Inevitably, it comes down to how we best-helped clients develop conviction for deep value and the runway for an asset to reach great potential. While the questions have changed somewhat since the last downturn—particularly about the pace of change in every market, so have the resources at our disposal. The combination of access to data and improved methodology has helped us gain a better advantage than ever. The data we can gather and synthesize in a deal timeframe now blows away what we could gather just seven years ago.
Where we helped clients succeed in the tough years of 2001–2003 and 2009–2010 was particularly visible in at least four areas: 1) being able to take a long view investing in a company where the investment market is either short sighted or lacks good information 2) investing in debt that was trading down, 3) bankruptcies, (good company with a bad balance sheet?) 4) being ready to move fast on dispositions from companies that had to sell quickly And where we help clients in every cycle is by quickly getting them out of low value situations that inevitably soak time and resources, and helping them deeply understand high value potential deals -that could be home runs.
For the industries under obvious stress, the questions this time include understanding whether the asset in question is a strong business in a weak market or the market has permanently shifted. Will there be a new norm where the current downward pressure will remain for the current core offering? How strong or weak are competitors, and will there be consolidation? Will the end customer be permanently impaired or will they come back with pent-up demand, creating an updraft on new offerings in the future? Are all of the customers impaired, or is there still a good enough volume of healthy business in the sector for the target? If the customer is impaired, are there new markets to reach with the same core offering?
For the industries in which end-customer stress is not confirmed, we get the same questions on due diligence as with under-performing portfolio companies. The question is what’s happening and why? Is it a market issue or share loss, or could management use better information to determine customer and market needs, and go-to-market? It’s a lot of fun helping companies outpace the growth of the market.
The ways to test customer stability—even in a faster changing world—are getting better for those who can bring a lot of skills together at once. Industry expertise alone will get you ideas and a good place to start –with a framework for viewing the market. Data—a lot of data—plus industry expertise, will get you answers that will beat historical expertise alone. There is more data than ever, if you have the variety of skills sets to get it all. And these combined skills are rarely resident in one person, so the team is what matters—and more likely—it’s the team of teams brought together, that can really make it happen.
Four ways to test stability –
My grandfather Sidney used to tell me that you learn more from tough times than easy times and he should have known, building himself up after the family lost its fortune in 1929. What I’ve learned from the last two recessions and working with some of the best investors in the world, is that information is far from perfect, and one can get a huge information advantage, and there is value in learning how to move fast. Whether this market is similar or different for technical reasons, I won’t argue. But there is no doubt about this: In today’s environment, we can get far more information, far faster, than any of the last go-arounds. And I for one, am looking forward to seeing Stax put this advantage forth for our clients.