RIPE: Realizing Investment Potential through Excellence
Excellence is a foundational aspect of sustained successful endeavors, though you can get away without it during certain, sometimes lengthy but always temporary, stretches of time. In many asset markets over the last 3-4 years, investment manager excellence wasn’t crucial to overall performance. Strong tailwinds filled sails and pushed forward all but the most incompetent. We all, manager and investor alike, welcome those tailwinds, yet it might be a good time to again remember the importance of operational excellence, what investment jargon might call “alpha”.
Excellence is a difference maker. It’s the built-in propulsion system that gets noticed and appreciated mostly when the wind stops. Everyone would say they want or have it, but excellence is not a costless way to produce results. Actually, it can be quite expensive in the short term, and anything that is immediately expensive with a long-term payoff will be tempting to fake. The ingredients of easy to fake and hard to verify makes a recipe with a predictable result.
A challenge with excellence is that it’s not nimble, it doesn’t behave like a switch which can get flipped on and off as needed. You could say that excellence is strategic, but not tactical.
Excellence and lack of it, we’ll call that anti-excellence, are behaviors that carry momentum. They are ways of being that get woven into organizational culture and reproduce themselves-- that is to say that groups of people which think a certain way, behave a certain way as a result. Those resulting behaviors have a magnetic quality, attracting/repelling other people like/unlike themselves. This creates an element of persistence so that opting to pay the cost of excellence only when its benefits would be most visible is not feasible. The weaving takes time and resources so that when you need it it’s either already woven in or it’s not.
It's not always a clear-cut exercise to parse out the excellence factor and judge the precise portion of overall performance owed to it. Much of excellence is a cumulation of small intangible things- triple checking your assumptions, under-promising when you would receive more attention (or money) by over-promising, voluntarily exposing your ideas to challenge and debate so that the best idea (not necessarily your idea) wins, performing a post-mortem on your mistakes so as to not waste a painful learning experience, valuing and treating people so that they are motivated to be bigger contributors and do their best… but some things done excellently are more explicit and easily quantifiable.
Allow me to share some simple case studies from inside Ripe that lead to quantifiable “alpha”.
Installing fully owned, common area laundry operations at a Cincinnati asset that have generated an annual return on incremental cost of 30.3% for each of the last 3 years and which will add another anticipated 2.7% to the total deal 5-year IRR when capitalized at sale
Causing another of our assets in OH which is captive to buying its trash removal service from the City to buy its own dumpsters, eliminating a recurring rental fee and generating an annual return on incremental cost of 21.6% and an additional anticipated 1% to the total deal 5-year IRR when capitalized at sale.
When deciding on increasing advertising spend on a property in Colorado Springs, our Asset Director first invested in a professional refresh of marketing photos and immediately increased leasing prospects by 3.4x, reducing vacancy costs and empowering further rent increase potential.
A long list could be built of items, some unexciting by themselves-- like the research into the optimal high efficiency toilet to be installed, or the conversations about where and how to maximize basis points of interest rate on temporarily idle capex dollars-- but all of which flow out of a culture and accumulate to better performance over time.
I have to admit that RIPE is a backronym. We didn’t name the company originally with the acronym in mind but the meaning found itself over time. Excellence is highly prized in our personal lives and our company culture. It’s noteworthy that we didn’t choose “Perfection” for the “P”. Not only would that be preposterous and a clear violation of the “don’t over-promise philosophy”, but more importantly there’s an important point relevant to discussing excellence. It may seem that excellence is found enroute to perfection, or even if you think that perfection in unattainable, excellence might be seen as a byproduct of striving for it. I don’t think so, for one big reason. The road to excellence is paved with reflected-upon mistakes while perfection doesn’t tolerate mistakes. When’s the last time you learned something very meaningful from a success? Mistakes and learning are inseparable. Learning and excellence are inseparable.
So, coming fully back to where we started, I could have titled this, “Let us make mistakes with your money” but made a different choice, which I think was an excellent one.
