Understanding the "Demand" Function
Before Fairmont will even consider a potential investment, we first assess the "demand" function for the business. Why do customers desire a particular product or service from the company? By understanding the "why" of the demand function, we can then analyze how Fairmont can assist the company to increase its sales and profitability.
Fairmont has a history of acquiring companies that contain hidden values. These hidden values may exist because (a) the business is in transition or needs to be transitioned, and that transition has not yet occurred; (b) there is a dislocation or disconnect between the true ability of the business to generate revenue and the reflection of that in the marketplace; or (c) there is a misperceived imperfection in the business which has not been properly analyzed and quantified.
Types of Businesses
Family or Individually-Owned Companies whose growth may have slowed as successful owners became risk-averse over time or slowly withdrew from the day-to-day operations of the company.
Corporate Orphans are businesses held by large corporations that typically lack focus and direction from corporate headquarters.
Stranded Public Companies are those businesses whose market capitalization is less than $1 billion with their stock trading in a narrow range, with little correlation to earnings. Compounded by low trading volume and no analyst coverage, there is little liquidity for shareholders. A "going-private" transaction provides the shareholders with the liquidity they desire and frees management to concentrate on long-term growth rather than short-term stock market fluctuations.
Non-Optimized Private Equity Owned Companies are the result of buyout firms that have little operating experience. Due to this lack of oversight experience, these portfolio companies may not be optimized in good times and they may be beset with significant valuation write-downs in bad economic times.
Companies with Misperceived Imperfections are many times overlooked by most private equity firms who have moved towards what they perceive as safer, cleaner, easier deals. If a company has a perceived imperfection or cannot be easily understood from its financial statements, most private equity firms will quickly reject it and move on. Yet, many of these companies are fundamentally sound, and are great investments.
Once a company has been acquired, in order to add value and to help transition the business into a more efficient and professionally managed structure, Fairmont augments the management team with its own team. We typically place two or more experienced operating executives with relevant industry or functional experience on the board of each portfolio company. One or more of these individuals may have been involved in sourcing the transaction or assisting Fairmont in conducting due diligence prior to making the acquisition. These individuals provide strategic oversight and technical support.