Experience building a portfolio of small cos. and operating them as one?

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August 25, 2020

by a searcher from INSEAD in Santiago, Región Metropolitana, Chile

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Reply by an investor
from Columbia University in Dallas, TX, USA
More difficult to do if you use typical capital sources for search funds (loans or capital structure with different classes of shares) or if you use other instruments where creditors/investors have different types of right.. For example, lenders bargain for covenants and other protections, including to prevent asset stripping, self-dealing, insider or related party transactions, etc. Similarly, different classes of equity may have liquidation preferences or approval rights for specific activities. These are just a few examples. If you are operating multiple, separate vehicles with different capital structure and investor bases, you have to be very careful to avoid violating finance documents and restrictions or shareholders rights. Notably, apart from what is on paper, directors and majority owners may have legal obligations to the company or its shareholders. For example, directors in many jurisdictions have a duty of loyalty to the company or cannot oppress minority holders. This makes it tricky to treat multiple companies "as one" if they are not actually "one." Be careful, especially if your companies have different sets of stakeholders, even if there are not formal agreements like loans or shareholder agreements that specifically address these matters. There are ways to achieve synergies, but you'll want to be careful, and duly and defensibly document actions that are required to be arm's-length.
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Reply by a searcher
from University of Pennsylvania in Dubai - United Arab Emirates
Your question can be interpreted in a number of ways. The above comment assumes you are asking about creating a "conglomerate" using a holding company to buy and control a number of independent companies. Hanson PLC (for those old enough to remember), MacAndrews & Forbes (Ronald Perlmans vehicle) and Berkshire Hathaway are big famous examples. The question there is always is whether there is value to be created in this manner. However it could also be interpreted as a a query about buy & build which is a common strategy and one I have backed in the past. There is a ton of literature on each of these.
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