Written by Rami Cassis
When I enter into a transaction with a company, I do so in the belief that I can work with the management team to develop and grow the business. It isn’t for flip and it isn’t for a trade – and it isn’t to put a whole raft of people out of work in order to sell it on a few months down the road. I take an entrepreneurial approach when I invest. I try to find the right balance of oversight that is neither too onerous nor completely hands off. It is important to form lasting partnerships with management teams that share the same entrepreneurial ambition.
So, I go in with a concerted and detailed view with how the business works, how it goes to market, the type of clients it has, and whether we are able to bring in additional revenue in light of my own existing contacts or other networks.
Finding good opportunities is really a mix of science, art, intuition and luck. But it is also very sector specific and the greater the specialism (of the acquirer), the lower the risk of failure, which is why I tend to stick to my core areas of enterprise software and business services – although I am growing increasingly courageous in venturing outside those areas.
Once I have made a transaction, I tend to be very operationally active for the first two to three months. During that time, any restructuring, cost reductions, client negotiations, change of direction or strategy will take place. But putting aside those few early months where I am very active, I work with CEOs and management teams who I trust and have confidence in – and then I leave them to get on with it. My role is very much to support the management team to achieve the company’s objective.
It is both presumptuous and impossible to sum up in a few hundred words about what finding the right opportunity looks like, but here are some guiding principles that over my career, have worked well for me.
Due diligence will be used to develop a clear plan – especially if the company is losing money. Most of my deals are not distressed, so there is generally not a huge level of urgency, but I still proceed with haste. The plan will, typically, include a review of products and services, whether organisational changes or investment are required, a contract and pricing review, and whether expansion or rationalisation is required.
Good private equity investment has nothing to do with what might be popular. Indeed, my preferred approach is generally to look for opportunities in markets that are out of favour, usually for temporary reasons. For example, if one were to look at which sectors to invest in now, I would go completely counter cyclical. If there was ever a time when the automotive sector was going to be at its lowest – it’s now.
With Europe becoming more socialist, at least in the eyes of many private equity investors, Brexit looks like an increasingly favourable outcome for the UK. It could, fiscally (and perhaps socially) develop a European quality of life with a US approach to fiscal policy. There are admittedly unknowns on how the Brexit negotiations will pan out, but in the current political climate and, with a general desire to agree terms, now feels like a good time to invest in UK deals. No one should be surprised if we also see a strengthening pound, so the best deals could be in the short term for foreign investors.
Gauge price expectations as early as possible. Assuming I decide to proceed, I set a clear price expectation early on before investing a lot of time and money. If price expectations are unrealistic then don’t waste your time.
You can make it as process driven as you wish but you also need to have reasonable judgement and self-awareness. If you have to cut costs, there are false economies like pastries and coffee subscriptions which will only serve to demoralise everyone. You also need to be self-aware and understand the people you’re talking to, what works for them and what doesn’t. And you unfortunately need to be unemotional about what’s required.
Once things are on track (which specifically means revenue, revenue visibility and cash) I will then step back and maintain regular oversight a couple of times a month. It’s important to step leave the management team to get on with it once you are satisfied and confident that matters are on track. There is nothing worse than a constantly meddling chairman or major shareholder, which only achieves to undermine the management team.