Alex Behring and Daniel Schwartz - Inside 3G Capital - [Invest Like the Best, EP.458]

At a Glance

This episode features guests Alex Behring and Daniel Schwartz, Co-Managing Partners of 3G Capital. The podcast delves into 3G Capital's unique investment strategy and operating model, including its "one investment per fund" concentrated approach, its talent development, and its deep involvement in business operations.

Daniel Schwartz believes that 3G Capital's success does not stem from cost control measures like zero-based budgeting, but rather from its emphasis on business growth and an ownership mindset, as well as its commitment to excellent business quality.

"One Investment Per Fund" Model: Scarcity and Risk Control

Alex Behring believes that truly exceptional companies and excellent CEOs are extremely rare, which is why 3G Capital adopts a "one investment per fund" strategy, concentrating all its time and best talent on a single opportunity. This model originated from Jorge Paulo Lemann's early practices in Brazil and was formally established in New York in 2004. The core of this strategy lies in:

• Scarcity Recognition: Truly great companies and CEOs are extremely few, making it difficult to find ten.
• Resource Concentration: Investing all of the firm's own capital, partners' funds, and top talent and time into a single investment.
• Rigorous Investment Process: This model creates healthy pressure, prompting the team to conduct extremely rigorous analysis of potential downside risks, ensuring capital preservation and modest returns. Alex Behring points out that if they are not satisfied with the potential downside, they would rather not proceed with the transaction.
• Risk Pricing Challenge: Unlike traditional diversified portfolios, this concentrated model makes risk pricing more difficult, thus requiring higher standards for evaluating business quality.
• Personal Reputation Investment: Partners stake their personal professional reputations on these investments, compelling them to hold themselves to the highest standards.

Definition of Excellent Companies: Customer Relationships, Simplicity, and Anti-Disruptability

Alex Behring and Daniel Schwartz emphasize that in today's rapidly evolving technological world, excellent companies must have a relationship with end customers and possess the ability to resist disruption.

• Customer Relationship Ownership: Daniel Schwartz observes that businesses with direct relationships with end customers (such as Burger King, Tim Hortons, or Hunter Douglas) are less likely to be replaced by new disruptive forces. He cites the example of private labels (such as Kirkland) from large retailers (like Walmart, Amazon, Costco) to illustrate that if retailers own the customer relationship, they can disintermediate suppliers.
• Business Simplicity: Alex Behring frankly states that 3G Capital is not adept at managing complex businesses requiring high IQ, but rather focuses on businesses that are "good, relatively easy to understand, and possess strong moats." For example, businesses like Burger King (burgers), Skechers (shoes), and Hunter Douglas (window coverings) often require only one word to describe their products.
• Brand Franchising: They favor businesses with strong brand franchises, which are typically long-standing and can grow through ownership and improvement.
• Anti-Disruptability: For a business like Hunter Douglas, its products (window coverings) are customized, complex to install, and its total addressable market (TAM of approximately $70 billion) is large but not enormous, making it difficult to be easily disrupted by "two young people in a Silicon Valley garage." Furthermore, the demand for energy efficiency driven by climate change provides a positive impetus for this business.

3G Capital's Unique Structure and Long-Termism

Alex Behring elaborates on the significant differences between 3G Capital and traditional private equity firms, including a high proportion of internal capital, a unique limited partner structure, and a long-term investment holding strategy.

• High Proportion of Internal Capital: 3G Capital's founders and partners are the largest investors in each deal, aligning their interests highly with those of the limited partners (LPs).
• Unique LP Composition: Beyond internal capital, its LPs primarily consist of global high-net-worth individuals and families, as well as some sovereign wealth funds, rather than traditional institutional investors.
• Long-Term Holding Strategy: 3G Capital is committed to long-term investing; for example, its investment in Restaurant Brands International (RBI) has exceeded 15 years.
• Operator Background: Alex Behring was previously the CEO of Latin America's largest railway and logistics company, and Daniel Schwartz was the CFO and CEO of Burger King and RBI. This operator experience enables them to better evaluate and improve businesses, and to deploy internal partners (also with CEO/CFO experience) to deeply engage in the operations of portfolio companies.
• Patience and Long-Term Relationships: Taking Hunter Douglas as an example, Alex Behring's relationship with its founder Ralph spanned 15 years, and Daniel Schwartz's relationship with his son David began in 2007. This long-term relationship building ultimately led to the 2021 transaction, demonstrating 3G Capital's patience in waiting for the right opportunity.

