Ep738: Neil Johnson – Take the Profit When You Can

Andrew Stotz 00:02
Hello fellow risk takers and welcome to my worst investment ever stories of loss to keep you winning. In our community, we know that the winning investing you must take risk but to win big, you've got to reduce it. Ladies and gentlemen, I'm on a mission to help 1 million people reduce risk in their lives. And I want to thank you for joining that mission today. Fellow risk takers this is your worst podcast host Andrew Stotz, from a Stotz Academy, and I'm here with featured guest, Neil Johnson. Neil, are you ready to join the mission?

Neil Johnson 00:37
of thermo promote me and who I am.

Andrew Stotz 00:39
I used to say, are you ready to rock but now I say Are you ready to join the mission? I'm glad to get you on and let me introduce you to the audience so that they know who you are. So Neil Johnson is a renowned finance expert with over 30 years of experience in investment banking, Merchant banking and research analysis in both Canadian and UK capital markets. He currently serves as the Executive Director and CEO of Duke royalty. He is responsible for leading deal origination due diligence, and structuring for Duke a $300 million alternative finance investment company listed on the London Stock Exchange. Neil's expertise as CEO of Duke royalty, and from his previous role as European head of investment banking at Canaccord Genuity is invaluable for business owners of private companies and investors in public companies. He has played an instrumental role in the growth and success of companies raising over $5 billion in funding for hundreds of companies during his 19 year tenure at that time, and that was 19 years at Canaccord. Right. That's right, fantastic. Well, why don't you tell us about the unique value that you are bringing to this wonderful world?

Neil Johnson 02:00
Thank you, Andrew. Yeah, I think I think the intro set of best I've, I've really had two careers one, at a brokerage house, I was analyzing companies for research, as as research and analysis, and recommending stocks myself, I went back into investment banking, so as a broker, working with companies helping them raise money, but now what I do is I am an investment company, I run an investment company. So I'm the one writing the checks, or I went from a broker to a principle, I have both sides of being an investor recommending investments and actually writing the children. So that's my unique proposition.

Andrew Stotz 02:53
And for some people out there, they might not really understand what does it mean an investment company listed on the London Stock Exchange? What is an investment company is that, like, some people may know something like in the US, like fidelity as an example or other, you know, this type of companies or they may know, an investment bank, and how would you describe what an investment company is in your case?

Neil Johnson 03:18
Yeah, we do at work, we're more like a private equity company. And so you, you know, the biggest ones are KKR and Apollo and, and things like that, you know, I've heard of venture capital firms, as well. So we invest in smaller companies, so we don't invest in a large companies we invest in, in SME businesses, and we kind of have a hybrid between debt and equity. So that's why it's called a corporate royalty. But just to keep it simple. We invest in SME businesses,

Andrew Stotz 03:57
and how do you define SME? Like, what's the cutoff point? You know, generally? Yeah, we,

Neil Johnson 04:04
you know, we invest in long standing profitable and private companies. Usually, they have revenue, going for decades. And they have revenue between 10 and $30 million and make a profit. Probably between two and $5 million of EBITDA. And that's, that's what we're looking for.

Andrew Stotz 04:28
Right? And then how do you find them?

Neil Johnson 04:32
Oh, well, we, we, we know a lot of intermediaries, whether that is lawyers, accountants and corporate finance advisors that advise private businesses, and so we tell them what we're looking for, and they represent a bunch of companies most of them are. We don't want the ones that are for sale, but we're little For companies that are looking for money, so that's a good match.

Andrew Stotz 05:03
And what is it? What is the typical way that you do it? Or is it they're just looking for finance to go to the next stage of growth? They're not looking for an operator, they're just looking for funding? Or are they looking for an exit? Or what is the typical way that you view it? Yeah, we, we,

Neil Johnson 05:20
we are searching, searching out. Companies that are owner operated. So we're working with the business owners that are actually this is their life, and we partner with them on a long term basis. And in give them the capital, that keeps them in control. So as they say, if we're brokers have companies for sale, we're not we're not looking to buy companies, we're looking for supporting the business owners themselves, and getting them the capital to either acquire other companies go on a growth growth spurt and, and different things. Or the other use case for our capital is management, that have the opportunity to buy the company that they that they operate, if the existing owners are looking to sell, and we would facilitate the management, buying their own company, and ending up with a majority stake and in control of the company that they've been managing.

