Joshua Kennon

Aaron and I have finally settled on a course of action on where, and how, we are going to develop the companies over the next few years (which I am calling “Kennon, Green & Company” for short hand when referring to everything – all of the assets).  This past twelve months, we worked to take advantage of the recession and went from a single business to about six, selling everything from cashmere scarves and diamond tipped fountain pens to baby gifts and sporting goods.  I used every penny I could get my hands on to buy stocks as they crashed, real estate, and even some gold and silver reserves.  Frankly, I’m exhausted.  Even now, it’s 5:05 a.m. and I haven’t yet gone to bed.

We figured, though, that given the increased calls from family and friends to invest alongside us, here’s what we’re going to do:

1.) In three years or four years, we are going to contribute most of our shares of the profitable companies we’ve built, along with the stocks, bonds, mutual funds, real estate, gold, silver, and other assets we’ve acquired, into a newly formed limited partnership.  Our contribution should be at minimum several million dollars; I hope it’s much more.  We will not perform the valuation ourselves.  Instead, we will hire a highly respected wealth management company such as U.S. Trust, Northern Trust, J.P. Morgan, BKD, LLP, or a firm of comparable caliber to calculate all of the necessary figures.  That way, there can be no conflict on interest.

2.) We will then open up the partnership to qualified investors, but limit it to close friends and family.  I’m an investor, not a lawyer, so we’ll use the folks at Polsinelli Shughart, who have handled all of our corporate work in the past, from establishing the companies to handling the trademark registrations for our intellectual property.  As one of the top business law firms in the country, they know what the securities rules are and how to implement them.

3.) Limited partners will be able to invest alongside us in the new partnership, owning the exact same assets we do.  The model will be pay-for-performance.  As the general partner, I will only get paid when the partnership makes money.  The limited partners will receive 4% interest on their capital account plus the first 70% of the profits based upon their proportional interest, with 30% going to me as the general partner.  Any losses will be counted against future earnings so I can’t earn a performance fee until the losses have been made up entirely. All of my performance earnings net of taxes must be reinvested in the partnership.  This is for several reasons:

• Partners could earn 4% by parking their money in the bank.  I shouldn’t get paid for doing nothing.  Hence, a 4% hurdle rate.
• If we lose money one year and make it back the next, I shouldn’t get paid anything based on the “positive” performance of the second year.  That would be idiotic.
• By investing a substantial portion of my net worth in the partnership, the limited partners will know that they are experiencing the same relative returns as I.  They will own the same assets I do.  By definition, making myself wealthier and showing up to the office every day to find great places to put our money to work will benefit them.  It’s the perfect alignment of interest.
• There’s no set percentage management fee based on total assets.  I only make money if the partnership makes money.  If I make us substantially richer, I’ll make a hell of a lot of money.  If I screw up, I don’t get paid plus I experience the proportional loss because a lot of my own money is invested in the partnership.  That seems fair to me.  If a waiter doesn’t provide good service during dinner, he doesn’t get paid.  Why should a money manager be any different?
• By requiring me to reinvest all of my performance earnings net of taxes in the partnership, there is no “cash out” event for me until the partnership dissolves.  I think an executive should be forced to have his net worth invested in the businesses he runs.  That just seems rational and fair.
• All of the transactions, including global custody, prime brokerage, et cetera, will be handled by a firm such as J.P. Morgan or Northern Trust so that every penny is tracked and held by a third party entity.  Every limited partner will have the right to inspect the books with a qualified professional accountant present, at their own expense.  There will also be several random audits throughout the year.  Although this will cost the partnership many thousands of dollars, the past twenty years have seen so much fraud that I would rather write the check and focus on finding new investment opportunities than worrying about if someone questions my ethics.  As Buffett says, quoting Reagan: Trust, but verify.  The partners should never have to trust me at my word.  Everything should be verifiable by third parties.
• My family and I will most likely buy a second home in Houston, Texas and make it our primary residence to take advantage of the lack of state income tax.  On this point I’m not entirely sure, but the numbers will be large enough at some point that the tax savings will be enormous.  Florida is also an option, but I’m not familiar enough with the state to know if I’d enjoy living there.

In poker parlance, this means that members of the Kennon and Green families will go “all in” and the new entity will be the primary investment vehicle through which we grow and compound our wealth for a very long time.

For now, the only thing I have left to decide is to set the minimum investment.  I’m tempted to set it relatively high; say $150,000 to $500,000 simply so I don’t have to deal with a lot of partners.  I’d rather have a few successful people that understand our value investing philosophy and focus on risk-adjusted returns, even if it means we take a little longer to make money.  The problem is, I’d say 65% of my friends from college have at least $25,000 saved in their retirement and savings accounts, which would make that the natural threshold because they are going to be ticked if they aren’t permitted to join.  I suppose this is where the lawyers, accountants, and partnership service firms come into the equation.  They’ll know best and there judgment is valuable.