Talent and Culture: Early Empowerment, Ownership, and Urgency

Daniel Schwartz emphasizes that the core of 3G Capital lies in its unique culture, which cultivates and attracts top talent through early empowerment, ownership incentives, and a high sense of urgency.

• Talent First: 3G Capital strives to be the preferred destination for top talent, offering young leaders earlier responsibility and ownership opportunities than anywhere else.
• 'Talent Over Tenure' Meritocracy: The company culture promotes pure meritocracy, valuing talent over tenure. Alex Behring was appointed CEO of Brazil's largest railway company at 30, Daniel Schwartz became CEO of Burger King at 32, and Josh Kobza became CFO at 26.
• Success Assurance Mechanism: Early empowerment is not blind risk-taking, but rather maximizes young leaders' chances of success through guidance from senior partners (e.g., Alex Behring serving as Executive Chairman for Daniel Schwartz at Burger King) and by bringing in experienced team members from other successful ventures.
• Ownership Mindset: Daniel Schwartz believes that business leaders must act like owners, aligning personal interests with company interests, and managing company expenses as if they were their own money.
• 'Concentrate on 'What,' Decentralize 'How'': Alex Behring explains that leadership should define the company's strategic goals (what to do), then grant teams full freedom to decide how to achieve those goals (how to do it), delegating decision-making to those closest to the problem.
• Urgency and Execution: Daniel Schwartz emphasizes that companies need to hire people who "wanted things done yesterday," and leaders must continuously convey this sense of urgency, because "5% of a company is strategy, 95% is execution."
• Transparency and Incentive Alignment: By setting ambitious goals, tracking progress with high transparency, and ensuring that employees at all levels are tied to company performance through stock or options, incentive alignment is achieved. Daniel Schwartz notes that in terms of compensation, 3G Capital adheres to meritocracy, allocating equity based on contribution rather than tenure, which, while perhaps not considered "fair" by everyone, attracts the best talent.

Case Studies: Burger King, Kraft Heinz, and Skechers

Burger King: Brand Value Reassessment and Operational Optimization

Daniel Schwartz believes that Burger King, at the time of its acquisition, presented a unique "brand far greater than business" opportunity, achieving significant growth through a series of operational optimizations and the deepening of its franchising model.

• Undervalued Brand Equity: At the time of its acquisition in 2010, Burger King's brand was widely recognized globally, but its store count in markets like Brazil was very low, and its business scale was far below its brand influence. At that time, McDonald's had a market capitalization of $80-90 billion, Yum! Brands $30 billion, while Burger King required only $1 billion in equity capital.
• Key Problems and Solutions:

1. Fragmented Operating Model: The company operated too many corporate-owned restaurants, lacking focus on franchisees. The solution was to simplify the business and focus on being an excellent franchisor.

2. Lack of Suitable Partners: There was a lack of strong partners in high-potential markets such as Brazil, China, and France. The solution was to introduce a "Master Franchise Joint Venture" model, partnering with well-capitalized local entrepreneurs. For example, in France, partnering with Olivier Bertrand grew the business from zero to €2 billion in sales.

3. Strained Franchisee Relationships: In the U.S. market, promotional activities (such as the $1 Double Cheeseburger) led to sales growth, but franchisees incurred losses and sued the company. The solution was to repair relationships with franchisees and ensure their long-term profitability.

• Advantages of the Franchising Model: Alex Behring emphasizes that if a brand is strong and meaningful enough, the franchising model allows entrepreneurs worldwide to invest capital and effort to grow the business, and jointly fund brand marketing, achieving efficient global growth. This is a high free cash flow, royalty-based model.
• Lessons from Patrick Doyle: Daniel Schwartz mentions that Patrick Doyle of Domino's Pizza transformed it into a technology company, capturing significant market share from competitors, demonstrating that even traditional restaurant businesses can achieve huge leaps through technology.

Kraft Heinz: Lessons on Business Quality and Concentration Risk

Alex Behring reflects on the Kraft Heinz investment, believing its main lessons lie in underestimating business quality and overlooking customer concentration risk.