Andrew Stotz 06:30
And when you look at, you talked about bought, you know, debt versus equity, and some you know, mixes and stuff, it sounds like, you need flexibility in those types of situations, because in some cases, you may be financing, you know, the prior management as they are the existing management as they take over the company or something like that. I'm just curious from an equity perspective, like, what's a range of investment that you would hold in a company, for instance, you know, if somebody said, Hey, I'll sell you 1% of my company, well, that's not worth a minute. And then if somebody says, Well, I'll tell you, 55% of my company, and then you're thinking, Wait a minute, I don't want to run this company, I don't want to have this thing in my hands up in becoming the operator, what's the range that you look in?

Neil Johnson 07:15
Yeah, I mean, we, we start with, with an up with, with, with a mindset, that we are going to look at the cash flow the business and then actually give an amount of capital that is equal to or less than half of the cash flow. And that's usually four times EBITDA. So you're making 5 million off of EBITDA. Half of that is sorry, if you're making two and a half million of EBITDA, then we can lend up to 5 million, we can invest up to two and a half goes to 10. And so we could, we could give you $10 million. And, and for that, it's, it's we're taking some cash, but we're also have a minority equity stake. And that can literally range from zero to up to 30%. And it depends on the circumstances and what's at play. But yeah, we won't take more than 30%.

Andrew Stotz 08:29
And, when owners come to you, Are they realistic about the EBITDA multiple that they should be getting for their company? Or are they wildly overly optimistic? Or, you know,

Neil Johnson 08:40
um, you know, and we're, we're gonna talk about one of my worst investments, that was wildly, you know, optimistic valuation. But, but we're now I'm looking for nuts and bolts, companies, I'm looking for kind of old economy businesses have been around that, that are either industrial companies or service companies. And, you know, they have to be realistic. And they usually are, huh.

Andrew Stotz 09:11
It's, the reason why I'm asking all these questions is because I just think it's, you know, it's fascinating what you're doing. One of the other questions is, when you look at the you talked about the $300 million company, which I suspect, you're talking about the market cap of your company, correct in the London so I'm, yeah, invested capital. Yeah. And then when we look at the source of that, for some companies, the source of that, let's say, Take fidelity as an example is that they don't have ownership in particular companies. What they have is a company that's giving service to all of these funds, providing research services, which is a very, you know, profitable and valuable business. Whereas you could say, okay, maybe a little bit more like Buffett style, he has a company and some of the core assets are the actual shares that He has in the companies that he's owning, what is the source of the 300 million in market cap?

Neil Johnson 10:07
Yeah. So we were in that relationship, we're more like Buffett, okay, you know, a few less zeros than Buffett. But we, but we certainly are, we have that capital, and we invest our own capital off the company's balance sheet. So we have that in cash, and then we invest it off the cash. So it's an internally managed company, as opposed to Fidelity's of the world that the manager, the fidelity all works for the manager, and then the third party capital funds are separate. The source of our funding has been by selling stock to the public and the London Stock Exchange. So we have Allianz and India insurance company AXA, we have GLD, and we've had BlackRock and Campbell as well as shareholders. So we sell, we sell our stomach to, you know, household names, when never had fidelity on our shareholder register. So there we go.

Andrew Stotz 11:16
Baby, they may pick this, pick this up, and then get on it. And I suspect for an investor. Now, if we look at your company in the in the London Stock Exchange, what an investor is getting in your company is access to the SME market, and they're being able to say, Hey, I own this company, and this company, Duke royalty has doing all the hard work out there to acquire small and medium sized companies that are good quality, they're managing that they're owning, you know, a stake in those companies. And the benefit for me is that I don't have to go out and search out all those small companies, I let you do it, and you do all the work on staying on top of those. And I get maybe an alternative asset class of small and medium sized companies that I wouldn't naturally get if I was just trying to do something on my own.

Neil Johnson 12:08
And not only that, Andrew, the number one thing that you get when you're investing in Duke royalty is quarterly dividend. Because our our, our the, the way we invest is to take half of the cash flow. So they're obligated the company's give us the monthly revenue to Duke. And then we really pass that a bulk of that on to our shareholders and dividends, those and I'm a big shareholder in my own company. So I'm aligned those quarterly dividend checks that actually I'm getting next week, so but it, it is, it is really something that a lot of investors value, especially in these times.

