XPO’s Jacobs on his next venture: Wait and see

GREENWICH, Conn. — When Brad Jacobs took the stage Tuesday at the Greenwich Economic Forum, the big question on everybody’s mind was: Just what is Jacobs Private Equity going to do?

That’s the next act for the man who founded XPO Inc. (NYSE: XPO) and who serves as its executive chairman as well as executive chairman of its two relatively recent spinoffs: logistics management company GXO (NYSE: GXO) and 3PL RXO (NYSE: RXO).

Jacobs Private Equity is Jacobs’ next venture. And despite a few mild suggestions from interviewer Brooke Masters of Financial Times to reveal what the next industry is that he’s going to play in, he wasn’t taking the bait.

Afterward, in a brief discussion with FreightWaves, Jacobs confirmed he had avoided answering that question and added that he wasn’t really sure yet where Jacobs Private Equity might focus.

(Jacobs will be the featured keynote speaker at FreightWaves’ F3: Future of Freight Festival in Chattanooga in early November. You can get more information here.)

During his interview at the forum for a high-powered audience filled with money managers, Jacobs, who has launched seven companies including five with a multibillion-dollar valuation, did discuss some of his investing and entrepreneurial philosophies. But few of his comments were specific enough to read between the lines and figure out where Jacobs Private Equity might be headed.

One thing it won’t be: a technology company.

“It’s not going to be a tech company because I don’t understand tech valuations,” Jacobs said. “It’s not my thing. I look at multiples or cash flows.” What Jacobs said he doesn’t look at are multiples of revenues tied to “future bets.”

“I don’t like to do things that have a big range of potential outcomes,” Jacobs said. “I look for things that I totally understand.” And that ultimately means researching “the cash flow an investment is going to generate and the cash we invest in the business right now.”

That doesn’t mean technology won’t be core to the next Jacobs business; it just means it won’t be a tech-specific company.

In his past ventures, Jacobs said, he would tell investors, “Don’t bug me about earnings for two years.” The reason for that was, “I’m going to spend a fortune on technology and I’m going to create a huge infrastructure, so that when I do all these acquisitions and bring in all this revenue, I don’t blow up. I have a big competitive advantage by having a backbone, a nervous system that can integrate and optimize quickly without bugs.”

He used 3PL RXO as an example. When it was launched as the truck brokerage arm of XPO, Jacobs said “nothing, nothing at all was done electronically.” That figure at RXO is now 96%, he said.

Another likely feature of Jacobs Private Equity: It will eventually be publicly traded. “I like the pressure of public markets,” Jacos said. “You get all this free advice from your critics. All day long people are throwing stones at you and telling you how stupid you are and how wrong you are and what mistakes you’re making.” And though it might not be pleasant, Jacobs said of the cacophony, “I listen to all that stuff. I don’t have to pay tens of millions of dollars to management consultants.”

On a more financial level, Jacobs said he prefers the access and cost of capital that comes with being a publicly traded company. “One of the main ways you create alpha is accessing capital and deploying that on creative terms. Public markets  have the cheapest cost of capital so I’ll definitely be in the public market.”

And in the one part of his address that might be considered a “tease,” Jacobs added about the timing of a venture into public financial markets: “Sooner than you think.”

He quipped, “We’re hiring!” when asked about staff, but he also said it outside the main presentation room; he clearly meant it. He talked about his philosophy on executive compensation.

“You should always overpay,” Jacobs said. “You should find extraordinary talent, off the charts talent and you should pay them really well.”

He boasted that there are likely more than 1,000 people at his various companies who became millionaires through compensation tied at least in part to the performance of places like XPO, “people who have made tens of millions and there is one person who made over $100 million.”

That happens because “their compensation was tied to results of [key performance indicators] and they overachieved, so they deserved that money,” Jacobs said. Sharing the wealth “should be spread out over large numbers of people.”

Asked about the types of companies he prefers to acquire, Jacobs noted that at XPO, management looked at about 2,000 potential acquisitions. “We bought 18,” he said. “So we’re very selective.”

Among the considerations Jacobs said are part of his acquisition strategy: “Is there a compelling strategic rationale for it? Is there something that brings to the table what we don’t have? Is there some fantastic synergy to it?”

As far as technology, Jacobs said he will look at whether a potential acquisition has “some tech angle to it, although usually our technology is better than the other guys’ technology.”

After considering that as well as the personnel at the subject of the potential acquisition, the question needs to be answered: “It is a price that works?” Jacobs said. “Because if you forget the price, your balance sheet doesn’t forget the price. Your balance sheet remembers the price forever.”

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