3 questions to smart minds

Investments in companies in turnaround situations

For this 3 questions to Dr. Frank Töfflinger

Photo: F. Töff­lin­ger | INDUC
6. May 2015

Enga­ge­ments with compa­nies in special situa­tions require a high degree of know-how as well as compe­ten­cies that differ from tradi­tio­nal invest­ment busi­ness. Important crite­ria here are, in parti­cu­lar, compre­hen­sive and long-stan­­ding expe­ri­ence in the opera­tio­nal (line) manage­ment of compa­nies. What crite­ria apply and what measu­res are called for when actively support­ing such port­fo­lio companies? 

For this 3 ques­ti­ons to Foun­der and Mana­ging Direc­tor of INDUC, Munich

1. In which compa­nies does INDUC prefer to parti­ci­pate? What para­me­ters should be met for these?
INDUC acqui­res majo­rity stakes in medium-sized compa­nies in the German-spea­king region with sales of more than EUR 15 million that are in special situa­tions. The objec­tive is always conti­nua­tion and value-orien­ted further deve­lo­p­ment. There is a certain prefe­rence for compa­nies with long value chains, such as manu­fac­tu­ring compa­nies in parti­cu­lar, without exclu­ding certain sectors in prin­ci­ple. Since value deve­lo­p­ment is achie­ved through active manage­ment support combi­ned with the injec­tion of finan­cial resour­ces, a number of crite­ria are important to us. These include not only the possi­bi­lity of struc­tu­ring the tran­sac­tion in a way that is suita­ble for us, but also our assess­ment with regard to market deve­lo­p­ments and the restruc­tu­ring of exter­nal contrac­tual rela­ti­onships (insol­vency admi­nis­tra­tor, banks, trade unions, etc.). And since a profes­sio­nal inves­tor will not under­take a turn­around without the pros­pect of a high profit in abso­lute terms, the return on invest­ment must also be well above average in the event of a posi­tive development.
2. What crite­ria must be present in poten­tial invest­ment targets?
The causes of the crisis must be clearly iden­ti­fia­ble and solva­ble and should tend to be found within the company rather than in disrup­tive chan­ges in the market envi­ron­ment. In addi­tion to the gene­rally valid assess­ments of the indus­try in terms of size, stabi­lity, growth, inten­sity of compe­ti­tion, level of entry barriers and expec­ted deve­lo­p­ment, special situa­tions also raise the ques­tion of the robust­ness of the core busi­ness. What is meant by this is that there must be a healthy core in the product and market posi­tion, such as a.o. a solid brand name, distinc­tive core compe­ten­cies and a resi­li­ent custo­mer base. Prohi­bi­tive are the tenden­cies of broadly decli­ning market shares and conti­nuously decli­ning gross margins that can often be obser­ved in such situa­tions. In addi­tion, we must be able to answer the ques­tion posi­tively as to whether our stra­tegy, our expe­ri­ence and the available scope for action will enable us not only to stabi­lize the company but also to deve­lop it in a way that will sustain­ably increase its value in order to meet our invest­ment crite­ria. Finally, it must be possi­ble to set prices that reflect econo­mic reali­ties. One of the most common reasons for the fail­ure of a turn­around tran­sac­tion is that the debt of the company to be restruc­tu­red is higher than its expec­ted earnings value after successful restruc­tu­ring; usually a conse­quence of crisis situa­tions that have alre­ady exis­ted for a long time and are accom­pa­nied by a complete loss of value. Howe­ver, profes­sio­nally struc­tu­red insol­vency procee­dings can open up possi­ble solu­ti­ons here, for exam­ple in the case of pension provi­si­ons, for which there is gene­rally no scope outside such proceedings.
3. Which sectors are curr­ently parti­cu­larly inte­res­t­ing for you on the invest­ment market?
A special feature of INDUC is that we initi­ally do not exclude any sectors, but — depen­ding on current deve­lo­p­ments — we tempo­r­a­rily distance oursel­ves from certain sectors. At present, for exam­ple, this means that we take a criti­cal view of the furni­ture produc­tion, prin­ting and car dealer­ship sectors. At the same time, the approach of not exclu­ding any sectors in prin­ci­ple — except for the criti­cal ones — also means always taking a close look at the respec­tive indi­vi­dual cases. And there are always inte­res­t­ing oppor­tu­ni­ties here.

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