Article: Fix to Sell, or Sell to Fix?

We were asked the other day if we’d be interested in buying a controlling interest in a substantial manufacturing company in one of our Frontier Markets.

The Financial Advisor explained that the owner wanted to sell the business to a “Strategic Investor”, who would then turn the business around. The FA hoped we’d be the Strategic Investor.

After a few more questions, we thought the FA and the sponsor had got it the wrong way around. Our sense was that the Sponsor would end up leaving lots of value for the Investor. We thought “Sell to Fix” wouldn’t serve his needs at all well - even though we saw clearly that we’d be the ones capturing value from the “Fix”. Sure, we understood his desire to earn a decent payout, but we thought he’d have been better off with a “Fix to Sell” approach. We told him as much, and there our conversations ended.

So how to can you combine the value from “Fix” and the value from “Sell”?

One way is to invite the investor to acquire a smaller initial stake, with an option to increase this stake at a fixed point in the future. The investor then leads the turnaround and growth, not the sponsor: the investor replaces key management, installs a new strategy and leads the Board through the tough choices needed to restart the growth engine.

A few years later, the investor buys the remaining shares at a price previously agreed. The sponsor walks away with value from the initial sale + value from the sale after the “Fix” is complete. If the fix doesn’t work, the Sponsor still has value stored up in his unsold shares.

The investor de-risks the second tranche of the investment, having got to know the company extremely well during the “Fix” period. He’s balanced the cost of his two positions against the cost of the time and effort invested in the “Fix” and he’s got a clear path to crystallizing value further down the line.

But there’s no instant gratification in this structure. The Sponsor has to delay fully exiting the business and the FA has to play a longer game. In some of our markets this is a hard behavior to find.

But mostly, the payoff is very much worth the extra runway. Festina Lente: hurry slowly.

I co-wrote this post with Alaa Oumansour, my Partner in Cassini Partners. Cassini Partners was an investment company operating in Emerging Markets.