Business

Difficult Deals of Real Merit ^®

What makes Advantage Capital different is that the firm will consider investments which do not appeal to other private equity investors. Advantage Capital does this to enable it to acquire high quality businesses, well, on behalf of its investors. Normally the other private equity investors are right to be wary of the deal but, very occasionally, they are wrong and they miss a real opportunity. Advantage Capital calls these situations "difficult deals of real merit ^®", and they are the only deals Advantage does.

Real merit means:

• A strong management team, with a clear CEO and separate finance director. The CEO must have a demonstrable track record of success. He/she must be a proven moneymaker.


• The target business must have clear and credible potential to grow its bottom line. If it is a turnround situation then the management team's turnround plans must be clear and measurable.


• A vendor who is totally committed to selling his business, come what may.

By difficult deal Advantage means one which is difficult to finance. There can be many reasons for this but a key characteristic of an Advantage style difficult deal is that almost always there is more than one apparent difficulty deterring other investors. Some example difficulties are:

• Unloved sector
  
  The target company may be operating in a market sector which currently suffers from generalised negative sector prejudice. It can be very difficult to raise equity capital for such a deal as the negative sentiment of the herd is so strong.

• Lack of verifiable historic results
  
  From time to time large groups of companies will move businesses around the group, creating new business divisions with no real divisional historic results. When these divisions are put up for sale a transaction can be difficult to finance due to the paucity of verifiable historic financial data.

• Tight timescale
  
  On occasions there can be very little time in which to do a deal. The vendor group may be approaching its year-end and needs to divest a subsidiary quickly before then. Deals done out of administration are also time critical. Transactions in these circumstances can be extremely difficult for private equity firms and their investment committees to become comfortable with.

• Incomplete management team
  
  Occasionally a good business which is up for sale has an incomplete or weak management. For the right opportunity, Advantage Capital is prepared to acquire the business and build the top team subsequently.

• Under-performance
  
  Financing an under-performing business is difficult, as it requires a large leap of faith on the part of the equity investor.

• Apparently knackered assets
  
  Sometimes a business becomes an orphan. It sits outside the core area of focus of the group and, consequently, is starved of resources and attention. The acquisition of these types of businesses can be difficult to finance, as they can appear to be uninspiring investments. But quite often, they can be very attractive businesses hiding in the shade.

These are just some examples. There are many other situations where it is difficult to raise private equity for an intrinsically good business.

In such situations, provided the deal is of real merit, Advantage Capital has the appetite to look at them and is the firm to approach for a rapid and intelligent response. Crucially, the whole Advantage Capital investment committee is at the coal face of every deal, in the form of Martin Bodenham and Trevor Jones. This means that the most experienced private equity practitioners have first hand access to all the relevant data when reaching the all important decision of whether to invest or not. It also means Advantage Capital can move very quickly, if it is necessary.

The quote below contrasts Advantage Capital’s contrarian, low volume, highly selective approach with the rather more conventional and opposing herd investment approach:

"Most managers have very little incentive to make the intelligent-but-with-some-chance-of-looking-like-an-idiot decision. Their personal gain/loss ratio is all too obvious…

Failing conventionally is the route to go; as a group, lemmings may have a rotten image, but no individual lemming has ever received bad press."

Warren Buffet