How to buy low and sell high

Ally Selby: Hello and welcome to The Pitch brought to you by Livewire Markets. I'm Ally Selby, and today we're very lucky to be joined by Schroders' Head of Private Assets, Claire Smith for insights into how you can buy low and sell high. Thanks so much for joining us today, Claire. Really excited to feature you on the show. Sounds pretty ideal - buying low and selling high. How do you even do that?

Claire Smith: So in private equity, when you look at buyout companies, which are quite profitable companies, we segment the market into small, mid, and large as you do in most equity markets. But there's a real difference between private equity investing versus buying a listed company. So you often have to sign a non-disclosure agreement and undertake months of due diligence. There's no publicly available information the way there is obviously in the listed market. So that's quite a lot of effort. 

When you think about return on effort, a lot of investors are exclusive in the large-cap part of the market because of all that work. Obviously, if you're only writing a small ticket, that can be quite cumbersome. But that's exclusively what we do. So, we focus on the small-cap part of the market and because there's less competition, that part of the market trades at a discount to the larger end of the market. So, we actually can buy at a low multiple, and then the plan is to grow that company and then sell it at a higher multiple. So, buy low, sell high.

Why would investors focus on the large-cap market then?

The small-cap part of the market outperforms the larger-cap part of the market, but there are people who are specialised in that part of the market. You look at the big superannuation funds, some of them are so large now that they can't undertake the work to write a $20 million cheque, for example. So we find, with our part of the market that we operate in, we're happy to go down to even a $5 million ticket and then we typically cap out at about a $100 million ticket. That's where some of these bigger investors start to play. 

It's actually not a very efficient way to run your business. Every time we want to double the amount of money we invest or double the amount of deals we do, we have to double the size of our investment team. So, it's not scalable. However, that's the way that we have built our brand. That's the way we've delivered returns to clients and that's what we're going to continue doing going forwards.

Claire Smith: We have a few key strategies. Often family-led or founder-owned businesses are the sweet spot. We find these can be really good companies with great legacies but perhaps aren't as efficiently run as they could be. We're often the first institutional capital. 

We could help them with internationalisation, particularly if you look at a market like Europe, which is very fragmented, with lots of different languages and legal restrictions. We have skills to help them expand there. It could be adding products to their suite, it could be improving operational efficiencies, improving sales, and lots of quite easy value creation levers that we can build to take what is a well-regarded but perhaps sub-optimally run company and professionalise it into a better company that is then more attractive to a broader range of buyers.

Claire Smith: You have to look at things like leverage. I think a lot of small-cap listed companies are quite heavily leveraged, and I know there are a lot of zombie companies out there. So, we look at things like what's their financing structure, how much capital they have available, what's their angle in the market. So, a lot of normal due diligence. But when you look at, say the general statistics around buyouts - typically one in 10 private equity buyouts will go bad. Our long-term track record is a 3.5% loss rate. So, we've proven we've got the skills, the expertise, to pick those good companies and help grow them. And more often than not make money rather than lose money.