How do I make my business attractive to investment fund managers?

Want to attract big investment dollars to your business? ED PRENDERGAST tells what investment fund managers are looking for.

I’m the chief executive of a small listed company and find it difficult to even get any attention from institutions, let alone investors. How do I make my business attractive to fund managers?

Ed Prendergast answers: Investing in listed companies is primarily an investment in people, and this is especially so at the smaller end of the market.

Senior management in smaller companies tends to have a higher level of influence on the company’s performance than in larger companies with deeper management structures. Also, because in many cases the CEO of a smaller listed company is the founder, they often have a strong influence over the entire strategy and outlook of the business.

Over the past two years, we have had over 700 meetings with companies as we look for investment ideas. Our approach is based heavily on interviewing management prior to forming any preconceived ideas about the investment opportunity.

Often a business which looks challenging on paper turns into a great investment opportunity because of the management ability.

A great example of this is Flight Centre, whose superior management approach saw them generate average profit growth of 20% between 1995 and 2001, despite operating in a highly competitive, mature industry. The stock price rose from $1.50 to over $28.00 during that time.

On the other hand, plenty of high quality businesses have generated dreadful investment returns due to mismanagement.

Capture investor’s attention

Neatly defining “good management” is difficult, but some of the things which capture our attention include:

• Structured medium term planning – a decent 3-5 year plan is critical.
• Succession planning – while smaller businesses naturally rely heavily on founders or senior management, what happens when they want to retire?
• Passion for the business – true passion is hard to describe but easy to identify.
• Acknowledgment of competition, and a clear strategy to differentiate from other industry players.
• Consistent messages over time – the best investments are often the most “boring”.
• Sound financial systems and personnel. Where there is a strong entrepreneurial drive, an empowered CFO/FD is critical for “reality checks”.

What turns us off:

• The golden rule when communicating with market professionals is to avoid any comment on your share price. Investors like to think they can assess the value of the business themselves. Further, investors need comfort that management is watching the business, not the share price.
• Management which disregards competitive threats is a bad sign. Investors need comfort that management has a realistic view of the industry structure.
• Flippant answers to questions about risk make investors nervous. All business has risk, and good management should have identified and mitigated all risk up front, and have a realistic approach to those risks which are harder to alleviate.
• Too much passion can be blinding.
• A loose understanding of basic financial details is a worry.

Ed Prendergast is co-manager of the Pengana Emerging Companies Fund which he established with Steve Black in 2004. He was previously a Director at Citigroup and head of the small companies research team. In total, Ed spent 10 years researching small companies for stockbrokers – primarily at Citigroup and ABN Amro