• 목요일, 02월 25일
목요일, 02월 25일

Instead of investing in equity markets, you might want to buy a private company instead

Instead of investing in equity markets, you might want to buy a private company instead

Picture=Wikipedia

[Newsphopick=Kingsley Lim] According to some observers, markets are currently at overvalued levels. After a 30% correction in April, US markets have lifted to record highs with support from speculative funds from retail investors. Some investors lament that there are no opportunities at today’s market prices.

While that is true to some extent, I have always held the view that the opportunity is in stocks with a small market capitalisation. You can find valuable opportunities in stocks which trade at less than US$100 million. Why? The markets often ignore smaller stocks. Such stocks are usually not covered by analysts and trade at less than the net tangible assets. Sometimes, you can find profitable stocks trading at less than 40% of the net tangible assets, while giving generous dividends. 

It is here that I build my argument for investing in businesses instead of stocks. For the intrepid investor, these areas are fertile grounds for exploitation. Since small stocks trade at such low valuations, what about private businesses who do not have a public presence? Quite often, many of these private businesses while profitable, especially in Asia, have had to close down. 

There are a number of reasons for this. Firstly, in Asia, there is no market for corporate control. Buyouts are a rarity. Even worse, the leveraged buyout is nearly non-existent in some countries. In Singapore where I live, obtaining financing from the banks to buy a private business is close to impossible. The banks in Singapore are willing to finance real estate development and purchases, but not the purchase of a business. It is the same in many parts of Asia. 

So with regards to financing the purchase of a private company in Singapore and many parts of Asia, purchasers have had to look towards family offices and seller financing. While the former is not a usual occurrence, seller financing is the prevalent mode of financing. In a transaction financed by the seller, the seller agrees to take a portion as down payment, and the rest in bond-like instalments until the debt is paid by the buyer. This way, the buyer finances the purchase of the business using the company’s cash flows – similar to a leveraged buyout. 

If the target company is large enough, one could look to an investment bank to help with the financing of the company. However, the deal size has to be larger than US$50 million in most cases for the deal to go through. Speaking to an investment banker, besides a large deal size, the banks must see some cross-selling opportunities to be motivated to do the deal. When a deal is executed, the financing will consist of bond-like instruments and a mezzanine layer. 

By contrast, buying a business in the US seems to be a less complicated matter. US banks are less conservative and are more willing to finance a deal, if it made sense. If the creditors are willing to finance a purchase, at a low enough valuation, it would be advantageous for buyers to initiate these deals. 

Of course, this is easier said than done. Private businesses for sale are a minefield. I recently considered the purchase of a business in Indonesia. It was a packaging company producing packaging for water products. The business owner built the business over a span of 20 years and now wants to retire. The problem is that he has not been able to find a successor. And there is no way that he will consider a public listing, for he does not have a built-in management team to run the business. To add to that, his personal financials have been mixed with the company’s financials. As such, when I requested for the last 10 years of financial statements, he couldn’t produce them. 

There are many more problems such as those described above. Sellers typically want the highest valuations for a business. In Singapore, I have seen sellers wanting to sell at a price-to-earnings ratio of ten times. This is pricey for an investment into a private company. But usually, these sellers settle for less. If Singapore’s companies list at between 8 to 12 times, it is unlikely that a private business will get the same valuations of a listing. 

Despite all these issues, why buy private companies then? Well, the valuations of these private companies can be very attractive. With enough due diligence, private companies could be purchased at a price-to-earnings ratio of around 3 to 5 times. Simply put, in 3 to 5 years, a buyer would have recovered his entire investment. 

The profits of successive years thus become a perpetuity if the company is a going concern. I have even seen and heard of purchases that occurred at a price-to-earnings ratio of 1 to 2 times. At these valuations, acquisitions done right, would likely lead to a good outcome in the future. However, this advice is not for the faint of heart – one would need a strong contrarian streak and be bold enough to make the move.

0
이 글을 페이스북으로 퍼가기 이 글을 트위터로 퍼가기 이 글을 카카오스토리로 퍼가기 이 글을 밴드로 퍼가기

0 Comments

Add Comment

captcha
자동등록방지 숫자입력
Make money whether the market goes up or down – even if you …

Make money whether the market goes up or down – even if you …

[Newsphopick=Kingsley Lim] At some point, investors have heard the mantra that one could make money whether the markets go up or down. Is that true? Well, to some extent, when you hear such things,...

Garuda Indonesia announces loss in first half of the year as…

Garuda Indonesia announces loss in first half of the year as…

[Newsphopick=Kingsley Lim] The national airlines of Indonesia, Garuda, has announced that it had suffered a loss of US$712.3 million in the first half of the year as the coronavirus pandemic ravage...

Be a writer of options to earn passive income

Be a writer of options to earn passive income

[Newsphopick=Kingsley Lim] When people talk about derivatives and options, immediately these terms are associated with “financial weapons of mass destruction” as they are often called by the media....

Planes sent to storage yards as coronavirus rages on

Planes sent to storage yards as coronavirus rages on

[Newsphopick=Kingsley Lim] Tourism has been badly affected by the COVID-19 pandemic. As such, travel demand has fallen off a cliff, causing commercial airlines to ground their planes, and store the...

Retail investors in Hong Kong prop up IPOs

Retail investors in Hong Kong prop up IPOs

[Newsphopick=Kingsley Lim] Hong Kong - As Hong Kong attempts to curb the coronavirus with new social restrictions, it prepares itself for billions in investments via new share sales as a number of ...

Instead of investing in equity markets, you might want to bu…

Instead of investing in equity markets, you might want to bu…

[Newsphopick=Kingsley Lim] According to some observers, markets are currently at overvalued levels. After a 30% correction in April, US markets have lifted to record highs with support from specula...

Jerome Powell: “The path forward for the economy is extraord…

Jerome Powell: “The path forward for the economy is extraord…

[Newsphopick=Kingsley Lim] The Federal Reserve Chairman held a press conference on Wednesday, explaining that the recovery of the US economy is dependent on America’s efforts of keeping the virus i...

Opinion: Avoid home country bias at all cost

Opinion: Avoid home country bias at all cost

[Newsphopick=Kingsley Lim] The road to recovery is uncertain according to Federal Reserve Chairman Jerome Powell. And I share that same sentiment. While stock markets around the world have rallied,...

Stimulus in Indonesia is insufficient for households to get …

Stimulus in Indonesia is insufficient for households to get …

[Newsphopick=Kingsley Lim] According to a new survey, Indonesia’s stimulus is not enough for households to survive the coronavirus pandemic. As such, economists have called on the Indonesian govern...

Silver could be a good hedge in a recession

Silver could be a good hedge in a recession

[Newsphopick=Kingsley Lim] While gold has always been the metal of choice during a recession, few investors would consider silver as a hedge in falling markets. For reasons which are beyond me, sil...