Category Investments

Want to attract institutional investors?

18 March 2013 Adrian Saville, Cannon Asset Managers
Dr. Adrian Saville, CIO, Cannon Asset Managers

Dr. Adrian Saville, CIO, Cannon Asset Managers

Adrian Saville, CIO of Cannon Asset Managers explains strategies that businesses can use to signal their readiness for institutional backing.

There are many factors that contribute to the success of a listed company. No matter how good your product, business plan and management team, it all comes to naught if you cannot raise the required capital.

Since the 2008/9 financial crisis, liquidity has dried up worldwide and a consequence of tighter credit is that small companies are turning to equity markets to raise much-needed cash. Cannon Asset Managers believes that institutional backing is a major differentiator in the small business universe.

Nothing shouts credibility more than welcoming a large institutional shareholder to your fold. If the country’s top fund managers are keen to own around 10% of your business then raising additional capital becomes much easier. What should your business do to attract institutional investors?

There is an age-old metaphor that says in order to really “know” someone you should walk a mile in their shoes. To find out what an institutional investor wants, we suggest you consider the Cannon Asset Managers’ investment philosophy. We are an owner-managed company with a 13-year track record in investing in undervalued businesses.

Whilst investment opportunities can be found across all parts of a listed market, our experience is that some of the greatest value opportunities are found in the “long tail” of the domestic equity market. That is why we look beyond the behemoths in the JSE/FTSE Top 40 index to place the next 200 companies under close scrutiny too. We believe that the future Apple or Anglo American resides in the small businesses universe, perhaps even your company.

A good starting point is to consider the following proposition: attractive prices plus good quality make excellent investments. Over time, Cannon Asset Managers has refined this statement to associate price with value, and quality with good business. We invest in good businesses at good prices and continually scan the market for businesses of all sizes that possess these attributes.

There are seven ingredients in Cannon Asset Managers’ recipe for an irresistible deep value opportunity. These ingredients satisfy our institutional clients’ desire for value and quality, and will eventually elevate your business from the long tail of stock market capitalisations into the big league.

1. The first ingredient is to get your numbers right. An institutional investor will not consider your business unless your books are up to date and your financial statements and integrated reports stand up to close scrutiny. We owe our institutional investors a duty of trust and will root out any financial irregularities or inconsistencies during our due diligence.

To this end, Cannon Asset Managers has successfully used a range of forensic and financial tools over many years to flag companies where the numbers simply don’t add up – where they don’t seem right – and have successfully avoided investing in companies where the numbers defy reality.

2. Institutions back companies that “eat their own cooking”. You demonstrate this to your customers by using the widgets you produce and to investment managers by buying your shares. Your executive management team and board of directors must show faith in your business.

3. Do not sell your business – buy it. As an institutional investor we resist investing in companies where management teams feed their appetite for corporate action by issuing “paper”. So our third ingredient is to find companies that buy back shares rather than issue them.

4. We want you to help us to understand your business and to invest alongside you. A bona fide institutional investor is in it for the long haul and a deep value investor will stick with your company for as long as it takes. We want management to be available, to engage with us openly and honestly, to respond quickly to our requests for information and to admit problems or mistakes as they happen.

5. Ingredient number five is to avoid the “get rich quick” trading strategies many South African company directors have fallen for. Cannon Asset Managers’ motto is: If you buy, buy it clean. We look for companies where management holds its investments via the same vehicles as we do, not through a leveraged or structured schemes or exotic instruments. While such derivative structures may give the impression of interests being aligned, this is not necessarily so.

6. Our sixth ingredient is a cautious approach to non-organic growth strategies. A wide body of corporate action evidence shows that the best investment results come about when firms buy small companies in closely-aligned businesses without using too much leverage.

7. And finally, forget forecasting. As asset managers, we know that accurate and reliable forecasting is notoriously difficult and bad forecasting leads to bad business decisions.

Value investing is built on the thought leadership of great investors like Benjamin Graham, David Dreman, Seth Klarman and John Neff. It is a strategy that demands focus and commitment from investment managers and business owners alike. Your business has a greater chance of attracting institutional investors if it signals its readiness in line with the factors above.

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