It will be no secret to Going Private readers that Sub Rosa, LLC has been frustrated lately by the absolute sea of cheap debt. We have had four misses on auctions where EBITDA multiples have hit 9.5x and even 11x. Quick interest rate sensitivity calculations tell me that the deal we lost at 11x had about 1.3% of headroom before the firm would have problems servicing the debt. This still assumed some rosy projections about revenue would hold. Given where The Fed seems headed, I just cannot see how it is rational to close a deal with that kind of interest rate risk and no margin for error.
There is always pressure to push price to close a deal, even if price gets pushed beyond the rational. Part of the difficulty in being one of the junior people in a firm like Sub Rosa is the need to push back at the senior people who want to close a deal and rely on the junior people (like me) to "make the numbers work." That can be a tough job when one has to confront charismas like Armin's.
The result has been a renewed focus on other opportunities. Europe is one that Armin has been looking at for the better part of the last 18 months. For reasons I won't go into here that particular approach has a lot of appeal for Sub Rosa. It has less for me, as I'm not really inclined to want to move to Europe in the next 6 months, though it seems things are headed that way.
Another area that Armin has been contemplating for a long while is activist investing in public firms. Recently, I was privileged enough to meet with about as famous an activist investor as you can find nowadays. The meeting, on the estate, was either kept very quiet, or happened to be totally spontaneous. I suspect the former.
One minute I was hunting for an apple to eat and the next I was being introduced to, let's just agree to call him "Theodore." I managed a weak and distracted "Hello," before we collectively endured the schizophrenic weather and the prospects of cooperation were discussed. It took a good bit of time, or so it seemed, before it dawned on me why I felt I had seen Theodore before. I had. In the Wall Street Journal, Fortune, McBusiness (Business Week) and etc. etc. etc.
For all his reputation as a brazen irritant to the biggest names in the corporate world, Theodore was amazingly humble, down to earth- but also very staccato and matter of fact. He projected a kind of confidence that is at once self-assured and subtle. The face of a man with nothing to prove, except perhaps to himself.
I must admit that the prospect of being an activist shareholder, or working for one, appeals to the growing arrogance in me. Core to succeeding in activism like this, hinted Theodore, is not the belief that you know better than management, but the certainty that you do.