FULL TRANSCRIPT
Slava (00:00)
In this episode of Smart Humans, we talk with Brett Hickey, who's founder and CEO of Star Mountain Capital. We talk about the world of lower middle markets and how is that different than the public markets or the other big companies that are possible to invest into out there? We get his perspective on the macro, which is a bit bullish, but also a bit pessimistic. So it'll be interesting to hear what timeline and horizon he has in mind for any challenges. We discuss how 22 years of investing and over $5 billion of investments.
His experiences and his takeaways and how you should look at investing into the lower middle markets. All this and also some great ideas as to where you can find information and alpha.
Slava (01:05)
Hello and welcome to the latest episode of Smart Humans. I am super excited for today's guest. We're gonna be talking about a topic that we don't always talk about, including the lower middle markets. And what does that even mean? So welcome Brett Hickey, who's founder and CEO of Star Mountain Capital. Thank you for joining.
Brett Hickey (01:24)
Pleasure, good to be here.
Slava (01:25)
Absolutely. So we always start with a similar question is how did you even get into this world? So take us back as far as it worked for you, which is was it from childhood, high school, college, your first job? How did the trajectory of Brett get you here?
Brett Hickey (01:42)
It's not as a crow flies, that's for sure. But as I reflect back and try to do a little bit of data mining, my mother taught entrepreneurship in high school, and my father taught mathematics and was a principal. And so perhaps those two things together were more formative than I realized. But I grew up in a very small town in northwestern Canada of about 10,000 people. I worked on the oil drilling rigs post-high school to save money for college.
And then initially in college was speed skating on the national training team in Calgary and going to college because I was fortunate to know there was no money in speed skating. And so I was working on some plan B, unlike a bunch of my friends in hockey that you could have a career, make money, have fun, that could be your all in one. But I guess in the world of finance, we learned that diversification is productive. and so ultimately I ended up getting injured cycling on the velodrome.
And at the same time, started a small workplacement agency in the healthcare industry, nothing financially relevant but fun and interesting, and sold that to my partner and then got very excited about finance and said, How do I get to New York? It seems like if I want to be in finance, that's the place to be. McGill University seemed to have the best recruiting platform into the Wall Street bulge bracket investment banks. So I transferred over to McGill, was fortunate enough to have been.
put in a French immersion program when I was young by my father who started it and so spoke French and that helped for being in Montreal and was fortunate enough to get recruited to Wall Street twenty four years ago. So that was kind of a a journey that doesn't really have any clear lines between it, but perhaps there's some correlation.
Slava (03:27)
So
you go from oil drills to speed skating to McGill to New York, and how do you go from what was your first role in New York and what's the trajectory to one day start your own firm? So how do you get there?
Brett Hickey (03:41)
One of the things that as I reflect on my three children and try to think a lot about how am I raising them and what are they doing, I try to reflect on at least the decisions I've made and my past. And I've always had courage and I've always had the view that I don't know what I don't know. There's a lot of people I know that said, Well, my dad or mom was in this industry and therefore that's what I'm doing, real estate, for example, or something. Or
I worked here at XYZ firm at Blackstone, and then I spun out and I did the same thing. I took an approach, if you look at entrepreneurship one on one, it would say find a market opportunity that's big, find a market opportunity that's growing and has positive secular trends, and find a market opportunity with very limited and fragmented competition. And so that's the lower middle market.
Going back one step, my first job was covering financial institutions, investment banking at the time for Solomon Smith Barney underneath the Citigroup umbrella. back then, Citigroup was the largest financial services firm in the world. I thought that was kind of cool. also big bank, big insurance companies had the largest wealth management platform in North America. And so I thought that was a really interesting learning opportunity. And unlike some of the other big investment banks, Citigroup.
Allowed you to join as an analyst in investment banking and do your first eight weeks learning about different groups. Because I'd worked on the oil and dri oil drilling rigs, there was a natural gravitational pull to have somebody actually come work in energy investment banking because there aren't many people in energy investment banking in Wall Street. They were actually roughnecks on the oil rigs themselves. But growing up in a small town, you can see the volatility in energy sectors.
You know, one year everybody's got a fancy new truck with a new snowmobile in the back. Two years later, there's for sale signs everywhere. and it's not too far off of that dramatization that I'm making. And so I didn't want that type of volatility. And I thought knowing nothing about anything, financial services would be great. A bank touches everything, an insurance company touches everything. So I thought that'd be a really good way to learn about the world and learn about the world of investing.
