6-17-09
Frequently in my travels and exploits, I run across a potential investor that has to have control of the company. I spoke to one of these investors last week about his investment in an oil and gas lease. He wanted 51% ownership in the lease, treating it as if it were a private company. His ignorance was obvious. He touted himself as an experienced oil and gas man, but in fact, owning 51% of an oil and gas lease means nothing because the operating agreement requires 100% consent or non-consent by all partners. ANYWAY….this potential partner wanted to be able to take control of the asset in case it was not being managed to his liking. This is a poor way to approach a private equity investment, at best.
I once new a corporate executive that was tasked by his major multi-national employer to find excellent companies to buy, control and add to the major company’s bottom line by using economies of scale. Through his efforts, he landed on a small gasket maker who had been posting 30% growth and 30% cashflow numbers for over a decade. The gasket company was privately owned by a man in his mid-50’s, he was a willing seller, if he could get enough money to take care of his people. He struck a deal with the multi-national for $100,000,000 (alot of money in the early 80’s). The company was sold, all his people received a nice retirement, he kept a nice chunk of change and went off into retirement. Within 3 years, the multi-national had turned this extremely profitable company in to the largest money looser in their portfolio. The company owner was able to purchase the company back for $5,000,000…all of his people returned to work with him and he again grew the company at an astounding rate.
This is a classic pitfall in the private equity business – GREED drove the multi-national to make several poor decisions and caused their efforts in this acquisition to fail. They could have successfully approached the company owner with the position that they would like to participate with the owner, the successful owner. They could have purchased a 25% stake in the company, left the management in place and profited handsomely for the next three decades…..but they were GREEDY. They could have learned the business, then offered to purchase the remaining portion of the company when the owner wanted to retire. Instead, they had to have control, they had to call all the shots in a business where they new none of the players. They had to own a controlling share. What a dumbkauf.
At my firm, Farpoint Private Equity, we frequently purchase companies and individual interests in companies, but we always approach a deal as if we were novices in the industry (even though we are not), with little knowledge of the acquisitions actual inner-workings. We do not have to control a deal to make a profit.
I have a partner in Florida who found a company that needed some expansion capital. This investor purchased a 25% interest in a gear maker in Cleveland who used the capital to build another plant in Detroit. With the two plants, the company made twice as much money. The investment repaid itself in 2 years and continued to pay stellar profits to the new investor for over a decade. At that point, the original owner bought the investment partnership out for the original investment amount. A PRIVATE EQUITY HOME RUN and the investment partnership did nothing but put up the needed capital and visit Cleveland once per year for a board meeting on the golf course.
OPPORTUNITIES LIKE THIS ABOUND, BUT IF YOU ARE GREEDY AND MUST OWN A CONTROLLING INTEREST IN A DEAL, YOU WILL NEVER SEE THEM.
At Farpoint Advisors, this is our approach to private equity investing and it works.
Read more about this investment approach by buying my new book: “Winning With Private Equity” www.winningwithprivateequity.us
Look at some of our current programs at: www.farpointadvisors.com
Thanks for reading…
Paul A. Thomas, Principal
Farpoint Private Equity Advisors and Managers
