, and so on in the off-season. Similar story in Greenwich and in Washington, D.C.
So we meet those people in other markets, whether it's equestrian Aspen, Palm Beach, and so on. And as we start to cluster a few clients in or a few major clients in certain cities, and we think that they're a center of influence and everything else, where one of the key things or the number one thing that we look in the market is our ability to create, to influence the market, to be a leader in that market. The biggest fear that I have for the future is to become like everybody else, where you plant a store, you know, it's location, location, location, and it's about the foot traffic, and we become like everybody else, sitting in the store and waiting and complaining that, you know, there's no foot traffic or not enough foot traffic.
That's my biggest fear for the future. For us, it's about finding a person that has, you know, from Houston, that has a house in Aspen as well. But their circle of friends and circle of influence in Houston is different than the one that they have in Aspen. There's correlation for sure, but there is a bigger center. Their businesses there, like everything, you know, that they're involved in and so on, basically allows us to come in and be three steps ahead. And as a generalization, every store that we open, when we open it, we're already profitable because we already have a seed of clients there. Looking into the future, again, there's so much room for growth. I mean, we're not yet in Chicago, in New York, in L.A., in San Francisco, and on and on and on.
They're all obviously places with a lot of great wealth and a lot of opportunities, and me, I could go on and on. And then from there, we just opened or... I mean, we opened a temporary salon in, while we're building our flagship store in, in London. We've already had some revenue in London last year. London will open its doors to the Middle East. It'll open its doors to Asia. It's like, so we, we plan to continue and follow the path of having our clients lead us to where is the next step rather than, you know, pray. Where?
Hey, Kyle Joseph from Jefferies. Just kinda wanna understand a little bit better, 'cause no offense, I'm not a client of yours. Yeah, I'm married. But in any case, just want to get a better sense for the cyclicality and seasonality of the business. I know you, you've touched on it a little bit, and, you know, it's not just, like, Valentine's, whatever. But... And then, forgive me, I don't even know how you guys did if you were around in the GFC or how, you know, if people were buying diamonds in the GFC, but, you know, cyclicality and seasonality.
What's GFC?
Financial Crisis.
Oh.
Oh, Great Financial-
Was the first question that when Elias, Pat, and I met, we met in a coffee shop here in Corona del Mar. Before the coffee arrived, Pat asked me, "How are you gonna do in
You'd expect me to, right? You'd expect me to, right?
in the next recession? I'll let him tell you what I answered.
Okay, no, I mean, I think in any crisis, there's an initial sort of clenching up of people's wallets, right? And of how people—and of people's lifestyles. It feels like Moti. I think Moti and Idit would believe that that loosens up quicker at sort of their end of the market than it may, say, at, you know, other sides of the market, if that makes sense. Yeah, I didn't wanna say that, but you gotta
Well, and I'll add to that, to the fact of, I mean, you're all businessmen and, in general, my view about business is when the going gets tough, then it's when you double down. Everything is like in the, it cycles, you know, even bad, bad timing has cycles. And one of the reasons why, you know, we joined forces with Cody was the element of in previous downturns, we doubled down, and we felt the business was getting too big for our ability to do it ourselves, to double down again when the going gets tough.
But I think if the fundamentals of the business are not changing, and I think that, you know, you're all in this world of analyzing this, the wealth that was created among the high-net-worth individuals is here to stay. And I think that it's literally that the economy is not even a topic of conversations. I see hundreds and thousands of high-net-worth individuals every year and I've seen them in the past, you know, year or so. It's literally not a topic of conversation. Doesn't mean they're not... I mean, some parts of their business may be, you know, suffering through high interest rate or inflation or whatever it is, but they've created so much wealth that their personal life is, like, separated.
They continue to fly private, they continue to travel, they continue to consume, and, and so on. And I think the data is showing that, that on the very high end, as... What you're seeing in luxury in general is that, the luxury market and the effort to expand has really pushed down the price point so much that you're seeing other, sectors bleeding, bleeding into the luxury market, and therefore, there are some elements of suffering, but definitely not at the top level. Back to your question about, about, cyclicality and, and sort of... I'll answer it from a different direction. We used to have some time off, no longer.
So the way we've built the business on is because we do a few hundred events a year, what we've done in the past quite a few years is if April was weak, then we found opportunities to find different events to be in and so on, and be in front of clients and initiate and create the momentum for ourselves. So that's one aspect and one way that we've addressed it. And the other one is if you look at the stores and where they're located, Aspen and Houston are in opposite times. You know, Washington, D.C., and Palm Beach are in opposite times, you know.
So every store has its time, and part of the our thought process is where to open stores is to keep the balance, you know, so the year is balanced and so on. And we initiate 80% of our sales. We don't wait for people to come into the store. So even on the element of Valentine and holiday and so on, I mean, holiday is definitely at a peak, but sometimes not even the highest peak in our year.
Other questions? Okay, I have a question. Just to end, could you tell us a little about what makes the Paraíba so attractive to you—and as a company, and why it has a special place in our heart?
So, first of all, my story with Paraíba, I'm originally a diamond-
Paraíba is the beautiful turquoise-ish stone, in there that you'll see that's very unique.
Yeah, there's one in the display straight through that door. So, Paraíba is a tourmaline that comes from an exhausted mine in Brazil. What happened in that mine is that copper and gold got integrated into the chemical balance of the stone, and it makes the stone glow. What I really, really love about this stone is that it really speaks for itself. It's not. It's something that needs no explanation, even though I just gave one. You know, we have clients that have bought, you know, a lot of jewelry from us, and they have a Paraíba, and they say that that's the stone that gets the most, you know, effect. But 99.9% of people around you wouldn't know, you know, to say, what's the price tag on it?
I think that the competition shouldn't be about who has more jewelry and is the wealthiest person in the room, at least from a jewelry perspective, but rather, who's the most sophisticated person in the room, and that's sort of our... I think that Paraíba is a very sophisticated stone that does something to you emotionally without even knowing the price tag or the importance and the significance of it.
It's a good way to end, good way to end. Thank you, Moti. I think we're gonna take a two-minute break, and we'll come back for the Cody part of this presentation.
Thank you, everybody.
All right, I think we're gonna get started with the Compass Diversified portion of the event. So if everybody could take their seats, that'd be great.
That didn't go well.
I know. He's just like, "Um-
Hello!
We good?
All right. Welcome, everyone. I think this is the first investor day that we've done outside of New York City, other than broadcasting during COVID online. Welcome to beautiful Southern California. Weather's probably a little bit better for most people that aren't from here, so hopefully you get a little bit of a time to enjoy it. Today, my name's Elias Sabo. I'm CEO of Compass Diversified. With me are Ryan Faulkingham, our CFO; Pat Maciariello, our COO; and Zoe Kotskinas, our head of ESG. They'll all be presenting with me throughout the presentation and available for Q&A. I think most of you know who we are and what we do. We own a collection of niche middle-market businesses. Today we own nine, about to go to 10, as we announced the acquisition, the acquisition of the Honey Pot Company yesterday.
