Capital Allocators – Inside the Institutional Investment Industry
Episode 384: Top 5 of 2024 – Featuring Alex Baring and Daniel Schwartz of 3G Capital
Release Date: December 30, 2024
Introduction
In this top-ranked episode of 2024, Ted Seides engages in a comprehensive discussion with Alex Baring and Daniel Schwartz, co-managing partners of 3G Capital. The conversation delves into 3G Capital’s unique private equity strategies, their landmark acquisition of Burger King, and the subsequent growth and operational excellence that transformed the company into a global powerhouse. This episode offers invaluable insights for institutional investors and anyone interested in the intricacies of successful capital allocation.
1. The Evolution of 3G Capital
00:45 – 07:08
Ted Seides begins by highlighting the impressive track record of 3G Capital, particularly their successful buyout of Burger King in 2010. Alex Baring provides a detailed background of the firm, tracing its origins to its founders—Jorge Paulo Lemann, Carlos Alberto Sicupira, and Marcel Telles—and their strategy of owner-operated investing. He explains, “We started 20 years ago originally as a family office of my co-founders... our intention was to replicate the long-term operating ownership model developed in Brazil” (06:01).
Daniel Schwartz adds that his journey with 3G began post-Harvard Business School, evolving from an analyst role to managing a portfolio company in Brazil. This foundation set the stage for 3G’s later international ventures.
2. The Owner-Operator Playbook
07:14 – 10:11
Alex elaborates on 3G’s owner-operator approach, emphasizing hands-on management and phased value creation:
“We attempt to chart a path of value creation in the business that typically has three phases... Initially, make the business more efficient, then focus on organic growth, and finally pursue inorganic growth opportunities” (07:14).
Daniel complements this by explaining the cultural shift towards ownership and accountability:
“It’s about looking at costs as if you are the owners... blending ownership with management to foster an entrepreneurial spirit” (10:11).
3. Acquisition of Burger King
16:43 – 27:18
The discussion shifts to the strategic acquisition of Burger King. Daniel describes the rigorous selection process, noting that 3G only pursues one major acquisition every few years despite evaluating numerous opportunities:
“We look at a lot of different businesses... but we study a lot more deeply into one target at a time” (22:36).
Alex recounts the challenges faced during the 2010 buyout amid the post-financial crisis environment:
“A $4 billion LBO in 2010 was by far the largest deal after the crisis... It was a long, convoluted, volatile process” (27:22).
The initial assessment identified Burger King as a strong brand with untapped operational efficiencies, despite its stagnating growth and internal lawsuits over franchisee relations.
4. Operational Excellence and Efficiency
29:45 – 34:40
Upon acquiring Burger King, 3G implemented zero-based budgeting to drive cost efficiencies. Alex clarifies the impact of this strategy:
“Zero-based budgeting attempts to look at expenses without abstracting from existing numbers... it’s an intellectually honest view of cost” (08:47).
Daniel shares specific measures taken:
“We compartmentalized costs around the organization and made groups accountable for their spending” (30:07).
These efforts led to significant EBITDA growth and a more streamlined, efficient operation, setting the foundation for aggressive expansion.
5. Strategic Growth and Global Expansion
33:27 – 36:04
With operational efficiencies in place, 3G shifted focus to scaling Burger King globally. Daniel explains the strategy of forming master franchise partnerships in key markets:
“We created partnerships in Brazil, China, France... to leverage local expertise and accelerate growth” (33:27).
Alex emphasizes the importance of a long-term investment horizon:
“The horizon was an important enabler... actions that create value over a longer period” (34:11).
This approach facilitated sustained growth, transforming Burger King into a $32 billion market cap company operating in over 80 countries.
6. Going Public and Capital Returns
40:12 – 42:44
In 2012, 3G decided to take Burger King public through a SPAC deal, returning 130% of their capital to investors:
“We returned 130% of capital... everybody was made whole and we owned 70% of the business” (41:00).
