This episode features Trish and James Higgins of Chenmark Capital, who invest in small businesses for their ongoing cash flow rather than reselling them. They believe the real edge comes from hands-on operational improvements, not financial engineering. They see the market as still friendly with limited competition. Key holdings: Seabreeze (a landscaping/snow removal firm bought at 4x cash flow, with the original owners staying on), a frozen dough maker in Western Canada (high margins, near key suppliers), and Mark's Lawn Care (evaluated but not acquired).
In this episode of Invest Like the Best, Trish and James Higgins of Chenmark Capital discuss the "Permanent Equity" investment style. The core thesis is that returns primarily come from the ongoing cash flows of portfolio companies, rather than from selling businesses. Chenmark focuses on small busi
Trish and James Higgins are co-founders of Chenmark Capital, previously engaged in hedge fund investing at firms such as Protégé Partners and AQR. This episode explores the core of the "Permanent Equity" investment style—returns primarily derive from the ongoing cash flows of portfolio companies, rather than from reselling businesses. The guests' central thesis is that excess returns in small business investing come from the "rolling up sleeves and diving into details" operational premium, not from financial engineering or leverage arbitrage.
Trish Higgins believes that traditional financial training is both useful and useless in small business investing—useful for risk and portfolio management frameworks, but useless for anticipating the "Day One reality."
The founding team of Chenmark came from a hedge fund background and initially entered small business investing with a "top-down" macro perspective. Their core assumption was that small business valuation multiples were far lower than those of large LBOs and public markets (4x cash flow), theoretically implying a 25% annualized return. However, theory quickly collided with reality.
Trish summarizes: "We had to lower our expectations of what 'actually needs to be done.' It wasn't about high-level operational improvements, but going back to basics—do we have a server? Do we have enough email capacity?"
This "Day One gap" is the core barrier to permanent equity investing—it explains why this field offers high returns but limited competition. Falsification condition: If a standardized small business operations SaaS platform or outsourcing service emerges in the future that can significantly reduce the "Day One gap," the excess returns in this field may be compressed.
James Higgins argues that the core of Chenmark's investment approach is to answer a single question: "How durable is this business?" — rather than the traditional PE question of "What can it sell for in three years?"
James uses the "tackle shop" concept to illustrate the moat of small businesses:
Target company characteristics for Chenmark:
James notes that Chenmark's initial assumption (small businesses can only generate returns, not reinvest) is being revised — many "tackle shops" actually have reinvestment opportunities to expand from local to regional, and if executed properly, the return on capital is higher.
Falsification condition: If Chenmark cannot systematically identify and execute regional expansion opportunities post-acquisition, its "operational value-add" hypothesis will be weakened.
Trish Higgins believes the small business acquisition space is still in a "friendly community" phase, with competition far from saturated, but capital inflows are spawning a "mini-PE" branch.
The search fund model (originating from Stanford/Harvard Business Schools) is diverging:
Trish emphasizes that Chenmark's differentiation lies in "being willing to listen" — spending 2–3 hours in a seller's living room discussing their dreams and concerns, rather than just talking about valuation terms. This trust-building is a barrier to scaling, but also a sustainable moat.
Falsification condition: If the number of search funds exceeds 1,000 and capital demands for short-term returns intensify, Chenmark's "patient buyer" positioning may face price competition.
James Higgins explicitly stated that Chenmark’s fees should come almost entirely from performance fees (carry), rather than management fees — this is "ahead of a dying fee model."
Chenmark envisions centralizing specialized functions such as finance, HR, technology, and marketing, then allocating costs proportionally across portfolio companies. This implies:
Trish noted that living in Portland (Maine) rather than New York means Chenmark partners have extremely low personal living costs — "We don’t need high management fees to maintain our quality of life." This enables them to design a more aggressive, carry-focused fee structure.
James believes that fee transparency and interest alignment are key to attracting top operational talent — "Working in small businesses is tough and dirty. If you can say, ‘You help build this company, and you also share in the upside,’ that is hugely attractive to talent."
Falsification Condition: If Chenmark needs large-scale external capital in the future and LPs insist on the traditional "2/20" fee model, its "carry-first" philosophy may face pressure.
| Position | Analyst View | Key Data |
|---|---|---|
| Seabreeze (Landscaping/Snow Removal Company) | Acquired, first transaction | Acquired at 4x cash flow; 1-5 year commercial contracts; owner's brother staying on for transition |
| Frozen Dough Manufacturer (Western Canada) | Acquired, second transaction | Over 15 years of history; profit margins well above industry average; located near largest flour supplier and largest distributor |
| Mark's Lawn Care (Not Acquired) | Reviewed but deal did not close | Located in a different region of the US; transaction was unsuccessful |
1. “You earned the right to take risks” (James Higgins) — Chenmark plans to spend the first 10 years building a solid foundation of small business holdings before considering higher-risk bets (e.g., cyclical or early-stage enterprises). This is a core principle learned from hedge fund mentor Scott Besant.
2. Excess returns in small business investing come from an “operational premium,” not a liquidity premium or leverage arbitrage (Trish Higgins) — When you go down to the small business market, what you get is not a “liquidity discount” but compensation for “rolling up your sleeves and diving into the details.” This premium is labor-intensive and therefore inherently difficult to scale.
3. “If you want to understand how the three financial statements link together, two weeks managing a small business’s cash flow is enough” (James Higgins) — The arrogance of “who looks at the cash flow statement” in traditional finance training is shattered on day one. Running a small business is the best hands-on accounting course.
4. The fishing tackle shop analogy: a moat does not equal growth potential (James Higgins) — A tackle shop at the end of a popular fishing spot can earn excess returns but lacks reinvestment opportunities. Chenmark’s evolution was discovering that these “tackle shops” actually have room to expand from local to regional.
5. “We are willing to spend 2–3 hours sitting in a seller’s living room talking about their dreams” (Trish Higgins) — This is Chenmark’s core differentiation in the competitive landscape. Small business sellers care most about how their brand, employees, and customers will be treated during the transition, not just the valuation. This trust-building cannot be scaled, but it is precisely the sustainable moat.
6. 200,000 target businesses vs. 200 searchers (James Higgins) — Even as search funds grow rapidly, the supply-demand imbalance remains extreme. This space is still a “friendly community” where information sharing is common and competition is far from saturated.
7. “We should be compensated almost entirely through carry” (James Higgins) — Chenmark’s fee philosophy: management fees only cover operating costs, with core incentives coming from performance-based carry. Living in Portland (Maine) with its low cost of living makes this structure feasible.
8. “Dare to be different to do great things” (James Higgins, borrowing Howard Marks’ “dare to be great” concept) — Chenmark’s core values include: daring to be different, believing in one’s own potential, and pursuing the compounding of “small advantages.” This explains why they can accept a choice that outsiders see as crazy, such as “quitting AQR to drive a snowplow.”