theXtraMarket
A Mechanism for Financial Salvation?

The Problem

Oh dear - it looks like there are many dark days ahead for the UK economy! Having survived the credit crunch we now face the grim and tiresome prospect of paying for the hole this has left in the country’s balance sheet while simultaneously stemming our national “overheads”. I suppose this is rather familiar territory to the turnaround professional, if a little different in scale to the usual corporate cashflow problems...

Businesses have been given a bit of leeway until now, such as deferred capital repayments, interest holidays, extended PAYE payment terms – all of which has probably achieved something positive in preventing some otherwise healthy businesses from falling over due to a simple short-term cash crunch. But what about those businesses who’s problems are simply too big to work through? There must surely be a limit to the ability of owners, banks, government and trade creditors to buy time for such businesses and I for one am wondering where and when these problems will hit. Will the dam burst or simply overflow at a manageable trickle? I certainly don’t pretend to know the answer, although I would speculate that there are more problems ahead of us than there are behind.

The prospective tragedy is that there are decent businesses out there which will fall over simply because they won’t be able to find the investor who wants to back them. At the same time there are investors who can happily deal with stress and businesses in difficulty who will struggle to find the transactions they want to complete. This isn’t because anyone is doing anything wrong - it is due to the fact that investors and investment opportunities in the current market are not adequately visible to each other. Why is this? The answer is boringly simple - It is utterly impossible and uneconomic for every adviser to meet and stay in contact with every specialist investor and vice versa. I have personally met more than 100 such investors – and I am talking here about organisations that generally have significant funds to invest and a formal investment process that mirrors that of a more generalist private equity investor. Then on the other side there are literally hundreds of insolvency practitioners and corporate finance advisors who will be handling the issues of troubled businesses in need of new funds. How can these parties come together to everyone’s advantage?

The Answer

You will not be surprised to discover this is a question I would very much like to address. I can do this by pointing to our own brand new solution in the form of theXtraMarket.

What is needed is exactly what we have provided – a market. What is more, this is a market where stakeholders and their advisors don’t have to pay for the privelege of listing a transaction. This removes barriers and makes us effectively a free service to anyone looking for new investment.

We are not behaving charitably – our business model allows for a 1% introduction fee from a successful investor who sees an opportunity via theXtraMarket [smaller version of our logo]. However, we do think the outcome will be good for everyone by ensuring two way access to investors and transactions respectively.

[XM] takes the practical form of a website www.theXtraMarket.com in order to provide a window for investors to see transaction opportunities. However, although there is a degree of sophistication and automation in the process, this is a relatively small world and there is a high level of day to day contact and discussion, without which any market would be lifeless and sterile.

Building Blocks to a Deal

Not all potential transactions will be worth listing on XM. Let’s examine some of the features that make up a “fundable” stressed deal.

• Timescale – less than 2 weeks before armageddon is probably too much of a challenge. It would have to be a truly wonderful opportunity to pursuade an investor to cancel his or her life and work 20 hour days to close a deal in such a limited time. The nearer to 6 weeks of time available, the more investors will potentially be able and willing to take a closer look.
• Upside – unless the business can be shown to have prospects for generating a positive and attractive return there is little point in listing the opportunity. Good returns from doing what you have done before are likely to be credible – “hockey- stick” growth projections to generate profits won’t be persuasive.
• Control – most investors into stressed situations want a control position. While possibly deliriously happy with the management team, these are high-risk investments and the investor will usually want to be in a position to take command if things aren’t working out.
• “Money off the table” – generally speaking, the new money coming in is to recapitalise the business and give it a workable future – it isn’t normally available for paying off an existing stakeholder unless the associated deal is particularly attractive and makes commercial sense.
• Geography – many of these investors are international in their investor appetites so location is not of prime importance providing the economic and legal background in the country of operations is adequate.
• Insolvency – processes such as voluntary arrangements and administrations are generally well understood by these investors. There has to be a good reason for the process – e.g. removing unwanted leases in a retail business – because a consensual deal with stakeholders which avoids company failure is usually seen as preferable in preserving contracts and agreements and avoiding stigma. However, these investors certainly do want to see “pre-pack” transactions.

Why theXtraMarket Works

This is a “why wouldn’t you?” service. We have access to more specialist investors than any other single source and professional advisors are sensitive to the advantages that come from using such a resource. However, there are strong positive reasons why using XM is the right thing to do:

• Using XM maximises the chances of gaining an investor and closing a transaction.
• XM provides a route that demonstrates that a deal was made broadly available to this specialist investor population without interfering with existing relationships and contacts, thus allowing advisors to confirm the completeness of their marketing efforts.
• Our investors are very happy to have access to a stream of potential transactions and if the right deal comes along they will be ready to take a close interest. Our fees to investors are at a low level of significance to the transaction value and only payable on success.
• We do not compete with advisors – indeed, we see ourselves as a service provider to the professional. In essence we are only a publisher and we are not happy to list transactions on [XM] unless the company concerned is being properly advised.
• The XM process meets all requirements as to confidentialty via Non Disclosure protocols agreed with the directors and advisors of the subject business.
• XM offers a co-ordinated approach to ensure there is no duplication in contacting potential investors.
• The XM approach provides a very rapid and cheap route to potential investors – these organisations are happy with raw information and do not require the preparation of an expensive Information Memorandum to attract their interest.
• The XM approach provides a very rapid and cheap route to potential investors – these organisations are happy with raw information and do not require the preparation of an expensive Information Memorandum to attract their interest.
• The post-transaction 100 day plan will always be important to the investor. In most cases these organizations do not have limitless management resources and they will value the presence of a specialist turnaround manager to give comfort as to the likelihood that required management actions will be properly planned and implemented.

Membership

You do not have to be a member to use the market to raise money. Simply visit the site and use the “List a Transaction” option. All deals will, however, need to meet a quality threshold before being posted.

Membership is generally restricted to professional advisors, bankers and stress-specialist investor organisations, but there are different tiers of membership for other intersted parties, generally requiring a fee.

Turnaround Managers

We are very grateful for the support we have received from PilotPartners and the links their role affords to the turnaround specialists is invaluable. Every “stressed-deal” represents a situation where the existing management team is working outside the parameters of normal business management. As the turnaround professional knows, managing crisis is a particular skill with its own priorities and radically different decision timescales. Turnaround managers will often be in a position where an awareness of XM could make a great difference in the potential for a business to survive – which will also generate a deal opportunity for XM! On the other side of the fence, specialist investors will value the capability of the turnaround specialist to effect the crucial 100 day post-investment- plan. Getting hold of new investment creates continuing management roles for the turnaround specialist, protects jobs, safeguards existing stakeholders, generates investment returns for investors and keeps XM busy! Well, what are you waiting for.....?

The Future

Whatever the scale and duration of the economic problems that face us here in the UK, every business saved with its jobs and activity continuing into the future represents a positive outcome for us all. Turnaround managers, advisors and investors are all ready and able to do their bit and I hope that XM can contribute to an improving and effective rescue culture.

Alan Thomas
CEO
theXtramarket Ltd
E: alanthomas@thextramarket.com
T: 0785 5048939