Minorities

The only real pool of quality while fear reigns?

It has been a busy couple of weeks at Tikto: we were name-checked in an FT Article published on Sunday 12th and that has generated a huge amount of interest. Welcome to our new subscribers.

Something that we should have been prepared for (but weren’t) was the number of people chasing our ambulance in order to sell us everything from outsourced IT to a whole new management team. Fortunately we’ve also had a great influx of companies wanting to speak about investment and whether we might be interested in a conversation. Turns out that good, old-fashioned, above-the-line exposure works a charm .

Following the article, we’ve talked to many investors who are curious about our strategy and who might want a piece of the action too. We’ve spent a lot of time discussing how the market has been for us this year and I’ve found myself extolling the virtues of minority investing vs. buyout.

If you’re operating a PE-strategy at the small end of the market you should have been asking yourself this question all-year:

If you are the CEO of a great business, and you have options, why would you sell the business right now?

The answer to the question is: you wouldn’t. Of course you wouldn’t.

Without wanting to rehash a tough year for us all: rates up, valuations down, depressed markets all-round ≠ a good time to sell your company. This doesn’t apply to everything and everyone, of course, but we think it’s a pretty accurate reflection of the state of play.

This has played out in our dealflow, too. The number of quality buyout opportunities that we’ve seen and gotten close to this year is lower than in 2022. If we carried operating as we did in 2022 we would have likely ended up with a lower quality portfolio. Rather than accept this as a grim new reality we’ve changed our approach slightly.

Knowing that great buyout opportunities are relatively few and far between at the moment in order to access quality opportunities we began to ask ourselves:

If people aren’t selling, are investors open to taking some money off the table and getting some fresh ideas and capital in?

The answer to this question is: yes, always.

While we’re not in a time of dealmaking frenzy finding businesses where some shareholders want or need to sell some shares is a much simpler challenge than originating top-draw buyout opportunities. For a start there’s a number of different motivations. Here’s a non-exhaustive list:

• Early shareholders, founders or management wanting some liquidity having had their capital tied up in a business for some years
• Sophisticated investors needing to exit an investment to rebalance their portfolio or for tax purposes
• De-risk/realise gains from a position by taking money off the table
• Inviting energy and new ideas to the table
• Getting a new investor on board who is prepared to finance future growth strategies

We’ve been enjoying good results and particularly in discussions concerning the final bullet. While buyout is our preference we’re happy to take a significant minority and develop a growth-orientated business plan which will see us build our stake over time while also getting to know the business to a greater extent. Thinking about this a different way: this (to the investor) looks a little bit like tranched investment. It’s unsurprising that such a risk-sensitive approach is popular given the prevailing headwinds.

Of course tranched investment comes with its own wrinkles: at what price do future investments go in at? What is a reasonable balance of control? What happens in a case of over/under-performance? Perhaps subjects for future posts.

Thanks for reading, as always.

Tikto

At Tikto, we purchase stakes in EBITDA profitable businesses and follow that up with incremental growth capital. We bring our network of experienced operators to help execute a business plan for the next phase of our portfolio companies’ growth.

Get in touch: [email protected]