After my first year, I guess that entrepreneurial itch got going. And I found a business plan in the lower middle market that satisfied all of those criteria that I mentioned. And I thought that'd be a lot of fun. I thought there was a big opportunity. And then I also thought that it would be purposeful in the sense that working with a lot of private, smaller businesses, you can really add value to people, to families, to communities. And that
To me, it was important versus trading stocks or buying and selling securities. I really like the sense of purposefulness in what I'm doing. And that seemed to satisfy all those things. And in 2004, I left and launched my first lower middle market private investment fund.
Slava (06:53)
And
what what year do you start Star Mountain?
Brett Hickey (06:58)
Technically started Star Mountain in 2010 in creating the trademark brand, but my partner Dave DePolo and I have been investing together since 2004. Used to call the firm Aegis, and back then wasn't smart enough to think as much about branding. And there's Aegis warships, there's Aegis brokerage companies, mortgage companies, all these other Aegises. And so I decided if we were gonna really build the leading lower middle market.
private investment firm in the US, we really wanted a trademarked distinguishable brand as part of that. and that's why sixteen years ago now, we trademarked the brand Star Mountain and launched that as a new brand. But we've actually been doing this now for twenty two years.
Slava (07:42)
Amazing. So we're going to talk more about that in just a second. But before we get there, one of the things that's special about this show is getting to learn how you, the guests, actually invest your own money. So the typical classic allocation is 60% public equities, 40% bonds, 0% into alternative investments. My guess is that is not your allocation. So if you just start with three numbers, what will be your 100% allocation summary?
between those three numbers. How much is in public equities for you? How much is in bonds? And how much is in alternative investments?
Brett Hickey (08:17)
Zero, zero and one hundred.
Slava (08:19)
Nice. So all in on I'm guessing your own product?
Brett Hickey (08:24)
Yes, but our own products are pretty diversified because of our secondaries investment strategies. In particular, I'm invested in about a hundred other private equity and private credit funds, in addition
Slava (08:36)
I see.
Brett Hickey (08:37)
to our direct private credit and direct private equity strategies.
Slava (08:41)
Got
it. So just to clarify, so when you say I'm invested also in like another hundred funds, this is independent of what Star Mountain would invest into. You are
Brett Hickey (08:48)
They're
no, they're through Star Mountain. So ninety-five percent of my capital flows in through Star Mountain and then into a broad array of our products and strategies. so it is all aligned with both our investors and my team. We're we're extremely focused on alignment. And I like to joke and say if our kind of end of the market fails, all the preschool chains and roadside repairs and plumbing companies and so forth in America, if that goes under, I've got a
figure l learn to hunt and fish again back in Canada 'cause we're all in a whole lot of trouble.
Slava (09:21)
Nice. you're very different than the typical 6040 zero, which I love, which is why you're on the show. So just to clarify, you have no like NVIDIA stock in like in a retirement account. Is that right?
Brett Hickey (09:33)
Zero.
Slava (09:34)
Wow, that's amazing. and how do you feel diversified inside of your 100% alternatives? Is there a mix of various ways that that's being positioned to feel like you're getting some exposure?
So let's call it that AI opportunity or the NVIDIA opportunities you're getting the equivalent of that somewhere else in one of your alternative funds.
Brett Hickey (09:57)
I think of investing with purpose. And I always ask myself, when you're investing, instead of just looking at the labels of what you're investing, I say, well, what's it trying to achieve? So my mom passed of cancer when she was 39. I was six years old, unfortunately. My dad's a retired high school teacher from Western Canada. I have no interest in going back to work on the oil drilling rigs again. That was tough work. I applaud all those that do hard work. Probably a good way to learn a little bit of grid in life.
But protecting capital to me is of extreme importance. And perhaps it's that insurance, financial institutions, mindset, but I look at the world from a probabilistic outcome of returns. I don't mind missing out on a potential 10 times return or something in an NVIDIA, but I want to miss out on the zeros. And so when I look at
A data-driven approach to investing. There's a lot of data that says picking stocks is very difficult. The public equity markets have generally exceeded what anybody thought was possible, what most people thought was possible for this reasonable period of time, or recent period of time, rather, I should say. But if we look at times of concentration in the markets in 2001, for example, we are way more concentrated in a few big companies than we were in 01.