• Investment Return Disparity: The investment in Heinz yielded nearly three times returns, but the investment in Kraft performed poorly.
• Business Quality Issues: A significant portion of Kraft's portfolio consisted of relatively commoditized products, overly exposed to the trend of private labels and large retailers capturing market share. Alex Behring admits that they failed to fully understand this, and past financial data did not fully reveal it.
• Customer Concentration Risk: Daniel Schwartz adds that any U.S. consumer packaged goods (CPG) company might face the risk of one-third or even more of its business relying on a few large retailers like Walmart or Costco. This customer concentration increases the likelihood of disintermediation and makes risk pricing more difficult.
• Execution Issues Secondary: Alex Behring believes that while there were some execution issues, these were not the decisive factors for the poor investment performance; the main problem was an insufficient assessment of business quality.

Skechers: Growth, Distribution, and Founder Leadership

Alex Behring and Daniel Schwartz believe that Skechers is a fast-growing enterprise driven by excellent products, strong distribution, and an experienced founder team.

• Market Position: Skechers is the world's third-largest athletic footwear company (after Nike and Adidas), with annual sales of $9 billion, compared to Adidas' $14 billion.
• Industry Trends: Benefiting from casualization and athleisure trends, the athletic footwear market grows 7% annually, is a multi-hundred-billion-dollar category, and has few private labels, dominated primarily by a few large companies.
• Growth Drivers:

1. Product Development: Excellent and affordably priced product development that meets consumer needs.

2. Distribution Network: Possesses over 5,000 owned stores and websites, not relying on large retailers, achieving strong distribution capabilities.

3. Management Team: An experienced team led by founders Robert and Michael, excelling in product, store development, and supply chain.

• Investment Rationale: 3G Capital has long tracked Skechers, impressed by its double-digit growth and high customer loyalty. They believe Skechers' growth is based on product and distribution diversification, rather than reliance on a single blockbuster product.
• Attractiveness: The Skechers team chose 3G Capital because 3G Capital possesses decades of operational experience and does not favor short-term monetization, but rather seeks long-term partnerships, which aligns with the Skechers founders' considerations for the company's future and legacy.

Zero-Based Budgeting: An Efficiency Tool, Not the Core of Success

Alex Behring believes that Zero-Based Budgeting (ZBB) is an effective tool for understanding and improving business efficiency, but its role in 3G Capital's success is often overstated by outsiders.

• Learning and Efficiency: ZBB forces teams to think about every business expense from scratch, helping to deeply understand the business and improve efficiency, thereby freeing up capital for business growth.
• Role Overstated: Alex Behring believes that if one analyzes RBI's investment returns, most of the growth came from the expansion of store count (from 12,000 to 30,000), rather than cost savings from ZBB.
• Manifestation of Ownership Mindset: Daniel Schwartz adds that ZBB is a manifestation of the ownership mindset in cost management, but this mindset also applies to revenue and growth. It can help companies achieve significant value on the cost side, but it cannot turn a bad business into a good one.
• Limitations: ZBB is suitable for cost control but cannot compensate for deficiencies in business quality. It is merely a way, under an ownership mindset, to link goals with compensation and results.

Current Market and Misconceptions About 3G Capital

Alex Behring and Daniel Schwartz believe that current capital market valuations are elevated, the investment environment is challenging, and there are also some external misconceptions about 3G Capital.

• Market Environment: Alex Behring observes that current market valuations are generally high, capital is abundant, and while debt is no longer as cheap, it remains attractive, making the investment environment more challenging than ever.
• Investment Difficulty: Daniel Schwartz emphasizes that regardless of the market environment, acquiring quality businesses at a reasonable price is always difficult.
• Role of Technology: 3G Capital welcomes technology to improve businesses (e.g., Domino's Pizza becoming a tech company, Burger King experimenting with AI voice ordering), but it will not invest in businesses that could be completely disrupted by new technologies. They favor businesses with "hard physical components," such as shoes and burgers, because they are harder to disrupt by "bits."
• External Misconceptions:

1. Focus on Business Quality: Outsiders might believe 3G Capital is overly focused on cost-cutting, but in reality, most of their investment discussions are spent evaluating business quality and growth potential.

2. Lean Team: Given the scale and global footprint of its portfolio, 3G Capital's internal team is exceptionally lean.

3. Humility and Intellectual Curiosity: Despite their significant success, 3G Capital's founders and partners demonstrate a high degree of humility and intellectual curiosity, willing to ask anyone questions.

