Investing in cyclical Industries

July 23, 2019

by a searcher from Columbia University - Columbia Business School in New York, NY, USA

What I've understand so far is that the approach recommended for successful search fund investors are to limit the searches to 'stable, unbreakable' businesses that have been had a steady state of performance. Just wanted to know if there are searchers who have pushed that boundary to explore cyclical industries (e.g., Oil & Gas services as compared to Telecom services). And if so, would be willing to discuss the pros and cons ?

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Reply by a searcher
from Northwestern University in Los Gatos, CA, USA

We look at both cycles and seasons. We don't have fundamental problems with either, but recognize that the earnings basis and multiples that comprise the valuation must consider both. The main issue we run into is that cyclicality and seasonablity both create problems for raising acquisition debt, which is part of our financing strategy. One must be particularly cautious using leverage to acquire goodwill and intangibles. Putting debt against collateral is one thing, especially when that collateral's value is not exposed to the same cyclical and seasonal variations as the business' cash flow, but putting it on intangible assets is quite another and should be underwritten and contingency-planned carefully.

Reply by an admin
from Stanford University in Honolulu, HI, USA

^redacted‌ - If you go to searchfunds on the green toolbar, then click on searchfunds list, you'll be able to search using the phrase oil and gas for acquisitions in that sector. ^redacted‌, the phrase real estate will also work for you. (No quotation marks or abbreviations).

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