By Rami Cassis, CEO Parabellum Investments
As specialist investors in mid-market companies around the world we are often asked to consider potential deals and what distinguishes a good investment opportunity. Given the current extreme turbulence across global markets, fuelled by the COVID 19 pandemic, this question is particularly timely – also unusually challenging.
Finding good opportunities in the mid-market has always been a mix of science, art, intuition and luck. In my view it is also very sector specific. Generally, the greater the specialism (of the acquirer), the lower the risk of failure, which is why we tend to stick to our core areas. Right now, however, most opportunities seem unusually high risk, because no one really knows what the mid to longer term impact of the current turmoil will be.
So current times are not for the faint-hearted but will doubtless offer opportunities for those with a positive attitude to risk, which we believe we have. We see ourselves as “entrepreneurial investors,” taking a more hands-on and operational approach, which perhaps helps. Indeed, I regularly step in as acting CEO on new investments to provide active short-term support alongside others on the Parabellum Investments leadership team.
But otherwise, the only constant is that every situation is different, but the following principles have worked well for us.
Forget about public (or media) opinion
Good private equity investment has nothing to do with what might be popular. Indeed, my preferred approach is generally to look for opportunities in markets that are out of favour, usually for temporary reasons. For example, natural resources in Australia may not seem top of mind after the recent wildfires, and with a recession looming, but we’re examining a potential investment in a sand and clay mining business. We know the sector, demand is strong and steady, and there’s less competition from other investors than there might otherwise be.
Take calculated risks or run with “informed gut feel“
With political sentiment shifting to the Left in many parts of Europe, at least in the eyes of many private equity investors, Brexit looks like an increasingly favourable outcome for the UK. It could, fiscally (and perhaps socially) develop a European quality of life with a US approach to fiscal policy.
Whilst there are many uncertainties over how the Brexit negotiations will pan out, my hunch is that pragmatism will prevail – particularly with threat of an economic downturn fuelled by the pandemic, and the UK will strike a good deal either with the EU or the US. The UK still has a more favourable corporate tax regime and lighter regulation than the rest of Europe and is looking to boost bank lending to small and medium sized businesses. So, despite cuts in Entrepreneurs Tax Relief, this still feels like a good time to back UK deals.
Focus on longer-term upside
The Gulf, particularly the UAE and Saudi, used to be heavily restricted but is increasingly open to foreign private equity investment. Saudi in particular is out of favour because of allegations of hacking and state back assassinations but, unlike many media commentators in the West who pretend to be appalled by this, I do not think it makes Saudi Arabia very different from most other countries. Although there is currently little in the way of mergers and acquisition activity, I think this is likely to grow over time, and the recent flotation of Saudi Aramco has, perhaps, brought it more into the mainstream of global business.
The UAE meantime has recently allowed non-UAE nationals to start businesses onshore for the first time, instead of restricting them to a free zone as before. This, too, is encouraging.
Meantime, looking to North America, Argentina also looks interesting, particularly for outsourcing to the US market. In the same time zone as the US, the country has many highly educated individuals who are not only Spanish speakers but have English and often many other language skills too. The economic woes of the country have made local employment relatively cheap when earning revenues in harder currencies, meaning that companies supplying IT-based services (in which we specialise) are ideally placed to serve the US market.
Follow the money
Meantime it is impossible not to be present in the US. The sheer size of the market and the wall of money going after deals is an opportunity for private equity investors, irrespective of scale. As the biggest truly single market in the world for mid-market business investment, there is always something here. Also, I find, there is a more positive attitude to risk and ambition in the US than almost anywhere else – making it a great place to find backers and develop businesses with new ideas.
Don’t exclude the real outliers
Without specifically looking for unusual choices, there are markets which are real outliers which few others are looking at. Yemen, in oil & gas, is a case in point, and possibly also Ukraine. These are admittedly not for the faint hearted but, when there are good opportunities, competition is less intense. These and other high risk markets are off the radar for most private equity players, who need to answer to outside investors and credit-committees, but, as we invest our own funds Parabellum Investments is not hampered by those constraints.