I started negotiating the deal, which was complex beyond belief. I was creating structures and terms that had never been done before. I went to Jay and took him step-by-step through this incredibly complicated transaction. And damn it if he didn’t just look at me and say, “But, Sam, isn’t the real key to this whole thing just to rent the office space?” And sure enough, that’s what the whole transaction was predicated on. Jay’s level of intellectual rigor really appealed to me. And I immediately latched on to the understanding that I could cut right to the heart of something complex if I broke the problem into pieces. It was a matter of organizing my thinking. A discipline.
Some emerging markets will check all the boxes — strong population growth, growing middle class, verge of investment grade, great leadership, and hunger for capital — and then be missing the one ingredient that enables you to monetize your investment: scale. Without scale, you don’t have liquidity. You have no optionality. In essence, you’re stuck. Africa is a great example. I think many countries, such as Botswana, have potential, but the upper and middle classes are too small for me to get involved. Chile is another example. It has the institutions and leadership, but only 17 million people — no scale.
Timing and execution made all the difference. We earned most of our money on the first one hundred stations we bought — numbers 20 to 118. Why? Because after that the rest of the industry caught on, competition for stations increased, and prices went up. However, we continued to acquire even then, albeit at a slower rate, because of the economies of eliminating redundancies within a large portfolio in geographic concentrations and because our average price per station remained so low. But it was the first-mover advantage that made Jacor a lead dog — and a home run. Within three years, we went from 20 stations to 243.
I figured the deal was as good as done, and I returned to Ann Arbor and identified five houses that were all in the same price range for what I was going to pay for the land, about $32,000 to $34,000. These five houses were beautiful — every one of them was three times better than what Mrs. D lived in. One day I drove her around to see them. She walked through each one but never said a word. I couldn’t get any response at all. At the end of the day, I drove her back home. As we neared the corner by her house, we saw a man swaying and holding onto a lamppost. I pointed him out, and Mrs. D said, “Oh, that’s my brother. He lives with us and visits the bars every night. That’s why I don’t like any of the houses we went to see — because he can’t drive; he has to be within at least eight blocks of the downtown bars because he goes there every night, gets drunk, and then walks home.” That’s what we call the major unknown factor. “No problem,” I said to Mrs. D, for the first of many times.
Opportunity is very often embedded in the imbalance between supply and demand. It could be rising demand against flat or diminishing supply, or flat demand against shrinking supply. When there’s an imbalance, I look at where the two lines will intersect and then determine whether it is cheaper to buy or to build. Usually the answer is in acquisition, which eliminates a lot of the risk inherent in development. I like to invest below replacement cost, thereby creating a competitive advantage.
From the very first deals we did at EGI, I have spread the opportunity — both the risks and the rewards. We co-invest, side by side, and I often provide a “promote” to my people, allowing them to share in profits on a portion of my invested capital. That means I put my money behind theirs (say $150,000 of my money to $30,000 of their money), and if our investments or funds achieve their minimum target metrics, my people get returns based on the aggregate ($180,000). In effect, we’re all invested in each other’s success. It’s not only about motivation; it’s a mandate to collaborate. Deal opportunities and challenges are discussed, questioned, and probed by the team at large because everybody has a piece of everybody else’s deal.
My takeaway was a whole new respect for simplicity. Development required multiple steps, and every step meant one more chance for something to go wrong. When Jay and I liquidated the Tahoe investment years later, I noticed that we had forgotten something critical, so I called him. “Listen,” I said, “the deal is closed, but I just realized we never drew up a formal partnership agreement between the two of us. If the IRS comes and reviews this thing, we’re going to look like idiots if we don’t have documents.” “Yeah, yeah,” he said, not really interested. That was indicative of Jay. Trust was one of his abiding principles. He’d always bet a lot more on the person than on the deal.