In the competitive and challenging landscape of private equity, William Thorndike, founding partner of Housatonic Partners, has managed to create a niche for himself. William Thorndike’s firm has made over 60 investments in private companies and kept generating decent returns for investors. So, it’s not surprising that assets under management have grown from $5 million in 1994, when the fund was set up, to around $1 billion currently. Housatonic focuses on growth buyouts and recapitalisation of profitable, middle-market service businesses with highly recurring revenue. But, more importantly, it seeks to invest in and build companies through the close cooperation of experienced and entrepreneurial managers. That approach also led William Thorndike to author a book The Outsiders: Eight Unconventional CEOs and Their Radically Rational Blueprint for Success. The book takes a look at eight individualistic CEOs, including Buffett, whose firms’ average returns outperformed the S&P 500 by a factor of 20. In other words, an investment of $10,000 in any of their companies, on average, would have been worth over $1.5 million 25 years later. William Thorndike, however, believes that what differentiates Buffett from 98% of CEOs is his exceptional understanding of capital allocation — a trait difficult to emulate for most CEOs.
You have an analogy: hedgehogs and foxes. How did that come about?
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It is from an essay by a British intellectual, Isaiah Berlin. The basic concept of the essay is about writers, but it also applies to business people. They are divided into two camps, hedgehogs and foxes. Hedgehog knows one thing but knows it very well — that is, more of an intense specialist. In contrast, the fox knows many things but lacks a deep sense of understanding. There is a common view that successful CEOs tend to be hedgehogs as they tend to focus and specialise and carve out a niche for their businesses. I think there is some truth in that. But the Outsider pattern is quite different. Such CEOs tend to be young and often new to their fields or industries, but bring with them fresh perspectives. Part of the thesis here is that such CEOs take unconventional iconoclastic paths owing to their exposure to other fields. This foxiness allows them to take a look at their businesses with fresh eyes and arrive at a differentiated approach, particularly around capital allocation. In that sense, Buffett would be a classic fox because he began as an investor, an unconventional background for a CEO in the mid-1960s when he assumed control of Berkshire Hathaway. But he had exposure at that time to several industries and businesses. So, when he took over Berkshire he then had a much broader range of capital allocation opportunities than just investing in textiles, which was a terrible business. So he was able to take the cash generated by the business and deploy it in other, more productive areas.