In my last blog, I shared a topic near and dear to my heart: the need to bridge the gap between SMEs (Small- to Medium-sized Enterprises) and the global capital markets. The three key reasons big money doesn’t follow the value of investing in SMEs are due to issues involving risk, scale, and liquidity.
But I believe you can address the disconnect between value found in SMEs and capital by clustering the best SMEs and publicly listing them. I refer to this process as an agglomeration, and by doing so, you can lower the risk typically associated with investing in SMEs and create scale and liquidity at the same time.
The impact of an agglomeration is twofold.
First, for entrepreneurs, it creates a connection between global capital and the value they have created. And, as a side effect, it makes them wealthy. This wealth, I believe, creates a meritocracy. It sends a message to the next generation that if you take some risks, and build a great business, add value to society and employ people, you can become wealthy. This will encourage others to follow in the same footsteps. Also, first-generation wealthy people are generous: they spend their money and are philanthropic. Give money to entrepreneurs, and they go on to solve bigger problems, or they spend it in their communities and create a real trickle-down effect.
Second, we are not all entrepreneurs, but we can unlock the trapped value in the SME space for ordinary investors. The financial markets have become a slaughterhouse for investors in recent history, where one seems to play a zero-sum game with the greediest people on the planet. Investing in bonds or equities is often described as “risk-on” or “risk-off” investing, but with the bubbles in both the share and bond markets, it is “risk-on” or “more risk-on” right now. I genuinely believe that through agglomeration, we can also make investments for ordinary investors that are profitable, debt-free, fast-growing, well-diversified, and pay a dividend by accessing a previously completely untapped part of the economy that also happens to be by far and away its most significant part.
Agglomeration has the power to redistribute trillions of dollars throughout the world because it is distributing it in a meritocratic way to the people in society who work hard, take risks, solve problems, and create jobs. The rewards and upside go to the ordinary people who back them by buying the shares.
So, how is an agglomeration accomplished?
Take the Different Approach
I decided to approach this in a completely different way by creating a common holding company—a publicly-listed holding company—that is shared by a number of business owners in the same sector. In effect, they swap their shares in their private company for shares in the public company and collectively own the majority of that publicly-listed company. Now, each person is still responsible for running their own business, but they can’t tell each other how to run each other’s business—they’re all equal. They form what’s called a “founders board,” so they can effectively make collective decisions on how they cooperate, but they’re not actually able to tell each other what to do.
These businesses effectively co-own the listed company, so what you end up with is a listed company that can report its accounts as the sum total of all the subsidiaries. If you have ten subsidiaries and they’re each doing $1 million of profit, you’ve now got a listed company that’s making $10 million profit a year. There’s a huge difference between a public company’s valuation doing $10 million a year in profit versus a private company doing $1 million a year in profit.
The three key issues of risk, scale, and liquidity are all addressed through the common holding company structure:
- You’re a lower risk because you’re a portfolio of independent limited companies, so it doesn’t affect the whole if one of them fails. They’re diversified across different products, services, countries, and currencies, thereby creating a lower risk profile.
- You have the scale with the big public company you can point to, so now you can win bigger contracts, apply for government contracts or bids for large businesses, and benefit from the credibility that comes from being a fully reporting public company.
- You have the liquidity because you’re now a public company, so you get that liquidity push-up in valuation; effectively, all the components of the deal get a much larger valuation.
The person who puts the deal together ends up with a slice of the company at the top, so it’s easy for the organizer to wind up with a decent share of the whole thing. It’s fairly easy to put the deal together on a no-money-down basis. It’s a powerful structure for growing quickly and adding lots of shareholder value.
And, the structure is a real game-changer. It potentially unlocks the value that’s being left on the table. The small business sector represents 50% of the economy in most mature markets, trillions of dollars of value across the globe. It’s a surprisingly easy conversation to have with business owners because you’re helping them go public. They retain their independence and can continue to run the business in the same way, but they create enormous shareholder value for them and their families.
Many of the no-money-down strategies I talk about at the Harbour Club deal with distressed and motivated sellers. For an agglomeration, you’re talking to people who are solvent, debt-free and doing well, but they just feel like they could do better. They want to fulfill their ambitions—that dream they had when they came up with the idea for the company. This is an opportunity for them to effectively create something truly game-changing and different within their particular sector. And who doesn’t want that?!
If you’d like to learn more about agglomeration, I invite you to attend one of our Harbour Club events. Not only do I share the ins and outs of deals, but it’s also a place for you to network with other Club members and learn from them as well. Events are currently conducted virtually, so your health and safety are ensured.
Let’s Connect!
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