That took the NASDAQ, what, 15 years to get your money back, not a return on your money, just get back to par, SP 500, 12 years or so. So I remember these days, and when I look at investing, I want alignment. If you go to any data-driven investment, strategy, if you look at any data around what drives success, alignment of interest, business model, people, culture, all those type of things.
And then back to entrepreneurship 101, you know, you want a growing market, a less competitive market, and so forth. There's a debate around growth versus a value-based investment, perhaps, but it's generally easier to make money and not lose money in a less competitive sector of the economy. And the lower middle market and alternatives, I'll get to in a second, but the lower middle market's nearly half of the US.
From a GDP perspective, and over the last 25 years has represented an estimated 65% of net new jobs. And if you look at a revenue chart, we have this fun little thing that I say which one of these revenue line items is easier to be successful as an investor in. There's data from the US Census within our broad segment that shows, at least over the last 13 years or so of the data.
That these companies in this end of the market, no, no cherry picking, just every single business revenue line item, has a higher revenue growth on average than the SP 500 and less volatility. And so it's easier to be right if on average the companies grow faster and less volatile. It's easier to be right on average if valuations and leverage are lower. So I take a very data-driven approach.
To how I invest. Now you have to build a really specialized engine to do that. I appreciate not everybody can or is willing to, but that's why we do it. And I'll add one other thing that's maybe an interesting little food for thought. You use the word alternative. Alternative sort of makes one think that it's an alternative to a core. Right? So you said, hey, 60% public equities, that's your core. And then here's alternatives. If you look at all businesses in the United States,
Over 90% of them are private. So when you think about the word alternative, it makes you think that that's a almost like a smaller piece of it. But I would kind of reflect and say, well, the the public companies are actually the small piece of the market. And over the last 25 years, the number of public traded companies in the US has cut in half.
Slava (14:06)
Sure.
Brett Hickey (14:06)
And also, maybe lastly, you used to almost have to go public to access the capital markets. That's
no longer the case at all from a capital perspective. So it doesn't mean NVIDIA is wrong or other things are wrong. I just can't really affect or help drive outcomes there. And so I'm not an a a specialist there. And so I don't invest there.
Slava (14:29)
Perfect. So going back to the 100% alternatives, you know, we think about it as kind of six major buckets, but there could be more. But I would love to hear how you kind of split up into these six buckets, which is one pre-IPO venture, which I imagine a lot of it is another, maybe you could ignore the word venture, but pre-IPO companies, right? Private companies, second crypto, third real estate, four private credit, five art, or six collectibles.
So of those six categories, which are you allocating your hundred percent alternatives into? All six, just one of them? How do you think about it? And this is your obviously your personal investments, which
Brett Hickey (15:08)
Yeah.
Slava (15:09)
a lot of is going through your your funds.
Brett Hickey (15:11)
So I worry about a lot of things in the economy today, and perhaps it's PTSD from losing a parent early, perhaps it's from the challenges and friends of mine that died on the oil rigs, perhaps it's from, you know, first job in two thousand and one and half the analysts get let go at the firm you're working at and they're out trying to find jobs when nobody's hiring. Perhaps it's having a hundred percent of your net worth invested when it's eight and your decisions. I'm not sure. But
I worry about a lot of things in the economy in the world today, the leverage of the government, the declining populations in the US and China, and how that might impact GDP, the political unrest. I mean, there's just there's a lot of things that the valuations of AI, different things like that, that I think has a lot of tail risks. And I think those tail risks are getting bigger and bigger. So therefore, I f and I was like the why behind things.
So I always try to give the why. Therefore I focus on things that add real value and are solving problems and produce positive cash flows. If it
Slava (16:16)
So of your
of of your a hundred percent, what percent would you say is in privates private companies?
Brett Hickey (16:22)
Yeah, a hundred percent private companies, other than the odd thing that might go public, but that's less than one percent.
Slava (16:27)
Meaning
zero percent of your alternatives is in real estate.
Brett Hickey (16:33)
almost, although many companies have real estate as exposure within it, but like construction or something, I don't have any direct explicit construction.
Slava (16:40)
No, no, more like your own no your own
real estate investments beyond your primary home.
Brett Hickey (16:44)
I mean owning a home and stuff like that. No, I don't have a lot of other real estate and and that that is not because it might not fit my buckets for what it's worth. That's actually something I think there can be opportunities in, and and we have some exposure there, but it's more derivative exposure. But I don't have any crypto, other than artwork for artwork's sake, I don't have artwork as an investment, I don't have collectibles as an investment. Again, it has to satisfy in my worrying way of looking at the world.