With Honey Pot, it will create seven companies within the branded consumer space, three in the industrial space. We do about $2.2 billion of revenue last year, 20%, roughly, EBITDA margins, generates about $450 million of EBITDA. So today, what we're gonna take you through is really to contrast what we do with what we get considered to do, which is traditional private equity. There are a lot of differences in how we execute our strategy versus traditional private equity, and we're going to compare and contrast that throughout the day. The reason that we get compared to private equity often is because of the type of assets that we buy. So when you invest in Compass, you are getting access to small middle-market companies that typically you would not be able to get access to as public investors.
They're too small, they lack the infrastructure and the scale, the management depth, the systems, in order to be qualified candidates for public investors. However, these companies typically occupy, and the companies that we look for, occupy really interesting niches, and they can be very defensible. They can have low market share and use market share growth as a way to accelerate growth and shareholder return. And really, the only way that you could access these type of companies historically is either through BDCs, if you wanted to principally do it through debt, and then you have a fixed investment that you're going to get back, or you could do it through the private channels and traditional private equity. And so that channel for traditional private equity, the way that it's modeled is these are relatively short-term partnerships, 10 years typically in length.
You have five years to put money to work. You then have 10 years in total in order to exit, and it really shapes all of your decisions. First, you're required to put money to work. You can't be patient and disciplined because you have a short commitment period. But the bigger problem that plagues private equity is that they don't have the time horizons to invest in innovation and growth.
The typical model with which the traditional business has worked has been, we buy a business, we're gonna sell it in a couple of years, we're gonna put a lot of leverage on it, and if the Federal Reserve is continuing to lower interest rates and multiples are going higher, we're just gonna be able to benefit by virtue of multiple arbitrage, and we don't really have to do much other than really starve our companies of the capital they need to grow and trim expenses in order to create greater margin. So by contrast, what do we do? We buy the same types of businesses, but we are a buyer and builder of these companies. And so in our model, we don't have pressure to put money to work. Before the Honey Pot, we didn't do a new acquisition in 18 months.
We didn't find companies that met our strict criteria, so we can sit on the sideline because we don't have a gun to our head in order to put money to work... But the biggest difference is we're gonna invest in the infrastructure of our companies. I'm not gonna go through everything we do. Our senior team up here is gonna walk through what we do once we own a business. I will tell you it is bespoke because not every business looks the same, and what it requires is different. But because we have an unlimited time horizon under which we're gonna own these businesses, our approach is to come in and help these become great companies. These are typically really good businesses.
They've got great competitive differentiators, but they're lacking in certain elements, and they can benefit from the human capital that we have at the corporate level, as well as the access to capital that we have. So I want to walk through and compare some of the areas where we create real value through differentiation. If you were looking at a company, as do we, the first thing that we always ask and in the investment committee, "What is this company's competitive moat? How is this company going to be able to sustain that moat and be able to deliver excess return beyond the industry?" So that same lens should be focused on us. What is our competitive moat? Well, the biggest moat that we can have is our cost of capital advantage.
And if you think about it simply, we're financing today a $500 million business that is uncorrelated, diversified by virtue of having 10 different businesses in there. We believe that will grow to 15 and maybe more over time, and diversification will only grow. And so if you compare financing a $500 million business to compare it to a $50 million single asset, single industry risk company, there's gonna be a wide gap in the financing cost between those two businesses. Now, a little later, we'll talk about where we stand today. That gap's never been greater. But just the structure of what we do creates an arbitrage because we're financing a company 10x larger. We can get access to products like bonds or, preferred equity, things that you would not be able to get.
So not only is the spread on our cost lower than what it would be if we were doing single-asset financing per tranche of debt security or non-participating security, it's also the breadth of products we can get is much greater. And so what does cost of capital enable us to do? It allows us to buy the best businesses that are trading in the industries that we're looking at investing in in that year. Since we embarked on this strategy shift, look at the companies that we've acquired: Altor, Marucci, BOA, Lugano, PrimaLoft, and now Honey Pot. These are some of the best profile companies that we've ever owned in our history. Very demonstrable, competitive moats, great growth rates, disrupting their industries.
These businesses can only be bought if you have a cost of capital that allows you to compete for these, because these are the most attractive assets that everybody's looking for. And so our cost of capital declines over the years, and the advantage that we've created comes full circle in allowing us to buy the types of businesses that are gonna create the best opportunities for our shareholders on a risk-adjusted basis. Our second and large differentiator is the permanent capital base that we have. What we always talk about internally is we match the duration of our capital to the duration of our opportunity. Now, look, none of us can tell you whether we're gonna hold a company for a year or for 20 years. We just don't know upfront. Somebody could emerge out of the blue that's gonna pay you an extraordinary price for a business.
Well, you know, we're fiduciaries on your behalf. We should sell that. That's three months after we buy a company or 16 years after we buy a company, that's what we need to do. At the same time, these companies typically have not had institutional capital. So you just heard Moti. It's always difficult for me to get up after one of the companies speaks, and it's all exciting, and you see product. But, you know, Moti's an incredible entrepreneur, built this business with his wife on his blood, sweat, and tears. But there is a point where institutional capital is required to come in. As he said, nobody wants to be doubling down with their own capital every time. So a lot of strategic decisions that you're making are easier to make when you have institutional capital.
But because we are typically the first or second institutional capital in, it means there's a lot of opportunity for these companies to be built into even better businesses through systems, through processes that are created, through augmentation of management. And the team will talk about that, but it takes time to do this. This isn't something that generally can be done in a two- or three-year window, like traditional private equity is executing. Now, if you're talking about financing in the big brand names like Blackstone and some of those, where they're buying multi-billion dollar businesses, those companies have probably already gone through this part of the life cycle and have had institutional capital.
What we're talking about is being on the small end of that market, where we're buying $30 million-$40 million EBITDA businesses, not billion-dollar EBITDA businesses, and they really do require investment, and investment requires time. The last area that I'll talk about is our people. We started this business originally in 1998. I was one of the founders, predating the IPO in 2006, and we've built really an extraordinary team of individuals that can execute this strategy... unlike traditional private equity, our talent is very unique. Traditional private equity is not business building, and so the managerial and the strategic ownership skills that one needs when you're going to buy a business and own it for a decade or two decades is very different than if you're just going to trade a business and finance it and create an arbitrage by having that ownership.
Our individuals need a combination of transactional experience, typically that they gain in investment banking, and sort of a consulting skill set. It's a very unique person, and it is a very long and steep learning curve when you come into our organization. When you have a unique job requirement, not everybody is going to be able to index against that, so you have a smaller pool of candidates you can even approach, and the learning curve is really high. That is when turnover costs you the most. If you look at our organization, and for all of those of you that can come over to our office today, when we walk through, I think you'll get a sense of our culture, of what we do for our employees, of how we put everything as an employee-first organization.