Andrew Stotz 12:54
That's, there's so many interesting things about what you're doing to me. First of all, I have a 28 year old manufacturing company in Thailand. Okay, my best friend and I have been running for 28 years. And we're, we're at getting close to 5 million US in revenue, you know, and we, we, we, we roast coffee, and we supply hotels and coffee shops and things like that, you know, we're not, we're not, we're still young. I mean, look at how young I look. So we see many years ahead. But you know, we always talk to people and you know, listen to what people say, and we have some private equity guys that come around, and you know, other people that talk to us. And so we've looked at that. And that's why it's interesting on that side. In addition, on the other side, I have a service I do called profit bootcamp where I help mid sized family businesses double their profits in 12 months. Interesting. And that's basically where I am based on going into a company every two weeks, I'm at the management with the management team, and particularly with the ownership of the company with the owners of the company and the top managers. I've got a curriculum that I worked in through over 52 weeks, I've got financial scorecards and measures that I use, and I dig deep into their company, and then I help them make the tough decisions. And, you know, that's really most of the companies that I work with, they kind of know what they got to do. But sometimes they just need some support in doing it. And so that's why the other thing that I am interested in is London Stock Exchange. You know, London Stock Exchange is an interesting one, just because of different like sub markets. I think it's called gem is that I can't remember what the there's a smaller and a larger market for, you know, that type of thing that I just I find this fascinating. We have that in Thailand, we have what we call more market for alternative investment where smaller and younger companies are in there, you know, unfortunately entirely and I would say there's almost similar regulations for both large and small and tiny companies. but they give a little bit of forbearance for those smaller ones. So all of those different things come together to think this is an interesting conversation to me.

Neil Johnson 15:10
Yeah, yeah. That's great. Well, I'm really glad to dive into this and meet you under. So

Andrew Stotz 15:16
yeah, well, that's great. I think we can, we can have more conversations, and maybe actually even more discussions about what you're doing that could benefit families, and family businesses, as well as you know, midsize businesses in Asia. So I'm excited also to hear your story. So now, after a tremendous warm up, we are now ready for the big question. Now it's time to share your worst investment ever. And since no one goes into their worst investment thinking it will be. Tell us a bit about the circumstances leading up to and then tell us your story.

Neil Johnson 15:50
Oh, thank you, Andrew. Well, we're gonna take you back to the run up to the.com one era, when the internet was just starting. And I was a young investment banker, I was actually an internet analyst is having some exposure to some of the high flying stocks of the day. And then when this company, darkened, my door was actually from LA. And there was a husband and wife, team. And they, and their idea was to, you know, this is back. This was like, dialogue, if you remember dial up internet service, so there was not a lot of, you know, media to the websites, they're very basic, and what they, what their, what their product was, was saying, listen, every every company is building these websites, you know, what we can do is give them templates to build a website faster, cheaper. And, and we do that and, and basically, if anyone knows Squarespace for, for example, that they do the same thing we had, we had a company that I was advising in 1996, I believe in 1997, all the way up to 2000. And so we were very, very early with was a great company to be involved with. They were looking for, for money. So me as a young investment banker, not only invest in some of my own my own you know, investments in bank account, net worth of the time, but also charges in the investment banking fee that I was taking in stock, and a very small company. And we're chugging along, and I think we're way too early. So no one paid attention to it. And so I was collecting these, these fees every month and getting shares like 50 cents a share. And and a few years, few years on the, the the internet, kind of in a bubble, you know, enveloped them. And they ended up getting a call from Frank Quattrone who was one of the big internet financiers a up the road in, in Silicon Valley. And so they got signed up to go public. And I was like, Well, this is great, because I'm sitting in Vancouver, Canada, you know, trying to raise some a little bit of money here and there. And, and all of a sudden, you know, the big guy, the big financiers, and Wall Street was knocking on their door. They had, they took over the, they took over the kind of the relationship. So all of a sudden, my might work for you. But, you know, I look back and I was like, I got some shares now. And so these guys came in, and the first thing they did was a pre public round. And so they wanted to buy all the shares, and that they could get their hands on so I got a call with my boss at the time, and it wasn't I was like 2028 years old, 29 years old at this time. And, and, you know, I saw like, all the internet companies going great guns as soon as your public you're doubling or tripling your stock and they want to buy mine to air. And listen, the company needed money, it was unprofitable. But you know, you know, they Squarespace has a market cap right now a $4 billion. Okay, so, so I'm thinking, you know, this must be amazing because all these smart people want my stock and so they were going to buy stock they're trying to buy stock at $5 a share. What was that? That was 10 times what I was like getting paid. And, and I talked to my boss about it where's he's gonna take it public because this was like, it's like six months before they're going to take it public, but they're gonna take it public, you know? And, and I didn't know but I was like now if you're you're wanting to buy my stock and then No, I'm not for sale, I want to keep I want to keep my stock. Fine. So. So add on my stock. Now I'm rubbing my hands because they filed to go public in March 2000. And if remember, march 2000, it was the very top of the first internet bubble, the day that index was at 5000 Nasdaq index was 5000. I think it took like 15 years to go back to 5000. That's how crazy it was. They finally go public and then. And now I know at $15 A share that thing was going to be, you know, double triple. That's going to start trading at $50 a share. So yeah,

