Q&A: Allegro Funds' Chester Moynihan

Q: In which sectors do you see the most activity?

A: We continue to see turbulence in retail. We’ve looked at a lot and passed up on a lot. There is definitely a place for retail, but the model is challenged from a cost perspective by the two Ls – landlords and labor. There are also opportunities in construction and building materials as the housing cycle cools and prices fall. 

Q: Has anything changed in terms of the sources of those deals?

A: We are seeing less deep distress, fewer banks wanting to sell their debt positions. Clearly, the Financial Services Royal Commission has caused the banks to act in more of a borrower-friendly way, given the climate and sentiment towards them. They are willing to advance additional funds to incumbent borrowers who a few years ago would not have received those funds. At the same time, our strategy has evolved because we are a bigger fund. Our gamut of deals still ranges from deep distress through transformation, but most of our opportunities involve sizeable and profitable companies that need operational assistance as well as capital. 

Q: Where have the recent deals come from?

A: We’ve invested in two businesses with our third fund – Ngahuia Group, a shoe retailer in New Zealand, and Endeavor Education in Australia – and both were corporate orphans. There are still a fair few businesses out there that larger enterprises are looking to offload. We are also seeing more activity from alternate credit funds. A lot of capital has been raised locally and then several multi-strategy funds have credit pools they want to put to work regionally. We’ve had conversations with them around partnering. A non-bank solution is not the only thing a business needs; we can bring expertise and people to drive change.

Q: Is that a byproduct of credit funds moving into spaces previously occupied by banks?

A: There is a bit of that, but the credit funds also tend to be aggressive on lending multiples and covenant-lite structures. You hear about valuations of 10x EBITDA now, whereas a couple of years ago it would have been 7-8x. Occasionally you hear 15x. In the past, investment banks dominated this space, underwriting deals and then selling down the debt or co-syndicating with commercial banks. That still happens, but it’s shrunk because investment banks have retreated from aggressive lending practices. Now, the credit guys hold the assets rather than syndicating. They are independents, largely staffed by ex-credit people from investment banks.

Q: How have your capabilities evolved in terms of providing assistance as well as capital?

A: We now have a team of 25. We are the most heavily resourced mid-market PE team in Australia and New Zealand. The tendency here is to bring in help from the outside rather than having it as a permanent member of your team, which incurs a cost. We formed the view that to do what we do it’s imperative to have this resource in-house. Increasingly, turnaround becomes growth. We try to get through the stabilization part quickly, ideally within six months, and then we are on to growth – either organically or through M&A. For us to achieve the exit we want, while we don’t need to deliver on as much growth as a pure-play growth PE fund, there must be a growth story.

Q: What kind of operational resources do you have?

A: At the start we just had a finance operating partner, someone who could go into a company as the CFO. Now we have eight operating partners and we think of them as specialist and generalist. The generalists can go into a situation as the CEO or COO, they have general management skills. Our specialists focus on certain areas: finance; transition, which means taking a business that has been part of a global group and help it become a stand-alone entity; project management; technology; and marketing and branding. Endeavor Education had no incumbent CEO or CFO, so we parachuted in our operating partners. That was attractive for a vendor looking to achieve a quick exit.

Q: And what is the most operationally complex deal you’ve worked on?

A: They are all complex in different ways. Carpet Court had a lot of moving parts and turning it around has been quite a journey. When you have a combination of company-owned stores and franchisees it can be difficult. Another challenge comes when a company has been through an aggressive bolt-on acquisition phase that hasn’t delivered synergies or there has been a lack of integration.

Q: How often does cross-border expansion feature in your investments?

A: We’ve had detailed conversations with Chinese GPs about partnering with some businesses that have appeal for the Chinese consumer. They can see a Chinese angle – it might be a food component or a made in Australia component – but they need a local partner. We see an offshore angle with a few of our businesses as well. Ngahuia has an Asian sourcing component, while Journey Beyond, our tourism business, has potential in terms of the Chinese tourist trade.  

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• Topics
• Australasia
• Credit/Special Situations
• GPs
• Australia
• Allegro Funds
• Distress