Alex explains that the decision was influenced by strong relationships and favorable valuation terms, rather than an initial intent to go public:
“We were approached by a SPAC... the valuation was compelling enough” (41:54).
7. Subsequent Acquisitions: Tim Hortons, Popeyes, and Firehouse Subs
44:00 – 58:47
Building on the success with Burger King, 3G expanded their portfolio by acquiring Tim Hortons in 2015 and Popeyes in 2016. Alex details the strategic rationale behind these acquisitions:
“Tim Hortons was a franchisor of excellence... we saw synergies and global growth potential” (46:23).
Daniel discusses the seamless integration process and the importance of maintaining distinct brand identities:
“We felt it was very important for the brands to maintain their own distinct brand identity... separate management” (51:51).
The addition of Firehouse Subs in 2021 further diversified the portfolio, emphasizing community engagement and global expansion prospects.
8. Culture and People Management
37:54 – 47:32
A cornerstone of 3G’s success is their focus on building a culture of ownership and accountability. Daniel explains how they incentivize employees:
“We granted sizable stock options to top 150 people... creating cultural alignment” (36:04).
Alex underscores the importance of nurturing talent from within:
“Today, 80% of the leadership team is people grown into the company” (15:09).
Their approach fosters long-term commitment and drives entrepreneurial behavior across all levels of the organization.
9. Performance Metrics and Growth Achievements
58:47 – 64:05
By 2024, Restaurant Brands International (RBI), the parent company of Burger King, Tim Hortons, Popeyes, and Firehouse Subs, boasts over 30,000 restaurants with $50 billion in enterprise value. Daniel shares ambitious growth targets:
“The company hopes to grow to $60 billion in the next five years” (58:36).
Alex highlights the resilience and capital efficiency of their franchise model:
“Franchise businesses are very capital efficient and have a lot of room to grow” (55:39).
10. Lessons Learned and Future Outlook
64:05 – 71:44
Reflecting on their journey, both Alex and Daniel emphasize the critical role of a talented team and selecting inherently strong businesses. Daniel states:
“Having an incredibly talented team running the business is essential” (64:05).
Alex adds the necessity of identifying great businesses with sustainable moats:
“There is no substitute for finding a great business, especially for long-term holding” (65:43).
Looking ahead, they express confidence in continuing to apply their disciplined investment approach to new opportunities, such as their recent partnership with Hunter Douglas:
“We do have the capital to start new ventures every several years as long as we maintain our discipline” (60:34).
11. Personal Insights and Closing Thoughts
67:14 – 71:47
In the final segment, Alex and Daniel share personal reflections and philosophies. Alex emphasizes focusing on impactful activities amidst daily noise:
“Focus your time on the things that make the most difference” (71:18).
Daniel highlights the importance of team and mentorship:
“Don’t be afraid to make a big bet on someone if you really believe in that person” (71:17).
Both articulate a commitment to long-term growth and sustained value creation, embodying the principles that have driven 3G Capital’s remarkable success.
Notable Quotes
-
Alex Baring:
“We attempt to chart a path of value creation in the business that typically has three phases... Initially, make the business more efficient, then focus on organic growth, and finally pursue inorganic growth opportunities.” (07:14) -
Daniel Schwartz:
“It’s about looking at costs as if you are the owners... blending ownership with management to foster an entrepreneurial spirit.” (10:11) -
Alex Baring:
“Zero-based budgeting attempts to look at expenses without abstracting from existing numbers... it’s an intellectually honest view of cost.” (08:47) -
Daniel Schwartz:
“We granted sizable stock options to top 150 people... creating cultural alignment.” (36:04) -
Alex Baring:
“There is no substitute for finding a great business, especially for long-term holding.” (65:43)
Conclusion
Episode 384 of Capital Allocators offers a deep dive into 3G Capital’s strategic approach to private equity, highlighting their disciplined investment philosophy, operational excellence, and unwavering commitment to long-term growth. Through the experiences of Alex Baring and Daniel Schwartz, listeners gain a profound understanding of what it takes to build and sustain one of the most successful private equity firms in the industry.
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