Twenty four years ago I was a young banker watching young Warwick Fairfax privatise the venerable media company (Fairfax Media) which bore his name. He did it armed with a recently acquired Harvard MBA and $1.7bn of bank funding. Not a bad effort for a 26 year old guy. Unfortunately the high gearing and 20% interest rates proved too much and the company was placed into receivership three years later.
This was a typical 1980s style leveraged buyout – too much debt; a half-baked plan and plenty of “advisors” around the table getting paid big fees to make it happen. It was always going to end badly.
Since then I have invested directly in several businesses some of which some have been strong performers and others that haven’t. Reflecting on these successes and failures I believe there are three ingredients that need to be present in any business to make it an attractive investment proposition for me.
I call these the three “Ps”:
- People. There needs to be a good team in place and an exceptional leader. People I can trust and count on. People with a plan for the future and the capability to execute it. Determined people who will treat company money like their own and will make hard decisions when they need to. Doers, not talkers.
- Product. The product must solve a real market problem at a fair price. The niche must be strong and growing and the business must have a point of difference that protects it from its competition. I need to be able to understand this quickly. Businesses with high (unsustainable) margins or conversely commodity-type products sold at cheap prices are not attractive to me. They’re just too vulnerable. The same applies to companies operating in sectors where very large companies are entrenched.
- Place. I invest close to home where I understand the local culture and how business is done. I don’t invest off-shore and even interstate is a stretch for me. I stay close to my own backyard because this is where I understand things the best and where my strongest networks are. Distance adds complexity and by staying close to home this helps me solve problems quickly and keeps me productive.
Ticking the boxes for all three Ps is ideal; however two out of three, in certain circumstances, may be acceptable too. One “P” alone is never enough for me to do a deal. In every situation, the people equation has to be right.
I also don’t invest more than I can comfortably afford to lose – that is, if I lost the lot it wouldn’t be a death-blow for me. At worst it might make me limp for a while.
I am also incredibly patient and always invest slowly. I would rather miss an opportunity than invest in a bad one.
Finally, I never invest in highly leveraged deals. Young Warwick Fairfax taught me that lesson.
Sometimes I have made money and sometimes I lost the lot. When I lost money it was always because I ignored the three Ps in my eagerness to get a deal done. Every SINGLE time. When I made money the opposite was the case. Every SINGLE time.
In the end it all comes down to the fundamentals – good people, a good proposition and plan, and a growing market. It sounds simple but believe me it isn’t. But then again nothing worthwhile ever is…
Have a great week…