Adding real value, so a preschool chain, roadside repair, plumbing
Slava (17:18)
Understood.
Brett Hickey (17:19)
services, producing positive cash flows, solving a problem for their end customers. If it doesn't achieve those things, I'm generally not interested in.
Slava (17:28)
And is it always an equity investment or is it sometimes a private credit investment?
Brett Hickey (17:33)
No, so now that you get that layer of where is it easier to make money and not lose money, then how do you look across the balance sheet? Some of my capital is in private credit, some of it is in a structured equity, some of it's in control equity, and then some of it's in secondaries where we're buying different portfolios and derivatives and discounts and so forth within that sector.
Slava (17:55)
If you were gonna massively simplify it down, and you can only call it either equity or private credit, what would be the split between the two?
Brett Hickey (18:05)
Probably sixty percent private credit and forty percent private equity.
Slava (18:10)
Great. Awesome. Super helpful. So
Brett Hickey (18:13)
And maybe if
I could say one other thing is I think of investing for purpose in my money when I allocate my portfolio and I think about my children, my family, it's what's protecting capital and how do I achieve capital protection? What's producing income? And then how can I make it as tax advantage as possible? And what's creating long-term returns? How do I make that as tax advantage as possible? How do I look at the correlation across it? And ultimately then how do I create the highest probability of my desired outcomes?
Slava (18:43)
Great. So you're already going here, and this is really we'd love to hear your opinion on it, because you have such a broad view. You already were mentioning your perspectives on the US economy, whether it's leveraged, China, overvalued for AI, et cetera, et cetera. Give me the Brett Hickey point of view on where our economy is at today and where the stock market is at today. And I know that you probably are gonna say I don't really care about the stock market, because I don't
Brett Hickey (19:05)
No, I do.
Slava (19:06)
because I don't really invest in it, but my listeners care, and we just love to hear your perspective.
on
where the economy is and and the stock market.
Brett Hickey (19:15)
So first off, your your statement's accurate that I'm not directly investing in it, but I do care about it a lot because ultimately, if the public equity markets crash, that will have a massive ripple effect on the
Slava (19:29)
Ripple effect. Yeah.
Brett Hickey (19:30)
entire economy and it will impact everything. And so I think that to be a good investor, my view is you need to understand the world.
And you need to understand all markets because they're they have different forms of correlating into each other. So we have investors from over 40 countries from around the world. I have deep relationships and investors in us of many of the largest investment firms in the world. I just had breakfast with a friend of mine that runs one of the largest publicly traded now alternative investment firms in the world. I always want to be talking, learning.
Actually own an event business called Private Market Insider that we just get together thought leaders. So I had what 40 CEOs and CIOs and so forth of insurance companies together this Monday doing a confidential round table talking about things. I think we need to understand the whole world. If you look at the whole world, the US and China US and China roughly represent 70% of GDP. So if you figure out what those two what's going on with those countries, that solves for most of the world.
US and China both are heading into declining populations and aging demographics. China having a single child policy for a long time is a real worry. some of the overbuild and things that they have done is interesting. I won't go too much deeper into that, but there's a lot of things there that are positives and negatives. In the US, I'm most bullish on the US economy in
private markets where you can get better valuations than anywhere in the world. So why the US? The US from a natural resource perspective is much more immune to oil shock issues and stuff going on right now in the Middle East and many other variables. It's a very self-contained market. It's a big market, I on a relative basis, efficient market, on a relative basis,
Tremendous entrepreneurialism, and you can build and have a company and expand it with one language, one general rule of law, and so forth. There really is no other economy in the world that comes anywhere near that ability for founders, owners, entrepreneurs, innovation driving. and really not even close. And so then you look at different war threats.
type of things. I grew up in Canada, you know, our northern neighbors, and while there's some friction with tariffs and whatnot, which is unfortunate, you know, generally US and Canada get along pretty well. I don't think anybody here is worried about some war with Canada. I certainly hope not. And I don't really think the same with with Mexico either, as we think of North America. And one of the big advantages the US has sitting on its doorstep is if it wanted to take a different approach to immigration.
It's got a lot of people that would love the education, quality of life, and so forth in the US from Mexico and other places to come in. So the US has many levers that it can pull that can assist with the aging demographic, declining population aspects coming to it, combined with the natural resource, combined with the size of the economy. Like if you're in Italy, you know, and you you're trying to do business with Greece.
