Making Investments
A moat is a characteristic that either provides a barrier to entry against competitors or enables the business to extract greater value from customers. We call these strengths “moats” to distinguish them from the more common investment term “sustainable competitive advantage” as often a moat is not unique to a single business. Just like in medieval times where many castles had moats to add to their defence, the simple presence of a moat is often not unique. Nor does it make a business invulnerable. But it protects its shareholders more than a business without a moat.
We have a five-stage investment process that draws on a collective model developed over many years. In our view, this enables us to better ‘sort the wheat from the chaff’, and to ensure that once a great portfolio company is identified, we can continue to add value in order to deliver outstanding investor returns.
Investment Process
John West famously used the advertising slogan “it’s the fish we reject that make us the best” and the Company seeks to emulate this principle by rejecting the vast majority of potential opportunities.
To facilitate its investment strategy, the Company has a five-stage investment process:
Initial analysis by the Company’s management
Potential investments must meet the following qualification criteria:
- Have a minimum four years of operating history
- Be profitable
- Have revenue greater than $2.5m per annum
- Show strong return on equity
- Be willing to be mentored by Teaminvest Private
The initial analysis of potential investments is conducted in-house by TIP’s management. Initial analysis includes:
- Investigating the financial performance of the potential investment
- Studying the business model of the potential investment and considering growth prospects
- Interviewing senior management and shareholders
Each year, we examine numerous potential investment opportunities. Only the most promising proceed to the Investment Committee stage.
Further analysis by the Investment Committee
The Investment Committee is a body constituted by the Board to examine potential investments. The committee includes:
Seven Selected Shareholders
One member of the Board
The Chief Executive Officer and the Chief Financial Officer of TIP
The Board delegates the following duties to the Investment Committee:
- Examining and assessing the financial performance of a potential investment
- Investigating whether management appears to be a suitable partner for investment by the Group, including:
- A review of the moats of the potential investment
- A review of key risks of the potential investment
- A review of key management personnel of the potential investment
- Assessing the receptiveness of the potential investment to the Company’s investment philosophy
- An assessment of whether investment in the potential investment would meet the Company’s investment goals
- Identifying industry or company specific headwinds or risks and whether these are acceptable given the potential returns offered by the potential investment
- Assessing whether an investment by the Group is feasible
The SMaRT Meeting
The SMaRT meeting is a full day opportunity for Selected Shareholders to discuss the potential investment and meet management. The day runs for approximately 6 hours and includes two question and answer sessions with management along with detailed round-table discussions among Selected Shareholders. In particular, the SMaRT meeting focuses on:
- Understanding the strategy of the potential investment
- Identifying and scoring the moats of the potential investment
- Identifying and scoring the risks relevant to the potential investment
- Assessing if the potential investment’s management is a suitable partner for investment by the Group
In addition, the SMaRT meeting also examines where and how it would be possible for the Group to add value to the business should we proceed with an investment.
The SMaRT meeting adds a further level of rigour to the deliberations of management and the Investment Committee by incorporating the views of Selected Shareholders with significant business experience.
Due Diligence
The due diligence process involves a two stage approach managed by the Investment Committee.
The first stage involves commercial due diligence undertaken by the Investment Committee and any Selected Shareholders they believe are appropriate on a case by case basis. The commercial due diligence committee is delegated the responsibility of verifying the existence of the moats identified in the SMaRT meeting, that the risks identified are no worse than identified in the SMaRT meeting, that no significant risks have been overlooked and that management of the potential investment are capable of adequately participating in an intensive due diligence process.
These factors are critical for the success of any investment:
- Without moats a business cannot preserve its competitive advantage
- Misunderstood or significant risks have the potential to damage the performance of an investment
- If the potential investment’s management are incapable of constructively completing the due diligence process, they are unlikely to be suitable partners for investment by the Company
If commercial due diligence is successfully concluded, a potential investment will proceed to the second stage, traditional due diligence. Traditional due diligence involves detailed legal, accounting and (where applicable) tax due diligence. The second stage is conducted by external legal, accounting and tax advisers reporting to the Investment Committee. We believe it is important to conduct a detailed review of all legal, accounting and (where applicable) tax matters prior to committing to make an investment in a business. Traditional due diligence is conducted after commercial due diligence because we must first determine that commercial benefits and value exist in the potential investment before incurring the expense of engaging external advisers.
Ongoing Management
Successfully managing the Group’s investments is as important as making the decision to invest.
The ongoing management of our investments is handled:
- On a day to day basis, in respect of business operations, by the management team of the portfolio company
- At an individual portfolio company level, in respect of capital oversight and strategic planning level, by the board of the portfolio company
- At a strategic Group level, by the Strategy Committee in conjunction with TIP’s Board and management
We usually invest in companies where the existing management intends to remain in place and the daily operations will not change substantially post investment. This ensures that the already successful business practices are continued.
It is at the portfolio company board and strategic level that we seek to add value. All portfolio companies have a board that includes both representatives of the founder/management, and directors nominated by TIP who are Selected Shareholders (TIPReps). It is noted that the board composition of each Portfolio Company may differ due to specific company factors.
TIPReps are selected by the Board of TIP and are sourced from Selected Shareholders. TIPReps are responsible for acting as directors of a portfolio company, providing mentorship to management and representing the interests of the group. TIPReps are paid an honorarium and are encouraged to step down from their board role once the value they can add has been achieved. In this way, each portfolio company can access a wide range of skill sets from Selected Shareholders.
The Strategy Committee is the final formal management structure outside of TIP’s management and Board. The Strategy Committee reports directly to the Board and comprises seven members:
The scope of the Strategy Committee’s mandate is to:
- Monitor the performance of board members appointed to Portfolio Companies
- Recommend the appointment or removal of board members of Portfolio Companies
- Develop (in conjunction with executives) divisional strategy goals
- Work with the Board and Company management to achieve growth
The Strategy Committee has been delegated the following powers by the Board:
- To create and adopt divisional strategy for the Group
- To direct Portfolio Company boards and CEOs in respect of divisional strategy
- To recommend to the Board the appointment or removal of any Portfolio Company board member or CEO
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