TIP833: Perimeter Solutions (PRM): A Niche Monopoly, One Acquisition at a Time w/ Kyle Grieve & Shawn O’Malley

**SPEAKER_1** (0:00)
You're listening to TIP.

**Shawn O'Malley** (0:03)
Before we get started on this business today, I think I need an explanation.

**Kyle Grieve** (0:06)
Uh-oh, that's never a good way to start an episode.

**Shawn O'Malley** (0:10)
So you know exactly how I feel about Dilution, and this business pays fees to its founders, similar to what you'd find in a 2 in 20 hedge fund structure, just for the privilege of owning a stock. So what gives?

**Kyle Grieve** (0:21)
Yeah, I mean, probably because the guy collecting that fee is the same guy who turned Transdigm into a compounder that outperformed the market for a couple of decades.

**SPEAKER_1** (0:33)
Since 2014, with more than 200 million downloads, we have interviewed the world's best investors, studied deeply the principles of value investing, and uncovered many compelling investment opportunities. We focus on understanding businesses and intrinsic value, investing accordingly, and sharing everything we learn with you.
This show is not investment advice. It's intended for informational and entertainment purposes only. All opinions expressed by hosts and guests are solely their own, and they may have investments in the securities discussed. Now for your hosts, Shawn O'Malley and Kyle Grieve.

**Shawn O'Malley** (1:20)
We have discussed many holding companies on this show, and we own a few of them in our intrinsic value portfolio. Businesses like Exor, EXOR, and Lyfco, but you can make the argument that Amazon, Berkshire, and Google are holding companies as well, just with massive, massive business units and trillion-dollar market caps. Anyway, you look at it, we clearly think holding companies can be good businesses as long as they're anchored by high-quality assets that generate cash consistently with top-notch management teams allocating capital. When it comes to Exor, the main reason we own that holding company in the portfolio is because of its Ferrari stake.
Even though the other assets are just okay, the Ferrari position is, again, the real reason we own it. We get to own Ferrari shares at really a very steep discount relative to what it would cost to own the shares directly with the ticker RACE. Kyle, I know you're a big fan of serial acquirers, which is why we also now own Lyfco. In one business we don't own, however, that is probably one of the best examples of what we've been talking about because its founder, Nicholas Howley, was wildly successful with Transdigm and also with a company known as Perimeter Solutions.

**Kyle Grieve** (2:35)
And Nick Howley is really only the star of Perimeter Solutions superstar board and executive team. This team also includes the likes of William Thorndyke, who wrote the exceptional book that I know that you're a big fan of, Shawn, The Outsiders. And he's actually also a really good investor himself with a net worth of a few hundred million dollars. Much of that invested specifically into the business that we'll be covering today, Perimeter Solutions.
Then, you have Tracy Britt Cool. So Cool worked at Berkshire Hathaway for 11 years prior to opening her own fund, Canbrook. While at Berkshire, she spent about five years working in their HQ, specifically with Warren Buffett. She was also the CEO of one of their subsidiaries, Pampered Chef, which I got a chance to check out this year at the AGM. And then she was also on the board of multiple Berkshire Hathaway subsidiaries like Kraft Heinz, Benjamin Moore and John's Manville. But the Howley connection is where I think the real story is because Howley just created a ton of shareholder value at Transdigm.
And that business has compounded its share price at 22% since 2006, not including dividends. To compound at a rate that high for two decades is definitely what I would call an anomaly.

**Shawn O'Malley** (3:35)
And part of Howley's strategy with Transdigm was to sell products that were niche aircraft industry parts, which he did strategically by buying up more and more businesses to complement that product stack in this very narrow niche. But the secret sauce was in buying businesses that had a very sticky customer base, didn't cost more than 1% of their customers total spend. So they were a small fraction of the cost input structure in these B2B sales. And yet they were very integral to their customers' businesses. So, what is an example of that? Well, imagine the most boring essential parts of a plane, like the seat belts, pumps, valves, ignition systems, and even things like cockpit security systems. They're really, really mundane, but essential for flying a plane safely. And because Transdigm owns businesses that sell these products, and famously so, they have sort of a quasi-monopoly in the industry, and that's allowed them to compound that incredible returns for a long, long time.