You think about the complexities, languages, laws, and just how many things just have you waste an enormous amount of time to try to build your business. There's just getting through regulatory stuff. Go ahead.
Slava (23:04)
I'm gonna I'm gonna bring you
back back towards the question, which is I'm gonna put you on the spot here because you're saying before that our rise in our i stock market has been pretty significant since the global financial crisis. So we've outperformed. Potentially we're gonna underperform. That's why you have potentially good results insulated in the private markets. What do you think in the next five years, do you think stock market will be up or down?
Brett Hickey (23:34)
My my guess is down, but I think it's very I think there's some inflection points that are gonna be hard to put a probabilistic analysis around that. You know, the US government, if I can just add one other piece, the US government continues to lever up in an expansionary economy. How long that can happen for a bit unknown, if it wants to change immigration policy to do things, there's tools at the US disposal that could mitigate that.
But I think the tail risk of bubble impacts is very large in the public equity markets.
Slava (24:10)
All right, lightning round, twenty second answers or less. Are we going to have a recession twelve months from now?
Brett Hickey (24:18)
I don't think so.
Slava (24:20)
Fed rates, they just went up twenty-five basis points. What will they be a year from now? Will they be flat, up or down?
Brett Hickey (24:29)
I think they will be roughly flat.
Slava (24:33)
Okay, so not up a little bit, not down a little bit.
Brett Hickey (24:36)
I think they may go up and down a little bit within that, but I think there's gonna be there's pressures on both directions. So I'm picking the midpoint flat.
Slava (24:44)
Okay,
interesting. unemployment. Is it going up, down, or flat twelve months from now?
Brett Hickey (24:53)
Twelve months relatively flat.
Slava (24:55)
Okay, interesting. Inflation.
Brett Hickey (24:58)
Again, pressures
on both sides. So that's where I think there's a reasonable
Slava (25:01)
Totally.
Brett Hickey (25:02)
flattening.
Slava (25:03)
Inflation up, down, or flat? Twelve months from now.
Brett Hickey (25:10)
Different parts, I think you're gonna start to see more divergence on some things inflating and some things perhaps starting to deflate. Quick little thing is you can roughly, I believe, access AI for less than a tenth of the price in China that you can in the US as an example of different things like that.
Slava (25:30)
But our typical inflation rate that we hear from the economy, which is like, you know, in low what is it, like low fours right now? is that gonna be flat up or down, you think?
Brett Hickey (25:41)
I think the
Slava (25:41)
Twelve months.
Brett Hickey (25:42)
average I'll take over twelve month period, so relatively short, roughly flat, but I think that you're gonna see some things inflate more and some things different that nets out close to flat.
Slava (25:55)
Are we still in a in a conflict with Iran twelve months from now?
Brett Hickey (26:01)
I don't have any good guesstimate, so I'll just say I'm not close enough to have a good guess to mate on that.
Slava (26:07)
Okay,
so no recession, flat Fed rate, unemployment is pretty flat, inflation's pretty flat. Iran's we're not sure about. So is the stock market twelve months from now, from today, is it its typical eight percent up or the last fifteen years ten percent up? Or is it some other number twelve months from now? What percent flat, up or down?
Brett Hickey (26:24)
my guess is slightly up in a in a low to mid single digit. So maybe somewhere in a you know
Slava (26:32)
Like the
Brett Hickey (26:32)
three to eight percent type of return band.
Slava (26:35)
I mean eight percent would be good.
Brett Hickey (26:38)
I think it would be. I I think there the tail risks are very large and getting larger, but when eventually that collapse sort of happens
Slava (26:43)
But you think closer to three percent?
Brett Hickey (26:45)
is hard to estimate. And my guesstimate is it's less less less than a fifty percent chance that it's in the next twelve months.
Slava (26:52)
Got it. So let's say it again. So you think the drop there's a less than fifty percent chance that that happens in the next twelve months?
Brett Hickey (27:00)
In the next twelve months, yes. Over the next three years, I think the probability is much higher.
Slava (27:04)
okay, excellent point. I thank you for adding that one.
Brett Hickey (27:08)
Working within the constraints you're giving me.
Slava (27:10)
No,
I know I love it. That's I
love it. Thank you. So perfect. My next question is you've already been telling us quite a bit about the Star Mountain playbook. So I feel like I'm strong to understand it, but can you just educate the audience? What is the lower middle market? What is Star Mountain Capital doing exactly? And if you can illustrate that through an example of like what is the size of the business, what are they doing as in like the work that they do?