Andrew Stotz 21:39
just to summarize, you had an opportunity to sell at $5 per share for the stock that you paid, you know that you got to 50 cents per share. And then you had a second chance to sell at $15 a chair share for those same stocks that you got at point five. Okay, continue on.

Neil Johnson 22:00
Yeah, yeah. So, the nuance of what you just said was the second chance. So I, they, filed all the paperwork to go public. But that was at the very height. And so they kept kind of delaying the roadshow and whatnot. And or they never, they never went public. They they had they had ballooned the the the management team and all the costs and everything of this company, because they did finance it $5 a share, put like $25 million on the balance sheet, you know what they blew through that $25,000,000.06 months, six months later, the thing went to zero. And, I never got that second chance to sell it. But you know, my head, you can imagine as a 2029 year old, I was like looking at houses in London. This is a London by this time, I was looking at million multi million dollar houses that I was going to buy and you know, all these things. My, my boss, my boss was like, gonna leave as you know, like, like, like, quit his job and you know, and, and go run away in some deserted island probably go to Bangkok with you. And there's, you know, it's just like, he was counting his money. We're both we're all like, thinking that, you know, like, lottery. And

Andrew Stotz 23:41
can you remember the day that you found out that it was all gone?

Neil Johnson 23:47
I remember the month. It was September 2020. I remember the phone call. And I remember where I was. And that's usually what I remember. I always remember kind of where I was when I get phone calls.

Andrew Stotz 24:05
You said September 2020? You mean September 2008? Yeah,

Neil Johnson 24:10
September 2000. March 2020 was awesome, pretty bad. Pretty bad month. So

Andrew Stotz 24:18
So you got a phone call

Neil Johnson 24:21
to Yeah, I got a phone call from the original founder and CEO. And basically said, Neil, you know, the guys and he got kicked out as CEO like all these guys came in from, you know, the, the, the really smart money put in these managers. And then they blew all the money in the men left. And the original founder called me up and who I was advising for the three years. And he's like, you know, can you help we need you know, $5 million more and whatnot. And by that time I was like, you know, at John, his name was John. And I said, you know, there's, there's nothing I can do. And, I mean, I felt bad. But imagine him, he was going to be, you know, he was going to be the next billionaire. So that's the story.

Andrew Stotz 25:19
How would you summarize the lessons that you learned?

Neil Johnson 25:23
Well, you know, I didn't? Well, first of all, I think the lesson is, you know, take take profit, when you can, I mean, I didn't have to sell it all, I could have just sold, you know, a little bit and get rolling, you know, so I really regret not selling some, and, and then, and then the rest is free money, you're playing with house money there, right. So I got greedy. And, and you know, that in the other thing, I think, is I didn't do my due diligence, I just, you know, like, just kind of heard that these guys wanted to buy stocks, and hey, we're gonna do this and that. And, and, and I could have been a lot more inquisitive as to why they were trying to what they were up to, and really look at the balance sheet and the end, the end the company to understand whether this was really worth $5 a share. So, you know, it was impulse. I was greedy. And, and, and I, and I didn't take the money out. I didn't take a profit when I can.

Andrew Stotz 26:44
Maybe I'll share a couple of things that I take away. I mean, the first one is, yeah, doing the research, doing the due diligence is critical. And I think that's a mistake that every that's our most common mistake on this show. People don't do the research. But I would also argue that I'm not sure, if the research that you do, would be able to give you much information in some cases like this, where you're there riding a wave, and it's all coming from this, you know, future boom, and all that. So, it's, it's a little bit difficult to imagine, in some cases, that research would have helped. So that's the first thing that I was just thinking about. Yeah. The second thing is, I would say that, there's just, there's so many stories, where they didn't, you know, they didn't sell in time, and then it collapsed. But there's also an equal number of stories, where it rose, you know, part of it, I feel like, this is a numbers game, that you've got to have a lot of bats lined up. Because you just can't tell. And so there's that's a second like a, an unknown aspect, where you have that diversification, which I guess, is part of what you're doing now with your businesses being diversified. So that one of those decisions doesn't, you know, wipe you out or something like that. But those are some things that I was thinking about, as you were talking. Is there anything you would add to that?

