Many business owners fear private equity investors taking away their control. Harrington is emphatic that Advent is not interested in control. “Our view is that we like to be a trusted partner – I know that is a cliché – in the sense that we are never the owner. We are a joint venture partner without management rights, but with step-in rights if things go wrong. We are happy to get things fixed, but that is in the interest of all shareholders. We never want to run the business.”
Advent has a current portfolio of nine companies, which is a typical number for its funds. The most recent was a $68 million investment in Orionstone, a company that hires earth-moving equipment. “About a third of each portfolio is facing the resources sector, providing services to that sector or partially exposed through products,” Harrington says.
And what else attracts Advent? “We like industrial services. We like health services, but it is hard to find a good one in health. We like niche manufacturers because they have been well exposed to international markets. They are really service businesses that happen to manufacture rather than being manufacturers per se, and in those services businesses, we like them to have a technology that gives them a competitive advantage.”
Companies facing a generational change of leadership – mum and dad retiring and one or more of their children taking control – are vulnerable to stagnation, Harrington says. The older generation want to draw dividends to fund their retirement; the young ones want to plough profits back into growth. A private equity investor will pay out the parents, and get the company back onto a growth path, Harrington says. “You have a conflict in the business. So we might come in and buy one of those shareholders out. We would tidy up the share register, and if necessary provide some capital to grow the business,” he says. “We don’t go in with a prescriptive view that there is only one way to make money.”
It is true, however, that the involvement of a private equity investor sharpens a company’s focus on growth and profitability. Advent will only invest in companies that are open to active involvement. “We want a leader who is passionate about their business, understands it and their market. But I have never seen the perfect manager, so we ask how aware are they of their blind spots? Self-awareness is an important characteristic.”
“They have to have tenacity because growing businesses is a pretty tough gig. It is not a smooth path, things go wrong. You want people who will take advice, listen, distil the information and work out what is relevant.”
Advent looks for average returns of 20% for its backers, after the managers’ fees and profit shares have been deducted (called internal rate of return – IRR). Often, the returns are higher.
Advent’s 2002 investment in ACIL Australia, which managed foreign aid projects, returned a 54% IRR when it was sold in 2005.
It’s $31 million investment in Taverner Hotel Group in 2000, returned 32% IRR when it was sold to Woolworths in 2005.
Still, a couple of our other funds have failed to return even the money invested. Usually, it’s a management-related problem, Harrington says, but he admits investments based on multiple acquisitions are inherently high risk.
Advent sources its deals from its large networks: director from past investments will refer opportunities, while Advent’s managers follow companies in the press before making an approach.
“We spend a lot of time networking and drinking cups of coffee and engaging with companies, and our track record is that we manage to find most of our own deals,” Harrington says. “We ask ourselves, can we all work together, is the plan realistic, and is there a growth opportunity?”
“But fundamentally, the question is can we all win together? If we can’t, we prefer to walk away.”
