Monday, November 14, 2011

"Playing with the House's Money"

As I sat thinking over morning coffee today, I puzzled over the curious experience I have, when talking with investors about an investment opportunity that pays returns from the cash flows generated by the Enterprise, how much trouble people seem to have with cash flow as a return strategy.

Consider this.  I have been aware for the last while of an Enterprise that for some very special reasons can sell large amounts of its product for long periods of time at market clearing prices that allow the Enterprise to earn really, really big profit margins.   I see this Enterprise as a "poster child" for the use of a partnership solution for its financing needs.  In part, because of its very robust cash flow waterfall; and in part because its capital needs are also extraordinarily small, relative to that waterfall.

To me, this would be a phenomenal opportunity for a return motivated investor to earn a simple return (payback of principal) on a very accelerated timetable, from shares of cash flows generated by the Enterprise, so that in a very short period of time, the investor would have really nothing invested in the deal, but would still be getting substantial cash distributions: they would be "playing with the House's money".

When I talk to people about this idea, they always ask: "but how will I get my money back?"  It doesn't seem to resonate that they get their money back first, in the form of early cash payouts, then start making money as they continue to receive additional cash payments from the Enterprise over time.

People seem to need some form of exit by sale.  Even when I show them, side by side, how a traditional exit-by-sale strategy returns them less money than this kind of partnership pay-out strategy, it doesn't seem to resonate.  They want the sale, even though it's worth less.  A lot less.


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