And what's an example of how long you're holding it, what is the size of position you're taking, et cetera, et cetera. obviously if you can be concise, that'd be great. But I would love for you to illustrate because I I think we understand what you're doing, but if you could illustrate it more in detail.
Brett Hickey (27:51)
So, first off, if I can break the economy, there's the small business more startup, often referred to as venture capital part of the world. We are not investing in that segment. Those are generally businesses that are not as established, often not cash flow positive. So they might have EBITDA, but they have a negative net income. we're focused on companies that generally have between five and fifty million of EBITDA. We want to see them established.
And reducing that idiosyncratic risk and having diverse customer bases, but not so big where they're in a highly competitive market environment. So we want to de-risk the idiosyncratic risk. We want to de-risk the macro market competitive risk. So that's where, yes. Generally
Slava (28:38)
And five to fifty, sorry, five to fifty, that's the lower middle market. That's kind of like the
Brett Hickey (28:43)
speaking, I think most people would think of the lower middle market as being in the five to thirty of EBITDA. We generally
Slava (28:48)
Got it.
Brett Hickey (28:49)
look at five to fifty.
Slava (28:50)
And what can you give us a few examples? What are these companies doing? Can you just give me three examples of they are doing
A, B, and C?
Brett Hickey (28:55)
Sure. So we we
recently invested in a company that has multiple swim school training centers where your kids go to learn to swim to for safety and stuff like that. We think that's durable, recession resilient, preschool chains, again, durable, resilient, some of which are not too far from where you live. and also then roadside repair businesses. We just invested in a 100-year-old cement batch company that helps fix and build bridges.
Tarmax for planes, roads, so a lot of infrastructure services, plumbing services and repair. When you need plumbing fixed to your home and buildings, those generally need to get done and are pretty essential, service-oriented, which that's a key theme. Things that we deem recession resilient and relatively essential service-oriented. I'll give you another one. We're sitting here with a video chat. Wi-Fi. If Wi-Fi cables need to be fixed or improved or new things.
That's pretty mission critical for most people, electricity and so forth. That segment of the US economy, that service segment, not only is really big and fragmented, but it's also very low correlated to whatever's happening with AI, Google, big public companies. And that's where we have a value proposition for our investors. And then there's tax advantage aspects we get to take advantage of and so forth for our taxable clients.
Slava (30:20)
Awesome. So can you give a sense of like what's like the type of check size for like that's called that pool instruction or for that services company? What's like the check size that you're investing? And if you can share directionally like in what kind of valuations are we talking about here? You don't have to be specific, but you understand what I'm asking.
Brett Hickey (30:35)
Sure. Initial
investment sizes for us are often between 20 million and 100 million per company. But the other thing that we really capitalize on is the aging demographic trend. So let's take the plumbing service company, right? There are thousands of them in the country. We might make an initial $50 million investment, but then help them find other good add-on acquisitions and maybe help finance four or five add-on acquisitions.
Professionalize that business and then sell it, taking it from, let's just say, for simple math, 10 million of EBITDA up to 50 million of EBITDA, and then sell, where by doing that, you can buy the companies and invest in that EBITDA at a much lower valuation multiple, and then sell it into a more competitive, efficient market at a higher valuation multiple.
And that's
Slava (31:24)
And
Brett Hickey (31:25)
just sort of systematic.
Slava (31:26)
just to clarify though, you're taking majority investment, is that right? More than fifty percent. Are you taking ownership?
Brett Hickey (31:30)
Yeah, so if you if you go back to our business model, we have private lending, minority equity and control equity. So we get to sit down with business owners and have authentic conversations, say, What are you looking to do? What's your family, personal situation? And we do all
Slava (31:43)
What about like for what about for like that
Brett Hickey (31:45)
of the above.
Slava (31:46)
right, let's talk about that swimming pool one. Is that majority?
Brett Hickey (31:48)
Sure.
That was a that one was a loan and preferred equity because that's
Slava (31:53)
Okay, got it.
Brett Hickey (31:54)
what the company was looking for and we have pockets of capital for that.
Slava (31:58)
And how long are you typically holding before you get let's call it your exit?
Brett Hickey (32:02)
They're generally in the three to six year time period, I think average in the sort of high mid mid to high fours.
Slava (32:10)
And what is like kind of the fat part of the bell curve of success? What kind of results are you getting for holding for three to six years? You know, obviously every single deal has its own unique nuance, but what does the fat part of the bell curve feel like? Not the exceptions good and exceptions bad.