What it leads to is a lack of turnover. We've had over 95% retention in the last five years, and we've talked about this in terms of our diversity, our inclusion. You know, we have, over the years, hired our staff based on the most competent person gets the job. Now, I know ESG has sort of come in focus, out of focus. It's like a political football that goes back and forth, depending on which debate you're going to listen to, Republican or, you know, Democrat. But the truth is, you know, a lot of the values that lie within ESG, those are the same things that we have been doing for years and years. We are not trying to fit a diversity mix just because it's in vogue to talk about that. We hire the best people. What has it resulted in?
Basically, our organization is 50/50 between men, women, people of underrepresented class. You know, in the last few years, that has gained momentum. Two-thirds of our hires were females or underrepresented in the last year. We now have three female board members. So you'd say: Why does this even matter? It matters because diversity of thought adds value to all of our processes. I think differently than Pat or Zoe or Raj or Phoebe or Rachel, and as a collective, we are going to have a better outcome if we all are able to weigh in with our diverse backgrounds in the way that we're approaching, whether it's the initial investment, the opportunity that we have, or how we're going to manage that company going forward.
I'm going to turn it over now to Pat, and he and the team are going to walk through some of the things that we do in our businesses once we own one.
Sure, and thanks, Elias. So first, let's talk about strategy development. When we partner with a company and partner with a management team, we ask them all to provide, at some point, first and foremost, just a five-year strategic plan. What's this business going to look like in five years? How's it going to get there? It may not be day one. These businesses are often going through a lot, after a acquisition is announced. But at some point, we're going to ask them to put that rigor down, pen to paper, and work with us, to do that. We also create very specific independent boards at each of our subsidiaries.
And these boards, it's not just about reporting numbers. It's about fleshing out strategy on a quarterly basis, and it's about creating resources for our executive teams to go to if they need to talk about their strategic problems or strategic issues that they may be having at the time. We also populate that board with outside directors that know stuff that, quite frankly, we don't know, and that and have expertise that we clearly don't have. At Lugano, for example, we have the former CEO of Tiffany's on our board. We have the former chairman of the Robb Report. So people who can add something really material. And then we just have constant sort of strategy discussions with our executive teams, and this is an every day.
This is not, you know, every quarter. This is, this is we come in thinking strategy first. We come in thinking strategy second, and, you know, our team internally, will discuss that constantly to see if there's ideas we can bring back. And then we oftentimes are sounding boards. You know, if Moti has a question or a thought in his mind on how to move strategically, he'll call Raj perhaps, or he'll call me, and we'll discuss that. Long-term capital investment. Elias touched on this, but it's very important in our business. You know, if you're in a traditional fund and you're getting close to when you're going to exit, you're not going to put in place a new ERP.
Even if that's the right thing to do for the company, even if that's the right sort of medium- and long-term ROI, you're not going to do it, because it's a cost that you'll incur, and you won't get-- you'll get very little of the benefit. For us, we look at each of our businesses as if we're going to own them forever, and we invest as if we're going to own them forever. And so maybe we, you know, kind of stretch that sort of, return on investment period a little bit. Maybe it's got a two-year payback. But I can tell you, you all want us to do those, investments.
Those are things like, you know, opening up our retail stores, which was a strategic shift that we helped with at the board as well, at 5.11, which we now have sort of 123 retail stores. And it's driving a great portion of our revenue. It's things like investing in high-density interconnect boards at Advanced Circuits, which is really sort of getting into the sweet growth spot of the industry when other parts of the industry were stagnating. It's things like building out our advanced customer care capabilities at 5.11, right?
Where we have to—as we're growing so fast in DTC, you know, we have to match the service of the best DTC businesses out there, and that takes investment. It's things like ERP implementation, not just at 5.11, but recently at Altor. It's things like plant rationalization at Altor, which may not pay back overnight, but if you get that right, will reduce shipping costs, which are such a major component of the cost of our product there. And lastly, or the last one I'll discuss is on sort of personnel additions and optimizations. Look, we have a 25-year history and 25 years of collective relationships, and we've worked with a lot of great executives.
We're able to call on them, and we have a lot of great resources for additional personnel, and we're able to call on them, you know, when needed for help. I think as we enter a business, sometimes there's no changes needed. Sometimes you acquire a business with a world-class management team, and there's very few changes, and you just sort of, you know, you learn. In every example, you learn from them, but here you just kinda, sit back is the wrong word, but discuss strategy and work on some of the other stuff and learn from them.
Other places, like Lugano, we have a world-class leadership team, but there are some additions perhaps that could help in its growth trajectory, and we've made those, and we've worked closely with their head of human capital to work on those. Other places, like most recently at Altor, we need to hire, or we think it would help the company to hire whole new teams, and we go ahead, and we make that decision, and in this case, you know, it's done wonders for the business.
The point is, over our history, I think we've learned what businesses need at what point in their growth trajectory, if they need augmentation, if they need financial help, if they need processes, et cetera, and we're able to add that and to work with our companies, to do that for them. Zoe, I'll give it over to you.
Thanks, Pat. So if we think about how ESG plays into building better businesses, we may dare to take a look at the ESG landscape right now, and that may be a bit confusing or a bit scary. But what that is sort of showing is that a lot of companies took ESG and got caught in the political crossfire that is happening. Some may went too fast, too soon, created some pretty lofty ESG goals and weren't able to deliver on that, and that caused confusion, and that caused mistrust. Then there were companies who had no conviction in ESG, didn't do anything, lost market share, and lost their competitive advantage, and that caused a lack of direction. And so we've been steadfast in the way that we view ESG. It hasn't changed. It's been consistent.
We believe that ESG adds good business merits, and that's been part of our DNA since inception, before ESG was even called ESG. So if you look at our capital structure, by nature, it is responsible investing. If you take private equity, they buy lower growth businesses. They over-leverage those businesses to get a return. What we do is we go after companies that have high growth. We don't over-leverage them, so they're safer investment opportunities, and they're able to weather the economic downturns that are happening. So if we're thinking about long-term growth, what does that mean? Well, it means, it certainly means that you can't deliver on long-term growth in these short time periods that typical private equity has. So what we have to our advantage is that we have unlimited time frames. We have forever.
And so what can you do with forever? Well, you can do anything you want. So what do we do? So we take governance, we take good governance, and what's important about that is that the G is the foundation for the E, the environmental, the S, the social. And so we're able to implement things like SOX. We're able to implement good ESG robust programs because buyers want those things. They're willing to pay higher multiples for those things, and we know that to be true because we pay higher multiples for those companies. And what that means is that we believe the opportunity cost for not doing ESG is very substantial because of what I'm saying right now. We can demand higher multiples, and it reduces our cost of capital.
And so if we think about our companies, I'm gonna provide some of these examples of how we do this. And so we don't rely on financial alchemy like typical private equity. So what our companies do is that Marucci, for example, we just sold them. We got a great financial return, but that also came with employee engagement, community engagement, and their employee well-being. If we look at Altor, Altor has a very strong management team who are sitting in a sleepy industry, which they've recognized, and they're willing to innovate on a sustainable product based on their consumer demand, and they're about to... they will capture that market, and they will be the leader in that market.
