Investment syndicate eyes small business
It's syndication, but not as we know it.
Usually the term is synonymous with commercial property or race horses, where a management company sells a property, or an animal, to a group of investors, who individually could not afford the asset.
But Paul Ayers and Myles Cooper are building a company doing the same with small to medium-sized businesses, though unlike other syndicators, their target investor market isn't the general public.
Through Challenge Partners Limited, the men are building an investor base of people like themselves: owners, directors and executives of small and medium-sized businesses wanting to invest their capital in other similarly-sized ventures.
The men and women they want as investors are people with a minimum $615,000 to invest, people the law considers sophisticated investors, who understand small and medium-sized businesses and want passive investments, though nowhere near as passive as the likes of venture capital and KiwiSaver funds.
Ayers and Cooper, who have worked together for five years in The BMC management consultancy, are rather scornful of share investing and traditional pooled investment models, such as managed funds, and say their investors feel similarly.
Ayers, a former British naval officer and management consultant, said: "With shares, they are not necessarily sure that the companies they are buying are being well run, and [as small shareholders] they are powerless. It is worse with traditional managed funds that own shares."
They are also unimpressed by the returns from shares and property when so much better can be achieved by owning businesses themselves, businesses that can be bought at low multiples to earnings, and that offer the chance of significant growth.
The kinds of businesses Challenge Partners is in the market for have already grown to a self-sustaining level, but fly below the venture capital funds' radars. They also tend to be the kind of businesses that do not tend to be well-served by traditional management consultancies, which Ayers says look down their noses at companies with small payrolls. That means many of those businesses have not received much good external advice.
But to attract the kind of investors they want, Ayers and Cooper felt they had to rework the traditional concepts of syndicates to allow investors the control and power they have been long used to in owning and operating their own businesses.
Unlike an ordinary syndication, investors buying a "seat" (as a shareholding is known) in Challenge Partners make interest-free shareholder loans to Challenge Partners that will be repaid from company earnings.
And they are not expected to sit quietly on those seats.
"The fund managers welcome their wisdom," the crib sheet for prospective investors states.
The investors, Ayers explains, have experience and skills that are of value. Their scrutiny of operations, their market knowledge, their management experience, their networks of potential investors and acquisitions, are of great value.
They'll get a level of financial and strategic reporting not commonly seen in pooled investment vehicles, and the company's structure means they would be relatively easily able to mobilise to remove Ayers and Cooper as directors, if they saw fit.
The common modus operandi for a syndicator is to ensure they are hard to remove, so they can build a portfolio of syndicates from which to earn fees.
But seat-holders at Challenge Partners are a small group, all known to each other, all participating in three meetings a year, though Ayers and Cooper are effectively available to investors whenever those investors want to talk to them.
It's not the kind of relationship investors have with their KiwiSaver fund manager.
Ayers and Cooper also have a lot of skin in the game. They own a 20 per cent stake, with the seat-owners owning the rest. Until the shareholder loans are paid off, that 20 per cent stake is worthless.
Challenge Partners is in its "establishment phase", a period in which it aims to make three purchases. The first was made in November last year with the purchase of the Pukekohe-based Fieldmaster agricultural machinery business specialising in mowers, slashers, grinders and the like.
Six months on Fieldmaster has seen sales rise, product lines increase, and is close to unveiling a technology that it hopes will crack open a global export market.
Two more purchases are planned for this year.
Once those first three purchases are operating satisfactorily, the next five-year period will be about steadily acquiring more businesses to build a more sizeable portfolio.
The next phase will be the exit strategy, though by this time, investors should, if all goes well, have had their shareholder loans paid back and collectively own a group of businesses outright.
- © Fairfax NZ News