Finding the needle in the haystack

But what determines whether it is the right match or not? Trying to answer this literal million-dollar question, we sat down with Stefan Linder, long-time Partner at Altor. Stefan has a track-record partnering with stellar companies such as Byggmax and Dustin in the early years, and Toteme more recently.

In this conversation he talks about how the tough process sometimes involves the heart as much as the head – and where creativity really kicks in.

Which companies are you primarily looking for?

“Historically, we have looked for companies that are performing all right, but have a large performance delta, meaning the difference between what the company is today, and what it can be tomorrow. We always look for those wanting to do the work to become best-in-class, sometimes even with the ambition to reshape their industry. In recent years we’ve also increased our focus by selecting five industry sectors that we are primarily pursuing.”

Tell us a bit about the process?

“When we first look at a company, we pose the question: Is this a company we want to own? Is it a company with an interesting market position and with a distinct contribution in the value chain? Is there anything unique about it? And we are looking for the not-fully-polished companies that have that delta I just mentioned. Those who have a lot left to work with – be it margin improvements, cost efficiencies, productivity, or boosting growth. Those areas are our core competence, that is what we desire to do.”

“We also look for the obvious red flags: the stuff you don’t want to find. A company that is too exposed to cyclicality, or has a very high customer concentration. Sometimes you get tempted to believe that risks like that will not materialize, “this time is different” – because you get a bit personally invested in some cases. But trust me, they typically always do.

 

 

 

 

If a company has made it to the final sprint, it rarely falls on the partnership. It usually falls on the calibration of ambition versus risks – do we feel confident in our ability to close the delta. Sometimes you fall so much in love with a company you just want it to work – but in the final stage we really challenge each other to make sure that we call the right shots.”

Does investing in those who have a way to go equal taking a high risk?

“I would say no. There is risk involved in any business you buy. To take two extremes, a company in distress is naturally a high-risk venture to invest in – but if you pay a high premium for company which already is best-in-class, it needs to continue to perform at that high level to make up for the price tag, and that is a sizeable risk too. We take the risk with our partners that we will be able to significantly improve company performance, but also have the will and the skill to support the companies to do just that. That is a risk we are comfortable taking, when we have selected the right opportunity.”

 

If it turns out to be a No to investing, I guess that is a tough decision for all those who have pursued the partnership?

“Our investment teams usually have a core of three or four people with support from a larger group of expert colleagues. Many times, we have spent months on a transaction and if it falls on the finish line, it is tough. This is a process that sometimes involves the heart as much as the head. But it is important to keep your eyes wide open until the end, and if it does not work out, accept the fact, mourn, and then get up and move on. It can be incredibly painful when you saw an opportunity and started to look forward to the partnership. But we also know that we need to stay cool and make the right decision in every situation.”

Are there companies you have approached several times?

“Yes, it is quite common that we come across a company many times. We might have knocked on their door early on when they weren’t looking for a partner, and later they come calling when they’re facing a big investment, an expansion or a generational shift. And some companies we got to know as private companies and later invested in after they’ve gone public.”

 

 

You mentioned partnership. How important is the entrepreneur?

“The entrepreneur is vital, of course. This is possibly one of the most important decisions in an entrepreneur’s lifetime – who should they partner with. The company is almost like their child, whom do they trust it with?”

So how do you make the entrepreneur get comfortable with you as a long-time partner?

“It’s a little bit like dating. But it is really a two-sided match making, an entrepreneur and their team assess us as much as we assess them. First, we spend a lot of time together. Both parties need to assess if the chemistry works. Secondly, one could assume that our biggest asset are the graphs showing our return on investments, but it is actually another document: the list of former entrepreneurs, families and leaders who we have partnered with previously. We let the entrepreneur call anyone or everyone, in order to form their own opinion and understand what we are like, how we will succeed together and what our quirks are.”

 

 

But just as important as you are to the entrepreneur, the entrepreneur must be to you, right?

“Oh yes. But it is not only the “one person”, we need the fit to be also with the management and the rest of the employees, really the culture in total. We need plenty of time to sit down together. For us to listen to the entrepreneurs and the team, let them tell their story and hear them describe what their vision and passion is. And as importantly, what they are looking for in their partner and how well can we as Altor deliver on that. We want to celebrate what they have already achieved – otherwise we would not be sitting at the table – but we need to be on the same page that we can and should create even greater things for the future, together. And we need to be honest about that the journey together may involve changing the way things have been done in the past.”

What is one big difference now from when Altor started in 2003?

“20 years have passed, and one big difference today is our refined sourcing process. As I mentioned earlier, Altor is now organized in five sector teams. Each have their own deep domain knowledge, pattern recognition from prior investment opportunities and local networks, and they look for investment opportunities in their sectors across all our core geographic markets. They also filter opportunities thematically within their sector, to see if it fits a theme they really like. But one thing that I believe always will stay the same is the search for the large delta, and of course, the next great company. The very reason we’re Altor.”

I guess, that takes us back to the delta, can’t every investment firm find that?

“Naturally, we compare the companies we’re interested in with the best in the sector, like many others. But here is where our creativity kicks in – because it is not always obvious where the big improvement potential lies in a company nor how to actually close the delta. You need to really ask yourself – is it possible to close that gap, but also use your creativity for the “how”.”