One of the primary ways we judge growth and success in our business is through AUM and annual acquisition volume.
These goals must be balanced with the most important goal, which is to build and maintain a strong track record of consistent and attractive returns by under promising and over delivering. This means it is important to have a good balance of aggressiveness and patience when looking to scale since the market is ever changing. With that being said, the focus of this article is to discuss the different components contributing to annual acquisition volume and how we can achieve our goals as efficiently as possible.
In the simplest terms, acquisition volume is a function of how many deals we can do per year and the average size of those deals. Lone Star Capital acquired six deals in 2022, which felt very busy given the size of our team at the time. Our corporate team is on pace to double in size in 2023 and our management team continues to grow proportionally to the size of our portfolio to ensure we remain hands on. With our larger team, we should be able to handle eight to ten acquisitions in a year, which dramatically helps us in our equation (number of deals multiplied by deal size).
Another way to increase acquisition volume, which I have noticed to be popular among very large sponsors is to acquire multiple properties at once (not necessarily from the same seller nor even in the same market) and raise capital through a portfolio offering.
On the other side of the equation, Lone Star’s average acquisition price in 2022 was slightly greater than $36M. There is certainly an opportunity to focus and find larger deals, which is arguably the most efficient way to improve total volume. When focusing on efficiency, it can lead to a sponsor to question whether doing a small deal is worth it because it takes up nearly the same resources and could possibly preclude a sponsor from doing a larger deal. With that being said, it is difficult to pass up a good deal just because it is small (that’s foreshadowing).
If a sponsor has the systems and network in place to close deals faster, it frees the team up to pursue new opportunities by freeing up analysis bandwidth, pursuit capital, due diligence manpower, and capital raising efforts. Based on our goals, simply closing the deal is no longer good enough. We must strive to improve our processes and capabilities to allow us to enjoy faster and smoother closings which will allow us to be more productive over the course of the year.
As our team thinks about building our business, we don’t want the biggest company or to do as many deals as possible, but rather we’d like to have the best business, which we define as smooth. If a breakneck speed is required to achieve our goals, then we are better off slowing down, building more systems, or hiring more people. Similarly, the market at times will present many strong buying opportunities and at other times will not. Having patience and a long-term outlook serves us best rather than being fixated on short-term goals.