The Art of Picking an Investment

How do the professionals choose what their fund invests in? Chris Westbury explains how the Booster team makes decisions on new investments for the Tahi fund - and his insights could help you identify new opportunities.

Choosing the right investment is always a challenge, particularly when your decisions shape the success of a major fund. Booster’s Tahi fund looks for the kind of investments that are typically difficult for the average person to access – it invests in private companies that are only normally accessible to the super-wealthy. The total portfolio value is around $150 million, and although you can’t buy into Tahi directly unless you qualify as a wholesale investor, Booster’s KiwiSaver funds are the biggest investor. With KiwiSaver members’ money on the line, the stakes are high. So how does the team at Booster choose which businesses to invest in? Associate director Chris Westbury provides some insights – which give you a window into the top-level thinking that can help any investor make smart choices.

Is your potential investment run by great people?

Successful private equity investment has a lot to do with relationships, so meeting the people in charge of a potential opportunity is vital, says Westbury. “One of the very first decision points when we’re presenting a potential investment is, ‘Who are our partners?’ We want to know what drives them – do they share our values, and do they have the same long-term strategic horizon? That’s very important because this is about long-term investing, not a quick win.”

Is it profitable?

Tahi only invests in profitable companies, and typically they are in a growth phase where there needs to be a clear road to a goal of sustainable cash earnings. Most of the companies Tahi invests in are producing strong earnings from the outset. “Ideally, we never exit our holdings; we’re working on building in value and creating sustainable cashflow,” Westbury says. “That’s our key test: can this company produce sustainable long-term cashflow for our investors? You’ll never hear us talk about multiples of revenue, it’s always multiples of earnings.”

Does it have a sustainable competitive advantage?

Consider your potential investment in its sector. How easy would it be for a competitor to come along and knock it off its perch? Warren Buffett calls this an ‘economic moat’: the company’s ability to maintain its competitive advantage. “We like to invest in areas that New Zealand does well at,” Westbury says. The Tahi fund invests in wine, dairy and horticulture as major parts of its portfolio. “We’ve found a happy hunting ground in the primary industries, because we Kiwis are good at it. The world’s population is growing, and there’s increasing demand for high-quality protein, food and drink.”

Is it taking IP to the global stage?

A business doesn’t need to be huge to be valuable. It can simply be producing something unique that dominates a small market by adding massive value. That’s the case for Dodson Motorsport, which specialises in double-clutch gearboxes for racing cars. “Nobody is replicating this type of product or manufacturing,” says Westbury. “You can see that because nearly all its product gets exported. We don’t see it as simply a motorsport business, but also as a precision engineering business. It isn’t high volume, but it’s high value-add.” Similarly, Zeal Creamery is taking grass-fed A2 milk to the global stage, capitalising on New Zealand’s reputation and skills in the dairy sector. “We produce milk with half the emissions of the global average, which is indicative of New Zealand’s industry-leading position in dairy.”

Is there still room to add value?

Consider the future for your potential investment – if it’s a small business it must be scalable, and it must continue to be profitable for many years. Think about how it could get even better at what it does, or apply its strategic advantage to either another slice of its sector, or step into a new sector. Westbury says every Tahi fund investment has room to add more value. “The easiest dollar to invest is into a company you already know, so we look for follow-on, value-add opportunities in our portfolio. That can provide our investors with high incremental returns on capital, with the opportunity for growth and expansion.”

Have you done your research?

There’s a huge amount of due diligence that goes into researching a new investment for the team at Booster. From the time they identify a potential investment, to the time the fund buys into it, is never less than four months and the process can take up to a year. The opportunity must be researched, analysed and weighed up against the fund’s criteria. It must be presented to the investment committee and thoroughly interrogated. “You have to roll up your sleeves and do the work,” Westbury says. “Doing your own research is essential, right from the beginning. Read everything you can, talk to people if possible. Rate them against your criteria – are they a good fit?” For the team at Booster, each investment made by the Tahi fund is like a business partnership, where they typically hold a minority stake but trust in the operator’s speciality expertise. Perhaps every investor should approach each share they buy with the same approach.

Booster Investment Management Limited is the manager and issuer of the Booster KiwiSaver Scheme. Some Booster KiwiSaver Scheme funds invest into the Booster Tahi fund. A Booster KiwiSaver Scheme Product Disclosure Statement is available at www.booster.co.nz