• Future Vision: Alex Behring hopes that 3G Capital can become the ideal long-term home for founder-led and family-controlled businesses, as these companies typically possess the advantage of long-term decision-making and their owners are passionate about the business.

Mentioned Targets

Target	Guest's Stance	Key Data
Burger King	Positive	Acquired in 2010 with $1 billion in equity capital; grew from 12,000 stores to 30,000 stores; French market grew from zero to €2 billion in sales.
Tim Hortons	Positive	Considered a high-quality business by 3G Capital, became part of RBI after merging with Burger King.
Hunter Douglas	Positive	Window coverings market leader; global TAM approximately $70 billion; possesses scaled manufacturing and distribution capabilities; high degree of product customization; benefits from energy efficiency and natural lighting trends; consolidates the industry through acquisitions.
Skechers	Positive	World's third-largest athletic footwear company; annual sales of $9 billion; 99% of business is footwear; two-thirds of business is overseas; double-digit sales and volume growth for many years; customer loyalty second only to Nike; strong product development and owned distribution network (5000+ stores).
Kraft Heinz	Risk Warning/Neutral	Heinz investment yielded nearly three times returns; Kraft investment performed poorly; main lesson is that some businesses are commoditized, susceptible to private labels and disintermediation by large retailers; customer concentration risk exists.
Restaurant Brands International (RBI)	Positive	Parent company of Burger King, Tim Hortons, Popeyes, Firehouse Subs; investment held for over 15 years; store count grew from 12,000 to 30,000.
Popeyes	Positive	RBI brand.
Firehouse Subs	Positive	RBI brand.
Domino's Pizza	Positive	Previously led by Patrick Doyle, transformed into a technology company through technology, capturing significant market share from competitors.

Key Takeaways

1. Alex Behring believes that truly great companies and excellent CEOs are extremely rare, which is why 3G Capital adopts a "one investment per fund" strategy, concentrating all its time and best talent on a single opportunity. While this concentrated model increases the difficulty of risk pricing, it also compels the team to conduct extremely rigorous analysis of potential downside risks, ensuring capital preservation.

2. Daniel Schwartz emphasizes that in today's rapidly evolving technological world, excellent companies must have a relationship with end customers and possess the ability to resist disruption. He points out that businesses with customer relationships (such as Burger King, Tim Hortons) are less susceptible to disintermediation, whereas highly commoditized businesses (such as some of Kraft's products) are vulnerable to private labels and large retailers.

3. Alex Behring and Daniel Schwartz elaborate on 3G Capital's unique "talent over tenure" meritocratic culture, which cultivates and attracts top talent through early empowerment, ownership incentives, and a high sense of urgency. Daniel Schwartz mentions that company leaders should "concentrate on 'what,' decentralize 'how'," defining strategic goals, then granting teams full freedom to decide how to achieve those goals, delegating decision-making to those closest to the problem.

4. Alex Behring reflects on the Kraft Heinz investment, believing its main lessons lie in underestimating business quality and overlooking customer concentration risk. He points out that even if a business has strong historical financial performance, one must be wary of whether its products are commoditized and whether it relies excessively on a few large customers, as these factors can make the business susceptible to disintermediation.

5. Daniel Schwartz believes that Zero-Based Budgeting (ZBB) is an effective tool for understanding and improving business efficiency, but its role in 3G Capital's success is often overstated by outsiders, with true value creation primarily stemming from business growth. He emphasizes that ZBB is a manifestation of the ownership mindset in cost management, but this mindset also applies to revenue and growth, and it cannot turn a bad business into a good one.

6. Alex Behring emphasizes that 3G Capital strives to be the ideal long-term home for founder-led and family-controlled businesses, as these companies typically possess the advantage of long-term decision-making and their owners are passionate about the business. He points out that this long-termism is reflected in talent development and strategic investments, such as building the Burger King business from scratch in the French market, which requires years or even decades of investment to see returns.

7. Daniel Schwartz believes that regardless of the market environment, acquiring quality businesses at a reasonable price is always difficult. He points out that while current market valuations are elevated, it has never been "easy" in the past either, which requires investment firms to maintain discipline and not compromise on business quality.