Ensuring prudent entry valuations through bull markets
As investors, we are acutely aware of the risk of paying too much for a company when investing into an otherwise attractive value creation opportunity. A too high entry value risks turning an otherwise great value creation job into a mediocre investment return; and, an average value creation job into a dismal investment return.
Credo Partners’ investment model represents a high-touch, very active ownership approach; thus, the investment return from our portfolio companies should reflect the value-add of the time, insight and human capital we bring into our ownerships, and therefore reflect a superior return relative to peers.
We therefore pay significant attention to the risk of paying too much at entry into new companies, even when we are confident about the value creation program we bring to the table. The demonstrated 37% IRR from our realized portfolio demonstrates that we effectively master both entering new investments at prudent valuations; and, contributing to creating super-normal returns through our active ownership periods.
To ensure maintaining prudent entry valuations through the bull markets over the last years, Credo Partners has applied a two-pronged investment sourcing strategy:
Be the preferred buyer through early and deep strategy work together with existing owners and managers of potential acquisition companies to jointly fully understand the potential value creation opportunity, what it takes, and what it can mean for existing owners. This ensures focus on the future joint value creation potential, and builds a partnership context into the case from the start, even before the transaction is made. This approach characterizes our investments into e.g. Mill, MMC First Process, and Q-Light. With this approach, Credo Partners invests into being owners’ and managements’ preferred value creation partner, making it less important for owners to capture the last dollar at Credo’s entry.
Create our own platforms for “buy, build, and transform” for extraordinary value creation. The bull market affects the valuations of medium and larger companies to a higher degree than smaller companies. Thus, multiples for smaller companies have to a much larger degree remained unaffected by the last years’ boom markets. Credo Partners has therefore taken an active role in spotting industry opportunities for bringing several smaller companies together to form a strong contender. This approach is reflected in our “creations” of Konstel, Tellus, Evidi and Project Fitness; groups that have been built into a nr 1- or 2-position within their respective industries within 18 months from Credo’s entry.
We believe this two-pronged sourcing strategy will prove to be as robust in weaker financial markets as it has proven in the hitherto bull market. Both approaches leverage Credo Partners’ partnership-based investment strategy: We invest in partnerships with founders and managers that truly believe in the long-term potential of their companies, but have the insight/foresight to conclude that to truly succeed they need a professional partners that can support transforming their companies on to a trajectory and platform for long term growth and success.
In summary, we believe that our prudent entry valuation approach with a two-pronged sourcing strategy, coupled with a dedicated strategic/operative transformation methodology, represents a solid methodology for ensuring attractive returns to all stakeholders in Credo’s partnership model: To owners/founders; to our LP’s/co-investors; and to Credo as active owners in our investment cases. It is our belief that this thesis will be further proven in the period ahead when several of our portfolio companies that were acquired in a “bull market” will be ready for a new ownership (“exit”) in the next years. In this perspective, we believe our Globus Wine exit in July this year represents a positive indicator of model robustness, with a return of 4x capital at a time equity markets where down 20% from peak and markets faced severe future uncertainties.