Review of the year 2016
As we look forward to what 2017 might bring, I thought I’d share some thoughts and reflections on 2016 – a tumultuous year in global terms but a year of relative stability and progress at Nevis. So, what does progress look like? Well, we’ve found that it is rarely linear or steady when it comes to investing in and owning SMEs. Our experience is that it comes in leaps interspersed by hard work and plenty of challenges to be met (and overcome) along the way. 2016 was no different.
In terms of new investments, we didn’t make a single one in 2016. Believe me, it wasn’t for the want of trying. During the year, we saw thousands of opportunities and requested additional information on more than 120. We met face-to-face with 30 companies and spent considerable time working with and reviewing a further 8. A few of these are still “in progress” and so we are hopeful that some of the work will lead to a deal in 2017. That would be great, but if the deal isn’t right then we’ll just keep looking – we know the needle is in there somewhere!
In some investment firms, a year without completing a deal wouldn’t be seen as progress but as failure. Thankfully for me, my Partners know that there is huge value in declining the wrong opportunities. If you are in it for the long term, being patient and selective is, we believe, the right way to go and in our first ten years, the results have supported this with very significant increases in equity value and portfolio company profits.
So why, from all these opportunities, haven’t we found one that is right for us? What are our selection criteria and why are they apparently so difficult to fulfil? A lot of it comes down to finding a business owner whom you trust but when we’re first looking at an opportunity, we try to look for niche businesses with a strong technical capability and a good spread of long term customer relationships. Unlike many investors, we aren’t looking for high growth companies but for those businesses with a track record of consistently delivering profits of between £500,000 and £1,500,000.
When I look back at 2016, the main reason for declining opportunities was a lack of quality management. With a focus on the SME market, our investment opportunities often come from retirement sales and in many cases the owner of the business is also the key manager. Frequently, the owners haven’t built a team around them or developed succession and as a result they are the business. When they leave, there isn’t anything left for us to buy.
Does that mean we are waiting for a small company with a complete management team who don’t currently own the business? Thankfully not, as I don’t think I’ve seen any such opportunities in my 9 years with Nevis! What we are looking for is people who are passionate about their business and about pushing themselves. We are firm believers in continuing personal development; both formally through the use of external courses and informally through mentoring and encouragement. More than 20 of the managers in our portfolio companies have been on formal courses in 2016 and we hope to increase that going forward. The benefits to the individual, their team and the business as a whole are often significant. In our experience, the “leaps” of progress I mentioned above have often sparked from managers having the opportunity to step away from the day-to-day, to learn something new and to be encouraged to implement change.
So, if we’ve not completed any deals, what else have we been spending our time on (none of us has improved our golf handicap)? Well, to start with it takes a long time to analyse a business and to come to the conclusion that it isn’t right for us. We’re happy to invest that time because that is the only way we’re going to find one that does fit and because it gives us a great opportunity to see and learn about different businesses and markets. That benefits us in assessing new opportunities and in helping our current investments.
This leads me nicely to what we’ve been doing with the rest of our time. As many of you will know, our approach is different from most investors because we look to partner with the leaders of our portfolio businesses after we invest. That means we take a “hands-on” approach where we can add value so we’ve spent hours as sounding boards and thinking about the businesses, their strategies and what needs to be done to make sure they fulfil their potential.
Our input isn’t just in the boardroom. Over the course of the year we’ve rolled our sleeves up and spent time looking at potential acquisitions, assessing and negotiating significant new contracts, recruiting for new senior roles and helping to prepare and review data so each business better understands its critical success factors. And we’ve enjoyed (nearly) every minute – not because everything has been an instant success (it hasn’t) but because we’re in the very fortunate position of only working with managers whom we like and admire:
“The key is to keep company only with people who uplift you, whose presence calls forth your best.” Epictetus
This brings me to something that has been reinforced again and again during 2016: the importance of good leadership. In our experience, a good leader’s approach pervades the company – their commitment to their business and its customers and to doing the “right thing” becomes instilled in everyone else in the organisation. They surround themselves with people of a similar positive mind-set, creating a culture where people take pride in being part of a company and are prepared to go that extra mile to make it a success. Unfortunately, bad leaders tend to do the exact opposite…
One final note on the portfolio… you will have seen above that one of the businesses in the portfolio has seen profits decline. To see a business achieve its potential in the long term, our experience is that you often have to take decisions that are detrimental to short term profits – hiring expensive people, investing in sales and marketing, improving systems and creating capacity. We’re happy to do this because, in contrast to some other investors in private companies (traditional private equity perhaps being the prime example), we don’t invest in companies where we hope to increase profits quickly and then sell them on again in the short term. We invest in companies we want to own. Full stop. So we’re happy to accept lower profits in the short term if that means a much brighter long term.
Let me finish by looking forward to 2017. Already, we can see the green shoots of strong growth at two of the portfolio companies… whether these shoots survive the Scottish winter we shall see but we’re comfortable that all of our investments are good long term bets. We’re also hopeful of adding one or two more companies to the stable so we’ll keep searching in a disciplined and focused way. Of course, it would be nice if we didn’t have to search too hard so if you own or know a company that you think might fit with us then please don’t be shy….