Few Americans know Fimi. In Israel, everyone in business does. It is Israel’s first, and now its largest, private equity (PE) fund.
Since its creation in 1996, by Ishai Davidi, a former IDF Special Forces officer, Fimi acquired 72 companies. All but one are in Israel. Forty-one of them were sold, only three at a loss, and 32 are still owned. In the PE industry such a dominant fund is known as a country fund. Among the latest US investors in Fimi one can find Michael Milken, Jim Tisch of the Loews Corporation, and Jay Jordan of The Jordan Company.
There is no one formula for success. Moreover, no one knows in cases of successful investors if superior ability is at work or merely a halo effect. It is similar to Warren Buffett buying a company: everyone immediately assumes this is a company worth doing business with. IMD Professor Phil Rosenzweig documented this phenomenon in his best-selling book The Halo Effect. (Especially appropriate since halo effects lead to self-fulfilling prophecies.)
Even if Davidi’s success is due to halo effects , it is still worth examining the way he looks at the world. We may learn something. Here are some interesting principles he follows:
- Fimi does not invest in financial or real-estate companies. Right off you can tell the guy is serious.
- Each investment comes after years of patient monitoring of the target, and meeting with the owners.
- Before making an offer, the fund assesses risk by running a red team/blue team war game. The stated objective of the war game is devil’s advocacy: argue that the deal should not be done.
Those steps, while prudent, don’t sound particularly innovative. But Fimi goes further. Fimi looks for companies with a) clear strategic plans and b) humble executives. Executive compensation must be correlated not only to performance over several years but also to workers’ compensation. Davidi does not believe in high executive pay and low workers’ pay. That’s not just about morality or generosity; it serves a business purpose. None of Fimi’s companies is unionized, in a country where unions are extremely strong and can be quite destructive, and Fimi wants to keep it that way. Finally, Fimi never looks for an exit. Instead, it improves the company’s performance. Davidi’s philosophy: once performance improves, offers will look for you.
The principles above do not amount to a formula for success; instead, they reflect a systematic, careful process of evaluation. Many investors, including our readers, follow similar logical process. So what makes Davidi different? I believe it is his ability to find the essence of competition in any segment where his portfolio’s companies play. It is almost as if he runs Porter’s Five Forces model for each company he buys. Consider this anecdote.
In 1999, Fimi paid $1 million for a small manufacturer of automobile engine parts. Fimi improved it and several years later sold it for $30 million. The new owners were not as strategic. In 2011, the company was near bankruptcy. Fimi bought it again for around $5 million. Today the company is valued at $210 million. Here is how Davidi summarizes the challenge in competing in the automobile supply market:
It takes years until the big car companies trust you enough to be in their supply chain. So you must participate in as many RFPs as possible, over and again. You must offer very low prices to gain a foothold. Entry into the trusted list is the most important aspect of the strategy, because once you are in, you are in. The car companies do not like to change suppliers. However, at a hint of legal trouble, they will drop you. So, when this company was in financial trouble, Fimi jumped in to avoid any creditors’ litigation or other legal wrangling which would have completely destroyed the company’s standing with the buyers.
In my career, I have met hundreds of executives who were extremely knowledgeable about every little detail of the competition in their industry. They tended to lose the big picture. They tended to think execution matters more than clear strategy. My perspective, as an observer of the skill of competing, is that Davidi’s ability to abstract from the details and focus on the most salient feature of competition is his biggest competitive skill. Once you crystallize the essence of competition in a given sector, you are at least looking at the right challenge to solve with your strategy.
Davidi, www.competing.com is not for sale!
Mark Chussil, co-founder of Competing.com, adds this: “Not so fast, Ben…”
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