Our preferred investments are in companies that have, or have the potential of developing: (i) sustainable competitive advantages, (ii) meaningful barriers to entry, (iii) strong market share, (iv) non-cyclical business models and (v) substantial EBITDA margins and free cash flow. While we employ a flexible and generalist approach in evaluating opportunities, the following sets out a few key considerations by which we judge opportunities.
- Industries –
- Market Opportunity –
- Sustainable Competitive Advantage –
- Capable Management –
- Size of Our Investment –
- Interaction with Management –
- Financial Considerations –
- Investment Structure –
We like niche companies directly or indirectly involved in industries such as raw materials processing, basic manufacturing, infrastructure, utilities, power, defense, and business services, in particular if international. We are also interested in investments in health care and possibly real estate. We are less comfortable with companies with high capital requirements for their ongoing business or high technology risk that are in consumer related areas such as retailing.
We like companies that are facing a market opportunity that provides room for substantial growth organically or through acquisitions and/or industry consolidation. We are particularly attracted to companies that are poised to capitalize on major structural changes or trends within their target markets.
We like companies that can build or sustain a winning position over an extended timeframe based on some combination of unique market position, access to inputs, specialized expertise, or intellectual property or other barriers to entry.
A key consideration is for the company to have a talented management team that is willing to stay on and that can convince us of their ability to turn a well conceived plan into reality. We also need to feel that management has the ability to grow as the business develops. We look for relevant experience and a track record of success. A key factor is that management’s assessment of the business’s potential, while ambitious, is realistic and that they have action-oriented plans for how to realize their objectives within a reasonable time frame. This requires the ability to set priorities, and a commitment and passion to overcome the inevitable obstacles that arise on the way to building a successful business.
The preferred size of our investment is $25-50 million per transaction, but we will invest outside this range when appropriate, particularly in early stage companies when initial capital needs may be limited. If possible, we try to “stage” our investments in tranches, tied to specific milestones. Since we put a substantial amount of time and energy into each investment, we also want to participate meaningfully in its success. We thus will expect to hold a meaningful position in the companies in which we invest. We typically seek majority ownership positions but can settle for as little as 25% if the circumstances are right. In any case, we expect to be the lead investor in our deals.
We also believe it is important that management feel that they can trust Allegro, and we them, and that working together will be enjoyable. Part of this involves the ability of management to be open to listen to advice and be ready to change. On our side we need to be sensitive to the company’s history and to management’s concerns.
We prefer companies with moderate capital expenditure requirements and with high product value rather than high volume. We focus on growth in profitability rather than on sales growth.
Although we prefer to invest in established companies, we invest in companies in all stages of development and via the full array of transaction structures including relatively early stage start-ups, buyouts, recapitalizations, consolidations and participation in growth financings. We have a strong preference for investing in equity, but can in exceptional cases consider mezzanine or other financial investments, as long as they carry a meaningful equity component.