PrimaLoft, a very unique business, in that with their product, they're able to partner with household name brands, and they're able to push those household name brands' sustainability message and commitments forward. Brands like Nike, they wouldn't be able to do it with brands like PrimaLoft. We're not a competitor, we're a partner, and we're pushing it forward, and that uniquely places PrimaLoft in their market.... If we look at The Honey Pot, we look at BOA, fantastic companies with really strong management teams who will say that they've partnered with us based on our values. We're able to work with great businesses because they want to work with us. And finally, Lugano. This is the space that we're standing in, sitting in, sharing in right now. This is a social space by nature.
This has been set up for their high-end clientele who are demanding community, who are demanding a mission beyond what they're doing every single day. This is what we're here for. This is what it's all about, and we're sitting in it right now.
Thank you, Zoe. So quality of earnings. Look, we're all. We're a public company, of course, and you all expect financial reporting processes and controls that are effective. So that's really what the finance team at Compass is focused on. It's all about, you know, raising the quality of earnings that these companies are producing. So, we've got a team of 16 people within the finance group. We have, seven people that are accounting and tax experts providing guidance to subsidiaries, but we also have a team of nine internal auditors, right? Every one of our subsidiaries are Sarbanes-Oxley compliant. That's a significant investment in time and energy and resources to get these businesses there, but that's what our teams are doing day in and day out.
Pat referenced ERP implementations, which is a, you know, significant investment in that, and, you know, certainly the financial reporting capabilities out of that ERP, but also KPIs, right? Pat and his team are looking at KPIs that some of these businesses haven't considered, but we're looking at that daily, weekly, monthly. ERPs are incredibly important to that. And in the end, it's about, as Moti mentioned earlier, it's about scalability, right? Do we have the processes, the controls in place to take a business like Lugano from $30 million to $110 million of EBITDA in two and a half years? That's high growth, and you have to have the capability to handle that scalability. So that's really what the team is working day in and day out to do.
So I'm going to take you through a couple of case studies. I mean, really what the team does when we come into our companies and why we are successful in getting increased multiples on exit, is we're reducing the risk of these companies. Whether it's the financial risk, because we have better controls in place, whether it's the environmental and people risk and governance risk, because we have ESG programs in place, whether it's just the monitoring and the human capital, these risk-reducing activities pay back through multiple increases when we sell businesses. And that's one of the things that the intensive effort that we put in place ultimately yields back to our shareholders. So I'm going to give you one example of a company we currently own, and then I'm going to walk through one that we have divested.
So with Altor, you just heard Pat and Zoe talk about some of the initiatives we've had. You know, when we acquired the business, we really liked its competitive positioning, and it was, you know, acquired for a price that, you know, really allowed us to get a pretty good return. You know, 10.7% cash-on-cash yield upon acquisition. But what we knew, and, you know, as Pat and Zoe have mentioned, you know, this is a relatively sleepy industry that's lacked any type of innovation. And so, you know, in the process of our ownership, we have replaced the entire C-suite, and we brought in an extraordinary management team that we were able to match to the opportunity of this company.
What they and we both believe, and what is being executed on, is taking a company that has not been known for good environmental stewardship and moving that to a much better place of environmental stewardship. We're doing that by using now recyclable polymers that we now have—or not recyclable, I'm sorry, degradable, biodegradable polymers. We now, within four years, have the ability to provide products to our customers that fully biodegrade in four years. That is a huge benefit to the environment from an industry that has never historically been considered environmentally friendly. We are moving towards having a fully circular system. This deepens the competitive moat of the business. As Zoe mentioned, we pay more for companies that are good environmental stewards and have good social programs. Why do we do it? Because that's what consumers want today.
When Zoe talks about Nike or Patagonia working with PrimaLoft, it's because that's what their consumers are demanding, and that is becoming a bigger and bigger trend. And the football can be get thrown back and forth politically on ESG, but it's what the consumer demands that you get your return from. And so this company has embarked on that, and it's deepening its economic moat. So what has happened through the efforts that we've put forth? We've acquired about $75 million worth of add-on acquisitions, pretty attractive prices. And now, in the LTM period through September, we've increased that cash-on-cash yield to 13.5%. And now there's a slide in the back that you can take a look.
And if I was going to venture a guess, and Ryan will talk a little bit about our Q4 and next year anticipation, I would bet that number will go up pretty significantly here in the fourth quarter. So just to give you a sense of where our capital is in our balance sheet and what does that mean to equity, if we deliver a 13.5% return from the cash flows of the business, you pay roughly 2% in management fees and about 50 basis points in overhead cost. So that brings your 13.5 down to 11, net of what sits up at corporate. Today, we're financing 56% of our business with non-participating securities. So that's senior debt, that's term debt in the senior facility, that's bonds, that's preferred.
That 56% comes in an average of 3.1%. I'm sorry, 6.1%. 50% of six is three. I think I was going in the— Sorry, at 6.1%. So when you run that math, the cash yield to equity today is in the 17%-18% range. That's without the benefit of multiple increase or enterprise value increase. In this business, when we bought it, did $30 million of EBITDA. Today, it does more than $50 million. So I think we all know there's going to be huge value increase in enterprise value, but yet you're getting, along the way, a 17.5% return to equity today, just based on our capital and based on the cash flow yield we recognize from this business.
A business that many of you are familiar with because it came public with us in 2006, Advanced Circuits, and we just sold it in January 2023. It's the longest hold we've ever had of a business, and I don't really need to talk about everything we did in the business. I think this company is a great example of having a permanent capital model. And so this is a circuit board industry. Probably a lot of you in here would be like, "Ooh, circuit boards. Man, they were hot at one point, then they all went offshore, and we all lost a lot of money in it." And so a lot of people have that same, you know, kind of history investing in this industry.
As a result, industry investment fled the industry for years and years and years. So this was a great business. It had. It was very stable, it had high margins, it had incredible free cash flow, but yet investment capital wasn't coming into the industry. We can't make investment capital come in. So over those years, we invested. We did some add-on acquisitions, we invested in some capabilities, but ultimately, investment came back to the industry. When that happened, our permanent capital model allowed us, allowed us to hold the business long enough to be able to sell when investment came back and realize, for this industry, a premium multiple. So what did that yield?
Now, I'm going to tell you, over 16.5 years, when you see an IRR up there, generally those numbers are a lot smaller than 20% because that is a huge multiple of, of return on money that you get when you compound 20% over 16.5 years, as we all know. So it was a phenomenal return. That number is a gross unleveraged rate of return. So what does that mean? That's every cash flow that has gone into the business from the parent, every cash flow that has come up to the parent, including acquisition price and divestiture price. It is pre-management fees, it is pre-corporate overhead load, and it's pre-carried interest.
So, we have in our web, on our website, in our financial history slide, we have every company we've ever invested in up on that, on that website. You can go through, and you can check every single cash flow from every single company. Matt, I think you've done this work at one point when you initiated coverage. Thank you. You can look at what returns we've created on a gross unleveraged basis. Transparency is one of the hallmarks of our business, and so whether it's reporting in 10-Qs and 10-Ks or providing all of these, this detail, you have everything you need to be able to figure out how we perform.
