Our investors, partners and financiers often ask us why we focus on partnerships rather than buyouts. Full buyouts are easier to manage (given total board and managerial control) and transact (potentially cleaner structures and documentation) so why do we continue to leave significant equity with our portfolio management teams?
Minority stakes or pools of equity for staff come with an up-front cost and multiple conversations, negotiations and documentation outlining each party's responsibilities and expectations. However, at the end of the process, assuming we have completed comprehensive due diligence and relationship-building exercises, there isn’t a better way forward for an asset, management team or portfolio.
Trust and transparency should have greater emphasis within finance and investing, especially private equity and venture capital. I’m not proposing a completely open book policy but a model where a significant majority of data, information and decision-making is open source. If you find yourself opposing this statement, I would venture to guess that you’re picturing a top-down system and hierarchy where power and decisions remain with a few managers at the top.
What about flatter structures with decentralised decisions and responsibilities?
Optimising for collaboration and alignment
Experienced funds and managers are justified in their desire for total control and oversight in each line item on a PNL. The game is about margins, and margins must expand. It’s an incredibly successful model that has produced exceptional returns for a lot of managers but doesn’t fully realise the strength and potential of the underlying asset.
Financial engineering and cost-cutting are overlooked by founding teams and existing management. In a bull market, there is no better honey trap than over-hiring and over-committing. It’s common and expected. But an inevitable downturn always causes companies and businesses to introspect and rediscover the high financial performance and operational efficiencies that investors love so much. This usually means layoffs, reduced benefits, expenses and credit lines. This is where private equity thrives. A ruthless lens that leaves the key drivers of the business in place and removes everything else.
What about facilitating further growth and developments? Where do research and experimentation fit into this mix? Expansion of products and services and ventures into new areas of business and markets that simultaneously minimise risk?
That’s where we, Mandeleo, want to operate. A world that combines the optimism of venture capital and venture studios with diligent financial and operational management.
Finding the sweet spot
Let’s take Mandeleo Animal Health Group as an example. Veterinary clinics across the UK are incredibly profitable with phenomenal margins and inelastic demand that can withstand most economic cycles. One of our advisors aptly said, ‘vets are great practitioners who made obscene amounts of money by accident.’ That is why we want to operate in the space. We believe our team has the right operational expertise combined with digital transformation and investment experience. Then again, so does everyone else, so what makes us different?
Partnerships.
It is easy to invest in veterinary practices across the country, take full ownership and add in our processes and procedures to increase margins and gear up for a sale in 5-7 years. But that would leave a lot of value on the table. The animal health sector is booming and will continue to do so. The new age demographic of pet owners skews towards Millennials and, eventually, to Gen Z and beyond. A digital-focussed generation that is quite aware of their impact on environmental, social and governance issues across the world.
Financial engineering will undoubtedly increase our returns, but it will not address the unmet demands of the new-age clientele. That is the sweet spot.
We partner with our clinics to align the portfolio's mission, vision, and values. We target incredible returns, implement smart but flexible budgets, negotiate the best deals with our suppliers, and centralise costs across the group. That is our responsibility. We also empower our teams to experiment and explore with autonomy in day-to-day operations, process engineering and people management. That is our value.
Currently, clinical teams are overworked and underpaid. There is also a massive shortage of veterinary staff across the country. Occasionally, through conversations with practice managers or surgeons, we hear interesting ideas and thoughts on how to improve employee turnover, operations or develop new products and systems. It becomes apparent in the discussions that the issue is not the validity of the ideas but the lack of time, resources, and support to implement those ideas or experiments. That will change with us.
Our goal is to bring out the best in each other and share in our businesses' future wealth and successes. This concept goes both ways. By introducing transparency, honesty, and autonomy amongst our staff we can unlock the human capital within our businesses. We want our staff to own a piece of their workplace. We want our teams to have skin in the game, akin to the GP-LP relationship. We also want our staff to feel comfortable exploring novel solutions and taking measured risks to chase high rewards.
The proof is in the pudding, and we have a lot of work to do but as we continue down the journey, the partnership pillar of our strategy has never wavered. It has only been validated and strengthened by the response and excitement of the teams we talk to and the solutions we continue to build.
Until next time.
