By John Cotter
The telephone rings. The voice of the stranger on the other end of the line is desperate. He is staring down the barrel of a shotgun clause and his partner just pulled the trigger. Now he needs $4 million fast or he is out in the cold.
This is business as usual at Argosy Partners, investors of last resort. Formerly a traditional merchant banking firm, Argosy was reorganized two years by partners Richard Reid and Jim Ambrose as a $20-million-equity fund intended to take advantage of opportunities exactly like this one – ownership crises in private firms that momentarily leave equity up for grabs at bargain prices.
The market niche Argosy has discovered lies in seizing that magic moment.
The case above is typical. One partner in a private firm actually triggers what is known as the “shotgun clause,” a nasty provision found in many partnership agreements that allows one party to demand the others sell their shares at a given price, or else buy out the perpetrator at the same rate – usually in a very short length of time. Typically, the clause is triggered at a bargain price when the target can least afford to buy. As a result they are forced to sell.
That’s where Argosy comes in, picking up the option to buy out the shooter and rescue the target, along the way acquiring equity in a company that simply would not come up for sale under normal circumstances.
The formula works, but the problem is always reaction time. “One of the most important weapons we have in our arsenal is that fact that we can react extremely quickly,” said Reid. “We can give a go/no go decision within 48 hours and move on to a written contract within a week.”
Typically, funds are actually disbursed within 14 days.
In other words, due diligence must be accomplished in a matter of days, no more. In order to accomplish that, Argosy uses a team of outside professionals, including forensic accountants, lawyers, and private detectives. In the interests of speed, they gather information with the aid of a court reporter who records verbal questions and answers. And the partners work virtually around the clock until the deal is complete, or else a decision is taken to abandon it. A project last Christmas began on Dec. 23 and the team worked straight through Christmas Eve, Christmas Day and Boxing Day, finally closing the deal on Dec. 27 at 4 a.m.
If two projects were ever to occur at the same time, one project is sure to collapse, said Ambrose. “No chance. Sorry, we’ve tried. If we have five days on one and 30 on the other there may be a chance. But when they are both ten days, we have to pick one or the other.”
In this line of business, shotgun finance, Argosy has virtually no competition, said Reid. Lenders tend to shy away from a conflict that is certain to disrupt management. By definition, the principle or principles who are thrown on the defensive will be unprepared to approach venture capital firms with a properly detailed proposal and business plan and third-party agents simply don’t have the time to undertake a search. The concept arose from a discussion between Reid and Ambrose about what would constitute the perfect private equity investment. What they ended up with was basically the same list of criteria they use today for inclusion in their shotgun fund: An established firm, which is self-financing, probably beyond $10 million in sales but still with some room for growth, and enough middle management in place to operate smoothly without the founder or founders present.
As a matter of preference rather than strategy, the partners prefer to focus on the manufacturing, service and distribution sectors and they like to hold between one-third and two-thirds of the companies they get involved in.
When such properties come on the market, competition is fierce. If a strategic investor does not hear of them first, the buy-out funds line up to snag them. That is why Argosy Partners developed the technique of lying in wait for a shotgun crisis.
Because the window of opportunity is so small, the first challenge they face is finding the properties at all when the time is right. It was essential to come up with a device so Ambrose and Reid trademarked the term “The Shotgun Fund” and loaded it on the Web. That brings in some business, but the most reliable technique is still to canvass advisers and intermediaries such as lawyers, accountants, bankers and insurance agents.
This effort brings in about 100 possibilities a year. Of these the firm actually tendered an offer on 12 last year and closed four. At present, Argosy has about $6.5 million invested, or a third of the fund.