And so we may have run the numbers, as Matt did, and if you took the 14 exits that we've achieved since coming public, it is remarkably close to that 19.7% on a pooled basis. Let's go back to what I was saying about the cash-on-cash equity yield, because the same analysis can get done on exited investments that we've made. If you earn a 19% return and you pay 2.5% between management fees and corporate overhead, that gets you to a net return, in this case, of 17.2%, 'cause it started at 19.7. If you put the same capital structure in place against that return... Now, this is a theoretical analysis because we did not have that capital structure over the entire ownership of Advanced Circuits.
But if you did that, that yields almost a 30% return to equity pre-carried interest, fully loaded for everything else. And so if you believe that we can continue to execute as we have since coming public over the last 17 years, and that our capital costs are going to remain, granted, they've gone up a little bit right now as the Fed has changed, then you can make your own assumptions as to what we can underwrite and deliver, but the math produces sort of high 20%-30% equity returns if we are able to continue to do that. And I will say one thing: We all know capital costs have gone up, but yet the decline in purchase price multiples in the businesses we acquire has come down faster than our rise in capital costs.
So this equation should only get better, not worse, based on where we stand today. And we'll walk... Later in the presentation, just talk about the competitive dynamic and why that exists. So those are all internal analyses to determine how we create value. But look, we get it. You guys all get measured on how we compare to our benchmark. We have beaten our benchmark since we came public.... We came public in May of 2006. We beat our benchmark by 30% over that 12-year period. But look what's happened since we've had our strategy shift. Since lowering our cost of capital, since buying better businesses, we've been able to almost double in 5 years what the index has been able to do.
It is a real testament to the shift in strategy and how this new competitive moat we've established around cost of capital is delivering for our shareholders. And Ryan will now walk through our financial update and guidance.
Okay, thank you, Elias. Good morning, everybody. It's still morning. So I've got a lot to cover here, and I'll try to keep us on pace. I wanna leave enough time for, for Q&A, so I'll move relatively quickly. But first, fourth quarter update, and I'll cut to the chase here. We expect a very good closeout to 2023. We expect a very strong fourth quarter. I'll get to that here shortly, but two items in the fourth quarter of note. One is we did a BOA recapitalization in the fourth quarter. That's very normal course. A lot of our businesses are high free cash flow, right? We own the debt with them. It's intercompany. They pay that back. We'll relever the business.
It's a great way to continue to incent our management teams long term because they're, as equity owners in the business, they take a dividend. We don't as management of CODI, but the executives at the subsidiaries do allows us to continue to own that business long term. So we did have that in the fourth quarter for BOA. It produced a few million of compensation expense as a result of the way that was structured. That will be an add back to adjusted EBITDA in the fourth quarter. Second is PrimaLoft. You're all aware, you've heard us comment, shortly after that acquisition, there's a significant, significant inventory destocking headwind that we did not see in diligence, and that's put a lot of pressure on that business's earnings, and as a result, GAAP requires you to assess whether you have an impairment.
That analysis is a fourth quarter event. We don't have an estimate of that, but just as a, as an update. So fourth quarter guidance, as you can see here on this slide, if you recall, at the end of the third quarter earnings, we provided a full year update. That full year update in subsidiary adjusted EBITDA implied a range of $105 million-$120 million for the fourth quarter. In that was our Marucci estimate for the fourth quarter of $10 million in that guidance. So ex that, revised guidance would be $95 million-$110 million, and I'm very happy to report that we expect to exceed that $110 million of subsidiary adjusted EBITDA in the fourth quarter.
I know you all will go back and do that math, but it is a greater than 20%, increase over fourth quarter last year, ex Marucci. Very, very strong close to the year. I do wanna get right to an update on our full year outlook. I'll start off on the left of the slide, which is 2023. Again, having to update for a number of events that have occurred last time we've had an earnings call, but the subsidiary adjusted EBITDA guidance for 2023 that we provided on our third quarter earnings call was $450 million-$465 million.
In that estimate was a Marucci estimate of adjusted EBITDA for the full year of $50 million, and then you heard yesterday on our teach-in call that the Honey Pot TTM December 2023 adjusted EBITDA is $29 million. That equates to a range, ex Marucci plus the Honey Pot, of $428 million-$444 million of a subsidiary adjusted EBITDA for 2023. So looking now at 2024, we're very excited to announce the subsidiary adjusted EBITDA range, inclusive of the Honey Pot, of $480 million-$520 million for 2024 subsidiary adjusted EBITDA. So when we compare that against 2023, I just told you that we expect to have a really strong fourth quarter. So we're... From that high end of that range, that's a 12.6% increase against 2023.
2024 is expected to be a really strong year. To take a step back on guidance, I know there's been confusion on subsidiary adjusted EBITDA versus adjusted EBITDA. Does it include a corporate? Does it exclude corporate? So this year, we will be coming to market with three different guidance numbers. First will be subsidiary adjusted EBITDA, which is this range. Next will be adjusted EBITDA. That will be less management fees and less corporate. So we'll provide that number, and then we'll continue to provide adjusted earnings, which we have the last few years. So there'll be three: adjusted EBITDA and adjusted earnings, we're still working on. Our subsidiaries are rolling those budgets up real time, so we'll provide that as part of our fourth quarter earnings call.
Okay, so real quick, I'll bet if I polled this group, most wouldn't realize that in the last four years and nine months, we've created over $600 million of net income. So this business generates net income long term, and I thought that was an interesting chat to show everybody. So next few slides, we're gonna touch on some non-GAAP measures. So we have a number of reconciliations in the appendix, but these non-GAAP metrics we think are an important way to think about us, to value us. We continually talk about adjusted EBITDA. A lot of you do some of the parts work, some of the parts analysis. So we want you to have adjusted EBITDA by business, because then I know you all can think about what the multiple of that business is and come up with a sum of parts valuation.
So that's an important part of the story, and what we wanted to talk here on this slide about is, we've talked about the shift in strategy in 2018, right? Lowering the cost of capital, moving away from, you know, low multiple, low growth businesses into high growth, high multiple businesses. We've been talking about that growth rates and the increase, but haven't been able to financially provide that information. So this effort is, there's a lot of pro forma data here, so there's a lot of information before our ownership of some of these companies. That comes from management estimates prior to our ownership, and we have reconciliations in the appendix. But on the left is the growth rate of companies that we owned at 12/31/2018.
So some of you who've been around us a while recognize Manitoba Harvest and Clean Earth, some of these other businesses. But that four-year CAGR, adjusted EBITDA growth rate, was 4.7%. And we've always talked about that group of companies being kinda GDP plus type growth, and that's evidenced here. So to be honest, though, and you can see the footnote, we've removed Sterno and Velocity from these calculations because both those companies, in this time period, had significant add-on acquisitions. If you recall, Raven, it's about a $100 million purchase price, Rimports, it's a few hundred million. So those accelerate that growth rate to above 7%, but that was not really representative of the growth rate back then. And if you think about Velocity and Sterno's performance since then, it's been kinda flattish, right?
