With the downturn, the tightening of venture capital and private equity purse strings and the dearth of exits, investment portfolios are littered with companies that are losing money, in need of backing and a long way from creating any exit opportunity for their owners. Consequently, several routes have surfaced to getting these stagnating assets off investors' books. Secondary venture investment funds such as San Francisco's Industry Ventures have been around for a while, but have been raising oversubscribed new funds to absorb positions in startups or limited partner commitments.
True to the adage that adversity breeds creativity, now the recession has spawned a new flavor of fix-it investment firm.
The former head of information technology outsourcing giant Wipro Technologies' American operations, Richard Garnick, is attempting to put his own twist on mining investment portfolios for turnaround opportunities by marrying the cost-cutting advantages of outsourcing with equity investing.
His new firm, ConJoin Group, targets struggling, privately owned middle-market companies that aren't big enough to hire a major IT services firm but operate the kind of businesses that could benefit from outsourcing to India or other low-cost labor pools.
"VC and private equity firms have invested based on growth and leveraged-up companies with debt, and for a long time that was an easy path to great returns," Garnick says. "Financial engineering has to be combined with operational excellence, though."
The firm aims to invest in eight to 12 companies over two to three years, with an investment size of up to $20 million. While it does not have a formal fund, ConJoin has commitments from Canadian VC and private equity firm Jefferson Partners and its funding sources for up to $200 million, Garnick says.
The average struggling Silicon Valley technology startup doesn't tend to fit the mold of a company ConJoin would target. Rather, appropriate targets have sales of $25 million to $300 million, recurring revenue streams, a "large human capital pool" and have been slow in adopting the kind of technologies that could make their operations more efficient, Garnick says.
The industries that easily fit this mold include healthcare and financial services, he adds, particularly companies that offer back-office services, such as insurance-claims processing and mortgage reconciliation. "There's a massive need for efficiency applying technology to transform these kinds of businesses," Garnick says.
Will the model work? After all, private equity and VC firms often install their own management teams or "executives in residence" to bolster struggling portfolio companies. Why would a private investment firm dilute its holding with another investor when it could fix the problems on its own?
"The largest PE firms bring in executives, but those are one-off project engagements," Garnick argues. "I am institutionalizing this and building a repeatable model."
Garnick has met with some of the most prominent private equity firms recently, including Kohlberg Kravis Roberts & Co., TPG Capital and Weston Presidio, and so far he says he's had a positive response.
"In many cases, only the bulge brackets have robust operational teams in place but no common approach to apply across the firm," he says. Small private equity firms, on the other hand, have very small resources to fix problem assets, Garnick contends.
"They're spending a lot more time managing their portfolio assets, and we can take some burden off their shoulders on the operating side."
So far, ConJoin, which launched in April, has taken on only one project: Oakville, Ontario-based Avotus Corp., a $30 million annual-sales company that automates enterprises' telecom services and asset management. The company was languishing and losing money in Jefferson Partners' portfolio after the firm took it private several years ago.
Garnick was asked to take on the executive chairman and CEO roles and shake up Avotus' operations. So far, ConJoin's model has proven fruitful. By outsourcing to ConJoin's Mumbai-based services team many of Avotus' back-office operational tasks, the firm boosted Ebitda by more than $10 million in less than nine months, he says.
ConJoin is close to securing its next deal, Garnick says, and, attesting to the widespread pain afflicting private investment portfolios, has a six-month pipeline of more than 80 other potential projects.
"We projected the market would have this dislocation a while ago but didn't project it to be this big," Garnick says. "There's a clear gap in the market that presents lots of opportunity for us."