Neil Johnson 28:27
Well, I certainly agree with you that, you know, it was irrational exuberance back in.com one, no one has ever seen, you know, the power of the internet and how it was going to change, change everything so rapidly. And nothing, nothing makes sense. You know, that was the thing. That was the thing about it, nothing. You couldn't really value it and poor internet analysts trying to justify like 1500 times, you know, future sales, you know, and make it a buy, you know, it's like, I remember that, reading that as an ex analysts going, why is this? No 800 times more than Oguz revenue revenue was a buy only because there was already a company on the market trading at 1500 times forward revenue, this is cheap. And this is why this is a buy. So, yeah, nothing nothing makes sense. I agree. I agree with that. And,

Andrew Stotz 29:41
and for the listeners out there who are just about to step in this big pile of poo that we've discussed, and they're facing some of these similar type of situations and decisions. What would be one action that you'd recommend that they take to avoid suffering the same fate?

Neil Johnson 30:03
try to not be not be greedy or overly greedy. You know, you know, there's something about leaving a little on the table for someone else. And so there's that aspect that I would that would that's when I would say, you know, as you said, you know, was there research that I would say that oh, I would accept, you know, $4 a share and not $5 a share or five? You know, at the time there really, there really wasn't? No,

Andrew Stotz 30:44
yeah, it's funny, because you said there's never been, you know, something like the internet bubble. And what was everybody was thinking about? And I thought, Bitcoin it's somewhat similar, you know, to the whole, let's say, the whole crypto world is got a similar field to that. So let me ask you, what's a resource either of your own or any other resource that you'd like to recommend for our listeners?

Neil Johnson 31:10
Well, well, Andrew, you know, as I would say, that invest in Duke royalty, you know, I've learned a lot, I've learned a lot of invest lessons along the way. I mean, you never stop learning, right? There's, there's no, there's nothing perfect, but, you know, I would say, cash flow is king. And, in a lot of these internet companies, and unprofitable companies that are, you know, promising a lot of future there's, that's a very difficult way to make money. You know, the get rich, quick schemes of public investing. The greater fool is very, it's very difficult to consistently take money on. But you know, if you're investing in good cash flowing companies, it's boring. But for me, boring is the new exciting. My days, my days of being an internet analysts, and in and those, you know, are given way to do what I do now. really invest in companies that, you know, are aligned with management. And

Andrew Stotz 32:30
what, what's, what's the, what's the dividend yield right now do quality.

Neil Johnson 32:36
It's about eight, eight, or eight and a half percent dividend yields.

Andrew Stotz 32:41
Incredible, incredible. And for the listeners out there, you can go to Duke royalty.com. And they've got a section for investors, where you can see, you know, the, that's, it says on here, it's in the top 10%. Of Aim. Aim is the name of the market, right?

Neil Johnson 32:58
That's right. That's the junior market. Yep.

Andrew Stotz 33:01
So it's in the top 10% of ame dividend yield. So you've got all the information in there. So most importantly, ladies and gentlemen, do your research. But here's a place to start with some good research. Last question, what is your number one goal for the next 12 months?

Neil Johnson 33:18
Well, I think professionally with Duke is, is really to continue investing in good companies and looking at good companies. And also, you know, in our portfolio that has 15 Different companies right now is ensuring that they're, you know, weathering the storm of, of, of the current, you know, macro environment, we have investments in in the UK, the US and Canada. And, you know, everyone, you know, they're all in Ireland as well, you know, every market has their nuances. So, it's, it's, it's, you know, making sure that the portfolio is found, getting that cash flow out to our investors and dividends, and looking for new opportunities.

Andrew Stotz 34:10
Well, listeners, there you have it another story of laws to keep you winning. Remember, I'm on a mission to help 1 million people reduce risk in their lives. As we conclude, Neil, I want to thank you again for joining our mission. And on behalf of a Stotz Academy, I hereby award you alumni status for turning your worst investment ever into your best teaching moment. Do you have any parting words for the audience?

Neil Johnson 34:35
Well, stay safe out there and Investing. Investing is never 100% Just got to win more than you lose.

Andrew Stotz 34:46
Fantastic and that's a wrap on another great story to help us create, grow and protect our well fellow risk takers. Let's celebrate that today. We added one more person to our mission. To help 1 million people reduce risk in their lives. This is your work. first podcast Hosea Andrew Stotz saying I'll see you on the upside.