So we felt like, you know, pulling them out of this analysis was a better reflection of true growth rates back then. On the right are the new companies as of 12/31. Now, we've taken Marucci out 'cause that business is, that has been divested. We've added in The Honey Pot. But if you pro forma back as if we own those businesses at the beginning of January 1, 2019, and in the appendix is Honey Pot's historical information that we obtained from their management team, but it's a significant acceleration in growth rate to over 14%. I think the natural question here is then, Well, have you taken on more risk, right? What, where's your balance sheet risk at this point? And what's interesting is that at 12/31/2018, our leverage ratio was 3.96 x.
At 9:30, it was 4.03. So it's very, very similar leverage levels, yet we've really accelerated the growth rates of the business. So we've talked about our $1 billion of subsidiary adjusted EBITDA. The punchline is that that is still, still achievable. We still believe in that. And what we've tried to do here is subsidiary EBITDA by businesses that we've owned, but what we've removed is pro forma, so nothing before we've owned these businesses. So from the day we've owned them on, the adjusted EBITDA, that fell in the year, but we've also included the businesses that we sold that year. So for example, in the 2019 number, we sold Clean Earth at the end of June of 2019. We've included the EBITDA that Clean Earth generated up until the sale date.
So it's meant to replicate how much adjusted EBITDA fell in that time period under our ownership, okay? That's what these numbers represent. We felt like that was a good way to think about what's the growth rate getting to a $1 billion. And if you look at the CAGR over the past couple of years, it's a 12.5% growth rate of that subsidiary adjusted EBITDA falling in that year. So that mathematically calculates an $838 million amount, still short of the $1 billion, but it's on track, and that shortfall we'll get through acquisitions. So the question is, you know, how are we gonna fund those? And a big component of how we'll fund that, and we've been talking about this a few years, is the retained cash.
So retained cash calculation here is it's pre-working capital cash flow, but after all common distributions, all preferred distributions, and all CapEx. It's kinda what's left over to invest in either the businesses we own or future acquisitions, future platforms acquisitions. Past few years and nine months, that's about over $175 million. Now, that's continuing to increase, that's continuing to accelerate, and I'll talk to the reasons why here shortly. So managing our leverage with that retained cash is important. You've seen this slide before. If you went back another five years from this slide to the left, you'd still see the same thing, which is conservatively managing our balance sheet. If we get to kinda 4x , a little over four times, we seek at ways to delever the balance sheet.
We've done that through preferred issuances, we've done that through common equity issuances, and of course, from time to time, we'll opportunistically divest businesses. Most recently, over all the way on the right, you can see our leverage at 9/30 was a little over four times, as I mentioned earlier. We've sold Marucci. We also did a private placement for net $74 million in the fourth quarter, and an estimate of our leverage at year-end is 3.1. So the question on, well, what's our leverage pro forma for Honey Pot? I can tell you though that calculates to about 3.7 x. So still below four, slightly above our financial policy. Our financial policy is still 3x-3.5 x. That has not changed, but that's pro forma for The Honey Pot.
Adjusted earnings, we've been talking about in the past that we anticipate gaining operating leverage on adjusted earnings as adjusted EBITDA growth gross because the delta are mostly fixed costs. We have management fees, we have some overhead. That continues to happen, that continues to perform as we'd expect. The challenge entering 2023, of course, was rising rates, right? Since December of 2022, it's been, right, 350 basis point rise. That's been a headwind to adjusted earnings. It's been a headwind to cash flow. Yet we've still had, you know, very strong performance in adjusted earnings. So as we think about the future, you know, obviously, we've got higher growth rates of adjusted EBITDA that we just talked about. That will accelerate adjusted earnings. We no longer have the headwind. We don't believe in rising rates.
If anything, they should at least remain flat, maybe even come down and provide a tailwind. But the other item that I think, you know, might be lost is this strategy shift to low growth, low multiple, to high growth, high multiple, that's come at a financing cost. But if you think about same EBITDA business is going to be more expensive to acquire, but yet you get higher growth rate, funding that is in adjusted earnings early, right? The cost of that comes early, pre-growth. So that rotation into faster growing businesses is yet to come in adjusted earnings, and then without the headwind of rising rates, there's a further acceleration.
So the business is beginning to generate, you know, really strong earnings and cash flow as we've, you know, rotated just about 70%-80% of our EBITDAs now, kinda double-digit growth rates or at least high single digits. So that's really gonna add a lot of growth here. And then finally, touch on balance sheet before I turn it back over to Elias. As you all know, a lot has happened since September thirtieth, right? We no longer have a revolver outstanding 'cause we paid that down with Marucci proceeds. We do still have our Term Loan A outstanding because we saw, you know, very good clarity on some deals, and certainly we closed on the Honey Pot.
But I do want to reiterate the center of this slide, which is, you know, what had been very fortuitous placement of really powerful cost of capital and two bonds placed a few years ago, but at five and 5.25, not due till 2029 and 2032. You know, that's really the cost of capital advantage Elias and the team have been highlighting. That, that's gonna carry on for many years. So I'll turn it over back to Elias here to talk about 2024.
Thank you, Ryan. So quickly, and we'll get to Q&A here. You know, where do we stand today, and how does it look compared to where we've been historically? You know, we talked a little bit earlier, the current conditions and the change in monetary stance of our Federal Reserve has really favored us. And I know you'd say, "Well, but you guys are like a private equity, you know, kind of investor. How does that favor you?" It's favored us because it's widened our competitive advantage. And historically, private equity buyers were able to use significantly greater levels of leverage. Today, leverage available for a single-asset financing is more comparable to what our overall leverage is. But the big difference is today, the cost of that capital is 400 or 500, maybe even more basis points higher than what we're incurring.
And so the delta in capital cost has widened as their leverage has come down to us because they used to make it up by having more leverage and using less equity that's expensive, you know, could, on an absolute basis, allow our competitors to have a cost of capital that was close to ours or near ours, now not on a risk-adjusted basis, but on an absolute basis. Today, even on an absolute basis, that doesn't exist. And so what it looks like most today to us is 2020. Now, all of you would say, "Well, in 2020, we all were shopping on Amazon, sitting behind our computers in our house because there was a pandemic raging in the background, and we all thought the economy was going to collapse." Clearly, those conditions don't exist today.
In fact, the economy is holding up, contrary to all the recession calls, remarkably well, at least by what we're experiencing in our companies. So what is similar to 2020 is the financing markets. In 2020, the financing markets were just catatonic, and it allowed us to swoop in and buy BOA and Marucci. One of those companies has already tripled, the other one's already doubled EBITDA. That's going to be a great class of investment. The reason we were able to buy those businesses at the prices we did is because the competitive environment was basically nonexistent back there, back then. I don't want to say it's nonexistent today, but it's a lot closer to what it was in 2020 than what it was in 2021.
Our competitors, especially in the consumer market, have pulled back dramatically, and financing partners have pulled back dramatically. So that's how we can buy a company like the Honey Pot. You know, we said this yesterday on the call. The Honey Pot is in the personal health and well-being space. It's an on-trend growth company in that space. Look, these companies have never traded for 13x EBITDA. And to be able to get a company at a value like that, that has historically traded high teens to mid-twenties, like, that's really... That, that only exists when competitive dynamics are in place like we have right now. And we're seeing a pipeline of new opportunities that frankly, we haven't seen in a couple of years. You know, we, we benchmarked what we saw, and granted, this is only one quarter, but it was representative of the year.
