Friendly white knight rolls up sleeves
May 13 2010 - Stephen Shore, The Australian Financial Review
There are some hidden opportunities and the best way to find them is to be market savvy, writes Stephen Shore.
In the 1990s, Roger Sharp was a successful investment banker with ABN Amro. His job was to travel the world acquiring competitor investment banks and brokerages. Like every other major investment bank at the time, ABN Amro swallowed its smaller rivals, converting them to its style of writing equity research and trading in large cap companies.
"It became clear to me that there were hundreds and hundreds of emerging companies in every market not covered by research and not covered by brokers," Roger says. "the pricing was opaque, creating huge opportunities for those prepared to do the work."
Sharp left ABN Amro in 2001, and as soon as his three-year non-compete clause expired he started Co-Investor Capital Partners.
The firm has similarities with private equity and micro-cap funds management, but doesn't really fit either label. Sharp prefers the phrase "strategic bloc investing".
Co-Investor's strategy is to find a small, struggling listed company and assemble a large enough holding to gain a seat on the board or a least a meaningful say.
The company could be underfunded, lacking strategic direction, or simply need a new chairperson. Co-Investor will enter with a three-to-five year aim of turning the company around and either selling its stake or ushering it into the hands of an acquirer.
The strategy has been around since 1975, pioneered by Richard Blum of Blum Capital in San Francisco.
In 2006, formerly Kohlberg Kravis Roberts senior executives Edward Gilhuly and Scott Stuart started a strategic bloc investment fund called Sageview Capital, and over the past decade a dozen or so firms have popped up around the world.
Co-Investor is the first of its kind in Australia. It has completed just two deals; the most successful was the online travel site travel.com.au. travel.com.au listed on the ASX in 1999 at the peak of dotcom fever raising $23.5 million at $1.25 per share, valuing othe company at $52 million. On its first day of trade the stock closed at $2.88.
The company failed to deliver and after a series of earnings disappointments, its shares had slumped to a record low of 8 cents by mid-2003, implying a market cap of $4.5 million. From 2003 to 2006, Co-Investor built a 26 per cent stake in it at an average price of 16 cents per share.
In February 2005, Sharp was made chairman, charged with leading a restructure and recapitalisation. By 2007 webjet.com and wotif.com were fighting over the stock, bidding up the price until Wotif succeeded at 57 cents per share.
"For the first two years, everyone was saying 'what are these guys doing?'." Sharp says.
"We saw a battle going on in online travel in the US that was headed for the UK and then Asia. So here we had a business that owned the brands lastminute.com.au and travel.com.au and it was just absolutely clear to us that as broadband took over, the multinationals around the world would come to Australia and they would try to buy it. In the end it was two local dotcoms that fought it out, but that's a classic example of what we do."
Co-Investor looks for mature, established business. It won't touch resources, bio-techs, or start ups.
Unlike private equity, Sharp describes himself as a "friendly investor" who is there to "roll up his sleeves" and help a company.
Co-Investor will run the numbers on about 100 companies each year to uncover one or two investment opportunities, a hit rate it is hoping to boost. It now has a stake in three companies which account for 60 per cent of its $100 million of investable funds.
It committed to two companies at the bottom of the financial crisis - mobile telecommunications service provider ComTel and direct marketing, advertising and communications company D2 Marketing, which has since delisted.
"ComTel had contracts to buy a marketing business for $20 million during the boom," Sharp explains.
"When the meltdown came ComTel was saddled with debt and couldn't settle the purchase, so we came in and bought out the bank debt, underwrote a rights issue, refinanced the business and stabilised it. Now we have a new chief executive and a rapidly growing business."
Sharp says they find a quarter of the companies through quantitative analysis, a quarter from disgruntled shareholders who are sick of no progress or are locked in and want some assistance, a quarter from boards and company management seeking help, and the rest from brokers and analysts.
"The common thread is being out on the street, wearing out shoe leather, talking to people whether they are brokers or companies, you've just got to be out there sniffing out the opportunities," Sharp says.
"At the bottom of the market there's some really good businesses, or businesses that could be really good, with just a llittle help."