Managing Director of Ready Media Group, Rob Langton, recently sat down with Adrian Loader; one of the joint founders of Australian fund manager Allegro Funds. Having started his career with Arthur Anderson & Co in 1993, Mr. Loader had plenty of anecdotes to reflect on. We’ve parsed through the 51 minute-long conversation to bring you the highlights from this extensive discussion.
His criteria for investment
“As a private equity fund, the first thing you’re trying to do is actually make a return.”
It might seem obvious, but Adrian makes sure to emphasise that a priority for selecting an asset is that a profit can be secured for investors. Specifically, Allegro Funds aim to multiply an initial sum by 300 per cent.
“We’re a private equity fund; we’re trying to make three times money.”
He highlights the multiplicity of ways that Adrian and his team go about achieving this figure.
“There are various ways you can do that. You can do that through structuring on the way in; you can do that through an operational improvement.”
But it’s not just about having the capacity to take a business in a positive direction; there also needs to be a market to sell that business to.
“Ultimately, up-front, you’re trying to work out: if I transform this business, do I believe there’s a market to sell this business, and that someone’s actually going to pay me an amount of money for it that I can make my targeted returns [with]?”
It’s the fundamental principle of supply vs. demand in action. Yes, Adrian can rejuvenate an organisation and enhance its profitability in a substantial way, but all that effort would be for naught if the market has no interest in that venture.
Adrian Loader - Allegro Funds
Allegro bought Toll Global Express with no management
Last year, Allegro Funds acquired Toll Global Express; an express parcel, freight delivery and domestic forwarding service in Australia, and a transport and contract logistics service in New Zealand. Being that the organisation was part of a larger group, it came without a management team in place.
“It’s one of the three divisions of Toll Group. We bought one of those divisions, so it came without a CEO, CFO, Chief Information Officer, Chief Customer Officer.”
Adrian believes that Allegro’s proven experience with developing well-equipped, capable management groups was what prompted Toll Global Express’s enthusiasm for the deal.
“All the systems were largely Toll systems... the reason why they selected us as the acquirer is that they believed that we could help meet their needs in terms of exiting Toll in a way which helped them operationally.”
Toll Global Express - One of Allegro's most recent acquisitions
Adrian has a very particular methodology for navigating these circumstances, and that method is grounded in getting to properly understand exactly what is needed to improve a business. That requires asking simple but direct questions.
“We have this very collaborative approach of: what are we actually really building, and how are we actually focusing on how to build a business over a number of years?”
For Toll Global Express, it started with creating a more positive culture in the workplace, so employees felt good about the work they’re doing.
“Turnarounds are a lot easier if your staff actually want to work there, as opposed to if they hate you or hate the company... our Customer Net Promotor scores went up 20—odd per cent, even though we had no systems changes. That’s just because people cared more and people did more because they wanted the company to do better.”
The red flags to look out for when buying a business
Whilst there exist a multitude of metrics that can be employed to determine whether an organisation is worth engaging with, Adrian has a few key considerations which give a good indication of a company’s value and worth. Pivotally, a business should have, at some point, turned a profit.
“If the business has never made money, it’s probably not the greatest investment.”
He acknowledges that companies can lose their way and have their profitability reduced; this, he says, is a lot easier to work with.
“If it has made money and it's lost its way, that’s a way better place to be than if it's never made money.”
Another factor to watch out for: if the customers are enthusiastic about the company or not. If customers hate the company, then it becomes a much bigger job to rectify the situation.
“If [the company’s] customers hate it... it’s very different to if the customer’s want the business to do better in the future, and they’re prepared to support it.”
The Ghan - Allegro rejuvenated Great Southern Rail after purchasing the transport company
His last major red flag considers an organisation’s established following and customer base. If to restore a company, you need to find an audience willing to purchase the product or service they’re offering, you’re already positioned at a disadvantage.
“If you’re searching for customers... I think that’s always a very hard place to do a turnaround.”
If a business possesses these three red flags, investors should be running and hiding.
How involved Adrian and Allegro Funds get when entering a new business
Adrian cites Allegro’s involvement with holiday parks operator Discovery Park as an example of a business that he has been integrally involved with, to the point that he had a say on much of the minutiae of the business.
Discovery was established in 2004 with a portfolio of three parks in Western Australia, and by 2008, it had accumulated 40 holiday parks. Despite this rapid growth, the lack of back-end integration and the high level of debt that the company had accumulated meant that the organisation’s prospects looked bleak.
“In 2010, we did a financial restructure of [Discovery Parks]. We bought on some other financial partners, and then... [Sunsuper] bought that business in 2014, and they gave us the mandate to help manage that business.”
Adrian and his team did not lead from afar. They personally attended many of the company’s locations, to better grasp what Discovery did well and what needed improvements.
“I’ve been to 65 of the parks in that business across Australia. We can talk in detail about that business.”
Discovery Parks - One of Allegro's most successful turnarounds
As such, whilst Adrian and Allegro aren’t considered management, they do have a good understanding of what the business in questions needs, and they are able to bring in management team members that will best cater to those specific needs.
“We’ve established a board there which can really help that business prosper. And that business has got an equity value of over $1 billion, and keeps going from strength to strength.”
Being a better deal-maker and private equity investor
“The real skillset in doing a deal is: do you think you can win, and how do you win?”
According to Adrian, to be better at making deals, you have to be extremely critical, and that often manifests in not coming to a resolution.
“Some of the best deals you ever do, are the deals you never do.”
This might lead to some feelings of regret down the track, but hindsight is not a blessing you have in the midst of negotiations for an asset. Assertions, demands, and price points can only be based on what is known.
“Sometimes, you wish that you’d gone a bit harder and bought it when you know that it was a success three years later. And you say, okay, that one got away. But the truth in the matter is that you didn’t know that at that point in time.”
Watch the full interview, conducted by Ready Media Group’s Managing Director, Rob Langton, here.