What we saw in Q3 of 2021 versus Q3 of 2022 and Q3 of 2023, and our deal volume in both of those years, with increasing effort, fell 50%, so 75% cumulatively down in the third quarter of this past year from where we were in 2021. But in the fourth quarter, we saw deal activity really pick up, and we saw the quality of companies really improve materially, and that is, you know, continuing now, albeit only two weeks into 2024. But what we're hearing is more and more is coming, and we know some of the companies that are already in the pipeline and what's building. And so that combination gives us really optimism we haven't had in years, that we are right now able to consummate M&A-...
More attractive valuations and better shareholder return prospects than what we've been able to, you know, identify in years past, coupled with an earnings trajectory in our business that really looks as good as it's ever looked. And I don't know that we've ever guided to double-digit growth, unless like what, 12.5% like we are today, and we've been really conservative in our guidance. So I think it just demonstrates how much conviction we have in the growth in our business coming into 2024, and when we marry that to the competitive advantage that's widened in the M&A markets in a, you know, strengthening pipeline, it makes us really bullish as we come into this year that we're gonna be able to create significant shareholder value for all of our constituents.
And so with that, that's the end of our presentation, and we will move to Q&A. Larry.
Straighten up?
Well, I think they-- for the webcast, they may want you to wait a second.
Larry Solow, CJS. Elias, you sound super confident in terms of the acquisition environment. Lots of opportunities, it sounds like, too. Can you just speak to sort of your, your leverage today, sort of at the mid to higher end of your target, maybe just a little above that even? Do you have-- what's your capital situation in terms of do you need to maybe sell another couple of, a business or two? Or how do you kinda look at that? How do you balance that with some, you know, some opportunities ahead of you?
Yeah. So as Ryan mentioned, we expect to be about 3.7 x pro forma for Honey Pot and the divestiture of Marucci. So I think that's a good starting point from which to, you know, kind of go from. Clearly, that's outside of our leverage range, right? We've said 3x-3.5 x. But Larry, just... I wanna be clear, that 3x-3.5 x was set back in 2018. Now, you've followed us for a long time. The portfolio looked a lot different back then. And when we were paying 7x, 8x , 9x maybe for a business, leveraging it 3.5 x is 40%, 50% of the capital, right? Today, we're buying 12x, 13x, 15 x businesses, but yet our leverage profile hasn't changed. The earnings growth rate has changed.
The cash flow profile of the business has changed. We've gone from -$35 million of cash flow pre-working capital generation to $100 million now. And so some of the leverage, that leverage target, which we have not changed and we don't plan on changing, is today, by comparison, extraordinarily conservative compared to where it was back in 2018. So today, yeah, we are a little bit outside, and we have been outside. Partly that's a function of the fact that the equity markets are so weak. We would love to raise capital and equity like we did in December in a private placement, in order to fund the equity component of our transactions. But we have to be really judicious with that because today, we don't really like the price.
Now, if we can bring in a marquee investor and we can, you know, sell—if we're selling at a little bit of a discount, but we're getting a massive discount on the acquisition we're buying, we're okay with that because that's gonna more than offset it, and that's what happened with the investment we took in in December, coupled with the acquisition of the Honey Pot. So now, as we look at new opportunities, I think the same model could exist, where we could look for larger chunks of equity capital in advance of a deal that we feel very confident in. That's one model. Second model is if the markets come back, we would obviously look at potential equity. We could look at selling businesses, right? As you identified. But we're more comfortable today bringing leverage a little higher than where we've been historically.
So if you said to me, "Would you do another Honey Pot-size, $400 million or $500 million deal today that would bring your leverage to slightly over 4x?" We would absolutely do it. And it's not because we wanna have more risk tolerance or we think that we're becoming a riskier company. It's because the conviction in the growth of the business is stronger than it's ever been, and our cash flow generation is stronger than it's ever been. So yeah, you're right, the pipeline is a lot better, and we would be willing, absent bringing in some junior capital, to take our leverage a little higher to execute against another great opportunity.
Great. And just to follow up on that, just on the guidance, just from a high level, without getting too specific, you mentioned sort of the economy. We know last year you were somewhat concerned, but that was kind of waning your concern through the year as your companies seem to be sort of somewhat more immune, at least to the general consumer. As you look out into 2024, how do you view the economy impacting your, you know, some of your larger companies, and how does the inventory drawdowns of 2023-
Mm-hmm.
How do you look at that as you look out into 2024? Thanks.
Yeah. So, you know, for 2024, as I started, you know, by saying a little earlier, the economy feels better than what we hear on TV every day in the financial press. Everyone wants to come in and say that we're heading into a recession. I don't know about you guys, but has there ever been a recession with under 4% unemployment? Like, I think, you know, 70% of our economy is driven by consumption. People spend. Now, granted, I get it, real wages have been down for years because of inflation, but people are employed, and they spend under those circumstances. And so maybe call me someone who's bucking the trend that we think the economy is going into a recession, but employment still remains strong and spending is still holding up.
And we're seeing it not only with the acceleration of growth we saw it in the fourth quarter, but we're seeing it early thus far in 2024. Granted, it's only a couple of weeks, but we're seeing it through bookings and other things. Our built into our expectations, which I think is sort of what you're trying to figure out, is a very slow growth to slightly receding economy. So somewhere in that soft landing, you know, maybe we grow -1% or shrink 1% to grow 2%, you know, somewhere in that, you know, kind of low growth. We don't want to get out over our skis in terms of, you know, kind of what the macro can deliver for us. Now, what we haven't done in any of our company forecasting is assume that there's going to be a big snapback in inventory.
That should happen, right? People were depleting inventories at a really rapid pace through 2023, and even if you stop depleting and just hold sell in to sell through, you should have a pretty big snapback. That's a little bit riskier than what we would want to forecast because we want to be able to, you know, do what we've done historically, which is meet or beat and raise our expectations. And so, you know, we've taken a pretty conservative view here, Larry, that inventories generally in the system, you know, are not rebounding. In fact, they're probably continuing to dribble off a little bit, and it's the company's success in gaining market share as the primary growth drivers against a very muted economic expectation for the year.
Got it. Thanks.
Kyle?
Yeah, thanks, probably for Elias. Just want to get your thoughts on the competitive environment. I understand your advantage versus private equity, but then when I see you guys, you know, triple bag Marucci, I'm wondering why people don't replicate your strategy and just kinda your thoughts on the competitive environment there.
Yeah, it's so our model is really different. And, you know, on the one hand, I think there's been a lot of private equity interest in what we do because the investment banks that kind of troll in that GP alt space call us and talk to us a lot about other PE firms that are interested in how we created a private or a permanent capital model. You know, the thing that makes it really difficult, Kyle, for other companies is they don't have assets that they can seed into a vehicle, and the market doesn't really love blind pool vehicles, right? I mean, we had SPACs that kind of grew, and that became a, you know, tremendous wipeout of probably principally retail capital.
