Q&A: Allegro Funds' Chester Moynihan

Q: Your fund has explored a number of different business models. How has that history shaped your perspective on investing?

A: In the first stage of our history we were going into troubled companies and helping develop restructuring plans. Come 2008 we were actually tapped on the shoulder by the LPs to take over as a replacement GP of a distressed fund that was owned by ABN AMRO. We worked pretty much exclusively on that until the end of 2010. From then until 2013, we were accessing institutional capital for deal-by-deal investing and then in October of last year, we announced the first close of our fund, and we've done two deals out of that fund already. I think what we've been able to demonstrate through those different phases is an ability, not only to operationally restructure and turn around underperforming businesses, but also to access that segment of the market, and deploy capital successfully into it.

Q: What sort of businesses do you consider to be good candidates for a turnaround?

A: Essentially, we target businesses that have a reason for being. They typically have a reasonably substantial revenue base, but have lost their way profitability-wise, and cash flow-wise. They are typically overleveraged, so they may be in the workout or bad bank section of a bank. In most cases the business has been operationally damaged. Good people have left, short-term decision making has prevailed, and the business is damaged.

Q: How do you structure your investments, and what size do you aim for?

A: Typically we would come in on an all equity basis. If we are partially debt funding something, it would be at a 1-1.5x, maybe 2x maximum level of debt. But the majority of our deals, and certainly the first two deals in our fund, have been on an all-equity basis, and the deal we're getting close to now will be on that basis as well. In terms of deal size, we've done a couple around the A$10-20 million mark, but from a fund balancing perspective, A$20-50 million is the sweet spot, particularly given that we've got a lot of parties, including our LPs, that are looking for co-investment.

What we're looking to do is to fix the balance sheet day one, but then to work intimately with the company to address whatever has gone wrong from an operational perspective

Q: What strategy do you follow when you are trying to turn a company around, and how do you go about implementing that strategy?

A: What we're looking to do is to fix the balance sheet day one, but then to work intimately with the company to address whatever has gone wrong from an operational perspective. We call that our stabilization phase, and it would typically last 6-12 months. In every case we seek to partner with management, be that the incumbents or new people that we bring in. Once it's through stabilization, we're into the growth phase. At that point, we have an eye on exit.

Q: What is the most important factor in deciding that a particular company is not worth getting involved with?

A: The first judgment call is on what is fixable versus what is structurally impaired. We're looking for businesses in industries that will have a positive growth dynamic. There are some segments of mining services, for example, that have structural issues - no matter how cheap the assets are, we wouldn't go there. We're looking for businesses that we can restore to industry-level profitability, and that have a tail wind of industry dynamics behind them. A growth story is critical to achieving a successful exit. We find that it becomes a step too far to find a business that is challenged, or has issues, within an industry that has structural issues as well.

Q: How did you apply these criteria in one of your recent deals?

A: I'll use I-Med [which runs a network of radiology clinics] as an example. It was in an industry displaying 8.5% growth, but was overleveraged with around A$1 billion of debt, and that led to all sorts of issues. We felt that fixing the debt structure and the business issues would put the company in a position where someone would want to buy it. And as was demonstrated when it was sold to EQT, having an industry tailwind is very helpful.

Q: How do you source deals?

A: There are broadly four buckets that our sourcing falls into. Traditional private equity is certainly one of them - these are usually failed sale processes. The second bucket is debt holders. This is where the debt is in commercial banks' workout areas, so they're looking to exit or find a solution for a problem loan, or it's a hedge fund that has bought into credit and wants to partner with someone that has on-the-ground resources and operational turnaround capability. The third bucket is the distress community. These would be the intermediaries, the lawyers, the insolvency practitioners, the accounting firms, the specialist restructuring advisors. And the final bucket is what we call proactive deal sourcing. That's just us running our ruler over industries, over companies, following up on industry intelligence.

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• Topics
• Australasia
• Credit/Special Situations
• Buyouts
• Australia
• Distressed
• buyout
• Allegro Funds