Brett Hickey (32:26)
Yeah, I my my compliance guy would slap my wrist for talking about specific returns, but let's just say things that one can look to target in the lower middle market would be substantially higher than the larger market. So your private equity returns you're going to target something twenty-five to fifty percent greater than larger markets, probably similar in credit and so forth. You're looking to get paid for the labor, the complexity, the less competitive.
Environment.
Slava (32:56)
Got it. And how much money have you directionally deployed to date? 'cause you've been doing this for a long time.
Brett Hickey (33:02)
roughly five billion.
Slava (33:03)
Yeah, I just wanted to make sure that number got out there. That's a that's a big number. It's a big number. So said simply, I I don't know, I'm sure the numbers increase over time, but if it's like twenty years, five billion so that's like two hundred fifty million a year.
Brett Hickey (33:16)
Yeah,
it continues to grow. When I was small, our my my first fund
Slava (33:19)
Of course.
Brett Hickey (33:19)
I think was thirty million dollars or so. So it's it's continued to grow as we've we've built this business over last twenty-two years of of doing this.
Slava (33:27)
Got it. So is it like a close end fund that you invest into a new fund each time that LPs invest into?
Brett Hickey (33:32)
We we
so we have if you're a business owner, we get to sit down and really come up with bespoke solutions that fit the business, the market, and your desires with you, whether that's just a loan, a loan plus equity, just equity controlled minority or so forth. And I think that's very important because we get to have authentic conversations and actually listen and build real solutions. Same thing with investors. Some investors say, I want low I just really want low market correlated, stable defensive yield.
Or I want tax advantage, private equity returns. There's some tax things like QSBS where you can get up to 10 times your money tax-free. So there's some great aspects. So we we really listen to investors, it might be insurance companies that want their products rated and structured. So we have many different ways of how you can invest into this end of the market that really is tailored towards what your objectives are. The objectives of insurance companies different than a pension fund, different than a taxable US individual.
Slava (34:32)
So if somebody
Brett Hickey (34:32)
It's not
just one fund, it's multiple structures and products to optimize
Slava (34:36)
Awesome.
Brett Hickey (34:36)
end objectives.
Slava (34:38)
If somebody wants to invest with you, are you allowing retail to invest, accredited to invest, QPs to invest, none of the above, institutions only? What's the threshold?
Brett Hickey (34:48)
We are roughly fifty percent family office type of investors and fifty percent more traditional institution, insurance pension, endowment foundation, so forth, as well as actually we have products for commercial banks as well that invest with us, the which are great partnerships and how we work with business owners together. so we we do have different products for different suitability for people, including different liquidity solutions within that.
Slava (35:16)
What would be the minimum to invest?
Brett Hickey (35:19)
In our accredited structures, through wealth platforms, the minimum is a hundred thousand, but generally two hundred and fifty thousand to a minimum, two hundred and fifty thousand to a million, pardon me, depending on the product.
Slava (35:33)
Okay, awesome. super interesting. So you've been doing this for such a long time, obviously with a great track record. So it's great to hear you short share all this and really explain the middle market opportunities, which even I'm hearing it, like I should be thinking about how I'm deploying into it since you know we're predicting bad stock market returns and we're gonna be more insulated with the private companies, which is ninety percent of the market. so you've already indoctrinated me. So obviously you're a smart guy. You mentioned how you try to listen to a lot of stuff, read a lot of stuff. Can you give me any specific examples?
content
that you like to watch, listen to or read, what's on the Brett genius menu?
Brett Hickey (36:08)
Yeah, so a couple things. I'll I'll admit some bias because these are friends of mine and we do some business together in different ways. But there's a there's a piece of content that comes out daily called the Daily Shot. Dr. Lev Bordovsky started it. you know, full disclosure, you know, his senior advisor with us and so forth, but just brilliant. He was the head of risk for Credit Suisse, founding chief risk officer of GSO Blackstone.
And just one of these guys that loves data, loves information, insights. So that has a lot of really organized ways of let's figure out what's going on the world. Another one that I love, also senior advisor, again, full disclosure, is Joe Zidle. Joe Zidle most recently the chief investment strategist for Blackstone and you know, sat across observing on their investment committees and so forth. Just very thoughtful. And he has Zidle Macro, I think is the name of it, but if you look
Can follow up with you guys if you're interested around it. But he really synthesizes a lot of the information in the market really well. Beyond that, what I love is getting into the weeds of different curated groups. We put together groups with family offices and talk about a lot of things together. We get together, as I mentioned, with insurance companies and have real open dialogue, not just here's 500 people in a room and it's scratched the surface stuff. It's okay, we're gonna spend three hours together, we're going around, we're gonna debate and discuss things and
really get in the weeds. I find that really helps us think about the world. those are a few well called synthesized places that I really like the curated content.