But the market doesn't really like these blind pools that are raised, and most traditional limited partnerships have restrictions that do not allow you to exit en masse, especially to essentially yourself if you're taking it public, right? And so it's very hard to do. Now, who could do it? All the big brands. So you think of the KKR and Carlyles and Blackstones, heck, their brand is so good, they could go out and raise, you know, billions of dollars of private capital or public capital. But for them, why would they? They could go raise... Blackstone, I think, has $1 trillion. Why would they go raise $5 billion or $2 billion of public capital? So those that can do it have already gotten so much scale in the private markets to build their...
And they have brands that they don't want to do it, and those that would like to do it don't have the brand to be able to actually do it. So it's created this real conundrum where companies can't emulate our model. We would like nothing more than companies to do it because we recognize one of the biggest things that you guys suffer from is: Who do you compare us to? There is not a class of us that is out there, so we would love to promote this, but it's just a much harder thing to get public than I think people appreciate.
Thank you. You know, last year, you guys said at the Investor Day, 8%-10% subsidiary adjusted EBITDA growth, and now we're talking about 12.5%. So can you talk about the factors that have changed? And obviously, there's been a lot of corporate actions between now and then, but the factors that are driving that increase in confidence.
Yeah. So remember, I'm going to point out it's one-year growth.
Okay.
Eight-10 was what we called our core growth rate, but it's also been a function of the portfolio is changing. Advanced Circuits, great business that we sold in January of last year, that was a relatively no-growth business. You sell that, and you put Honey Pot in its stead, you're going to get a leveraging up of the growth rate. You know, do we- we still stick by the fact that our core growth rate is, you know, kind of high single digit, low double digit, where, you know, what we talked about last year. I think some dynamics are driving that a little bit, you know, faster right now. But, you know, frankly, the portfolio composition continues to change, and it continues to leverage growth higher, not lower. You know, maybe we are just in a different context.
We don't want to get out over our skis and promise something that over the, you know, intermediate or longer term is harder to deliver. But I think your point is a great one in that the activities in M&A that we, you know, consummated over 2023 have led to a fundamental leveraging up of our core growth versus where we were a year ago today.
Great. And then just to follow up on that, when we're thinking about 2024, how can we kind of break out the growth rates between consumer versus niche industrials? Obviously, puts and takes with consumer and niche industrial, Lugano is one good example of that, but.
Yeah, just kind of high level, I would say our industrial business, which performed exceedingly well in 2023, double-digit growth. That's abnormal. This, the industrial business is more sort of like the stuff we used to buy, right? Back 2018 and prior. In fact, a lot of it, two of the three businesses are pre-2018. You know, those businesses should be GDP plus. So if I were modeling it as two distinct verticals, I'd probably model it as a 3%-5% grower in the industrial, and then I'd squeeze into what that, you know, develops out for consumer.
Great, thank you.
We have time for probably like one more on our line here. Okay.
Thanks. Elias, you sound a lot more excited about the M&A environment, on the consumer front, but wondering if you could just clarify for us how you're thinking about the healthcare strategy and sort of the opportunities on that front as well coming into this year?
Yeah. And so I am really excited about consumer, and, you know, part of it is that competitive backdrop that, you know, I alluded to. I find it really funny in that there's such herd mentality in private equity, that if you did bad in consumer over the last couple of years, maybe because of inventory stocking and change from the pandemic, that everybody wants to vacate the space. By the way, that's the greatest time that you should be putting money to work, because now multiples are gonna come down way faster than the risk-adjusted return profile going forward for the company. So consumer has that dynamic, and as we see great opportunities, I'd be absolutely stunned if we didn't transact more in consumer, given that dynamic.
Now, I will tell you, we're working really hard in healthcare, but we're not the only ones that understand critical outsourced services to the healthcare industry is a really attractive segment. It's non-cyclical, so who cares about the macroeconomic outlook in 2024? Yeah, financing costs are a little bit higher, but the problem is, the PE herd sort of moved into that category as well, and it's created pricing that's a real stretch. And so we're finding great opportunities. We're seeing companies, but we're staying disciplined. And so I can't tell you, Matt... Obviously, it's a strategic initiative, but you know, for us, our strategy is determined in decades. It's not in quarters. And so whether we put a healthcare asset on the books in 2024 or not, that isn't going to be whether it's a good decision to be in healthcare.
And by the way, the manager is incurring the cost to fund the effort, right? So the shareholder doesn't even have to fund it. We're willing to do that because we know it's long-term, the right strategy for the business. But I can't tell you in 2024, pricing dynamics in that industry, given how the herd has moved over to this market, is going to yield an outcome or an opportunity that we can close on. We want to. Of course, we want a healthcare, you know, acquisition. We've been in the market now for a little over a year, and we haven't done one.
Yes, we want to put something in the market, but our—You know, what we tell you and what we stay true to is we are going to be good, disciplined, patient providers of capital, and we are not going to overpay for the opportunity because there's some strategic rationale behind it. The opportunity has to fit within the framework of what our capital costs are and the risk-adjusted rate of return that we're expecting for the risks that we're taking. And so I don't know whether we're gonna find something in healthcare, but that's why having multiple verticals is so important, because we can fluidly move across verticals to deploy capital and keep the M&A at part of our business vibrant without compromising on our risk-adjusted return requirements that we have.
Do you have a final one?
Yes. Derek Yoo of Bank of America. As the company continues to scale and scales towards that $1 billion of growth in EBITDA, how should we think about the evolution of just the corporate structure? Will that change over time as the company continues to scale? Kind of that internal versus external debate.
No. Is that succinct enough?
Yes. Thank you.
No, we-- I mean, in all honesty, Derek, look, we like our structure, and I talked about the longevity of our people, the retention of our people. It's what you're investing in, because if we don't have the people that come in and out of the doors every day to do this strategy, we're not gonna be able to execute it successfully. The truth is, who we compete against when we're going and looking for talent, and we grow our talent base by, you know, 5%-10% every year, we're competing against other private equity firms. So if we can't have a compensation opportunity and a model that mimics what's in the industry, we're not gonna hire the talent that can execute this strategy five, 10, 15 years into the future. So it's incredibly important to the underlying return that we can generate, that we have this structure.
Without this structure, we'd look like a corporate, and I'm not sure that the quality of people we could get under a traditional corporate to execute this type of strategy, where you're both transactional and you're strategic and you have management, you know, as a skill set within that, it would just be very difficult for us to hire the talent we need in a different corporate structure than what we have. And over time, that would erode the returns, and we wouldn't be getting, you know, kind of almost 20% unleveraged gross rates of return on the exits that we're achieving.
So that's all we have time for. I wanted to make one announcement, though. We do have transportation set up to 5.11. The cars are here behind you. For those of you that brought luggage, the luggage has been moved right out here to the exit versus in the salon. So that's where it'll be, and thank you. Appreciate it.
Thank you all. See you all at 5.11.