Slava (37:42)
Great. And then last question, we always put everybody on the spot. Give us your prediction for three years out, which is one public markets pick, which even though you're not a public markets guy, even more interesting, and why, and one non-public markets pick and why. So what will be your two picks and why?
Brett Hickey (38:00)
I don't have a public market pick because I'm not focused on looking for those investments. What I would say the characteristics I would look for if I was developing a thesis to hunt for, it would be a public market business that has a lot of founder owner operated dollars involved in it that they were really caring about, not only growing, but protecting their own capital. So that's an aspect I would highly focus on. I would focus on it being something that.
services, the home services sectors of the US economy that are going to be more essential service oriented. So I don't know which public stock or stocks might fit that, but that's what I'd hunt for. In private markets, really the same thing. And thankfully in the lower middle market, there's a lot of these. So I think parents will still want to teach their children with preschool chains. So you got to make sure you find the right one, the right management. I think parents will still want to protect their children from drowning
And have them learn to swim. I think people will still want to fix their sewer, their plumbing, their garage doors, and so forth. So in those home services sectors, I think we'll continue to be very durable if you have the right management team, keep leverage low, keep risk management managed, and keep alignment high.
Slava (39:18)
there is there such a thing
as an index to track for middle markets or lower middle markets to see how they're performing?
Brett Hickey (39:25)
Not directly. Star Mountain has a private BDC, so it's not an index. we've about fifty companies in it currently, so it
Slava (39:32)
Understood.
Brett Hickey (39:33)
has pretty good diversification. So that is sort of one thing people can look at.
Slava (39:36)
But there's no equivalent
of like the Dow or something.
Brett Hickey (39:40)
No, we you know, we've had people approach us and say, Would we take our company public so that an investor could invest in Star Mountain directly that would go across all of that? I just am not interested in being CEO of a publicly traded company, at least at this juncture of life.
Slava (39:55)
All right, perfect. Well, talking about life, we've covered a lot here, Brett, from Northwest Canada, which was a sleepy place that you were able to navigate oil drills and speed skating to get to New York, to then start your first firm, which becomes your only firm from Aegis to Star Mountain. and you were nice enough to tell us that you're a zero, zero, hundred percent, zero percent equity, zero percent bonds, and a hundred percent in your alternatives, which is absolutely fascinating. So the hundred percent obviously you you know put across
many different types of funds, 60% private credit, 40% equity. That was a little bit forced for you to tell us what you thought it was. and really you're very much thinking about the macro, whether it's what's happening in the US and China or what's happening in the stock market, all informative to how you invest, which is fascinating. You did get put on the spot. You told us no recession 12 months from now, the Fed rate flat, unemployment flat. You do think stock market's still gonna be up 8% a year from now. So you're not really predicting yeah,
Brett Hickey (40:49)
I said three to eight just to make sure in that.
Slava (40:51)
yeah, three to eight.
No armagettin in the next 12 months, but it it is dark for you in the next five years. So three to five years out, you're not so bullish, but you're not ready to say it'll be apocalyptic within one year since I gave you that constraint. We got to learn about Star Mountain, which is awesome. Typically, lower middle markets is five to thirty EBITDA, but you go five to fifty, hold for three to six years, and about fifty percent of it's coming from family offices, fifty percent of it from institutions. For those of you are interested, 100k potential minimum through provider, but more like a 250 to a million minimum.
And you gave us some good nuggets here. You gave us the Daily Shot and also the Zidle Macro. I gotta look that up. And I did try to play one spot for public and private picks, which you did not play the game well, but it's okay. You still were very
Brett Hickey (41:33)
Yeah.
Slava (41:33)
informative and very helpful. Thank you very much, Brett.
Brett Hickey (41:36)
Failed the
public stock one.
Slava (41:38)
So what's
Brett Hickey (41:39)
I failed the public stock pick.
Slava (41:41)
I'm sure your compliance people will be very proud of you. Thank you very much. Have a good day. Bye.
Brett Hickey (41:45)
Thank you. Well well summarized, impressive.
